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[November 14, 2012]
CYTOMEDIX INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements regarding Cytomedix, Inc. ("Cytomedix," the "Company," "we," "us," or "our") and our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. When used in this document and other documents, releases and reports released by us, the words "anticipate," "believe," "estimate," "expect," "intend," "the facts suggest" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements. Other unknown, unidentified or unpredictable factors could materially and adversely impact our future results. You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report, as well as the audited financial statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as amended to date. The Company undertakes no obligation to update the forward-looking statements contained in this report to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as may occur as part of its ongoing periodic reports filed with the SEC. Given these uncertainties, the reader is cautioned not to place undue reliance on such statements.
Description of the Business Overview Cytomedix, Inc. ("Cytomedix," the "Company," "we," "us," or "our") is a regenerative therapy company, harnessing the body's own capacity to heal itself.
Cytomedix develops and commercializes innovative autologous therapies that promote healing by harnessing the innate regenerative capacity of platelets and adult stem cells. We currently have a growing commercial operation, and a robust clinical pipeline seeking to exploit large market opportunities with unmet medical needs.
Our current commercial offerings are centered around our platelet rich plasma ("PRP") platform technology, and primarily include the Angel® Whole Blood Separation System ("Angel") and the AutoloGelTM System ("AutoloGel"). These products primarily address the areas of wound care, and support of healing and recovery following orthopedic procedures. Our sales are predominantly in the United States, where we sell our products through a combination of direct sales representatives and independent sales agents. In Europe, the Middle East, Canada, and Australia we have a network of distributors covering several major markets.
Our clinical pipeline primarily involves the ALDHbr cell-based therapies, acquired through the acquisition of Aldagen, Inc., a privately held biopharmaceutical company, in February 2012, and the expansion of the Angel System for use in other clinical indications.
Angel Product Line The Angel Whole Blood Separation System, acquired from Sorin USA, Inc. ("Sorin") in April 2010, is designed for single patient use at the point of care, and provides a simple yet flexible means for producing quality PRP and platelet poor plasma ("PPP") clinical blood components. The system is easy to set up and 21 -------------------------------------------------------------------------------- TABLE OF CONTENTS maintain and is capable of processing up to 180 ml of whole blood. In surgical procedures, the PRP can be mixed with bone graft material prior to application.
Angel's advantages compared with other commercially available systems include: 1) high platelet yields, 2) significant reduction in pro-inflammatory cells, 3) rapid processing time, 4) adjustable hematocrit from 0%-25%, and 5) flexible final cPRP volumes. Proprietary software automatically adjusts the separation parameters to deliver a consistent, high-quality product.
We have grown worldwide sales of Angel steadily since acquiring the product line in April 2010 and expect this trend to continue. After acquiring Angel from Sorin in 2010, we successfully worked to ensure that we did not experience any net attrition of sales and any major supply chain interruptions, and our integration and transition efforts are now complete. Our focus is on growing sales in both the U. S. and international markets, and seeking efficiencies in the supply chain. We expect that future sales growth of these products will be driven through a combination of a focused marketing effort, strengthened distributor relationships, expanded indications, and direct sales. We expect our international distributors to drive increased sales in the coming quarters. In the long term, we expect new technology applications for Angel and expansion into other surgical and orthopedic applications will provide future growth opportunities.
The Angel product line also includes ancillary products such as phlebotomy and applicator supplies, and activAT®. activAT is designed to produce autologous thrombin serum from platelet poor plasma and is sold exclusively in Europe and Canada, where it provides a safe alternative to bovine-derived products. It currently represents less than 1% of our total sales revenue.
In November 2012, we obtained 510(k) clearance for our Angel® Concentrated Platelet Rich Plasma (cPRP) System for processing a small sample of blood or a mixture of blood and bone marrow aspirate. PRP produced from either blood or a mixture of bone marrow aspirate may be combined with bone graft material and used in appropriate orthopedic procedures as deemed necessary by a clinician, such as spinal fusion, healing of nonunion bone fractures and other bone grafting applications.
Expanded use of the Angel cPRP System for the production of PRP from blood and bone marrow increases Cytomedix's ability to support and advance markets within personalized regenerative medicine. Samples of bone marrow spirate are routinely collected using a needle to obtain a small amount of the soft sponge like fluid found inside of bones. Aspirated bone marrow is frequently used with bone grafting procedures and bone grafts are widely used to treat problems associated with bone loss and delayed union and nonunion fractures. In the U.S., approximately 400,000 spinal fusion procedures are performed each year and the application of bone marrow or bone marrow concentrates has been the historical gold standard. Concentrated PRP produced from blood and bone marrow may be used in up to 90% of spinal fusion procedures. The biologics market associated with spinal fusion procedures is approximately $700 million annually.
AutoloGelTM System The AutoloGel System is a device for the production of autologous PRP gel.
AutoloGel is cleared by the FDA for use on a variety of exuding wounds and is currently marketed to the chronic wound market. The AutoloGelTM System harnesses the patient's natural healing processes to provide growth factors, chemokines and cytokines known to promote angiogenesis and to regulate cell growth and formation of new tissue. PRP technology restores the balance in the wound environment to transform a non-healing wound to a wound that heals naturally.
In October 2011, as extended, the Company entered into an option agreement with a top 20 global pharmaceutical company granting the potential partner an exclusive option period through August 30, 2012 regarding U. S. supply and distribution of the AutoloGel System. In exchange for this period of exclusivity, we received non-refundable fees totaling $4.5 million. In August 2012, we agreed to the early termination of the exclusivity period and ceased further negotiations. The Company is currently pursuing one or more potential partnerships and commercial agreements for the product with interested parties.
Since 1992, the Centers for Medicare and Medicaid Services ("CMS") had maintained a national non-coverage determination for autologous PRP in wound care. This severely restricted the markets which Autologel could address commercially. In late 2011, based on significant amounts of additional positive data regarding the effectiveness of AutoloGel, CMS accepted our request to reconsider its non-coverage 22 -------------------------------------------------------------------------------- TABLE OF CONTENTS determination. On August 2, 2012, CMS issued a final National Coverage Determination ("NCD") for autologous blood-derived products for chronic non-healing wounds. In this final decision memo, CMS confirmed coverage for autologous platelet rich plasma ("PRP") in patients with diabetic, pressure and/or venous wounds via its Coverage with Evidence Development ("CED") program.
CED is a process through which CMS provides reimbursement coverage for items and services while generating additional clinical data to demonstrate their impact on health outcomes. This determination provides for an appropriate research study with practical study designs that we believe will demonstrate that patients treated with AutoloGelTM experience positive and clinically significant health outcomes. We believe the achievement of coverage by CMS is a significant development which will positively impact sales revenue and our ability to secure a strategic partner for the broad commercialization of AutoloGel.
We continue to make progress on a next generation device, enhancing the separation of blood components to provide the added convenience and effectiveness that treating clinicians are looking for at the point of care.
Importantly, the new device allows for the whole blood collection and the separation of the platelet rich plasma to be accomplished with a single specially designed closed syringe system that maintains an aseptic environment.
This streamlines the process, improves safety and ease-of-use and may be more conducive for certain developing orthopedic indications. The sterilization studies are complete. We expect to file a 510(k) application, in the first quarter of 2013, with the FDA upon the completion of platelet characterization and validation studies.
ALDHbr Cell Technology and Development Pipeline We acquired Aldagen in February 2012 in an all equity transaction valued, based on our volume weighted common stock price at the time of acquisition, at approximately $40 million in up-front and contingent consideration. The Aldagen technology utilizes an intracellular enzyme marker to fractionate essential regenerative cells from a patient's bone marrow. This core technology was originally licensed from Duke University and Johns Hopkins University. This proprietary bone marrow fractionation process identifies and isolates active stem and progenitor cells expressing high levels of the enzyme aldehyde dehydrogenase, or ALDH, which is a key enzyme involved in the regulation of gene activities associated with cell proliferation and differentiation. The selected biologically instructive cells ("ALDHbr") have the potential to promote the repair and regeneration of multiple types of cells and tissues, including the growth of new blood vessels, or angiogenesis, which is critical to the generation of healthy tissue.
Our lead product candidate, ALD-401, is an autologous preparation for the treatment of post-acute ischemic stroke. ALD-401 is currently being evaluated in the RECOVER-Stroke clinical study, an ongoing 100-patient, double-blind, placebo-controlled Phase II study in patients with unilateral, cerebral ischemic stroke with an NIH stroke scale score of between 7 and 22. In this study ALD-401 is delivered via the carotid artery, and a single infusion is administered 13 to 19 days post the ischemic event. The trial is being conducted at up to 10 - 15 sites in the U. S. The primary endpoint of the trial is safety and the efficacy endpoint is post-stroke recovery of neural function based on the modified Rankin Scale at three months post treatment.
We recently completed the initial safety stage of the study. The independent Data Safety Monitoring Board (DSMB) reviewing the safety data has recommended that the Phase 2 trial of ALD-401 can continue as designed. Additional DSMB reviews are scheduled upon enrollment of 30 and 60 patients per the clinical protocol. We are in the process of expanding the study to between 10 and 15 sites. We expect to complete enrollment within the coming 12 months and to have top-line data approximately four months following completion of enrollment.
In July of 2012, we announced the initiation of a Phase I clinical study with autologous ALD-451 in brain cancer patients in collaboration with Duke University Medical Center. The open-label study will enroll up to 12 patients and is intended to demonstrate the feasibility and safety of ALD-451 when administered intravenously in World Health Organization ("WHO") grade IV malignant glioma patients following surgery, radiation therapy and treatment with temozolomide. The trial also will obtain an initial description of the effects of ALD-451 on neurocognition. The clinical study is open for enrollment having received Investigational New Drug clearance from the U. S. Food and Drug Administration and Investigational Review Board clearance from Duke University Medical Center. Cytomedix will be responsible for manufacturing 23 -------------------------------------------------------------------------------- TABLE OF CONTENTS ALD-451 for the clinical trial. Duke University Medical Center, through the Robertson Clinical & Translational Cell Therapy Program, will fund the trial and be responsible for all other aspects of the study.
An additional product candidate, ALD-301, is in clinical development for critical limb ischemia ("CLI"). We have completed a Phase I/II study of autologous ALD-301 in CLI. The results showed improvement in limb perfusion as well as improvements in key parameters measuring CLI severity, and was published in the medical journal Catheterization and Cardiovascular Interventions. FDA clearance has been received to begin a 150-patient, double-blind, placebo-controlled Phase II study of Rutherford Category 4 or 5 patients who are not candidates for blood flow restoration procedures.
We have also completed a Phase I study with ALD-201 to treat end-stage heart failure. In this study, the trial provided initial evidence of improved blood flow and improved clinical status following administration of this autologous preparation. A paper detailing the clinical data was recently published in the American Heart Journal in an article entitled: "Randomized, double-blind pilot study of transendocardial injection of autologous aldehyde dehydrogenase-bright stem cells in patients with ischemic heart failure." Our current development strategy involves seeking partners to further advance the ALD-301 and ALD-201 programs. This study leverages our data and positive clinical experiences in CLI with ALD-301.
Comparison of Operating Results for the Three- and Nine-Month Periods Ended September 30, 2012 and 2011 Certain numbers in this section have been rounded for ease of analysis.
Product sales were $1.7 million in the third quarter of 2012 and $5.2 million for the year. In February 2012, we received a $2.5 million non-refundable exclusivity fee (in addition to the $2.0 million exclusivity fee received in the fourth quarter of 2011) from a top 20 global pharmaceutical partner in conjunction with a potential supply and distribution agreement for AutoloGel.
Also in February of this year, we acquired Aldagen, Inc., a privately held autologous adult stem cell company, in an all equity transaction valued at approximately $40 million, provided certain clinical milestones are met.
Aldagen's lead product candidate, ALD-401, is currently in a phase II clinical trial involving post-acute ischemic stroke patients.
Our revenues will be insufficient to cover our operating expenses in the near term. Operating expenses primarily consist of employee compensation, professional fees, consulting expenses, clinical trial costs, and other general business expenses such as insurance, travel related expenses, and sales and marketing related items. Operating expenses have risen to support the continuing growth of product sales, our substantial efforts with regard to Medicare reimbursement for AutoloGel, and the more recent ALD-401 phase II clinical trial involving patients with ischemic stroke. We therefore expect losses to continue for the foreseeable future.
Revenues Revenues increased $227,000 (15%) to $1,759,000 and $4,169,000 (97%) to $8,461,000 comparing the three and nine months ended September 30, 2012, respectively, to the same periods last year.
For the three-month period, the increase was due to higher product sales of $171,000 and royalty revenue of $56,000. Sales of Angel increased $142,000 (10%) and AutoloGel increased $9,000 (9%) in addition to sales of $20,000 from Aldecount®. Royalty revenue was a result of royalties received from our Aldefluor® license.
For the nine-month period, the increase was primarily due to higher product sales of $911,000, royalty revenue of $103,000, and license fee revenue of $3,155,000. The increased product sales were primarily due to an increase in Angel sales of $730,000 (18%), AutoloGel sales of $139,000 (47%), and Aldecount sales of $42,000. Royalty revenue was a result of royalties received from our Aldefluor license.
License fee revenue was a result of exclusivity fee payments recognized with respect to an option agreement with a top 20 global pharmaceutical company.
Gross Profit Gross Profit decreased $54,000 (7%) to $761,000 and increased $3,344,000 (146%) to $5,635,000 comparing the three and nine months ended September 30, 2012, respectively, to the same periods last year.
For the three-month period, the decrease was primarily due to sales on lower margin products, specifically Angel machines and disposables sold to international distributors, which made up a more significant portion of 24 -------------------------------------------------------------------------------- TABLE OF CONTENTS the product mix, in addition to increased logistical costs on raw material and finished goods. This was partly offset by increased profits from royalties.
For the nine-month period, the increase was primarily attributable to $3.2 million in licensing revenue (which had no associated cost of revenue) as well as increased profit on product sales.
For the three-month period, gross margin decreased to 43% from 53% while gross margin on product sales decreased to 42% from 53%. The decreases were primarily attributable to sales on lower margin products, specifically Angel machines and disposables sold to international distributors, which made up a more significant portion of the product mix and increased logistical costs on raw material and finished goods.
For the nine-month period, gross margin increased to 67% from 53%. The increase was primarily due to the license fee revenue which had no associated cost of revenue. Gross margin on product sales decreased to 46% from 53%. The decrease was primarily due to sales on lower margin products, specifically Angel machines and disposables sold to international distributors, which made up a more significant portion of the product mix.
Operating Expenses Operating expenses increased $3,122,000 (169%) to $4,970,000 and increased $8,867,000 (147%) to $14,911,000 comparing the three and nine months ended September 30, 2012, to the same periods last year. A discussion of the various components of operating expenses follows below.
Salaries and Wages Salaries and wages increased $1,027,000 (143%) to $1,746,000 and $3,409,000 (157%) to $5,587,000 comparing the three and nine months ended September 30, 2012 to the same period last year. The increases were primarily due to increased stock-based compensation expense and additional employees as a result of the Aldagen acquisition, in addition to increased bonus expense.
Consulting Expenses Consulting expenses increased $188,000 (60%) to $501,000 and $836,000 (88%) to $1,784,000 comparing the three and nine months ended September 30, 2012 to the same period last year.
For the three and nine-month period, the increase was primarily due to consulting expenses related to the Aldagen acquisition, in addition to consulting expense associated with clinical, finance, and European distribution channel activities.
Professional Fees Professional fees increased $200,000 (147%) to $336,000 and $416,000 (71%) to $1,003,000 comparing the three and nine months ended September 30, 2012 to the same period last year.
For the three-month period, the increase was primarily due to legal costs related to the Aldagen acquisition and costs related to the option agreement with a top 20 pharmaceutical company which was terminated in August 2012.
For the nine-month period, the increase was primarily due to legal costs related to the Aldagen acquisition and costs related to the option agreement with a top 20 pharmaceutical company which was terminated in August 2012, in addition to increased costs related to patents and regulatory filings.
Research, Development, Trials and Studies Trials and studies expenses increased $1,002,000 (24,661%) to $1,006,000 and $2,348,000 (2,213%) to $2,455,000 comparing the three and nine months ended September 30, 2012 to the same period last year. The increases were primarily due to research and development costs related to the ALD-401 Phase II clinical trial.
General and Administrative Expenses General and administrative expenses increased $704,000 (104%) to $1,380,000 and $1,857,000 (83%) to $4,082,000 comparing the three and nine months ended September 30, 2012 to the same period last year.
25 -------------------------------------------------------------------------------- TABLE OF CONTENTS For the three- and nine-month period, the increase was primarily due to higher stock based compensation due to additional members of the board of directors, rent, employee benefits, and amortization expense as a result of the acquisition of Aldagen. Additionally, travel, marketing, and European services increased as we made further investments in our sales and marketing and distribution efforts.
Other Income and Expense Other income, net totaled $428,000 compared to other expense, net of $1,170,000 for the three months ended September 30, 2012 and 2011, respectively. The change was primarily due to $689,000 in income compared with a $780,000 loss associated with the change in fair value of derivative liabilities. This improvement of $1,470,000 reflects non-cash adjustments expected to have no long-term net effect on shareholder's equity.
Other expense, net totaled $6,674,000 compared to other expense, net of $641,000 for the nine months ended September 30, 2012 and 2011, respectively. The change was primarily due to an increase in expense of approximately $4,335,000 related to the increase in the fair value of the contingent consideration mainly due to the change in our stock price. In addition, there was approximately $1,513,000 in non-cash inducement expense and $471,000 in settlement expense offset by an $845,000 non-cash change in the fair value of derivative liabilities. The settlement expense realized was a result of a contingency resolved, in the second quarter of 2012, that resulted in common stock issuable to our pre-bankruptcy Series A Preferred stock holders as outlined in the Company's plan of reorganization in 2002. The non-cash inducement expense is associated with common stock issued to compensate Series D preferred stockholders for forgone preferred dividend payments due to the early conversion of preferred stock incentive warrants issued in exchange for the early exercise of existing warrants. These were partially offset by a gain of approximately $577,000 recognized in 2011 related to the Company's renegotiation of the note payable due to Sorin.
Liquidity and Capital Resources Since inception, we have incurred and continue to incur significant losses from operations. Although our recent acquisition of Aldagen was an all equity transaction, the on-going Phase 2 study and general corporate activities at Aldagen will increase our operational expenditures at least through the end of 2013. Historically, we have financed our operations through a combination of the sale of debt, equity and equity-linked securities, and licensing, royalty, and product revenues. The Company's commercial products are currently generating approximately $7 million in revenue per year on a run-rate basis. The Company needs to sustain and grow these sales to meet its business objectives and satisfy its cash requirements.
At September 30, 2012, we had approximately $5.8 million cash on hand including approximately $3.2 million dedicated for use in the ALD-401 clinical trial and related matters. We believe we will have sufficient cash to sustain the Company at least through 2012. However, we will require additional capital to finance the further development of our business operations, in particular the completion of the Phase II RECOVER Stroke trial, beyond that point.
We continue to have exploratory conversations with large companies regarding their interest in our various products and technologies. We will seek to leverage these relationships and this heightened interest to secure further non-dilutive sources of funding.
The Company may also access additional capital through a purchase agreement with Lincoln Park Capital ("LPC"). Under this agreement, which expires in January 2013, the Company may, within certain parameters, raise up to an additional $4.1 million. To date, the Company has raised $7.4 million by selling a total of 12.2 million shares to LPC with approximately 70% of those shares sold prior to September 30, 2011. Given the parameters within which the Company may draw down from LPC, there is no assurance that the amounts available from LPC will be sufficient to fund our future operational cash flow needs.
If significant amounts are not available to the Company from future strategic partnerships or under the LPC agreement, additional funding will be required for the Company to pursue all elements of its strategic plan. Specific programs that may require additional funding include, without limitation, continued investment in the sales, marketing, distribution, and customer service areas, further expansion into the international markets, completion of the ongoing Phase II RECOVER Stroke trial, significant new product development or modifications, and pursuit of other opportunities. We would likely raise such additional capital through the issuance of our equity or equity-linked securities, which may result in significant additional dilution to our 26 -------------------------------------------------------------------------------- TABLE OF CONTENTS investors. 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. To secure funding through strategic partnerships, 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. There is no assurance that additional funding, through any of the aforementioned means, will be available on acceptable terms, or at all. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company's operations could be materially negatively impacted.
Net cash provided by (used in) operating, investing, and financing activities for the nine months ended September 30, 2012 and 2011 were as follows: [[Image Removed]] [[Image Removed]] [[Image Removed]] September 30, 2012 September 30, 2011 (in millions) Cash flows used in operating activities $ (7.2 ) $ (3.8 ) Cash flows (used in) provided by investing $ (1.4 ) $ 0.1 activities Cash flows provided by financing $ 12.2 $ 3.9 activities Operating Activities Cash used in operating activities in 2012 of $7.2 million primarily reflects our net loss of $16.0 million adjusted by a (i) $4.3 million increase for change in contingent consideration relating to the Aldagen acquisition, (ii) $1.8 million increase for stock-based compensation, (iii) $1.5 million increase for non-cash inducement expense associated with warrant exercise agreements, (iv) $0.8 million increase for depreciation and amortization, (v) $0.5 million increase for settlement of contingency expense, (vi) $0.5 million increase for non-cash interest expense, (vii) $0.5 million decrease for changes in assets and liabilities, and (viii) $0.4 million decrease for change in derivative liabilities. The $0.5 million decrease due to changes in assets and liabilities, in part reflects a net $0.7 million decrease in deferred revenue for revenue recognized relating to the non-refundable exclusivity fees received from a potential global pharmaceutical partner.
Cash used in operating activities in 2011 primarily reflects our net loss of $4.4 million adjusted for a (i) $0.6 million decrease for gain on debt restructuring relating to the Company's renegotiation of the note payable to Sorin, (ii) $0.5 million increase for depreciation and amortization, (iii) $0.4 increase for change in derivative liabilities, (iv) net $0.3 million decrease for changes in assets and liabilities, (v) $0.3 million increase for amortization of deferred costs relating to debt issuances, and (vi) $0.2 million increase for stock-based compensation.
Investing Activities Cash used in investing activities in 2012 primarily reflects the net activity of purchases and sales of Angel and AutoloGel centrifuge devices.
Financing Activities In 2012, we raised $8.3 million through the issuance of common stock ($5.0 million of which was sold to existing Aldagen investors, concurrent with the acquisition of Aldagen), and received $4.1 million from warrant exercises. This was offset by a $0.2 million cash payment for the redemption of Series A and B Convertible Preferred Stock and the satisfaction of accrued but unpaid dividends thereon.
In 2011, we raised $3.0 million through the sale of common stock ($2.7 million of which was sold to LPC), $2.1 million through the issuance of traditional debt, and $1.4 million through the issuance of convertible debt. These amounts were partly offset by a $2.6 million repayment of the note payable to Sorin.
Contractual Obligations The Company's primary office and warehouse facilities are located in Gaithersburg, Maryland, and comprise approximately 7,200 square feet. This facility falls under two leases with monthly rent, including our share of certain annual operating costs and taxes, at approximately $6,000 and $4,000 per month with the leases expiring December 2013 and August 2017, respectively. The Company also leases a 16,300 square foot facility located in Durham, North Carolina. This facility falls under two leases with monthly rent, including 27 -------------------------------------------------------------------------------- TABLE OF CONTENTS our share of certain annual operating costs and taxes, at approximately $11,000 and $6,000 per month with the leases expiring April and December 2013, respectively.
The Company has also committed to purchase approximately $1,092,000 of new Angel machines through January 2013 and $159,000 in machine parts through 2013 in order to support demand for the Angel products.
Critical Accounting Policies A complete summary of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2011. The following accounting policies changed or were adopted in 2012.
Basic and Diluted Loss Per Share We compute basic and diluted net loss per common share using the weighted-average number of shares of common stock outstanding during the period.
During periods of net losses, shares associated with outstanding stock options, stock warrants, convertible preferred stock, and convertible debt are not included because the inclusion would be anti-dilutive (i.e., would reduce the net loss per share). The total numbers of such shares excluded from the calculation of diluted net loss per common share were 19,164,126 for the three and nine months ended September 30, 2012, and 33,184,304 for the three and nine months ended September 30, 2011.
Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired in business combinations. The Company conducts an impairment test of goodwill on an annual basis as of October 1 of each year. The Company will also conduct tests if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company below its carrying value.
Indefinite lived intangible assets consist of in-process research and development (IPR&D) acquired in the acquisition of Aldagen. The acquired IPR&D consists of specific cell populations (that are related to a specific indication) and the use of the cell populations in treating particular medical conditions. The Company evaluates its indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, and at least on an annual basis as of October 1 of each year, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, the Company would recognize an impairment loss in the amount of that excess.
Identifiable intangible assets with finite lives consist of trademarks, technology (including patents), and customer relationships acquired in business combinations. These intangibles are amortized using the straight-line method over their estimated useful lives. The Company reviews its finite-lived intangible assets for potential impairment when circumstances indicate that the carrying amount of assets may not be recoverable.
Recent Accounting Pronouncements ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment." The amendments in this update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test.
The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. ASU 2011-08 became effective for the Company on January 1, 2012 and did not have a significant impact on the Company's financial statements ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment." The objective of the amendments in this Update is to reduce the cost and 28 -------------------------------------------------------------------------------- TABLE OF CONTENTS complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in this Update apply to all entities, both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. 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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