SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________________________
FORM
10-Q
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(Mark
One)
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ý
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended September 30, 2006
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period
from to
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Commission
file number 0-32501
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CYTORI
THERAPEUTICS, INC.
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(Exact
name of Registrant as Specified in Its
Charter)
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DELAWARE
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33-0827593
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(State
or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S.
Employer
Identification
No.)
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3020
CALLAN ROAD, SAN DIEGO, CALIFORNIA
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92121
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(858) 458-0900
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||
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 ý
No o
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. Large Accelerated
Filer o Accelerated
Filer o
Non-Accelerated Filer ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
As
of
October 31, 2006, there were 18,722,735 shares of the registrant’s common stock
outstanding.
CYTORI
THERAPEUTICS, INC.
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Page
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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||
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3
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|||
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4
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5
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6
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7
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Item
2.
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21
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Item
3.
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39
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Item
4.
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39
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PART
II
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OTHER
INFORMATION
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||
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Item
1.
|
39
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Item
1A.
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39
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Item
2.
|
45
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Item
3.
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45
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Item
4.
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45
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Item
5.
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45
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Item
6.
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47
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-2-
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PART
I. FINANCIAL INFORMATION
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||||||||||||||||
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Item
1. Financial Statements
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||||||||||||||||
The
Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We
have
reviewed the accompanying consolidated condensed balance sheet of Cytori
Therapeutics, Inc. and subsidiaries (the Company) as of September 30, 2006,
the
related consolidated condensed statements of operations and comprehensive
loss
for the three and nine month periods ended September 30, 2006, and the
statements of cash flows for the nine-month periods ended September 30, 2006
and
2005. These consolidated condensed financial statements are the responsibility
of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based
on
our review, we are not aware of any material modifications that should be
made
to the consolidated condensed financial statements referred to above for
them to
be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
Cytori Therapeutics, Inc. and subsidiaries as of December 31, 2005, and the
related consolidated statements of operations and comprehensive loss,
stockholders’ deficit, and cash flows for the year then ended (not presented
herein); and in our report dated March 24, 2006, we expressed an unqualified
opinion on those consolidated financial statements. In
our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 2005, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been
derived.
Note
1 of
the Company’s audited financial statements as of December 31, 2005 and for the
year then ended discloses that the Company derives a substantial portion
of its
revenues from a related party. Our auditors’ report on those financial
statements dated March 24, 2006, includes an explanatory paragraph referring
to
the matter in note 1 of those consolidated financial statements.
| /s/ KPMG, LLP |
|
|
San
Diego, California
|
|
|
November
14, 2006
|
CYTORI
THERAPEUTICS, INC.
(UNAUDITED)
|
As
of September 30,
2006
|
As
of December 31,
2005
|
||||||
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Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
13,615,000
|
$
|
8,007,000
|
|||
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Short-term
investments, available-for-sale
|
4,834,000
|
7,838,000
|
|||||
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Accounts
receivable, net of allowance for doubtful accounts
of
$1,000 and $9,000 in 2006 and 2005, respectively
|
103,000
|
816,000
|
|||||
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Inventories,
net
|
210,000
|
258,000
|
|||||
|
Other
current assets
|
781,000
|
621,000
|
|||||
|
Total
current assets
|
19,543,000
|
17,540,000
|
|||||
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Property
and equipment held for sale, net
|
457,000
|
675,000
|
|||||
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Property
and equipment, net
|
4,578,000
|
3,585,000
|
|||||
|
Investment
in joint venture
|
82,000
|
—
|
|||||
|
Other
assets
|
453,000
|
458,000
|
|||||
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Intangibles,
net
|
1,355,000
|
1,521,000
|
|||||
|
Goodwill
|
4,387,000
|
4,387,000
|
|||||
|
Total
assets
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$
|
30,855,000
|
$
|
28,166,000
|
|||
|
Liabilities
and Stockholders’ Deficit
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
4,850,000
|
$
|
6,129,000
|
|||
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Current
portion of long-term obligations
|
886,000
|
952,000
|
|||||
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Total
current liabilities
|
5,736,000
|
7,081,000
|
|||||
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Deferred
revenues, related party
|
29,128,000
|
17,311,000
|
|||||
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Deferred
revenues
|
2,392,000
|
2,541,000
|
|||||
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Option
liabilities
|
1,817,000
|
5,331,000
|
|||||
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Long-term
deferred rent
|
831,000
|
573,000
|
|||||
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Long-term
obligations, less current portion
|
910,000
|
1,558,000
|
|||||
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Total
liabilities
|
40,814,000
|
34,395,000
|
|||||
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Commitments
and contingencies
|
|||||||
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Stockholders’
deficit:
|
|||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; -0- shares
issued
and outstanding in 2006 and 2005
|
—
|
—
|
|||||
|
Common
stock, $0.001 par value; 95,000,000 shares authorized; 21,475,506
and
18,194,283 shares issued and 18,602,672 and 15,321,449 shares outstanding
in 2006 and 2005, respectively
|
21,000
|
18,000
|
|||||
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Additional
paid-in capital
|
102,016,000
|
82,196,000
|
|||||
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Accumulated
deficit
|
(101,548,000
|
)
|
(78,013,000
|
)
|
|||
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Treasury
stock, at cost
|
(10,414,000
|
)
|
(10,414,000
|
)
|
|||
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Accumulated
other comprehensive loss
|
(34,000
|
)
|
(16,000
|
)
|
|||
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Total
stockholders’ deficit
|
(9,959,000
|
)
|
(6,229,000
|
)
|
|||
|
Total
liabilities and stockholders’ deficit
|
$
|
30,855,000
|
$
|
28,166,000
|
|||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
|
For
the Three Months Ended
September 30,
|
For
the Nine Months Ended
September 30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Product
revenues, related party
|
$
|
133,000
|
$
|
1,544,000
|
$
|
1,087,000
|
$
|
4,776,000
|
|||||
|
Cost
of product revenues
|
383,000
|
928,000
|
1,341,000
|
2,411,000
|
|||||||||
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Gross
(loss) profit
|
(250,000
|
)
|
616,000
|
(254,000
|
)
|
2,365,000
|
|||||||
|
Development
revenues:
|
|||||||||||||
|
Development
|
1,000
|
11,000
|
832,000
|
20,000
|
|||||||||
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Research
grant and other
|
350,000
|
27,000
|
413,000
|
116,000
|
|||||||||
|
Total
development revenues
|
351,000
|
38,000
|
1,245,000
|
136,000
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development
|
5,552,000
|
3,991,000
|
16,749,000
|
10,573,000
|
|||||||||
|
Sales
and marketing
|
610,000
|
479,000
|
1,584,000
|
1,207,000
|
|||||||||
|
General
and administrative
|
3,181,000
|
3,129,000
|
10,005,000
|
7,486,000
|
|||||||||
|
Change
in fair value of option liabilities
|
(374,000
|
)
|
924,000
|
(3,514,000
|
)
|
984,000
|
|||||||
|
Total
operating expenses
|
8,969,000
|
8,523,000
|
24,824,000
|
20,250,000
|
|||||||||
|
Operating
loss
|
(8,868,000
|
)
|
(7,869,000
|
)
|
(23,833,000
|
)
|
(17,749,000
|
)
|
|||||
|
Other
income (expense):
|
|||||||||||||
|
Interest
income
|
158,000
|
99,000
|
537,000
|
208,000
|
|||||||||
|
Interest
expense
|
(47,000
|
)
|
(31,000
|
)
|
(158,000
|
)
|
(107,000
|
)
|
|||||
|
Other
expense, net
|
(7,000
|
)
|
(13,000
|
)
|
(13,000
|
)
|
(52,000
|
)
|
|||||
|
Equity
loss from investment in joint venture
|
(3,000
|
)
|
—
|
(68,000
|
)
|
—
|
|||||||
|
Gain
on sale of assets
|
—
|
5,526,000
|
—
|
5,526,000
|
|||||||||
|
Total
other income
|
101,000
|
5,581,000
|
298,000
|
5,575,000
|
|||||||||
|
Net
loss
|
(8,767,000
|
)
|
(2,288,000
|
)
|
(23,535,000
|
)
|
(12,174,000
|
)
|
|||||
|
Other
comprehensive income (loss)- unrealized income (loss)
|
6,000
|
(5,000
|
)
|
(18,000
|
)
|
9,000
|
|||||||
|
Comprehensive
loss
|
$
|
(8,761,000
|
)
|
$
|
(2,293,000
|
)
|
$
|
(23,553,000
|
)
|
$
|
(12,165,000
|
)
|
|
|
Basic
and diluted net loss per common share
|
$
|
(0.53
|
)
|
$
|
(0.15
|
)
|
$
|
(1.48
|
)
|
$
|
(0.84
|
)
|
|
|
Basic
and diluted weighted average common shares
|
16,641,423
|
15,177,020
|
15,891,674
|
14,512,898
|
|||||||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
(UNAUDITED)
|
For
the Nine Months Ended September 30,
|
|||||||
|
2006
|
2005
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(23,535,000
|
)
|
$
|
(12,174,000
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
1,605,000
|
1,290,000
|
|||||
|
Inventory
provision
|
70,000
|
178,000
|
|||||
|
(Reduction
in) addition to allowance for doubtful accounts
|
(5,000
|
)
|
1,000
|
||||
|
Change
in fair value of option liabilities
|
(3,514,000
|
)
|
984,000
|
||||
|
Stock-based
compensation expense
|
2,652,000
|
404,000
|
|||||
|
Stock
issued for license amendment, related party
|
487,000
|
—
|
|||||
|
Equity
loss from investment in joint venture
|
68,000
|
—
|
|||||
|
Gain
on sale of assets
|
—
|
(5,526,000
|
)
|
||||
|
Increases
(decreases) in cash caused by changes in operating assets and
liabilities:
|
|||||||
|
Accounts
receivable
|
718,000
|
(21,000
|
)
|
||||
|
Inventories
|
(22,000
|
)
|
(61,000
|
)
|
|||
|
Other
current assets
|
(160,000
|
)
|
200,000
|
||||
|
Other
assets
|
5,000
|
(206,000
|
)
|
||||
|
Accounts
payable and accrued expenses
|
(1,766,000
|
)
|
1,646,000
|
||||
|
Deferred
revenues, related party
|
11,817,000
|
7,811,000
|
|||||
|
Deferred
revenues
|
(149,000
|
)
|
(20,000
|
)
|
|||
|
Long-term
deferred rent
|
258,000
|
—
|
|||||
|
Net
cash used in operating activities
|
(11,471,000
|
)
|
(5,494,000
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Proceeds
from sale and maturity of short-term investments
|
53,264,000
|
36,788,000
|
|||||
|
Purchases
of short-term investments
|
(50,278,000
|
)
|
(33,484,000
|
)
|
|||
|
Purchases
of property and equipment
|
(2,214,000
|
)
|
(1,052,000
|
)
|
|||
|
Investment
in joint venture
|
(150,000
|
)
|
—
|
||||
|
Net
cash provided by investing activities
|
622,000
|
2,252,000
|
|||||
|
Cash
flows from financing activities:
|
|||||||
|
Principal
payments on long-term obligations
|
(714,000
|
)
|
(719,000
|
)
|
|||
|
Proceeds
from exercise of employee stock options and warrants
|
819,000
|
207,000
|
|||||
|
Proceeds
from sale of common stock
|
16,352,000
|
3,003,000
|
|||||
|
Proceeds
from issuance of options
|
—
|
186,000
|
|||||
|
Net
cash provided by financing activities
|
16,457,000
|
2,677,000
|
|||||
|
Net increase
(decrease) in cash and cash equivalents
|
5,608,000
|
(565,000
|
)
|
||||
|
Cash
and cash equivalents at beginning of period
|
8,007,000
|
2,840,000
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
13,615,000
|
$
|
2,275,000
|
|||
|
Supplemental
disclosure of cash flows information:
|
|||||||
|
Cash
paid during period for:
|
|||||||
|
Interest
|
$
|
160,000
|
$
|
112,000
|
|||
|
Taxes
|
1,000
|
16,000
|
|||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
SEPTEMBER
30, 2006
(UNAUDITED)
|
1.
|
Basis
of Presentation
|
Our
accompanying unaudited consolidated condensed financial statements as of
September 30, 2006 and for the three and nine months ended September 30,
2006
and 2005 have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for annual financial
statements. Our consolidated condensed balance sheet at December 31, 2005
has
been derived from the audited financial statements at that date, but does
not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations of Cytori Therapeutics, Inc., and our
subsidiaries, have been included. Operating results for the three and nine
months ended September 30, 2006 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2006. For further
information, refer to our consolidated financial statements for the year
ended
December 31, 2005 and footnotes thereto which were included in our Annual
Report
on Form 10-K, dated March 30, 2006.
Certain
prior period amounts have been reclassified to conform to the current period
presentation. In particular, effective January 1, 2006, we have presented
the
expense related to our stock-based compensation programs in the same lines
as we
classify cash compensation paid to the recipient employees. These expenses
were
shown as a separate line item in the prior year. See note 5 below for further
details.
|
2.
|
Use
of Estimates
|
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions affecting the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements, and the reported amounts of revenue
and
expenses during the reporting period. Actual results could differ from these
estimates. Estimates and assumptions are reviewed periodically, and the effects
of revisions are reflected in the consolidated financial statements in the
periods they are determined to be necessary.
Our
most
significant estimates and critical accounting policies involve revenue
recognition, evaluating goodwill and long-lived assets for impairment,
accounting for product line dispositions, and determining the fair value
of
stock options.
|
3.
|
Segment
Information
|
On
July
11, 2005, we announced the reorganization of our business based on two distinct
operating segments - (a) Regenerative cell technology and (b) MacroPore
Biosurgery, which manufactures bioresorbable implants. In the past, our
resources were managed on a consolidated basis. However, in an effort to
better
reflect our focus and significant progress in the development of regenerative
therapies, we are now evaluating and therefore reporting our financial results
in two segments.
Our
regenerative cell technology segment is focused on the discovery and development
of cell-based therapies for cardiovascular disease, spine and orthopedic
conditions, gastrointestinal disorders and new approaches for aesthetic and
reconstructive surgery using regenerative cells from adipose tissue, also
known
as fat tissue. Our MacroPore Biosurgery unit manufactures and distributes
the
HYDROSORB™ family of FDA-cleared bioresorbable spine and orthopedic implants; it
also develops Thin Film bioresorbable implants for sale in Japan through
Senko
Medical Trading Company (“Senko”), which has exclusive distribution rights to
these products in Japan.
We
measure the success of each operating segment based on operating results
and,
additionally, in the case of the regenerative cell technology segment, the
achievement of key research objectives. In arriving at our operating results
for
each segment, we use the same accounting policies as those used for our
consolidated company and as described throughout this note. However, segment
operating results exclude allocations of company-wide general and administrative
costs, and changes in fair value of our option liabilities.
Prior
year results presented below have been developed on the same basis as the
current year figures. For all periods presented, we did not have any
intersegment transactions.
The
following tables provide information regarding the performance and assets
of our
operating segments:
|
For
the three months ended
September 30,
|
For
the nine months ended
September 30,
|
||||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Regenerative
cell technology
|
$
|
350,000
|
$
|
27,000
|
$
|
1,096,000
|
$
|
116,000
|
|||||
|
MacroPore
Biosurgery
|
134,000
|
1,555,000
|
1,236,000
|
4,796,000
|
|||||||||
|
Total
revenues
|
$
|
484,000
|
$
|
1,582,000
|
$
|
2,332,000
|
$
|
4,912,000
|
|||||
|
Segment
losses:
|
|||||||||||||
|
Regenerative
cell technology
|
$
|
(5,491,000
|
)
|
$
|
(3,515,000
|
)
|
$
|
(16,006,000
|
)
|
$
|
(8,570,000
|
)
|
|
|
MacroPore
Biosurgery
|
(570,000
|
)
|
(301,000
|
)
|
(1,336,000
|
)
|
(709,000
|
)
|
|||||
|
General
and administrative expenses
|
(3,181,000
|
)
|
(3,129,000
|
)
|
(10,005,000
|
)
|
(7,486,000
|
)
|
|||||
|
Change
in fair value of option liabilities
|
374,000
|
(924,000
|
)
|
3,514,000
|
(984,000
|
)
|
|||||||
|
Total
operating loss
|
$
|
(8,868,000
|
)
|
$
|
(7,869,000
|
)
|
$
|
(23,833,000
|
)
|
$
|
(17,749,000
|
)
|
|
|
As
of September
30,
|
As
of December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Assets:
|
|||||||
|
Regenerative
cell technology
|
$
|
7,350,000
|
$
|
9,591,000
|
|||
|
MacroPore
Biosurgery
|
1,264,000
|
2,207,000
|
|||||
|
Corporate
assets
|
22,241,000
|
16,368,000
|
|||||
|
Total
assets
|
$
|
30,855,000
|
$
|
28,166,000
|
|||
|
4.
|
Assets
Held for Sale
|
We
are
developing applications for stem cells, residing naturally in adipose (fat)
tissue, for acute myocardial infarction, chronic ischemia, and for use in
reconstructive surgery. We have begun to focus our efforts exclusively on
the regenerative cell therapy segment of our business. As a result, our Board
of
Directors has decided to divest and is actively seeking a buyer (or buyers)
for our remaining MacroPore Biosurgery assets as a means to fund our
continuing efforts in this segment. This decision is based on the change
in our
strategic focus as well as the continuing negative profit margins being realized
from the MacroPore Biosurgery segment. We expect to complete the disposal
no
later than the third quarter of 2007. As of September 30, 2006, the
remaining assets were comprised of machinery and equipment used for
manufacturing, with a net book value of $457,000.
|
5.
|
Stock-Based
Compensation
|
Accounting
Policy
On
January 1, 2006, we adopted the provisions of Financial Accounting Standards
Board Statement No. 123R, “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method. SFAS 123R requires us to measure all share-based
payment awards granted after (or that were unvested as of) January 1, 2006,
including those with employees, at fair value. Under SFAS 123R, the fair
value
of stock options and other equity-based compensation must be recognized as
expense in the statements of operations over the requisite service period
of
each award.
Beginning
January 1, 2006, we have recognized compensation expense under SFAS 123R
for the
unvested portions of outstanding share-based awards previously granted under
our
(a) 2004 Equity Incentive Plan and (b) 1997 Stock Option and Stock Purchase
Plan, over the periods these awards continue to vest. This compensation expense
is recognized based on the fair values and attribution methods that were
previously disclosed in our prior period financial statements under SFAS
No.
123.
Prior
to
January 1, 2006, we applied the intrinsic value-based method of accounting
for
share-based payment transactions with our employees, as prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations including Financial Accounting Standards
Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions
Involving Stock Compensation-An Interpretation of APB Opinion No. 25.” Under the
intrinsic value method, compensation expense was recognized only if the current
market price of the underlying stock exceeded the exercise price of the
share-based payment award as of the measurement date (typically the date
of
grant). Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation,” established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As permitted by SFAS 123 and by Statement of Financial
Accounting Standards No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure,” we disclosed on a pro forma basis the
net income and earnings per share that would have resulted had we adopted
SFAS
123 for measurement purposes.
No
stock
options were granted during the three months ended September 30,
2005.
Fair
value under SFAS No. 123 is determined using the Black-Scholes option-pricing
model with the following assumptions:
|
For
the nine months ended September 30, 2005
|
||||
|
Expected
term
|
6
years
|
|||
|
Risk
free Interest rate
|
3.86-4.16
|
%
|
||
|
Volatility
|
81.40-82.67
|
%
|
||
|
Dividends
|
—
|
|||
|
Resulting
weighted average grant date fair value
|
$
|
2.27
|
||
Had
compensation expense been recognized for stock-based compensation plans in
accordance with SFAS 123, we would have recorded the following net loss and
net
loss per share amounts:
|
For
the three months
ended
September
30, 2005
|
For
the nine
months
ended
September
30, 2005
|
||||||
|
Net
loss:
|
|||||||
|
As
reported
|
$
|
(2,288,000
|
)
|
$
|
(12,174,000
|
)
|
|
|
Add:
Employee stock-based compensation expense included in reported
net loss,
net of related tax effects
|
341,000
|
341,000
|
|||||
|
Deduct:
Total employee stock-based compensation expense determined under
the fair
value method for all awards, net of related tax effects
|
(551,000
|
)
|
(1,968,000
|
)
|
|||
|
Pro
forma
|
$
|
(2,498,000
|
)
|
$
|
(13,801,000
|
)
|
|
|
Basic
and diluted loss per common share:
|
|||||||
|
As
reported
|
$
|
(0.15
|
)
|
$
|
(0.84
|
)
|
|
|
Pro
forma
|
$
|
(0.16
|
)
|
$
|
(0.95
|
)
|
|
Stock-Based
Compensation Arrangements
During
2004, we adopted the 2004 Equity Incentive Plan (the “2004 Plan”), which
provides our employees, directors and consultants the opportunity to purchase
our common stock through non-qualified stock options, stock appreciation
rights,
restricted stock units, or restricted stock and cash awards. The 2004 Plan
initially provides for issuance of 3,000,000 shares of our common stock,
which
number may be cumulatively increased (subject to Board discretion) on an
annual
basis beginning January 1, 2005, which annual increase shall not exceed 2%
of
our then outstanding stock.
During
1997, we adopted the 1997 Stock Option and Stock Purchase Plan (the “1997
Plan”), which provides for the direct award or sale of shares and for the grant
of incentive stock options (“ISOs”) and non-statutory options to employees,
directors or consultants. The 1997 Plan, as amended, provides for the issuance
of up to 7,000,000 shares of our common stock. The exercise price of ISOs
cannot
be less than the fair market value of the underlying shares on the date of
grant. ISOs can be granted only to employees.
Generally,
awards issued under the 2004 Plan or the 1997 Plan are subject to four-year
vesting, and have a contractual term of 10 years. Most awards contain one
of the
following two vesting provisions:
|
·
|
25%
of a granted award will vest after one year of service, while an
additional 1/48 of the award will vest at the end of each month
thereafter
for 36 months, or
|
|
·
|
1/48
of the award will vest at the end of each month over a four-year
period.
|
A
summary
of activity for the options under the 1997 and 2004 Plans for the nine months
ended September 30, 2006 is as follows:
|
Options
|
Weighted
Average Exercise Price
|
||||||
|
Balance
as of January 1, 2006
|
5,784,741
|
$
|
4.12
|
||||
|
Granted
|
791,350
|
7.52
|
|||||
|
Exercised
|
(360,468
|
)
|
2.27
|
||||
|
Expired
|
(22,336
|
)
|
7.10
|
||||
|
Cancelled/forfeited
|
(310,441
|
)
|
5.30
|
||||
|
Balance
as of September 30, 2006
|
5,882,846
|
$
|
4.62
|
||||
.
|
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
||||||||||
|
Balance
as of September 30, 2006
|
5,882,846
|
$
|
4.62
|
5.7
|
$
|
6,008,000
|
|||||||
|
Vested
and unvested expected to vest at September 30, 2006
|
5,786,693
|
$
|
4.41
|
5.7
|
$
|
5,889,000
|
|||||||
|
Vested
and exercisable at September 30, 2006
|
4,242,570
|
$
|
4.23
|
4.5
|
$
|
5,118,000
|
|||||||
The
total
intrinsic value of stock options exercised was $1,837,000 and $483,000 for
the
nine months ended September 30, 2006 and 2005, respectively.
The
fair
value of each option awarded during the nine months ended September 30, 2006
was
estimated on the date of grant using the Black-Scholes-Merton option valuation
model based on the following assumptions:
|
Expected
term
|
6
years
|
|||
|
Risk-free
interest rate
|
4.33-
5.04
|
%
|
||
|
Volatility
|
77.46-
78.91
|
%
|
||
|
Dividends
|
—
|
|||
|
Resulting
weighted average grant date fair value
|
$
|
5.31
|
||
The
expected term assumption was estimated using the “simplified method,” as
described in Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB
107”). This method estimates the expected term of an option based on the average
of the vesting period and the contractual term of an option award.
The
expected volatility assumption was based on the historical volatility of
our
common stock since the first day we became publicly traded (August 2000).
The
weighted average risk-free interest rate represents the interest rate for
treasury constant maturity instruments published by the Federal Reserve Board.
If the term of available treasury constant maturity instruments is not equal
to
the expected term of an employee option, we use the weighted average of the
two
Federal Reserve securities closest to the expected term of the employee
option.
The
dividend yield has been assumed to be zero as we (a) have never declared
or paid
any dividends and (b) do not currently anticipate paying any cash dividends
on
our outstanding shares of common stock in the foreseeable future.
The
following summarizes the total employee compensation cost recognized in the
accompanying financial statements:
|
For
the nine months ended
September 30,
|
|||||||
|
2006
|
2005
|
||||||
|
Total
compensation cost for share-based payment arrangements recognized
in the
statement of operations (net of tax of $0)
|
$
|
2,635,000
|
$
|
—
|
|||
|
Total
compensation cost capitalized as part of the cost of an asset
|
$
|
—
|
$
|
—
|
|||
As
of
September 30, 2006, the total compensation cost related to non-vested stock
options not yet recognized for all of our plans is approximately $4,341,000.
These costs are expected to be recognized over a weighted average period
of 1.91
years.
In
calculating the fair value of option awards granted after January 1, 2006,
we
generally used the same methodologies and assumptions employed prior to our
adoption of SFAS 123R. For instance, our estimate of expected volatility
is based exclusively on our historical volatility, since we have granted
options
that vest purely based on the passage of time and otherwise meet the criteria
to
exclusively rely on historical volatility, as set out in SAB 107. We did,
however, change our policy of attributing the cost of share-based payment
awards
granted after January 1, 2006 from the “graded vesting approach” to the
“straight-line” method. We believe that this change more accurately reflects the
manner in which our employees vest in an option award.
In
connection with convertible bridge financing in 1998 and 1999, we issued
warrants to purchase 25,000 shares of our Series C convertible preferred
stock. Upon conversion of our outstanding preferred stock in August 2000,
the warrants became immediately exercisable into shares of our common
stock. As of December 31, 2004, 2,777 of these warrants had been
exercised. The remaining 22,223 warrants, with cash proceeds to the Company
of approximately $50,000, were exercised in the third quarter of 2005.
Cash
received from stock
option and warrant exercises for the nine months ended September 30, 2006
and
2005 was approximately $819,000 and $207,000, respectively. No income tax
benefits have been recorded related to the stock option exercises. SFAS
123R prohibits recognition of tax benefits for exercised stock options until
such benefits are realized. As we presently have tax loss carryforwards
from prior periods and expect to incur tax losses in 2006, we are not able
to benefit from the deduction for exercised stock options in the current
reporting period.
To
settle
stock option awards that have been exercised, we will issue new shares of
our
common stock. At September 30, 2006, we have an aggregate of 76,397,328 shares
authorized and available to satisfy option exercises under our
plans.
Cash
used
to settle equity instruments granted under share-based payment arrangements
amounted to $0 in all periods presented.
Award
Modification
In
May
2006, our Senior Vice President of Finance and Administration, Treasurer,
and
Principal Accounting Officer terminated full-time employment with us. In
connection with his full-time employment termination, we extended the exercise
period of his 204,997 vested stock options as of May 31, 2006 to December
31,
2007. Moreover, we entered into a part-time employment agreement with him
according to which all stock option vesting ceased as of May 31, 2006 and
75,003
non-vested stock options were cancelled on May 31, 2006.
In
connection with a company-wide reduction in force, we eliminated the positions
of our Senior Vice President, Business Development, and Vice President,
Marketing & Development, on July 25, 2006. We
subsequently entered into short-term employment agreements with the
individuals formerly holding the titles of Senior Vice President, Business
Development, and Vice President, Marketing and Development. These individuals
continued to provide service to us following the elimination of their former
positions on July 25, 2006. At the time these positions were eliminated,
142,686 non-vested stock options held by these two employees were forfeited.
Moreover, subject to certain restrictions, we extended the exercise period
for
328,564 vested stock options held by these employees to December 31, 2007.
We
also
eliminated the position of a less senior employee on July 31, 2006.
Simultaneously, we continued the individual’s employment in a new capacity;
however, we cancelled 8,125 stock options as of July 31, 2006.
In
connection with the above modifications and in accordance with SFAS
123R, we recorded additional expense of $279,000 and $567,000 for
the three and nine months ended September 30, 2006, respectively, as
components of research and development, general and administrative and sales
and
marketing expense. The $279,000 and $567,000 charges recorded in the third
quarter and nine months ended September 30, 2006 constitute the entire expense
related to these options, and no future period charges will be
required.
Non-Employee
Stock Based Compensation
In
the
first quarter of 2006, we granted 2,500 shares of restricted common stock
to a
non-employee scientific advisor. Because the shares granted are not subject
to
additional future vesting or service requirements, the stock based compensation
expense of approximately $18,000 recorded in the first quarter of 2006
constitutes the entire expense related to this award, and no future period
charges will be required. The stock is restricted only in that it cannot
be sold
for a specified period of time. There are no vesting requirements. This
scientific advisor will also be receiving cash consideration as services
are
performed. The fair value of the stock granted was $7.04 per share based
on the
market price of our common stock on the date of grant. There were no discounts
applied for the effects of the restriction, since the value of the restriction
is considered to be de minimis. The entire charge of $18,000 was reported
as a
component of research and development expenses.
In
the
second quarter of 2005, we granted 20,000 shares of restricted common stock
to a
non-employee scientific advisor. Because the shares granted are not subject
to
additional future vesting or service requirements, the stock based compensation
expense of approximately $63,000 recorded in the second quarter of 2005 as
a
component of research and devlopment expense constitutes the entire expense
related to this grant, and no future period charges will be required. The
fair
value of the stock granted was $3.15 per share based on the market price
of our
common stock on the date of grant. The stock is restricted only in that it
cannot be sold for a specified period of time. There are no vesting
requirements. This scientific advisor will also be receiving cash consideration
as services are performed.
|
6.
|
Short-term
Investments
|
We
invest
excess cash in highly liquid debt instruments of financial institutions and
corporations with strong credit ratings and in United States government
obligations. We have established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest
rates.
We
evaluate our investments in accordance with the provisions of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” Based on our
intent, our investment policies and our ability to liquidate the debt
securities, we classify short-term investment securities within current assets.
Available-for-sale securities are carried at fair value, with unrealized
gains
and losses reported as accumulated other comprehensive income (loss) within
stockholders’ equity. The amortized cost basis of debt securities is
periodically adjusted for amortization of premiums and accretion of discounts
to
maturity. Such amortization is included as a component of interest income
or
interest expense. The amortized cost basis of securities sold is based on
the
specific identification method and all such realized gains and losses are
recorded as a component within other income (expense). Based on such evaluation,
management has determined that all investment securities (other than those
classified as cash equivalents) are properly classified as available-for-sale.
We
review
the carrying values of our investments and write down such investments to
estimated fair value by a charge to the statements of operations when the
severity and duration of a decline in the value of an investment is considered
to be other than temporary. The cost of securities sold or purchased is recorded
on the settlement date.
At
September 30, 2006, the excess of carrying cost over the fair value of our
short-term investments is immaterial.
|
7.
|
Inventories
|
Inventories
include the cost of material, labor and overhead, and are stated at the lower
of
average cost, determined on the first-in, first-out (FIFO) method, or market.
We
periodically evaluate our on-hand stock and make appropriate provisions for
any
stock deemed as excess or obsolete.
We
expense excess manufacturing costs- that is, costs resulting from lower than
“normal” production levels. The provisions of SFAS No. 151, “Inventory Costs- an
Amendment of ARB No. 43, Chapter 4,” were adopted during the first quarter of
2006 and have not had a significant effect on our financial statements.
During
the second quarter of 2006, we recorded a provision of $70,000 for excess
raw
materials that we determined were unlikely to be converted into finished
goods
and ultimately sold. There was no similar expense for the third quarter ended
September 30, 2006.
During
the third quarter of 2005, we recorded a provision of $132,000, primarily
for
excess HYDROSORB™ inventory. The inventory was produced in anticipation of
stocking orders from Medtronic which did not materialize. We determined it
was
more likely than not that the inventory would not be recovered. A similar
provision, for approximately $46,000, was recorded in the second quarter
of
2005, for a total of $178,000 for the nine months ended September 30,
2005.
|
8.
|
Long-Lived
Assets
|
In
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” we assess certain of our long-lived assets, such as property
and equipment and intangible assets other than goodwill, for potential
impairment when there is a change in circumstances that indicates carrying
values of assets may not be recoverable. Such long-lived assets are deemed
to be
impaired when the undiscounted cash flows expected to be generated by the
asset
(or asset group) are less than the asset’s carrying amount. Any required
impairment loss would be measured as the amount by which the asset’s carrying
value exceeds its fair value, and would be recorded as a reduction in the
carrying value of the related asset and a charge to operating expense.
During
the second quarter ended June 30, 2006, we recorded an additional $118,000
of
depreciation expense to accelerate the estimated remaining lives for certain
assets determined to be no longer in use. These assets related to furniture
and
fixtures no longer in use due to our recent relocation as well as outdated
computer software and related equipment. The assets relate to both our
regenerative cell technology and MacroPore Biosurgery operating segments.
We
recorded the charge as an increase to general and administrative expenses.
There
was no similar charge for the same period in 2005.
|
9.
|
Revenue
Recognition
|
Product
Sales
We
sell
our (non-Thin Film) MacroPore Biosurgery products to Medtronic, Inc.
(“Medtronic”), a related party, under a Distribution Agreement dated January 5,
2000 and amended December 22, 2000 and October 8, 2002, as well as a Development
and Supply Agreement dated January 5, 2000 and amended December 22, 2000
and
September 30, 2002. These revenues are classified as sales to related party
in
our statements of operations.
We
recognize revenue on product sales to Medtronic only after both (a) the receipt
of a purchase order from Medtronic and (b) shipment of ordered products to
Medtronic, as title and risk of loss pass upon shipment.
On
occasion, we will offer Medtronic extended payment terms. We do not
recognize revenues under these arrangements until the payment becomes due
or is
received, if that occurs earlier. Moreover, we warrant that our products
are
free from manufacturing defects at the time of shipment. We have recorded
a
reserve for the estimated costs we may incur under our warranty program (see
note 10).
License/Distribution
Fees
If
separable under Emerging Issues Task Force Issue 00-21, “Revenue Arrangements
with Multiple Deliverables” (“EITF 00-21”), we recognize any upfront payments
received from license/distribution agreements as revenues ratably over the
period in which the customer benefits from the license/distribution agreement.
To
date,
we have not received any upfront license payments that are separable under
EITF
00-21. Accordingly, such license revenues have been combined with other
elements, such as research and development activities, for purposes of revenue
recognition. For instance, we account for the license fees and milestone
payments under the Distribution Agreement with Senko as a single unit of
accounting. Similarly, we have attributed the upfront fees received under
the
arrangements with Olympus Corporation (“Olympus”), a related party (see note
17), to a combined unit of accounting comprising a license we granted to
Olympus-Cytori, Inc. (the “Joint Venture”), a related party, as well as
development services we agreed to perform for this entity.
On
February 22, 2006, we granted Olympus an exclusive right to negotiate a
commercialization collaboration for the use of adipose stem and regenerative
cells for a specific therapeutic area outside of cardiovascular disease.
In
exchange for this right, we received $1,500,000 from Olympus, which is
non-refundable but may be applied towards any definitive commercial
collaboration in the future. As part of this agreement, Olympus will conduct
market research and pilot clinical studies in collaboration with us over
a 12 to
18 month period for the therapeutic area. The $1,500,000 payment was received
in
the second quarter of 2006 and recorded as deferred revenues, related party.
The
deferred revenues, related party will be recognized in the income statement
either (i) in connection with other consideration received as part of a
definitive commercial collaboration in the future, or (ii) when the exclusive
negotiation period expires.
Research
and Development
We
earn
revenue for performing tasks under research and development agreements with
both
commercial enterprises, such as Olympus and Senko, and governmental agencies
like the National Institutes of Health (“NIH”). Revenue earned under development
agreements is classified as either research grant or development revenues
in our
statements of operations, depending on the nature of the arrangement. The
costs
associated with earning these revenues are typically recorded as research
and
development expense.
We
received a total of $22,000,000 from Olympus and Olympus-Cytori, Inc. during
2005 in two separate but related transactions (see note 17). Approximately
$4,689,000 of this amount related to common stock that we issued, as well
as two
options we granted, to Olympus (see note 17 for further details). Moreover,
during the first quarter of 2006, we received $11,000,000 from the Joint
Venture
upon achieving the CE Mark on the Celution™ System. Considering the $4,689,000
initially allocated to the common stock issued and the two options, we recorded
upfront fees totaling $28,311,000 as deferred revenues, related party. In
exchange for these proceeds, we agreed to (a) provide Olympus-Cytori, Inc.
an
exclusive and perpetual license to our therapeutic device technology, including
the Celution™ System and certain related intellectual property, and (b) perform
future development services related to commercializing the Celution™ System (see
note 17). As noted above, the license and development services are not separable
under EITF 00-21. Accordingly, we will recognize the $28,311,000 allocated
to
deferred revenues, related party, using a proportional performance methodology-
that is, as we complete substantive milestones related to the development
component of the combined accounting unit. As of September 30, 2006, we have
recognized $683,000 of the deferred revenues, related party as development
revenues. All related development costs are expensed as incurred and are
included in research and development expense on the statement of
operations.
In
the
third quarter of 2004, we entered into a Distribution Agreement with Senko.
Under this agreement, we granted to Senko an exclusive license to sell and
distribute certain Thin Film products in Japan. We have also earned or will
be
entitled to earn additional payments under the Distribution Agreement based
on
achieving the following defined research and development
milestones:
|
·
|
In
2004, we received a nonrefundable payment of $1,250,000 from Senko
after
filing an initial regulatory application with the Japanese Ministry
of
Health, Labour and Welfare (“MHLW”) related to the Thin Film product
line. We initially recorded this payment as deferred revenues of
$1,250,000.
|
|
·
|
Upon
the achievement of commercialization (i.e., regulatory approval
by the
MHLW), we will be entitled to an additional nonrefundable payment
of
$250,000.
|
Of
the
amounts received and deferred, we recognized development revenues of $1,000
and
$149,000 in the three and nine months
ended
September 30, 2006, respectively, representing the fair value of the completed
milestones relative to the fair value of the total efforts expected to be
necessary to achieve regulatory approval by the MHLW. In the three and nine
months ended September 30, 2005, we recognized development revenue of $11,000
and $20,000, respectively. As noted above, the license and the milestone
components of the Senko Distribution Agreement are accounted for as a single
unit of accounting. This single element of $3,000,000 in fees includes a
$1,500,000 license fee which is potentially refundable. We have recognized,
and
will continue to recognize, the non-contingent fees allocated to this combined
deliverable as we complete performance obligations under the Distribution
Agreement with Senko. We will not recognize the potentially refundable portion
of the fees until the right of refund expires. See note 19 for further
details.
Under
our
agreement with the NIH, we are reimbursed for “qualifying expenditures” related
to research on adipose-derived cell therapy for myocardial infarction. To
receive funds under the grant arrangement, we are required to (i) demonstrate
that we incurred “qualifying expenses,” as defined in the grant agreement
between the NIH and us, (ii) maintain a system of controls, whereby we can
accurately track and report all expenditures related solely to research on
Adipose-Derived Cell Therapy for Myocardial Infarction, and (iii) file
appropriate forms and follow appropriate protocols established by the NIH.
When
we are reimbursed for costs incurred under grant arrangements with the NIH,
we
recognize revenues for the lesser of:
|
·
|
Qualifying
costs incurred (and not previously recognized) to date, plus any
allowable
grant fees for which we are entitled to funding from the NIH;
or,
|
|
·
|
The
outputs generated to date versus the total outputs expected to
be achieved
under the research arrangement.
|
In
the
three and nine months ended September 30, 2006, we recognized NIH grant revenue
of $303,000 and $310,000 and incurred qualifying costs for the same amounts.
For
the three and nine months ended September 30, 2005, we recognized NIH grant
revenue of $25,000 and $110,000, respectively, and incurred qualifying costs
of
$25,000 and $108,000 for the same periods.
|
10.
|
Warranty
|
We
provide a limited warranty under our agreements with our customers for products
that fail to comply with product specifications. We have recorded a reserve
for
estimated costs we may incur under our warranty program.
The
following summarizes the movements in our warranty reserve, which is
subcategorized under accounts payable and accrued expenses, at September
30,
2006 and 2005:
|
As
of January 1,
|
Additions-charges
to expenses
|
Claims
|
As
of
September
30,
|
||||||||||
|
2006:
|
|||||||||||||
|
Warranty
reserve
|
$
|
155,000
|
$
|
9,000
|
$
|
—
|
$
|
164,000
|
|||||
|
2005:
|
|||||||||||||
|
Warranty
reserve
|
$
|
102,000
|
$
|
40,000
|
$
|
—
|
$
|
142,000
|
|||||
|
11.
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income (loss)
in
the years in which those temporary differences are expected to be recovered
or
settled. Due to our current loss position and expectations for the foreseeable
future, a full valuation allowance was recognized against deferred tax
assets.
|
12.
|
Loss
Per Share
|
We
compute loss per share based on the provisions of SFAS No. 128, “Earnings Per
Share.” Basic per share data is computed by dividing income or loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted per share data is computed by dividing net income
or
loss available to common stockholders by the weighted average number of common
shares outstanding during the period increased to include, if dilutive, the
number of additional common share equivalents that would have been outstanding
if potential common shares had been issued using the treasury stock method.
Potential common shares were related entirely to outstanding but unexercised
option awards and warrants for all periods presented.
We
have
excluded all potentially dilutive securities from the calculation of diluted
loss per share attributable to common stockholders for the three and nine
months
ended September 30, 2006 and 2005, as their inclusion would be antidilutive.
Potentially dilutive common shares excluded from the calculations of diluted
loss per share were 8,082,846 for the three
and
nine months ended September 30, 2006, and 7,547,076 for the three and nine
months ended September 30, 2005.
|
13.
|
Commitments
and Contingencies
|
We
have
contractual obligations to make payments on leases of office and manufacturing
space as follows:
|
Years
Ending December 31,
|
Operating
Leases
|
|||
|
For
the remainder of 2006
|
$
|
520,000
|
||
|
2007
|
2,086,000
|
|||
|
2008
|
1,556,000
|
|||
|
2009
|
1,382,000
|
|||
|
2010
|
707,000
|
|||
|
Total
|
$
|
6,251,000
|
||
On
May
24, 2005, we entered into a lease for 91,000 square feet of space located
at
3020 and 3030 Callan Road, San Diego, California. The majority of our operations
are located in this facility. The agreement bears rent at an initial rate
of
$1.15 per square foot, with annual increases of 3%. The lease term is 57
months,
commencing on October 1, 2005 and expiring on June 30, 2010. Payments for
our
Callan Road location commenced in June 2006.
Rent
expense, which includes common area maintenance, for the three and nine months
ended September 30, 2006 was $596,000 and $1,844,000, respectively.
Rent expense for the same periods in 2005 was $492,000 and $996,000,
respectively.
We
are
subject to various claims and contingencies related to legal proceedings.
Due to
their nature, such legal proceedings involve inherent uncertainties including,
but not limited to, court rulings, negotiations between affected parties
and
governmental actions. Management assesses the probability of loss for such
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability to
us that
may arise as a result of currently pending legal proceedings will not have
a
material adverse effect on our financial condition, liquidity, or results
of
operations as a whole.
Refer
to
note 14 for a discussion of our commitments and contingencies related to
our
interactions with the University of California.
Refer
to
note 17 for a discussion of our commitments and contingencies related to
our
transactions with Olympus, including (a) our obligation to the Joint Venture
in
future periods and (b) certain put and call rights embedded in the arrangements
with Olympus.
Refer
to
note 18 for a discussion of our commitments and contingencies related to
our
arrangements with MAST and Senko.
|
14.
|
License
Agreement
|
On
October 16, 2001, StemSource, Inc. entered into an exclusive worldwide license
agreement with the Regents of the University of California (“UC”), licensing all
of UC’s rights to certain pending patent applications being prosecuted by
UC and (in part) by the University of Pittsburgh (“U Pitt”), for the life of
these patents, with the right of sublicense. The exclusive license relates
to an issued patent (“Patent 6,777,231”) and various pending applications
relating to adipose derived stem cells. In November 2002, we acquired
StemSource, and the license agreement was assigned to us.
The
agreement, which was amended and restated in September 2006 to better reflect
our business model, calls for various periodic payments until such time as
we
begin commercial sales of any products utilizing the licensed technology.
Upon
achieving commercial sales of products or services covered by the UC license
Agreement, we will be required to pay variable earned royalties based on
the net
sales of products sold. Minimum royalty amounts will increase annually with
a
plateau in the fourth year.
In
connection with the amendment of the agreement in the third quarter of 2006,
we
agreed to issue 100,000 shares of our common stock to UC in the fourth quarter
of 2006. At the time the agreement was reached, our shares were trading at
$4.87
per share. Accordingly, we accrued $487,000 in the third quarter of 2006
and
recognized a corresponding general and administrative expense.
Additionally,
we are obligated to reimburse UC for patent prosecution and other legal costs
on
any patent applications contemplated by the agreements. In particular, the
University of Pittsburgh filed a lawsuit in the fourth quarter of 2004, naming
all of the inventors who had not assigned their ownership interest in Patent
6,777,231 to U Pitt. It was seeking a determination that its assignors, rather
than UC’s assignors, are the true inventors of Patent 6,777,231. This lawsuit
has subjected us to and
could
continue to subject us to significant costs and, if U Pitt wins the lawsuit,
our
license rights to this patent could be nullified or rendered non-exclusive
with
respect to any third party that might license rights from U Pitt. Accordingly,
it could have a negative effect on us if U Pitt were to win the
lawsuit.
We
are
not named as a party to the lawsuit but our president, Marc Hedrick, is one
of
the inventors identified on the patent and therefore is a named individual
defendant. We are providing substantial financial and other assistance to
the
defense of the lawsuit.
In
the
three and nine months ended September 30, 2006, we expensed $335,000 and
$1,701,000, respectively, related to this license. For the same periods in
2005,
we expensed $349,000 and $923,000, respectively. These expenses have been
classified as general and administrative expense in the accompanying
consolidated financial statements. We believe that the amount accrued as
of
September 30, 2006 is a reasonable estimate of our liability for the expenses
incurred to date. We paid UC $240,000 against the related accrual on June
30,
2006.
|
15.
|
Long-term
Obligations
|
In
2003,
we entered into an Amended Master Security Agreement to provide financing
for
new equipment purchases.
As
of
September 30, 2006, the future contractual principal payments, for the remainder
of 2006 and subsequent years, on all of our outstanding promissory notes
related
to the Amended Master Security Agreement are as follows:
|
Years
Ending December 31,
|
||||
|
Remainder
of 2006
|
$
|
238,000
|
||
|
2007
|
836,000
|
|||
|
2008
|
544,000
|
|||
|
2009
|
178,000
|
|||
|
Total
|
$
|
1,796,000
|
||
|
16.
|
Composition
of Certain Financial Statement
Captions
|
Inventories,
net
As
of
September 30, 2006 and December 31, 2005, inventories, net, were comprised
of
the following:
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Raw
materials
|
$
|
150,000
|
$
|
232,000
|
|||
|
Finished
goods
|
60,000
|
26,000
|
|||||
|
$
|
210,000
|
$
|
258,000
|
||||
Other
Current Assets
As
of
September 30, 2006 and December 31, 2005, other current assets were comprised
of
the following:
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Prepaid
expenses
|
$
|
723,000
|
$
|
506,000
|
|||
|
Accrued
interest receivable
|
43,000
|
77,000
|
|||||
|
Other
receivables
|
15,000
|
38,000
|
|||||
|
$
|
781,000
|
$
|
621,000
|
||||
Property
and Equipment, net
As
of
September 30, 2006 and December 31, 2005, property and equipment, net, were
comprised of the following:
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Manufacturing
and development equipment
|
$
|
2,930,000
|
$
|
2,676,000
|
|||
|
Office
and computer equipment
|
2,613,000
|
2,682,000
|
|||||
|
Leasehold
improvements
|
5,031,000
|
3,359,000
|
|||||
|
10,574,000
|
8,717,000
|
||||||
|
Less
accumulated depreciation and amortization
|
(5,996,000
|
)
|
(5,132,000
|
)
|
|||
|
$
|
4,578,000
|
$
|
3,585,000
|
||||
Accounts
Payable and Accrued Expenses
As
of
September 30, 2006 and December 31, 2005, accounts payable and accrued expenses
were comprised of the following:
|
September
30,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Accrued
legal fees
|
$
|
1,597,000
|
$
|
975,000
|
|||
|
Accrued
vacation
|
607,000
|
680,000
|
|||||
|
Accrued
bonus
|
522,000
|
981,000
|
|||||
|
Stock
to be issued for license amendment, related party (note 14)
|
487,000
|
—
|
|||||
|
Accrued
expenses
|
452,000
|
504,000
|
|||||
|
Accounts
payable
|
359,000
|
933,000
|
|||||
|
Accrued
studies
|
281,000
|
712,000
|
|||||
|
Deferred
rent expense
|
253,000
|
138,000
|
|||||
|
Warranty
reserve (note 10)
|
164,000
|
155,000
|
|||||
|
Accrued
accounting fees
|
103,000
|
199,000
|
|||||
|
Accrued
payroll
|
25,000
|
52,000
|
|||||
|
Accrued
leasehold improvements
|
—
|
800,000
|
|||||
|
$
|
4,850,000
|
$
|
6,129,000
|
||||
|
17.
|
Transactions
with Olympus Corporation
|
Initial
Investment by Olympus Corporation in Cytori
In
the
second quarter of 2005, we entered into a Common Stock Purchase Agreement
(the
“Purchase Agreement”) with Olympus in which we received $11,000,000 in cash
proceeds.
Under
this agreement, we issued 1,100,000 newly issued shares of common stock to
Olympus. We reflected the common stock issued to Olympus in our financial
statements at the market value of our common stock at the time of the Purchase
Agreement ($2.73 per share, or $3,003,000 in the aggregate).
In
addition, we also granted Olympus an immediately exercisable option to acquire
2,200,000 shares of our common stock on or before December 31, 2006 at $10
per
share. We have accounted for this grant as a liability in accordance with
EITF
00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock” because from the date of grant
through the expiration, we are required to deliver listed common stock to
settle
the option shares upon exercise.
At
the
time we entered into the Purchase Agreement, we estimated the fair value
of the
option liability to be $186,000 based on the following assumptions:
|
·
|
Contractual
term of 1.67 years,
|
|
·
|
Risk-free
interest rate of 3.46%, and
|
|
·
|
Estimated
share-price volatility of 59.7%
|
As
of
September 30, 2006 and December 31, 2005, we re-estimated the fair value
of the
option liability to be $17,000 and $3,714,000, respectively, based on the
following assumptions:
|
·
|
Contractual
term of 3 months and 1 year,
|
|
·
|
Risk-free
interest rate of 4.89% and 4.38%,
and
|
|
·
|
Estimated
share-price volatility of 61.8% and 65.1%,
respectively.
|
The
decrease in the fair value by $574,000 and $3,714,000 for the three and nine
months ended September 30, 2006 was recorded in the statements of operations
as
a component of change in fair value of option liabilities. This decrease
was
mainly attributable to the decline in our share price from December 31, 2005
to
September 30, 2006 and to the reduction in the remaining term due to normal
lapse of time. The option expires on December 31, 2006.
The
$11,000,000 in total proceeds we received in the second quarter of 2005 exceeded
the sum of (i) the market value of our stock as well as (ii) the fair value
of
the option at the time we entered into the share purchase agreement. The
$7,811,000 difference between the proceeds received and the fair values of
our
common stock and option liability is recorded as a component of deferred
revenues, related party in the accompanying balance sheet.
In
August
2006, we received an additional $11,000,000 from Olympus for the issuance
of
approximately 1,900,000 shares of our common stock at $5.75 per share from
the
shelf registration filed in May, 2006. The purchase price was determined
by our
closing price on August 9, 2006.
As
of
September 30, 2006, Olympus holds approximately 16.20% of our issued and
outstanding shares. If Olympus had decided to exercise its option on September
30, 2006 to purchase all 2,200,000 shares, it would have held 25.06% of our
outstanding common stock as of September 30, 2006. Additionally, Olympus
has a
right, which it has not yet exercised, to designate a director to serve on
our
Board of Directors.
Formation
of the Olympus-Cytori Joint Venture
On
November 4, 2005, we entered into a joint venture and other related
agreements (the “Joint Venture Agreements”) with Olympus. The Joint
Venture is owned equally by Olympus and us.
Under
the
Joint Venture Agreements:
|
·
|
Olympus
paid $30,000,000 for its 50% interest in the Joint Venture. Moreover,
Olympus simultaneously entered into a License/Joint Development
Agreement
with the Joint Venture and us to develop a second generation commercial
system and manufacturing capabilities.
|
|
·
|
We
licensed our device technology, including the Celution™ System and certain
related intellectual property, to the Joint Venture for use in
future
generation devices. These devices will process and purify adult
stem and
regenerative cells residing in adipose (fat) tissue for various
therapeutic clinical applications. In exchange for this license,
we
received a 50% interest in the Joint Venture, as well as an initial
$11,000,000 payment from the Joint Venture; the source of this
payment was
the $30,000,000 contributed to the Joint Venture by Olympus.
Moreover, upon receipt of a CE mark for the first generation Celution™
System in January 2006, we received an additional $11,000,000 development
milestone payment from the Joint
Venture.
|
As
a
result of the $30,000,000 cash contribution to the Joint Venture by Olympus,
we
realized an immediate appreciation in the carrying value of our interests
in the
Joint Venture. As a result, we reported accretion of interests in the Joint
Venture of $3,829,000 as a credit directly to additional paid-in capital
in the
fourth quarter of 2005. This accounting treatment is required by Securities
and
Exchange Commission Staff Accounting Bulletin No. 51, “Accounting for Sales of
Stock by a Subsidiary,” which prohibits gains from equity transactions (in this
case, the non-cash accretion of the interests held in an investment issuing
additional shares to another shareholder) when such entity is a “newly-formed,
non-operating entity” or a “research and development stage
company.”
We
have
determined that the Joint Venture is a variable interest entity (“VIE”) pursuant
to FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51” (“FIN 46R”), but that
Cytori is not the VIE’s primary beneficiary. Accordingly, we have accounted for
our interests in the Joint Venture using the equity method of accounting,
since
we can exert significant influence over the Joint Venture’s operations. At
September 30, 2006, the carrying value of our investment in the Joint Venture
is
$82,000.
We
are
under no obligation to provide additional funding to the Joint Venture, but
may
choose to do so. In the first quarter of 2006, we contributed $150,000 to
the
Joint Venture.
Put/Calls
and Guarantees
The
Shareholders’ Agreement between Cytori and Olympus provides that in certain
specified circumstances of insolvency or if we experience a change in control,
Olympus will have the rights to (i) repurchase our interests in the Joint
Venture at the fair value of such interests or (ii) sell its own interests
in
the Joint Venture to Cytori at the higher of (a) $22,000,000 or (b) the
Put's fair value.
As
of
November 4, 2005, the fair value of the Put was determined to be $1,500,000.
At
December 31, 2005, the fair value of the Put was $1,600,000, and increased
to
$1,800,000 for the quarter ended September 30, 2006. The change of $200,000
was
recorded in the statements of operations as a component of Change in fair
value
of option liabilities. The Put value itself, which is perpetual, has been
recorded in the caption Long-term option liabilities in the balance
sheet.
The
valuations of the Put were completed by an independent valuation firm
using an option pricing theory based simulation analysis (i.e., a Monte
Carlo simulation). The valuations are based on assumptions as of the
valuation date with regard to the market value of Cytori and the estimated
fair value of the Joint Venture, the expected correlation between the values
of
Cytori and the
Joint
Venture, the expected volatility of Cytori and the Joint Venture, the bankruptcy
recovery rate for Cytori, the bankruptcy threshold for Cytori, the probability
of a change of control event for Cytori, and the risk free rate.
The
following assumptions were employed in estimating the value of the Put at
September 30, 2006 (these assumptions were not materially different from
those
used in valuing the Put as of November 4, 2005, and December 31,
2005):
|
·
|
The
expected volatilities of Cytori and the Joint Venture were assumed
to be
63.2% and 69.1%, respectively,
|
|
·
|
The
bankruptcy recovery rate for Cytori was assumed to be 21%,
|
|
·
|
The
bankruptcy threshold for Cytori was assumed to be $10.78 million,
|
|
·
|
The
probability of a change of control event for Cytori was assumed
to be
3.04%,
|
|
·
|
The
expected correlation between fair values of Cytori and the Joint
Venture
in the future was assumed to be 99%,
and
|
|
·
|
The
risk free rate was assumed to be 4.64%.
|
The
Put
has no expiration date. Accordingly, we will continue to recognize a liability
for the Put and mark it to market each quarter until it is exercised or until
the arrangements with Olympus are amended.
The
Joint
Venture has exclusive access to our technology for the development, manufacture,
and supply of the devices (second generation and beyond) for all therapeutic
applications. Once a second generation Celution™ System is developed and
approved by regulatory agencies, the Joint Venture may sell such systems
exclusively to us at a formula-based transfer price; we have retained marketing
rights to the second generation devices for all therapeutic applications
of
adipose stem and regenerative cells.
As
part
of the various agreements with Olympus, we will be required, following
commercialization of the Celution™ System, to provide monthly forecasts to the
Joint Venture specifying the quantities of each category of devices that
we
intend to purchase over a rolling six-month period. Although we are not subject
to any minimum purchase requirements, we are obliged to buy a minimum percentage
of the products forecasted by us in such reports. Since we can effectively
control the number of devices we will agree to purchase and because no
commercial devices have yet been developed to trigger the forecast requirement,
we estimate that the fair value of this guarantee is de minimis as of September
30, 2006.
Deferred
revenues, related party
As
of
September 30, 2006, the deferred revenues, related party account primarily
consists of the consideration we have received in exchange for future services
that we have agreed to perform on behalf of Olympus and the Joint Venture.
These
services include completing preclinical and clinical studies, product
development and seeking regulatory approval for the treatment of various
therapeutic conditions with adult stem and regenerative cells residing in
adipose (fat) tissue. These services also include providing an exclusive
and
perpetual license to our device technology, including the Celution™ System and
certain related intellectual property.
Pursuant
to EITF 00-21, we have concluded that the license and development services
must
be accounted for as a single unit of accounting. Refer to note 9 for a full
description of our revenue recognition policy.
|
18.
|
Gain
on Sale of Assets, Thin Film Product Line
|
In
May
2004, we sold most, but not all, of our intellectual property rights and
tangible assets related to our Thin Film product line to MAST (see note 19).
The
carrying value of the assets transferred to MAST prior to disposition totaled
$634,000, and was comprised of the following:
|
·
|
Finished
goods inventory of $177,000,
|
|
·
|
Manufacturing
and development equipment of $217,000, and
|
|
·
|
Goodwill
of $240,000.
|
Under
this agreement we were contractually entitled to the following additional
consideration (none of this consideration has been recognized in the financial
statements):
|
·
|
$200,000,
payable only upon receipt of 510(k) clearance from the U.S. Food
and Drug
Administration (“FDA”) for a hernia wrap product (thin film combined
product); and
|
|
·
|
$2,000,000
on or before the earlier of (i) May 31, 2005, known as the “Settlement
Date,” or (ii) 15 days after the date upon which MAST has hired a Chief
Executive Officer (“CEO”), provided the CEO held that position for at
least four months and met other requirements specified in the sale
agreement. Note that clause (ii) effectively means that we would
not have
received payment of $2,000,000 before May 31, 2005 unless MAST
had hired a
CEO on or before January 31, 2005 (four months prior to the Settlement
Date). Moreover, in the event that MAST had not hired a CEO on
or before
January 31, 2005, MAST may have (at its sole option and subject
to the
requirements of the sale agreement) alternatively provided us with
a 19%
equity interest in the MAST business that is managing the Thin
Film assets
at May 31, 2005 in lieu of making the $2,000,000 payment. Our contention
was that MAST did in fact hire a CEO on or before January 31, 2005,
and
thus, we were entitled to a $2,000,000 cash payment on or before
May 31,
2005.
|
MAST
did
not make the payments specified above. Therefore, on June 14, 2005, we initiated
arbitration proceedings against MAST, asserting that MAST was in breach of
the
Asset Purchase Agreement by failing to pay the final $2,000,000 in purchase
price (among other issues). MAST responded asserting its own claims on or
about
June 23, 2005. MAST’s claims included but were not limited to the following
allegations: (i) we inadequately transferred know-how to MAST, (ii) we
misrepresented the state of the distribution network, (iii) we provided
inadequate product instructions to users, and (iv) we failed to adequately
train
various distributors.
In
August
2005, the parties settled the arbitration proceedings and gave mutual releases
of all claims, excepting those related to the territory of Japan, and agreed
to
contractual compromises, the most significant of which is our waiving of
the
obligation for MAST to either pay the final cash purchase installment of
$2,000,000 or to deliver 19% of its shares. Moreover, if MAST exercises its
Purchase Right (see note 18) and Thin Film products are marketed in Japan,
MAST
would no longer be obliged to share certain gross profits and royalties with
us.
In
exchange, MAST agreed to supply - at no cost to us - all required product
for
any necessary clinical study for the territory of Japan and to cooperate
in the
planning of such study. However, if MAST exercises its Purchase Right or
if we
enter into a supply agreement with MAST for the territory of Japan, we would
be
obliged to reimburse MAST for any Thin Film product supplied in connection
with
the Japanese study at a cost of $50 per sheet.
As
a
result of the arbitration settlement, we recognized the remaining deferred
gain
on sale of assets of $5,650,000, less $124,000 of related deferred costs,
in the
statement of operations in the third quarter of 2005.
|
19.
|
Thin
Film Japan Distribution
Agreement
|
In
the
third quarter of 2004, we entered into a Distribution Agreement with Senko.
Under this agreement, we granted to Senko an exclusive license to sell and
distribute certain Thin Film products in Japan. Specifically, the license
covers
Thin Film products with the following indications:
|
·
|
Anti-adhesion,
|
|
·
|
Soft
tissue support, and
|
|
·
|
Minimization
of the attachment of soft tissues throughout the body.
|
The
Distribution Agreement with Senko commences upon “commercialization.” In
simplest terms, commercialization occurs when one or more Thin Film product
registrations are completed with the MHLW.
Following
commercialization, the Distribution Agreement has a duration of five years
and
is renewable for an additional five years after reaching mutually agreed
minimum
purchase guarantees.
The
Distribution Agreement also provides for us to supply certain products to
Senko
at fixed prices over the life of the agreement once we have received approval
to
market these products in Japan. In addition to the product price, Senko
will also be obligated to make royalty payments to us of 5% of the sales
value
of any products Senko sells to its customers during the first three years
post-commercialization.
At
the
inception of this arrangement, we received a $1,500,000 license fee which
was
recorded as deferred revenues in 2004. We have also received $1,250,000 in
milestone payments from Senko. See “Revenue Recognition” under note 9 above for
our policies with regard to the timing of when these amounts will be recognized
as revenues.
As
part
of the Thin Film sales agreement (see note 18), we granted MAST a right to
acquire our Thin Film-related interest in Japan (the “Purchase Right”) during
the time period and according to the following terms:
|
·
|
From
May 31, 2005 to May 31, 2007, the exercise price of the Purchase
Right
will be equal to the fair market value of the Japanese business,
but in no
event will be less than $3,000,000.
|
|
·
|
Moreover,
between May 31, 2005 and May 31, 2007, MAST will have a right of
first
refusal to match the terms of any outside offer to buy our Japanese
Thin
Film business.
|
We
have
agreed to provide back-up supply of products to Senko subject to the terms
of
the Distribution Agreement in the event that (a) MAST exercises its Purchase
Right and (b) MAST materially fails to deliver product to Senko. In this
circumstance, Senko would pay any amounts due for purchases of product, as
well
as make royalty payments directly to us. We would be obliged to remit 5%
of the
gross margin to MAST on any products sold to Senko. We believe that it is
unlikely in practice that this contingency will materialize. Accordingly,
we
estimate the fair value of this guarantee to be de minimis as of the end
of the
current reporting period.
|
20.
|
Equity
Offering
|
In
May
2006, we filed a shelf registration statement to allow ourselves the ability
to
raise capital through the issuance of common stock, preferred stock, or
warrants. In the third quarter of 2006 we received approximately $16,800,000
from the sale of 2,918,255 shares of common stock at $5.75 per share. The
purchase price was determined by our closing price on August 9, 2006. Of
the
amount issued, Olympus purchased $11,000,000 while the balance was purchased
by
certain institutional investors.
We
incurred approximately $428,000 in costs related to this issuance, which
was
included in the net increase of approximately $16,400,000 to our additional
paid-in-capital.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
report contains certain statements that may be deemed “forward-looking
statements” within the meaning of United States securities laws. All statements,
other than statements of historical fact, that address activities, events
or
developments that we intend, expect, project, believe or anticipate will
or may
occur in the future are forward-looking statements. Such statements are based
upon certain assumptions and assessments made by our management in light
of
their experience and their perception of historical trends, current conditions,
expected future developments and other factors they believe to be appropriate.
The forward-looking statements included in this report are also subject to
a
number of material risks and uncertainties, including but not limited to
the
risks described under the “Risk Factors” section in Part II below.
We
encourage you to read those descriptions carefully. We caution you not to
place
undue reliance on the forward-looking statements contained in this report.
These
statements, like all statements in this report, speak only as of the date
of
this report (unless an earlier date is indicated) and we undertake no obligation
to update or revise the statements except as required by law. Such
forward-looking statements are not guarantees of future performance and actual
results will likely differ, perhaps materially, from those suggested by such
forward-looking statements.
Overview
Cytori
Therapeutics, Inc. is developing treatments derived from stem cells that
reside
naturally in adipose (fat) tissue. We are focused on developing applications
for
these cells for acute myocardial infarction (heart attack), chronic ischemia,
a
severe form of coronary artery disease, and for use in reconstructive surgery.
Our goal is to advance these applications into and through clinical trials
and
commercialize these therapies with an innovative cell processing device called
the Celution™ System. This system automates the complex procedure for extracting
and concentrating a patient’s stem and regenerative cells from his/her own
adipose tissue at the bedside in about an hour.
The
research and development of our adipose stem and regenerative cell therapies
has
been, and will continue to be, very costly in order to fund clinical trials,
preclinical development, and basic research. Research and development expenses
for the nine months ended September 2006 increased substantially compared
to the
same period in 2005 primarily due to the increase in research and clinical
development staff.
To
address our funding requirements and bolster our cash reserves, in August
2006
we raised approximately $16,800,000 from the sale of 2,918,255 shares of
common
stock at $5.75 per share. Of the amount of stock sold, Olympus Corporation
(“Olympus”) purchased $11,000,000 while the balance was purchased by new and
existing institutional investors. Olympus continues to hold an option to
purchase up to 2,200,000 shares of Cytori’s common stock, which expires on
December 31, 2006.
Our
Board
of Directors has decided to divest and is actively seeking a buyer (or buyers)
for our remaining MacroPore Biosurgery assets as a means to further bolster
our cash position as well as to eliminate expenses related to maintaining
product manufacturing operations. Revenues from our MacroPore Biosurgery
business have dropped significantly, resulting in negative gross margins
in the
second and third quarters of 2006, which has reduced our cash position and
contributed to our increased net losses.
During
the third quarter, we reduced our staff by approximately 18% predominantly
due
to our decreased emphasis on the MacroPore Biosurgery business line. This
will
further streamline our operations by significantly decreasing our operating
expenses. It also reflects the increased focus on our regenerative cell
technology and clinical development.
Our increased research and development efforts in the regenerative cell segment
year-to-date resulted in the achievement of many milestones. During this
time,
we received regulatory clearance on the clinical trial version of our Celution™
System in Europe (CE Mark). With this approval and based on our preclinical
data, we expect to initiate clinical studies in Europe to seek reimbursement
and
claims expansion so that we may market the device for specific therapeutic
applications. A safety and feasibility study is scheduled to begin before
the
end of 2006 to study the use of adipose stem regenerative cells processed
via
the Celution™ System as a treatment for chronic ischemia, a severe form of
coronary artery disease. A second safety and feasibility study is being designed
to study the use of these cells for acute myocardial infarction, which we
anticipate will begin in 2007.
During
the third quarter, we reported data on an important preclinical porcine study
evaluating the use of adipose stem and regenerative cells processed via the
Celution™ System for treating chronic ischemia. The findings were that injection
of adipose stem and regenerative cells into ischemic areas of a heart imparted
a
statistically significant improvement in ejection fraction, a measure of
the
heart’s pumping efficiency, and ventricular wall thickness, which may slow the
deterioration of its pumping ability. We believe the mechanism by which this
benefit was imparted is through angiogenesis, which promotes blood vessel
growth
and increases perfusion in and around the ischemic area.
During
the second and third quarters of 2006, the first 11patients were treated in
an investigator-initiated study in Japan utilizing our Celution™ System to
explore the use of adipose stem and regenerative cells in breast reconstruction
following a partial mastectomy. This application could serve as an alternative
to a synthetic implant or a complicated surgical procedure. Based on the
investigator’s preliminary observations, he feels there is a high likelihood
that the primary evaluation endpoints of safety and feasibility were met
and
therefore no further patient enrollment is required. We are evaluating the
sponsorship of larger studies for the same application in Japan and Europe
to
support market adoption in these regions.
Transactions
with Olympus
During
2005 and 2006, we entered into a number of strategic and collaboration
arrangements with Olympus. In the second quarter of 2005, Olympus purchased
1,100,000 shares of our common stock. In addition, we granted Olympus an
option
to purchase up to 2,200,000 additional shares of common stock at $10.00 per
share; this option expires December 31, 2006. Olympus was also given
a right to nominate one of our Directors, but has not yet exercised this
right.
We received $11,000,000 from Olympus upon signing this agreement.
On
November 4, 2005, we formed a joint venture with Olympus called Olympus-Cytori,
Inc. (the “Joint Venture”). We received $11,000,000 in cash from the Joint
Venture, the source of which was from Olympus’ initial investment in the
entity.
The
Joint
Venture plans to develop and manufacture future generation devices (based
on our
existing Celution™ System) that will process and purify adult stem and
regenerative cells residing in adipose tissue, also known as fat. The Joint
Venture alliance creates synergies between two companies that share the same
vision for regenerative medicine. Olympus, as a worldwide leader in the
development of innovative medical products, will contribute its expertise
in
engineering, manufacturing and servicing of sophisticated devices. In parallel,
we will increase our focus on the development of therapeutic applications
for
adipose stem and regenerative cells for multiple large markets. Together,
this
alignment enables the creation of a premier brand of devices for regenerative
medicine, to be sold by us.
As
a
result of the various arrangements with Olympus, we received $22,000,000
in cash
during 2005. We also received an additional $11,000,000 milestone payment
in
January 2006 after obtaining a CE Mark for the first generation Celution™
System. In the third quarter of 2006, we issued to Olympus an additional
1,913,043 shares for an aggregate amount of $11,000,000, which we received
in
August 2006. We may possibly receive even more cash proceeds if Olympus decides
to exercise its option to purchase 2,200,000 shares of Cytori common stock.
If
Olympus had chosen to exercise its option on September 30, 2006 to purchase
all
2,200,000 shares, it would have held 25.06% of our outstanding common stock
as
of September 30, 2006.
We
have
been using and plan to continue to use the $44,000,000 in total cash proceeds
received from Olympus to fund the development activities that are necessary
to
support the commercialization of future generation devices based on our
Celution™ System. These development activities include performing preclinical
and clinical trials, seeking regulatory approval, and performing product
development related to therapeutic applications for adipose stem and
regenerative cells for multiple large markets.
In
connection with the joint venture arrangement with Olympus, Cytori is provided
with a source of revenue in the near-and-medium-term. Initially, we recorded
$28,311,000 as deferred revenues, related party, a liability account, in
the
consolidated balance sheet.
This
balance sheet account represents unearned payments for future services that
we
have agreed to perform on behalf of the Joint Venture. As we complete our
future
service obligations, we will recognize income (using a proportional performance
methodology) and reduce the deferred revenues, related party account.
Specifically, we have recognized a portion of the $28,311,000 as revenue
and
will continue to do so through 2009. The exact timing of when amounts will
be
reported as development revenue will depend on internal factors (for instance,
our ability to complete the service obligations we have agreed to perform)
as
well as external considerations, including obtaining the necessary regulatory
approvals for various therapeutic applications related to the Celution™ System.
As
part
of the various agreements with Olympus, we will be required, following
commercialization of the Celution™ System, to provide monthly forecasts to the
Joint Venture specifying the quantities of each category of devices that
we
intend to purchase over a rolling six-month period. Although we are not subject
to any minimum purchase requirements, we are obliged to buy a minimum percentage
of the products forecasted by us in such reports. Since we can effectively
control the number of devices we will agree to purchase and because no
commercial devices have yet been developed to trigger the forecast requirement,
we estimate that the fair value of this guarantee is de minimis as of September
30, 2006 and therefore no amounts related to this guarantee are reflected
on the
balance sheet.
In
certain specified circumstances of insolvency or if we experience a change
in
control, Olympus will have the rights to (i) repurchase our interests in
the
Joint Venture at the fair value of such interests or (ii) sell its own interests
in the Joint Venture to us at the higher of (a) $22,000,000 or (b) the
Put's fair value. These put and call rights are contingent on events that
are unlikely to occur. Nonetheless, accepted valuation techniques suggest
that
the put right has a value of approximately $1,800,000 as of September 30,
2006.
This value has been recorded as a component of Option liabilities in our
balance
sheet. Note that the put right is perpetual. Accordingly, we will continue
to
recognize a liability for the Put and mark it to market each quarter until
it is
exercised or until the arrangements with Olympus are amended.
We
determined that the Joint Venture is a variable interest entity (“VIE”) under
FASB
Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51”
(“FIN
46R”), but that we are not the Joint Venture’s primary beneficiary. Accordingly,
we have accounted for our interests in the Joint Venture using the equity
method
of accounting, since we can exert significant influence over the Joint Venture’s
operations.
In
February 2006, we granted Olympus an exclusive right to negotiate a
commercialization collaboration for the use of adipose stem and regenerative
cells for a specific therapeutic area outside of cardiovascular disease.
In
exchange for this right, we received $1,500,000 from Olympus, which is
non-refundable but may be applied towards any definitive commercial
collaboration in this therapeutic area in the future. As part of this agreement,
Olympus will conduct market research and pilot clinical studies in collaboration
with us over a 12 to 18 month period for the therapeutic area. The $1,500,000
represents a portion of the deferred revenues, related party account in the
balance sheet and will be recognized in the income statement either (i) in
connection with other consideration received as part of a definitive commercial
collaboration in the future, or (ii) when the exclusive negotiation period
expires.
Thin
Film Japan Distribution Agreement
Even
after consummation of the 2004 Thin Film asset sale to MAST, we retained
all
rights to Thin Film business in Japan (subject to a purchase option of MAST,
as
described later below), and we received back from MAST a license of all rights
to Thin Film technologies in the:
|
·
|
Spinal
field, exclusive at least until 2012,
and
|
|
·
|
Field
of regenerative medicine, non-exclusive on a perpetual
basis.
|
In
the
third quarter of 2004, we entered into a Distribution Agreement with Senko.
Under this agreement, we granted to Senko an exclusive license to sell and
distribute certain Thin Film products in Japan. Specifically, the license
covers
Thin Film products with the following indications:
|
·
|
Anti-adhesion,
|
|
·
|
Soft
tissue support, and
|
|
·
|
Minimization
of the attachment of soft tissues throughout the body.
|
The
Distribution Agreement with Senko commences upon “commercialization.” In
simplest terms, commercialization occurs when one or more Thin Film product
registrations are completed with the Japanese Ministry of Health, Labour
and
Welfare (“MHLW”).
Following
commercialization, the Distribution Agreement has a duration of five years
and
is renewable for an additional five years after reaching mutually agreed
minimum
purchase guarantees.
We
received a $1,500,000 upfront license fee from Senko. We have recorded
the
$1,500,000 received as a component of deferred revenues in the accompanying
balance sheet. Half of the license fee is refundable if the parties agree
commercialization is not achievable and a proportional amount is refundable
if
we terminate the arrangement, other than for material breach by Senko,
before
three years post-commercialization.
Under
the
Distribution Agreement, we will also be entitled to earn additional payments
from Senko based on achieving defined milestones. On September 28, 2004, we
notified Senko of completion of the initial regulatory application to the
MHLW
for the Thin Film product. As a result, we became entitled to a nonrefundable
payment of $1,250,000, which we received in October 2004 and recorded as a
component of deferred revenues. To date we have recognized a total of $358,000
in development revenues ($149,000 and $20,000 for the nine months ended
September 30, 2006 and 2005, respectively).
The
previously mentioned 2004 sale agreement granted MAST a “Purchase Right” to
acquire, at any time before May 31, 2007, our Thin Film-related interests
and
rights for Japan. If MAST chooses to exercise the Purchase Right between
now and
May 31, 2007, the exercise price of the Purchase Right will be equal to
the fair
market value of the Japanese business, but in no event will be less than
$3,000,000. Moreover, until May 31, 2007, MAST has a right of first refusal
to
match the terms of any outside offer to buy our Japanese Thin Film
business.
Stock-Based
Compensation
In
January 2006, we adopted Financial Accounting Standards Board Statement No.
123R, Share-Based Payment (“SFAS 123R”). SFAS 123R requires us to measure all
share-based payment awards granted after, or that were unvested as of, January
1, 2006 at fair value.
We
have
recognized non-employee stock-based compensation expense of $18,000 and $63,000
for the nine months ended September 30, 2006 and 2005, respectively. We adopted
SFAS 123R using the modified prospective method of transition. Employee
stock-based compensation expense of $2,635,000 was recorded for the nine
months
ended September 30, 2006, and $337,000 was reported in the nine months ended
September 30, 2005. Specifically, we recorded compensation expense for:
|
·
|
Awards
granted after January 1, 2006, and
|
|
·
|
The
unvested portion of previously granted awards outstanding at the
date of
adoption.
|
Awards
granted to employees prior to our implementation of SFAS 123R were accounted
for
under the recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations.
As
of
September 30, 2006, the total compensation cost related to non-vested stock
options not yet recognized for all plans presented is approximately $4,341,000.
These costs are expected to be recognized over a weighted average period
of 1.91
years.
In
calculating the fair value of option awards granted after January 1, 2006,
we,
for the most part, used the same methodologies and assumptions employed prior
to
our adoption of SFAS 123R. For instance, our estimate of expected volatility
is
based exclusively on our historical volatility, since we have granted options
that vest purely based on the passage of time and otherwise meet the criteria
to
exclusively rely on historical volatility, as set out in Staff Accounting
Bulletin No. 107, “Share-Based Payment”. We did, however, change our policy of
attributing the cost of share-based payment awards granted after January
1, 2006
from the “graded vesting approach” to the “straight-line” method. We believe
that this change more accurately reflects the manner in which our employees
vest
in an option award.
Since
the
adoption of SFAS 123R, we have not made any changes to the types of awards
we
have historically granted to our employees. However, upon termination of
our
Senior Vice President of Finance and Administration, Treasurer, and Principal
Accounting Officer in May 2006, we extended his post-separation exercise
period
on his vested stock options until December 31, 2007. Furthermore, upon
elimination of the positions of our Senior Vice President, Business Development,
and Vice President, Marketing & Development, in July 2006, we granted both
employees an extension of the exercise period on their vested stock options
until December 31, 2007. These modifications were based on a business decision
related to the awards of three specific individuals and is not in any way
related to the implementation of SFAS 123R.
Results
of Operations
Product
revenues
Product
revenues relate to our MacroPore Biosurgery segment and include revenues
from
our spine and orthopedic products. The following table summarizes the components
for the three and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Spine
and orthopedics products
|
$
|
133,000
|
$
|
1,544,000
|
$
|
(1,411,000
|
)
|
(91.4
|
)%
|
$
|
1,087,000
|
$
|
4,776,000
|
$
|
(3,689,000
|
)
|
(77.2
|
)%
|
||||||||
|
%
attributable to Medtronic
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||||||||||||
Spine
and
orthopedic product revenues represent sales of bioresorbable implants used
in
spine and orthopedic surgical procedures. These revenues were primarily related
to orders during the three and nine months ended September 30, 2006 for our
radiographically identifiable Spine System products, marketed under the name
MYSTIQUE™, which Medtronic, our sole distributor of spine and orthopedic
products, launched in the third quarter of 2005. Revenues in the third quarter
of 2005 were dominated by pre-launch stocking orders for our MYSTIQUE™ products.
However, subsequent to the product launch in the third quarter of 2005,
Medtronic has substantially decreased its orders of this product. As a result
of
this decrease, we experienced negative profit margins for our MacroPore
Biosurgery segment for the three and nine months ended September 30,
2006.
Note
that
Medtronic owns approximately 5.38% of our outstanding common stock as of
September 30, 2006.
The
future (2006):
Our
revenue from spine and orthopedic products is dependent upon the market’s
adoption of our technology, which is largely dependent upon Medtronic’s
marketing efforts and pricing strategies. Therefore our visibility of the
size
and timing of HYDROSORB™ and MYSTIQUE™ orders is limited. Since we rely on
Medtronic’s ability and commitment to build and expand the market share for our
products and we have been disappointed in the past by their effort at such,
it
is possible that we will not receive more than minimal orders for the MYSTIQUE™
portion of the HYDROSORB™ product line during the remainder of 2006. Since it is
unlikely that we will see significant sales of the current non-MYSTIQUE™
products any time in the future, it is likely that we will continue to see
losses in our Medtronic-dependent MacroPore Biosurgery business going forward.
The
majority of all product revenues are attributable to Medtronic as domestic
Thin
Film revenues ceased in 2004. This may change when commercialization of the
Thin
Film products in Japan occurs and we begin Thin Film shipments to Senko.
Cost
of product revenues
Cost
of
product revenues relates to our MacroPore Biosurgery segment and includes
material, manufacturing labor, overhead costs and an inventory provision.
The
following table summarizes the components of our cost of revenues for the
three
and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Cost
of product revenues
|
$
|
368,000
|
$
|
796,000
|
$
|
(428,000
|
)
|
(53.8
|
)%
|
$
|
1,208,000
|
$
|
2,233,000
|
$
|
(1,025,000
|
)
|
(45.9
|
)%
|
||||||||
|
Inventory
provision
|
—
|
132,000
|
(132,000
|
)
|
—
|
70,000
|
178,000
|
(108,000
|
)
|
(60.7
|
)%
|
|||||||||||||||
|
Stock-based
compensation
|
15,000
|
—
|
15,000
|
—
|
63,000
|
—
|
63,000
|
—
|
||||||||||||||||||
|
Total
cost of product revenues
|
$
|
383,000
|
$
|
928,000
|
$
|
(545,000
|
)
|
(58.7
|
)%
|
$
|
1,341,000
|
$
|
2,411,000
|
$
|
(1,070,000
|
)
|
(44.4
|
)%
|
||||||||
|
Total
cost of product revenues as % of product revenues
|
288.0
|
%
|
60.1
|
%
|
123.4
|
%
|
50.5
|
%
|
||||||||||||||||||
MacroPore
Biosurgery:
|
·
|
As
our product revenues are currently generated only through sales
of
bioresorbable products, cost of revenues is related only to our
MacroPore
Biosurgery segment.
|
|
·
|
Total
cost of product revenues, as a percent of product revenues, increased
by
581.7% and 344.4% for the three and nine months ended September
30, 2006,
respectively, as compared to the same periods in 2005. The change
for the
three and nine months ended September 30, 2006 as compared to the
same
periods in 2005 was due primarily to fixed labor and overhead costs
applied to sharply declining product revenues in the periods. As
MacroPore
Biosurgery product revenues have declined, gross margins have been
negatively affected by fixed costs. In fact, for the three and
nine months
ended September 30, 2006, we experienced negative profit margins.
|
|
·
|
In
response to MacroPore Biosurgery’s declining revenues, we are seeking to
reduce expenses. We reduced our headcount by 18% in the third quarter
of
2006. A large portion of the affected personnel related to the
MacroPore
Biosurgery segment.
|
|
·
|
Excess
manufacturing costs - that is, costs resulting from lower than
“normal”
production levels - expensed during the three and nine months ended
September 30, 2006 were $346,000 and $988,000 as compared to $341,000
and
$532,000 for the same periods in 2005.
|
|
·
|
Cost
of product revenues in 2006 includes approximately $15,000 and
$63,000 of
stock-based compensation expense for the three and nine months
ended
September 30, 2006, respectively. There was no similar expense
in 2005.
For further details, see stock-based compensation discussion below.
|
|
·
|
During
the third quarters of 2006 and 2005, we recorded provisions of
$0 and
$132,000, respectively, related to excess
inventory.
|
The
future (2006).
The
lack of orders from Medtronic deprives us of economies of scale and has and
will
continue to negatively impact our margins. We do not expect demand for our
HYDROSORB™ MYSTIQUE™ products, which depends largely on Medtronic’s marketing
efforts, to increase during the remainder of 2006. If this proves to be true,
this segment will remain unprofitable and we will continue to incur excess
manufacturing costs similar to amounts we recorded in the first nine months
of
the year.
It
appears that the spine and orthopedics business is not succeeding under our
stewardship. As a result, our Board of Directors has decided to divest and
is
actively seeking a buyer (or buyers) for these assets.
Development
revenues
The
following table summarizes the components of our development revenues for
the
three and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||
|
Development
(Olympus)
|
$
|
—
|
$
|
—
|
$
|
—
|
—
|
$
|
683,000
|
$
|
—
|
$
|
683,000
|
—
|
||||||||||||
|
Research
grant (NIH)
|
303,000
|
25,000
|
278,000
|
1,112.0
|
%
|
310,000
|
110,000
|
200,000
|
181.8
|
%
|
||||||||||||||||
|
Regenerative
cell storage services and other
|
47,000
|
2,000
|
45,000
|
2,250.0
|
%
|
103,000
|
6,000
|
97,000
|
1,616.7
|
%
|
||||||||||||||||
|
Total
regenerative cell technology
|
350,000
|
27,000
|
323,000
|
1,196.3
|
%
|
1,096,000
|
116,000
|
980,000
|
844.8
|
%
|
||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||
|
Development
(Senko)
|
1,000
|
11,000
|
(10,000
|
)
|
(90.9
|
)%
|
149,000
|
20,000
|
129,000
|
645.0
|
%
|
|||||||||||||||
|
Total
development revenues
|
$
|
351,000
|
$
|
38,000
|
$
|
313,000
|
823.7
|
%
|
$
|
1,245,000
|
$
|
136,000
|
$
|
1,109,000
|
815.4
|
%
|
||||||||||
Regenerative
cell technology:
|
·
|
We
recognize deferred revenues, related party, as development revenue
when
certain performance obligations are met (i.e., using a proportional
performance approach). During the three and nine months ended September
30, 2006, we recognized $0 and $683,000 of revenue associated with
our
arrangements with Olympus. The revenue recognized in the first
quarter of
2006 was a result of completion of a pre-clinical study and a milestone
payment upon receipt of a CE mark for the first generation Celution™
System.
|
|
·
|
The
research grant revenue relates to our agreement with the National
Institutes of Health (“NIH”). Under this arrangement, the NIH reimburses
us for “qualifying expenditures” related to research on Adipose-Derived
Cell Therapy for Myocardial Infarction. To receive funds under
the grant
arrangement, we are required to (i) demonstrate that we incurred
“qualifying expenses,” as defined in the grant agreement between the NIH
and us, (ii) maintain a system of controls, whereby we can accurately
track and report all expenditures related solely to research on
Adipose-Derived Cell Therapy for Myocardial Infarction, and (iii)
file
appropriate forms and follow appropriate protocols established
by the
NIH.
|
Our
policy is to recognize revenues under the NIH grant arrangement as the lesser
of
(i) qualifying costs incurred (and not previously recognized), plus our
allowable grant fees for which we are entitled to funding or (ii) the amount
determined by comparing the outputs generated to date versus the total outputs
expected to be achieved under the research arrangement.
During
the three and nine months ended September 30, 2006, we incurred $393,000
and
$479,000 in expenditures, of which $303,000 and $310,000 were qualified.
We
recorded a total of $303,000 and $310,000 in revenues for the three and nine
months ended September 30, 2006, respectively, which include allowable grant
fees as well as cost reimbursements. During the three and nine months ended
September 30, 2005, we incurred $25,000 and $108,000 of costs, of which all
were
qualified. We recorded a total of $25,000 and $110,000 in revenues for the
three
and nine months ended September 30, 2005, which includes $2,000 in allowable
grant fees as well as cost reimbursements.
MacroPore
Biosurgery:
Under
a
Distribution Agreement with Senko we are entitled to earn payments based
on
achieving the following defined milestones:
|
·
|
Upon
notifying Senko of completion of the initial regulatory application
to the
MHLW for the Thin Film product, we were entitled to a nonrefundable
payment of $1,250,000. We so notified Senko on September 28, 2004,
received payment in October of 2004, and recorded deferred revenues
of
$1,250,000. As of September 30, 2006, of the amount deferred, we
have
recognized development revenues of $358,000 ($149,000 in 2006,
$51,000 in
2005, and $158,000 in 2004).
|
|
·
|
Under
this agreement, we also received a $1,500,000 license fee that
was
recorded as a component of deferred revenues in the accompanying
balance
sheet. We are also entitled to a nonrefundable payment of $250,000
once we
achieve commercialization. Because the $1,500,000 in license fees
are
potentially refundable, such amounts will not be recognized as
revenues
until the refund rights expire. Specifically, half of the license
fee is
refundable if the parties agree commercialization is not achievable
and a
proportional amount is refundable if we terminate the arrangement,
other
than for material breach by Senko, before three years
post-commercialization.
|
The
future (2006):
We
expect that revenues from our regenerative cell technology segment will increase
during the remainder of 2006. Specifically, we anticipate completing two
pre-clinical studies and certain phases of our product development performance
obligations during the remainder of 2006. If we are successful in achieving
certain milestone points related to these activities, we will recognize
approximately $7,000,000 in revenues in 2006. The exact timing of when amounts
will be reported in revenue will depend on internal factors (for instance,
our
ability to complete the service obligations we have agreed to perform) as
well
as external considerations, including obtaining the necessary regulatory
approvals for various therapeutic applications related to the Celution™
System.
We
are
entitled to receive up to $850,000 in grants related to Adipose-Derived Cell
Therapy for Myocardial Infarction as defined by the NIH grant agreement for
Phase II research. As of September 30, 2006, we have received and recognized
all
$850,000 of such funding.
We
will
continue to recognize revenue from the development work we are performing
on
behalf of Senko, based on the relative fair value of the milestones completed
to
the total efforts expected to be necessary to obtain regulatory clearance
with
the MHLW. Obtaining regulatory clearance with the MHLW for initial
commercialization is expected in the fourth quarter of 2006 or early 2007.
Accordingly, we expect to recognize approximately $1,142,000 (consisting
of
$892,000 in deferred revenues plus a non-refundable payment of $250,000 to
be
received upon commercialization) in revenues associated with this milestone
arrangement. Moreover, we expect to recognize $500,000 per year associated
with
deferred Senko license fees over a three-year period following commercialization
as the refund rights associated with the license payment expire.
Research
and development expenses
Research
and development expenses include costs associated with the design, development,
testing and enhancement of our products, regulatory fees, the purchase of
laboratory supplies, pre-clinical studies, and in 2006, clinical studies.
The
following table summarizes the components of our research and development
expenses for the three and nine months ended September 30, 2006 and
2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||
|
Regenerative
cell technology
|
$
|
2,805,000
|
$
|
3,293,000
|
$
|
(488,000
|
)
|
(14.8
|
)%
|
$
|
9,785,000
|
$
|
8,288,000
|
$
|
1,497,000
|
18.1
|
%
|
|||||||||
|
Joint
Venture
|
1,866,000
|
—
|
1,866,000
|
—
|
4,732,000
|
—
|
4,732,000
|
—
|
||||||||||||||||||
|
Research
grants (NIH)
|
302,000
|
25,000
|
277,000
|
1,108.0
|
%
|
388,000
|
108,000
|
280,000
|
259.3
|
%
|
||||||||||||||||
|
Stock-based
compensation
|
296,000
|
4,000
|
292,000
|
7,300.0
|
%
|
837,000
|
67,000
|
770,000
|
1,149.3
|
%
|
||||||||||||||||
|
Total
regenerative cell technology
|
5,269,000
|
3,322,000
|
1,947,000
|
58.6
|
%
|
15,742,000
|
8,463,000
|
7,279,000
|
86.0
|
%
|
||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||
|
Bioresorbable
polymer implants
|
235,000
|
533,000
|
(298,000
|
)
|
(55.9
|
)%
|
824,000
|
1,907,000
|
(1,083,000
|
)
|
(56.8
|
)%
|
||||||||||||||
|
Development
milestone-Senko
|
45,000
|
24,000
|
21,000
|
87.5
|
%
|
159,000
|
91,000
|
68,000
|
74.7
|
%
|
||||||||||||||||
|
Stock-based
compensation
|
3,000
|
112,000
|
(109,000
|
)
|
(97.3
|
)%
|
24,000
|
112,000
|
(88,000
|
)
|
(78.6
|
)%
|
||||||||||||||
|
Total
MacroPore Biosurgery
|
283,000
|
669,000
|
(386,000
|
)
|
(57.7
|
)%
|
1,007,000
|
2,110,000
|
(1,103,000
|
)
|
(52.3
|
)%
|
||||||||||||||
|
Total
research and development expenses
|
$
|
5,552,000
|
$
|
3,991,000
|
$
|
1,561,000
|
39.1
|
%
|
$
|
16,749,000
|
$
|
10,573,000
|
$
|
6,176,000
|
58.4
|
%
|
||||||||||
Regenerative
cell technology:
|
·
|
Regenerative
cell technology expenses relate to the development of a technology
platform that involves using adipose (fat) tissue as a source for
autologous regenerative cells for therapeutic applications. These
expenses, in conjunction with our continued development efforts
related to
our Celution™ System, result primarily from the broad expansion of our
research and development efforts enabled by the funding we received
from
Olympus in 2005 and 2006. Labor-related expenses, not including
stock-based compensation, increased by $305,000 and $2,031,000,
respectively, for the three and nine months ended September 30,
2006 and
2005. Professional services expense, which includes preclinical
study
costs, increased by $467,000 and $1,326,000 for the three and nine
months
ended September 30, 2006 as compared to the same periods in 2005.
Rent and
utilities expense increased by $118,000 and $805,000 in the three
and nine
months ended September 2006 as compared to 2005 due to the addition
of our
new facility. Other supplies increased by $132,000 and $722,000
during the
three and nine months ended September 30, 2006 as compared to 2005.
Other
notable increases included repairs and maintenance of $150,000
and
$380,000 and depreciation expense increases of $129,000 and $417,000,
for
the three and nine months ended September 30, 2006, respectively,
as
compared to the same periods in 2005.
|
|
·
|
Expenditures
related to the Joint Venture with Olympus, which are included in
the
fluctuation analysis above, include costs that are necessary to
support
the commercialization of future generation devices based on our
Celution™
System. These development activities include performing pre-clinical
and
clinical studies, seeking regulatory approval, and performing product
development related to therapeutic applications for adipose stem
and
regenerative cells for multiple large markets. For the three and
nine
months ended September 30, 2006, costs associated with the development
of
the device were $1,866,000 and $4,732,000. These expenses were
composed of
$712,000 and $2,217,000 in labor and related benefits, $714,000
and
$1,452,000 in consulting and other professional services, $335,000
and
$774,000 in supplies and $105,000 and $289,000 in other miscellaneous
expense, respectively. There were no comparable expenditures for
the three
and nine months ended September 30,
2005.
|
|
·
|
In
2004, we entered into an agreement with the NIH to reimburse us
for up to
$950,000 (Phase I $100,000 and Phase II $850,000) in “qualifying
expenditures” related to research on Adipose-Derived Cell Therapy for
Myocardial Infarction. For the three and nine months ended September
30,
2006, we incurred $393,000 and $479,000 of direct expenses relating
entirely to Phase II ($90,000 and $169,000 of which were not reimbursed,
respectively). To date, we have incurred $1,125,000 of direct expenses
($186,000 of which were not reimbursed) relating to both Phases
I and II
of the agreement.
|
|
·
|
Stock-based
compensation for the regenerative cell technology segment of research
and
development was $296,000 and $837,000 for the three and nine months
ended
September 30, 2006, respectively. Stock-based compensation for
the three
and nine months ended September 30, 2005 was $4,000 and $67,000,
respectively. See stock-based compensation discussion below for
more
details.
|
MacroPore
Biosurgery:
|
·
|
Our
bioresorbable polymer surgical implants platform technology is
used for
development of spine and orthopedic products. The decrease in research
and
development costs associated with bioresorbable polymer implants
for the
three and nine months ended September 30, 2006 as compared with
the same
period in 2005 was due primarily to our shift in focus to our regenerative
cell technology segment. Labor and related benefits expense decreased
by
$150,000 and $548,000 for the three and nine months ended September
30,
2006, respectively, as compared to the same periods in 2005. This
was due
to a redistribution of labor resources from one segment to the
other as
well as a reduction in force in the third quarter of
2006.
|
|
·
|
Under
a Distribution Agreement with Senko we are responsible for the
completion
of the initial regulatory application to the MHLW and commercialization
of
the Thin Film product line in Japan. Commercialization occurs when
one or
more Thin Film product registrations are completed with the MHLW.
During
the three and nine months ended September 30, 2006 we incurred
$45,000 and
$159,000, respectively, of expenses related to this regulatory
and
registration process. We incurred $24,000 and $91,000 of expenses
for the
same periods in 2005.
|
|
·
|
Stock-based
compensation for the MacroPore Biosurgery segment of research and
development for the three and nine months ended September 30, 2006
was
$3,000 and $24,000, respectively. Stock-based compensation for
the three
and nine months ended September 30, 2005 was $112,000 and $112,000,
respectively. See stock-based compensation discussion below for
more
details.
|
The
future (2006).
Our
strategy is to continue to increase our research and development efforts
in the
regenerative cell field and we anticipate expenditures in this area of research
to total approximately $20,000,000 to $22,000,000 in 2006. We are researching
therapies for cardiovascular disease, aesthetic and reconstructive
surgery, gastrointestinal disorders and spine and orthopedic conditions.
The expenditures will primarily relate to developing therapeutic applications
and conducting preclinical and clinical studies on adipose-derived stem and
regenerative cells.
We
continue to reduce research and development expenditures in the bioresorbable
platform technology, and they will continue to be significantly less than
our
regenerative cell business research and development expenditures. We anticipate
minimal further expenditures in this area of research in the fourth quarter
of
2006 given our increased focus on the regenerative cell business.
Sales
and marketing expenses
Sales
and
marketing expenses include costs of marketing personnel, tradeshows, and
promotional activities and materials. Medtronic is responsible for the
distribution, marketing and sales support of our spine and orthopedic devices.
The following table summarizes the components of our sales and marketing
expenses for the three and nine months ended September 30, 2006 and
2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||
|
International
sales and marketing
|
$
|
310,000
|
$
|
224,000
|
$
|
86,000
|
38.4
|
%
|
$
|
910,000
|
$
|
224,000
|
$
|
686,000
|
306.3
|
%
|
||||||||||
|
Stock-based
compensation
|
263,000
|
—
|
263,000
|
—
|
451,000
|
—
|
451,000
|
—
|
||||||||||||||||||
|
Total
regenerative cell technology
|
573,000
|
224,000
|
349,000
|
155.8
|
%
|
1,361,000
|
224,000
|
1,137,000
|
507.6
|
%
|
||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||
|
General
corporate marketing
|
10,000
|
106,000
|
(96,000
|
)
|
(90.6
|
)%
|
140,000
|
357,000
|
(217,000
|
)
|
(60.8
|
)%
|
||||||||||||||
|
International
sales and marketing
|
27,000
|
36,000
|
(9,000
|
)
|
(25.0
|
)%
|
74,000
|
513,000
|
(439,000
|
)
|
(85.6
|
)%
|
||||||||||||||
|
Stock-based
compensation
|
—
|
113,000
|
(113,000
|
)
|
—
|
9,000
|
113,000
|
(104,000
|
)
|
(92.0
|
)%
|
|||||||||||||||
|
Total
MacroPore Biosurgery
|
37,000
|
255,000
|
(218,000
|
)
|
(85.5
|
)%
|
223,000
|
983,000
|
(760,000
|
)
|
(77.3
|
)%
|
||||||||||||||
|
Total
sales and marketing expenses
|
$
|
610,000
|
$
|
479,000
|
$
|
131,000
|
27.3
|
%
|
$
|
1,584,000
|
$
|
1,207,000
|
$
|
377,000
|
31.2
|
%
|
||||||||||
Regenerative
Cell Technology:
|
·
|
International
sales and marketing expenditures for the three and nine months
ended
September 30, 2006, relate primarily to salaries expense for employees
involved in business development. The main emphasis of these newly-formed
functions is to seek strategic alliances and/or co-development
partners
for our regenerative cell technology, which we began to focus on
in the
third quarter of 2005.
|
|
·
|
Stock-based
compensation for the regenerative cell segment of sales and marketing
for
the three and nine months ended September 30, 2006 was $263,000
and
$451,000, respectively. There was no similar expense in 2005. See
stock-based compensation discussion below for more
details.
|
MacroPore
Biosurgery:
|
·
|
General
corporate marketing expenditures relate to expenditures for maintaining
our corporate image and reputation within the research and surgical
communities. The decreases in the three and nine month periods
ended
September 30, 2006 as compared to the same periods in 2005 were
due to a
shift in focus towards our regenerative cell technology marketing,
which
in turn prompted a reduction in headcount in biomaterials and general
corporate marketing.
|
|
·
|
International
sales and marketing expenditures relate to costs associated with
developing an international bioresorbable Thin Film distributor
and
supporting a bioresorbable Thin Film sales office in Japan. The
decreased
spending in 2006 as compared to 2005 relates to a significant headcount
decrease in this marketing group as MHLW approval for commercialization
has been delayed from our original expectation.
|
|
·
|
Stock-based
compensation for the MacroPore Biosurgery segment of sales and
marketing
for the three and nine months ended September 30, 2006 was $0 and
$9,000,
respectively. Stock-based compensation for the three and nine months
ended
September 30, 2005 was $113,000 and $113,000, respectively. See
stock-based compensation discussion below for more
details.
|
The
future.
We
project that general corporate marketing as well as our MacroPore Biosurgery
international sales and marketing expenditures will remain reasonably stable
for
the remainder of 2006. We also expect sales and marketing expenditures related
to the regenerative cell technology to increase as we continue and expand
our
pursuit of strategic alliances and co-development partners.
General
and administrative expenses
General
and administrative expenses include costs for administrative personnel, legal
and other professional expenses and general corporate expenses. The following
table summarizes the general and administrative expenses for the three and
nine
months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
General
and administrative
|
$
|
2,979,000
|
$
|
3,017,000
|
$
|
(38,000
|
)
|
(1.3
|
)%
|
$
|
8,737,000
|
$
|
7,374,000
|
$
|
1,363,000
|
18.5
|
%
|
|||||||||
|
Stock-based
compensation
|
202,000
|
112,000
|
90,000
|
80.4
|
%
|
1,268,000
|
112,000
|
1,156,000
|
1,032.1
|
%
|
||||||||||||||||
|
Total
general and administrative expenses
|
$
|
3,181,000
|
$
|
3,129,000
|
$
|
52,000
|
1.7
|
%
|
$
|
10,005,000
|
$
|
7,486,000
|
$
|
2,519,000
|
33.6
|
%
|
||||||||||
|
·
|
During
the three and nine months ended September 30, 2006, we accrued
$487,000
related to 100,000 shares of stock to be issued to UC in the fourth
quarter of 2006. This resulted from the amended contract between
UC and us
that was finalized in the third quarter of 2006. At the time the
agreement
was reached, the stock was trading at $4.87 per share.
|
|
·
|
An
overall decrease (excluding stock-based compensation) occurred
in the
third quarter of 2006 as compared to the same period in 2005. This
was a
result of the effort put forth by management to decrease costs,
offset for
the year by higher costs in the first and second quarters of 2006.
Salaries and other related benefits (not including stock-based
compensation) increased by $212,000 and $791,000 for the three
and nine
months ended September 30, 2006, respectively, as compared to the
same
periods in 2005. Travel and entertainment expense decreased by
$93,000 and
$30,000 for the three and nine months ended September 30, 2006.
Depreciation expense increased by $4,000 and $97,000 for the three
and
nine months ended September 30, 2006.
|
|
·
|
In
the second quarter of 2006, we recorded an additional $118,000
of
depreciation expense to accelerate the estimated remaining lives
for
certain assets determined to be no longer in use. These assets
related to
furniture and fixtures no longer in use due to our recent relocation
as
well as outdated computer software and related equipment. The assets
belong to both our regenerative cell technology and MacroPore Biosurgery
operating segments. We recorded the charge as an increase to general
and
administrative expenses. There was no similar charge for the same
period
in 2005.
|
|
·
|
Stock-based
compensation related to general and administrative expense for
the three
and nine months ended September 30, 2006 was $202,000 and $1,268,000,
respectively. Stock-based compensation for the three and nine months
ended
September 30, 2005 was $112,000 and $112,000. See stock-based compensation
discussion below for more details.
|
The
future.
We
expect general and administrative expenses to remain steady or increase slightly
in 2006, to approximately $12,000,000 to $14,000,000 in 2006. We are seeking
ways to minimize the ratio of these expenses to research and development
expenses. As a result, we have begun efforts to restrain general and
administrative expense.
We
have
incurred, and expect to continue to incur, substantial legal expenses in
connection with the University of Pittsburgh’s 2004 lawsuit. Although we are not
litigants and are not responsible for any settlement costs, if the University
of
Pittsburgh wins the lawsuit our license rights to the patent in question
could
be nullified or rendered non-exclusive and our regenerative cell strategy
could
be significantly affected. Further, as a result of the amended UC contract
signed in the third quarter or 2006, we are responsible for all patent
prosecution and litigation costs related to this lawsuit.
Stock-based
compensation expenses
As
noted
previously, we adopted SFAS 123R on January 1, 2006. Prior period figures
have
not been restated and therefore are not comparable to the current year
presentation.
The
following table summarizes the components of our stock based compensation
for
the three and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||
|
Research
and development related
|
$
|
296,000
|
$
|
4,000
|
$
|
292,000
|
7,300.0
|
%
|
$
|
837,000
|
$
|
67,000
|
$
|
770,000
|
1,149.3
|
%
|
||||||||||
|
Sales
and marketing related
|
263,000
|
—
|
263,000
|
—
|
451,000
|
—
|
451,000
|
—
|
||||||||||||||||||
|
Total
regenerative cell technology
|
559,000
|
4,000
|
555,000
|
13,875.0
|
%
|
1,288,000
|
67,000
|
1,221,000
|
1,822.4
|
%
|
||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||
|
Cost
of product revenues
|
15,000
|
—
|
15,000
|
—
|
63,000
|
—
|
63,000
|
—
|
||||||||||||||||||
|
Research
and development related
|
3,000
|
112,000
|
(109,000
|
)
|
(97.3
|
)%
|
24,000
|
112,000
|
(88,000
|
)
|
(78.6
|
)%
|
||||||||||||||
|
Sales
and marketing related
|
—
|
113,000
|
(113,000
|
) |
—
|
9,000
|
113,000
|
(104,000
|
)
|
(92.0
|
)%
|
|||||||||||||||
|
Total
MacroPore Biosurgery
|
18,000
|
225,000
|
(207,000
|
)
|
(92.0
|
)%
|
96,000
|
225,000
|
(129,000
|
)
|
(57.3
|
)%
|
||||||||||||||
|
General
and administrative related
|
202,000
|
112,000
|
90,000
|
80.4
|
%
|
1,268,000
|
112,000
|
1,156,000
|
1,032.1
|
%
|
||||||||||||||||
|
Total
stock based compensation
|
$
|
779,000
|
$
|
341,000
|
$
|
438,000
|
128.4
|
%
|
$
|
2,652,000
|
$
|
404,000
|
$
|
2,248,000
|
556.4
|
%
|
||||||||||
Regenerative
cell technology:
|
·
|
In
the first quarter of 2006, we granted 2,500 shares of restricted
common
stock to a non-employee scientific advisor. Similarly, in the second
quarter of 2005, we granted 20,000 shares of restricted common
stock to a
non-employee scientific advisor. Because the shares granted are
not
subject to additional future vesting or service requirements, the
stock-based compensation expense of $18,000 recorded in the first
quarter
of 2006 (and $63,000 recorded in the second quarter of 2005) constitute
the entire expenses related to these grants, and no future period
charges
will be reported. The stock is restricted only in that it cannot
be sold
for a specified period of time. There are no vesting requirements.
The
scientific advisors also receive cash consideration as services
are
performed.
|
|
·
|
Of
the $2,652,000 charge to stock-based compensation for the nine
months ended September 30, 2006, $567,000 related to award
modifications for the termination of the full-time employment of
our
former Senior Vice President of Finance and Administration in exchange
for
part-time employment and eliminations of the positions of Senior
Vice
President, Business Development, and Vice President, Marketing
and
Development, and the position of a less senior employee. The charge
reflects the incremental fair value of the extended vested stock
options
(over the fair value of the original awards at the modification
date), as
well as compensation cost associated with the
cancelled non-vested option awards that would have been recognized if
the three individuals continued to vest in their options until
the end of
their employment term. There will be no further charges related
these
modifications.
|
The
future (2006).
We will
continue to grant options (which will result in an expense) to our employees
and, as appropriate, to non-employee service providers. In addition,
previously-granted options will continue to vest in accordance with their
terms.
As of September 30, 2006, the total compensation cost related to non-vested
stock options not yet recognized for all plans presented is approximately
$4,341,000. These costs are expected to be recognized over a weighted average
period of 1.91 years.
Change
in fair value of option liabilities
The
following is a table summarizing the change in fair value of option liabilities
for the three and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Change
in fair value of option liability
|
$
|
(574,000
|
)
|
$
|
924,000
|
$
|
(1,498,000
|
)
|
(162.1
|
)%
|
$
|
(3,714,000
|
)
|
$
|
984,000
|
$
|
(4,698,000
|
)
|
(477.4
|
)%
|
||||||
|
Change
in fair value of put option liability
|
200,000
|
—
|
200,000
|
—
|
200,000
|
—
|
200,000
|
—
|
||||||||||||||||||
|
Total
change in fair value of option liabilities
|
$
|
(374,000
|
)
|
$
|
924,000
|
$
|
(1,298,000
|
)
|
(140.5
|
)%
|
$
|
(3,514,000
|
)
|
$
|
984,000
|
$
|
(4,498,000
|
)
|
(457.1
|
)%
|
||||||
|
·
|
We
granted Olympus an option to acquire 2,200,000 shares of our common
stock
which expires December 31, 2006. The exercise price of the option
shares
is $10 per share. We have accounted for this grant as a liability
because
upon the exercise of the option, we will be required to deliver
listed
shares of our common stock to settle the option shares. In accordance
with
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock,” the fair value of this
option has been re-measured at the end of each quarter, using the
Black-Scholes option pricing model, with the movement in fair value
reported in the statement of operations as a change in fair value
of
option liabilities. At September 30, 2006, the contractual term,
fair
market value, risk-free interest rate and volatility assumptions
used in
the Black-Scholes option pricing model were 3 months, 4.89% and
61.8%,
respectively. The decline in the fair value of the option liability
is due
primarily to a shortened contractual term as the option moves closer
to
maturity.
|
|
·
|
In
reference to the Joint Venture, the Shareholders’ Agreement between Cytori
and Olympus provides that in certain specified circumstances of
insolvency
or if we experience a change in control, Olympus will have the
rights to
(i) repurchase our interests in the Joint Venture at the fair value
of
such interests or (ii) sell its own interests in the Joint Venture
to us
at the higher of (a) $22,000,000 or (b) the Put's fair value. The Put
value has been classified as a liability.
|
The
valuations of the Put were completed by an independent valuation firm
using an option pricing theory based simulation analysis (i.e., a Monte
Carlo simulation). The valuations are based on assumptions as of the
valuation date with regard to the market value of Cytori and the estimated
fair value of the Joint Venture, the expected correlation between the values
of
Cytori and the Joint Venture, the expected volatility of Cytori and the Joint
Venture, the bankruptcy recovery rate for Cytori, the bankruptcy threshold
for
Cytori, the probability of a change of control event for Cytori, and the
risk
free rate.
The
following assumptions were employed in estimating the value of the Put at
September 30, 2006 (these assumptions were not materially different from
those
used in valuing the Put since November 4, 2005 and every quarter subsequent
until the present):
|
§
|
The
expected volatilities of Cytori and the Joint Venture were assumed
to be
63.2% and 69.1%, respectively,
|
|
§
|
The
bankruptcy recovery rate for Cytori was assumed to be 21%,
|
|
§
|
The
bankruptcy threshold for Cytori was assumed to be $10.78 million,
|
|
§
|
The
probability of a change of control event for Cytori was assumed
to be
3.04%,
|
|
§
|
The
expected correlation between the fair values of Cytori and the
Joint
Venture in the future was assumed to be 99%,
and
|
|
§
|
The
risk free rate was assumed to be 4.64%.
|
The
future (2006).
The
2,200,000 share option expires on December 31, 2006. Unless the option is
exercised some time during the fourth quarter of 2006, the change from $17,000
in the third quarter to $0 option liability at December 31, 2006 will be
reported in the statements of operations as changes in the fair value of
option
liabilities and no longer re-measured going forward.
The
Put
has no expiration date. Accordingly, we will continue to recognize a liability
for the Put until it is exercised or until the arrangements with Olympus
are
amended.
Other
income
The
following table summarizes the gain on sale of assets for the three and
nine
months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Gain
on sale of assets
|
$
|
—
|
$
|
5,526,000
|
$
|
(5,526,000
|
)
|
—
|
$
|
—
|
$
|
5,526,000
|
$
|
5,526,000
|
—
|
|||||||||||
The
$5,526,000 gain on sale of assets recorded in September 2005 was related
to the
sale of the majority of our Thin Film product line. As part of the disposal
arrangement, we agreed to complete certain performance obligations which
prevented us from recognized the gain on sale of assets when the cash was
initially received. In August 2005, following the settlement of arbitration
proceedings related to the sale agreement with MAST, we were able to recognize
the gain on sale of assets of $5,650,000 less $124,000 of related deferred
costs, in the statement of operations.
The
future (2006).
No
additional gains will be recognized related to this sale.
Financing
items
The
following table summarizes interest income, interest expense, and other income
and expense for the three and nine months ended September 30, 2006 and
2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Interest
income
|
$
|
158,000
|
$
|
99,000
|
$
|
59,000
|
59.6
|
%
|
$
|
537,000
|
$
|
208,000
|
$
|
329,000
|
158.2
|
%
|
||||||||||
|
Interest
expense
|
(47,000
|
)
|
(31,000
|
)
|
(16,000
|
)
|
51.6
|
%
|
(158,000
|
)
|
(107,000
|
)
|
(51,000
|
)
|
47.7
|
%
|
||||||||||
|
Other
income (expense)
|
(7,000
|
)
|
(13,000
|
)
|
6,000
|
(46.2
|
)%
|
(13,000
|
)
|
(52,000
|
)
|
39,000
|
(75.0
|
)%
|
||||||||||||
|
Total
|
$
|
104,000
|
$
|
55,000
|
$
|
49,000
|
89.1
|
%
|
$
|
366,000
|
$
|
49,000
|
$
|
317,000
|
646.9
|
%
|
||||||||||
|
·
|
Interest
income increased from 2005 to 2006 due to a larger balance of funds
available for investment, which was a result of the transactions
with
Olympus, as well as the sale of common stock in the third quarter.
Interest expense increased due to a new promissory note executed
late in
2005 for additional equipment
financing.
|
|
·
|
Other
income (expense) represents changes in foreign currency exchange
rates.
|
The
future (2006). Interest
income earned in 2006 will be dependent on our levels of funds available
for
investment as well as general economic conditions, but will exceed 2005 overall.
Interest expense will increase in 2006 due to the additional promissory note
executed late in 2005.
Equity
loss from investment in Joint Venture
The
following table summarizes equity loss from investment in joint venture for
the
three and nine months ended September 30, 2006 and 2005:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||
|
2006
|
2005
|
$
Differences
|
%
Differences
|
2006
|
2005
|
$
Differences
|
%
Differences
|
|||||||||||||||||||
|
Equity
loss in investment
|
$
|
(3,000
|
)
|
$
|
—
|
$
|
(3,000
|
)
|
—
|
$
|
(68,000
|
)
|
$
|
—
|
$
|
(68,000
|
)
|
—
|
||||||||
The
loss
in 2006 relates entirely to our 50% equity interest in the Joint Venture,
which
we account for using the equity method of accounting.
The
future.
We do
not expect to recognize significant losses from the activities of the Joint
Venture in the foreseeable future. Over the next two to three years, the
Joint
Venture is expected to incur only modest general and administrative expenses,
which we will likely (but have no obligation to) fund jointly with
Olympus.
Liquidity
and Capital Resources
Short-term
and long-term liquidity
The
following is a summary of our key liquidity measures at September 30, 2006
and
December 31, 2005:
|
September
30,
|
December
31,
|
$
|
%
|
||||||||||
|
2006
|
2005
|
Differences
|
Differences
|
||||||||||
|
Cash
and cash equivalents
|
$ |
13,615,000
|
$ |
8,007,000
|
$ |
5,608,000
|
70.0
|
%
|
|||||
|
Short-term
investments, available for sale
|
4,834,000
|
7,838,000
|
(3,004,000
|
)
|
(38.3
|
)%
|
|||||||
|
Total
cash and cash equivalents and short-term investments, available
for
sale
|
18,449,000
|
15,845,000
|
2,604,000
|
16.4
|
%
|
||||||||
|
Current
assets
|
19,543,000
|
17,540,000
|
2,003,000
|
11.4
|
%
|
||||||||
|
Current
liabilities
|
5,736,000
|
7,081,000
|
(1,345,000
|
)
|
(19.0
|
)%
|
|||||||
|
Working
capital
|
$ |
13,807,000
|
$ |
10,459,000
|
$ |
3,348,000
|
32.0
|
%
|
|||||
In
order
to provide greater financial flexibility and liquidity, and in view of the
substantial cash needs of our regenerative cell business during its development
stage, we will need to raise additional capital (notwithstanding the proceeds
received from the Olympus collaboration agreements, which were entered into
in
November 2005). We have put into place a shelf registration statement, under
which we can, from time to time, seek to sell up to $50,000,000 of registered
equity securities. In the third quarter of 2006, we received net proceeds
of
$16,400,000 from the sale of registered common stock pursuant to this
registration statement, of which Olympus purchased $11,000,000; the remaining
securities were purchased by other institutional investors. We are also
implementing certain cost containment measures and are considering divestment
and other strategic alternatives for our spine and orthopedics business.
With
consideration of these endeavors as well as existing funds, cash generated
by
operations, and other accessible sources of financing, we believe our cash
position is adequate to satisfy our working capital, capital expenditures,
debt
service and other financial commitments at least through September 30, 2007.
From
inception to September 30, 2006, we have financed our operations primarily
by:
|
·
|
Issuing
our stock,
|
|
·
|
Generating
revenues,
|
|
·
|
Selling
the CMF product line in September
2002,
|
|
·
|
Selling
the Thin Film product line (except for the territory of Japan),
in May
2004,
|
|
·
|
Entering
into a Distribution Agreement for the distribution rights to Thin
Film in
Japan, in which we received an upfront license fee in July 2004
and an
initial development milestone payment in October
2004,
|
|
·
|
Obtaining
a modest amount of capital equipment long-term
financing,
|
|
·
|
Closing
a Stock Purchase Agreement with Olympus in May
2005,
|
|
·
|
Entering
into a collaborative arrangement with Olympus in November 2005,
including
the formation of a joint venture called Olympus-Cytori, Inc.,
|
|
·
|
Receiving
funds in exchange for granting Olympus an exclusive right to negotiate
for
gastrointestinal-related applications in February 2006, and
|
|
·
|
Issuing
$16,800,000 of registered common stock under our shelf registration
statement in August 2006.
|
We
increased our cash position by $11,000,000 in May 2005 through a common stock
purchase agreement we entered into with Olympus in April 2005. This agreement
covers the sale of 1,100,000 shares of our common stock to Olympus. Also
as part
of the agreement, we granted Olympus an option that expires December 31,
2006 to
purchase an additional 2,200,000 shares of common stock at $10.00 per share.
Furthermore,
we entered into a strategic development and manufacturing joint venture as
well
as other agreements with Olympus in November 2005. Under the collaborative
arrangements, we formed the Joint Venture with Olympus to develop and
manufacture future generation devices based on our Celution™ System. Pursuant to
the terms of the agreements, we received $11,000,000 in cash upon closing
in the
fourth quarter of 2005; this cash is incremental to the proceeds received
under
the Olympus equity investment described above.
In
January 2006, we also received an additional $11,000,000 upon our receipt
of a
CE mark for the first generation Celution™ System and received an additional
$1,500,000 in the first half of 2006 in exchange for the grant to Olympus
of an
exclusive right to negotiate a commercialization collaboration for the use
of
adipose stem and regenerative cells for a specific therapeutic area outside
of
cardiovascular disease. We may receive more proceeds if Olympus decides to
exercise its option to purchase 2,200,000 shares of our common
stock.
In
August
2006, we sold 2,918,255 shares of our common stock at $5.75 per share for
an
aggregate of approximately $16,800,000. Olympus purchased $11,000,000 of
these
shares and the remaining balance was purchased by certain institutional
investors. We received net proceeds of approximately $16,400,000, net of
related offering costs and fees.
We
don’t
expect significant further capital expenditures in 2006 beyond those already
incurred to date; however, if necessary, we may borrow under our Amended
Master
Security Agreement.
Any
excess funds will be invested in short-term available-for-sale investments.
Our
capital
requirements for 2006 and beyond will depend on numerous factors, including
the
resources we devote to developing and supporting our investigational cell
therapy products, market acceptance of our developed products, regulatory
approvals and other factors. We expect to incur research and development
expenses at high levels in our regenerative cell platform for an extended
period
of time and have therefore positioned ourselves to expand our cash position
through actively pursuing co-development and marketing agreements, research
grants, and licensing agreements related to our regenerative cell technology
platform. Further, we are actively seeking a buyer (or buyers) for our
remaining MacroPore Biosurgery assets as a means to fund our continuing efforts
in this platform. This decision is based on the change in our strategic focus
as
well as the continuing negative profit margins being realized from the MacroPore
Biosurgery segment. We expect to complete the disposal no later than the
third
quarter of 2007.
The
following summarizes our contractual obligations and other commitments at
September 30, 2006, and the effect such obligations could have on our liquidity
and cash flow in future periods:
|
Payments
due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1
year
|
1
- 3 years
|
3
- 5 years
|
More
than
5
years
|
|||||||||||
|
Long-term
obligations
|
$
|
1,796,000
|
$
|
886,000
|
$
|
910,000
|
$
|
—
|
$
|
—
|
||||||
|
Interest
commitment on long-term obligations
|
211,000
|
139,000
|
72,000
|
—
|
—
|
|||||||||||
|
Operating
lease obligations
|
6,251,000
|
2,086,000
|
4,165,000
|
—
|
—
|
|||||||||||
|
Research
study obligations
|
1,283,000
|
1,225,000
|
58,000
|
—
|
—
|
|||||||||||
|
Total
|
$
|
9,541,000
|
$
|
4,336,000
|
$
|
5,205,000
|
$
|
—
|
$
|
—
|
||||||
Cash
(used in) provided by operating, investing and financing activities for the
nine
months ended September 30, 2006 and 2005, is summarized as follows:
|
For
the nine months ended September 30,
|
|||||||
|
2006
|
2005
|
||||||
|
Net
cash used in operating activities
|
$
|
(11,471,000
|
)
|
$
|
(5,494,000
|
)
|
|
|
Net
cash provided by investing activities
|
622,000
|
2,252,000
|
|||||
|
Net
cash provided by financing activities
|
16,457,000
|
2,677,000
|
|||||
Operating
activities
Net
cash
used in operating activities for the nine months ended September 30, 2006
resulted from our $23,535,000 net loss, adjusted for the $11,000,000 cash
we
received in 2006 from the Joint Venture upon obtaining the CE Mark in the
first
quarter of 2006 and $1,605,000 of non-cash depreciation and amortization,
along
with other changes in working capital due to timing of product shipments
(accounts receivable) and payment of liabilities.
Net
cash
used in operating activities for the nine months ended September 30, 2005
resulted from our net loss of $12,174,000, adjusted for material non-cash
activities, such as the gain on sale of assets, as well as changes in working
capital due to the timing of product shipments (accounts receivable) and
payment
of liabilities.
Operating
losses for both periods resulted largely from expenses related to our
regenerative medicine research and development efforts. The $5,977,000 increased
use of cash for operating activities was due primarily to the decline in
sales
to Medtronic, combined with an overall increase in research and development
expenditures.
Investing
activities
Net
cash
provided by investing activities for the nine months ended September 30,
2006
resulted primarily from expenditures for leasehold improvements, offset in
part
by the net proceeds from the sale of short-term investments.
Net
cash
provided by investing activities for the nine months ended September 30,
2005
resulted primarily from the sale and maturity of our short-term investments,
the
proceeds from which were used to fund operating activities during the first
nine
months of 2005.
Capital
spending is essential to our product innovation initiatives and to maintain
our
operational capabilities. For the nine months ended September 30, 2006 and
2005,
we used cash to purchase $2,214,000 and $1,052,000, respectively, of property
and equipment to support manufacturing of our bioresorbable implants and
for the
research and development of the regenerative cell technology platform. The
increase in 2006 capital spending was caused primarily by expenditures for
leasehold improvements made to our new facilities.
Financing
Activities
The
net
cash provided by financing activities for the nine months ended September
30,
2006 related mainly to the issuance of 2,918,255 shares of our common stock
in
exchange for $16,800,000. It was also related to the exercise of employee
stock
options and was to some extent offset by the principal payments on long-term
obligations.
The
net
cash provided by financing activities for the nine months ended September
30,
2005 related mainly to the sale of common stock to Olympus for $11,000,000.
The
composition of the $11,000,000 in proceeds included: $3,003,000 for the sale
of
common stock, $186,000 for the issuance of an option, which was recorded
in
financing activities, and $7,811,000 for the issuance of common stock and
options in excess of fair market value, which we have characterized as deferred
revenues, related party, and recorded in operating activities.
Critical
Accounting Policies and Significant Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of our assets, liabilities,
revenues and expenses, and that affect our recognition and disclosure of
contingent assets and liabilities.
While
our
estimates are based on assumptions we consider reasonable at the time they
were
made, our actual results may differ from our estimates, perhaps
significantly. If results differ materially from our estimates, we will
make adjustments to our financial statements prospectively as we become aware
of
the necessity for an adjustment.
We
believe it is important for you to understand our most critical accounting
policies. These are our policies that require us to make our most
significant judgments and, as a result, could have the greatest impact on
our
future financial results.
Revenue
Recognition
We
derive
our revenue from a number of different sources, including but not limited
to:
|
·
|
Product
sales,
|
|
·
|
Payments
under license or distribution agreements,
and
|
|
·
|
Fees
for achieving certain defined milestones under research and/or
development
arrangements.
|
Many
of
our revenue generating arrangements are relatively simple in nature, meaning
that there is little judgment necessary with regard to the timing of when
we
recognize revenues or how such revenues are presented in the financial
statements.
However,
we have also entered into more complex arrangements, including but not limited
to our contracts with Olympus, Senko, and the NIH. Moreover, some of our
non-recurring transactions, such as our disposition of the majority of our
Thin
Film business to MAST, contain elements that relate to our core revenue
producing activities.
As
a
result, some of our most critical accounting judgments relate to the
identification, timing, and presentation of revenue related activities. These
critical judgments are discussed further in the paragraphs that
follow.
Multiple-elements
Some
of
our revenue generating arrangements contain a number of distinct revenue
streams, known as “elements.” For example, our Distribution Agreement with Senko
contains direct or indirect future revenue streams related to:
|
·
|
A
distribution license fee (which was paid at the outset of the
arrangement),
|
|
·
|
Milestone
payments for achieving commercialization of the Thin Film product
line in
Japan,
|
|
·
|
Training
for representatives of Senko,
|
|
·
|
Sales
of Thin Film products to Senko, and
|
|
·
|
Payments
in the nature of royalties on future product sales made by Senko
to its
end customers.
|
Emerging
Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables”
(“EITF 00-21”), governs whether each of the above elements in the arrangement
should be accounted for individually, or whether the entire contract should
be
treated as a single unit of accounting.
EITF
00-21 indicates that individual elements may be separately
accounted for only when:
|
·
|
The
delivered element has stand alone value to the customer,
|
|
·
|
There
is objective evidence of the fair value of the remaining undelivered
elements, and
|
|
·
|
If
the arrangement contains a general right of return related to any
products
delivered, delivery of the remaining goods and services is probable
and
within the complete control of the seller.
|
In
the
case of the Senko Distribution Agreement, we determined that (a) the milestones
payments for achieving commercialization and (b) the future sale of Thin
Film
products to Senko were “separable” elements. That is, each of these elements,
upon delivery, will have stand alone value to Senko and there will be objective
evidence of the fair value of any remaining undelivered elements at that
time.
The arrangement does not contain any general right of return, and so this
point
is not relevant to our analysis.
On
the
other hand, we concluded that (a) the upfront distribution license fee, (b)
the
revenues from training for representatives of Senko, and (c) the payments
in the
form of royalties on future product sales are not separable elements under
EITF
00-21.
In
arriving at our conclusions, we had to consider whether our customer, Senko,
would receive stand alone value from each delivered element. We also, in
some
cases, had to look to third party evidence to support the fair value of certain
undelivered elements - notably, training - since we as a company do not
routinely deliver this service on a stand alone basis. Finally, we had to
make
assumptions about how the non-separable elements of the arrangement are earned,
particularly the estimated period over which Senko will benefit from the
arrangement (refer to the “Recognition” discussion below for further
background).
We
also
agreed to perform multiple services under the November 4, 2005 agreements
we
signed with Olympus, including:
|
·
|
Granting
the Joint Venture (which Olympus is considered to control) an exclusive
and perpetual license to our device technology, including the Celution™
System and certain related intellectual property;
and
|
|
·
|
Performing
development activities in relation to certain therapeutic applications
associated with our Celution™ System, including completing pre-clinical
and clinical trials, seeking regulatory approval as appropriate,
and
assisting with product development.
|
Following
commercialization of the Celution™ System, we will provide monthly forecasts,
specifying the quantities of each category of devices that we intend to purchase
from the Joint Venture, at formula-based prices, over a rolling six-month
period. Although we are not subject to any minimum purchase requirements,
we are
obliged to buy a defined percentage of the products forecasted by us in such
reports. However, this guarantee will trigger only upon the development of
a
commercializable device by the Joint Venture. Moreover, we effectively control
the number of devices we will agree to purchase, since the guaranteed quantities
will be derived from monthly forecasts prepared by us.
We
concluded that the license and development services must be accounted for
as a
single unit of accounting. In reaching this conclusion, we determined that
the
license would not have stand alone value to the Joint Venture. This is because
Cytori is the only party that could be reasonably expected to perform the
development services- including pre-clinical and clinical studies, regulatory
filings, and product development-necessary for the Joint Venture to derive
any
value from the license.
Recognition
Besides
determining whether to account separately for components of a multiple-element
arrangement, we also use judgment in determining the appropriate accounting
period in which to recognize revenues that we believe (a) have been earned
and
(b) are realizable. The following describes some of the recognition issues
we
have considered during the reporting period.
|
·
|
Upfront
License Fees/Milestones
|
|
§
|
As
part of the Senko Distribution Agreement, we received an upfront
license
fee upon execution of the arrangement, which, as noted previously,
was not
separable under EITF 00-21. Accordingly, the license has been combined
with the development (milestones) element, which was separable,
to form a
single accounting unit. This single element of $3,000,000 in fees
includes
$1,500,000 which is potentially refundable. We have recognized,
and will
continue to recognize the non-contingent fees allocated to this
combined
element as revenues as we complete each of the performance obligations
associated with the milestones component of this combined deliverable.
Note that the timing of when we have recognized revenues to date
does not
correspond with the cash we received upon achieving certain milestones.
For example, the first such milestone payment for $1,250,000 became
payable to us when we filed a commercialization application with
the
Japanese regulatory authorities. However, we determined that the
payment
received was not commensurate with the level of effort expended,
particularly when compared with other steps we believe are necessary
to
commercialize the Thin Film product line in Japan. Accordingly,
we did not
recognize the entire $1,250,000 received as revenues, but instead
all but
$358,000 of this amount is classified as deferred revenues. The
$358,000
($149,000 in 2006, $51,000 in 2005 and $158,000 in 2004) was recognized
as
development revenues based on our estimates of the level of effort
expended for completed milestones as compared with the total level
of
effort we expect to incur under the arrangement to successfully
achieve
regulatory approval of the Thin Film product line in Japan. These
estimates were subject to judgment and there may be changes in
estimates
regarding the total level of effort as we continue to seek regulatory
approval. In fact there can be no assurance that commercialization
in
Japan will ever be achieved, although our latest understanding
is that
regulatory approval will be received during the remainder of 2006
or early
2007.
|
|
§
|
We
also received upfront fees as part of the Olympus arrangements
(although,
unlike in the Senko agreement, these fees were non-refundable).
Specifically, in exchange for an upfront fee, we granted the Joint
Venture
an exclusive, perpetual license to certain of our intellectual
property
and agreed to perform additional development activities. This upfront
fee
has been recorded in the liability account entitled deferred revenues,
related party, on our consolidated balance sheet. Similar to the
Senko
agreement, we have elected an accounting policy to recognize revenues
from
the combined license/development accounting unit as we perform
the
development services, as this represents our final obligation underlying
the combined accounting unit. Specifically, we plan to recognize
revenues
from the license/development accounting unit using a “proportional
performance” methodology, resulting in the de-recognition of amounts
recorded in the deferred revenues, related party, account as we
complete
various milestones underlying the development services. For instance,
we
plan to recognize some of the deferred revenues, related party
as
revenues, related party, when we complete a pre-clinical trial,
or obtain
regulatory approval in a specific jurisdiction. Determining what
portion
of the deferred revenues, related party balance to recognize as
each
milestone is completed involves substantial judgment. In allocating
the
balance of the deferred revenues, related party to various milestones,
we
had in-depth discussions with our operations personnel regarding
the
relative value of each milestone to the Joint Venture and Olympus.
We also
considered the cost of completing each milestone relative to the
total
costs we plan to incur in completing all of the development activities,
since we believe that the relative cost of completing a milestone
is a
reasonable proxy for its fair value. The accounting policy described
above
could result in revenues being recorded in an earlier accounting
period
than had other judgments or assumptions been made by
us.
|
|
·
|
Government
Grants
|
|
§
|
We
are eligible to receive grants from the NIH related to our research
on
adipose derived cell therapy to treat myocardial infarctions. There
are no
specific standards under U.S. GAAP that prescribe the recognition
or
classification of these grants in the statement of operations.
Absent such
guidance, we have established an accounting policy to recognize
NIH grant
revenues at the lesser of:
|
○ Qualifying
costs incurred (and not previously recognized), plus any allowable grant
fees,
for which Cytori is entitled to grant funding; or,
○ The
amount determined by comparing the research outputs generated to date versus
the
total outputs that are expected to be achieved under the entire
arrangement.
|
§
|
Our
accounting policy could theoretically defer revenue recognition
beyond the
period in which we have earned the rights to such fees. However,
we
selected this accounting policy to counteract the possibility of
recognizing revenues from the NIH arrangement too early. For instance,
if
our policy permitted revenues to be recognized solely as qualifying
costs
were incurred, we could alter the amount of revenue recognized
by
incurring more or less cost in a given period, irrespective of
whether
these costs correlate to the research outputs generated. On the
other
hand, if revenue recognition were based on output measures alone,
it would
be possible to recognize revenue in excess of costs actually incurred;
this is not appropriate since qualifying costs remain the basis
of our
funding under the NIH grant. The application of our accounting
policy,
nonetheless, involves significant judgment, particularly in estimating
the
percentage of outputs realized to date versus the total outputs
expected
to be achieved under the grant
arrangement.
|
|
·
|
Back-up
Supply Arrangement
|
|
§
|
We
agreed to serve as a back-up supplier of products in connection
with our
dispositions of specific Thin Film assets to MAST. Specifically,
we agreed
to supply Thin Film product to MAST at our cost for a defined period
of
time. When we actually delivered products under the back-up supply
arrangements in 2005, however, we recognized revenues in the financial
statements at the estimated selling price which we would receive
in the
marketplace. We used judgment, based on historical data and expectations
about future market trends, in determining the estimated market
selling
price of products subject to the back-up supply arrangements. The
amount
of the deferred gain recognized as revenue is equal to the excess
of the
fair value of products sold, based on historical selling prices
of similar
products, over our manufacturing
cost.
|
Presentation
We
have
presented amounts earned under our NIH research arrangement as research grant
revenue. We believe that the activities underlying the NIH agreement constitute
a portion of our ongoing major or central operations. Moreover, the government
obtains rights under the arrangement, in the same manner (but perhaps not
to the
same extent) as a commercial customer that similarly contracts with us to
perform research activities. For instance, the government and any authorized
third parties may use our federally funded research and/or inventions without
payment of royalties to us.
Goodwill
Impairment Testing
In
late
2002, we purchased StemSource, Inc. and recognized over $4,600,000 in goodwill
associated with the acquisition, of which $4,387,000 remains on our balance
sheet as of September 30, 2006. As required by Statement of Financial Accounting
Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we must
test this goodwill at least annually for impairment as well as when an event
occurs or circumstances change such that it is reasonable possible that
impairment may exist. Moreover, this testing must be performed at a level
of the
organization known as the reporting unit. A reporting unit is at least the
same
level as a company’s operating segments, and sometimes even one level lower.
Specifically,
the process for testing goodwill for impairment under SFAS 142 involves the
following steps:
|
·
|
Company
assets and liabilities, including goodwill, are allocated to each
reporting unit for purposes of completing the goodwill impairment
test.
|
|
·
|
The
carrying value of each reporting unit - that is, the sum of all
of the net
assets allocated to the reporting unit - is then compared to its
fair
value.
|
|
·
|
If
the fair value of the reporting unit is lower than its carrying
amount,
goodwill may be impaired - additional testing is required.
|
When
we
last completed our goodwill impairment testing in 2005, the fair values of
our
two reporting units each exceeded their respective carrying values. Accordingly,
we determined that none of our reported goodwill was impaired.
The
application of the goodwill impairment test involves a substantial amount
of
judgment. For instance, SFAS 142 requires that assets and liabilities be
assigned to a reporting unit if both of the following criteria are
met:
|
·
|
The
asset will be employed in or the liability relates to the operations
of a
reporting unit.
|
|
·
|
The
asset or liability will be considered in determining the fair value
of the
reporting unit.
|
We
developed mechanisms to assign company-wide assets like shared property and
equipment, as well as company-wide obligations such as borrowings under our
GE
Loan Facility, to our two reporting units. In some cases, certain assets
were
not allocable to either reporting unit and were left unassigned.
The
most
complex and challenging asset to assign to each reporting unit was our acquired
goodwill. As noted previously, all of our recorded goodwill was generated
in
connection with our acquisition of StemSource in 2002. All of the StemSource
assets and liabilities still on hand at our 2004 testing date were allocated
to
our regenerative cell reporting unit. However, when we first acquired
StemSource, we determined that a portion of the goodwill related to the
MacroPore Biosurgery reporting unit. The amount of goodwill allocated
represented our best estimate of the synergies (notably future cost savings
from
shared research and development activities) that the MacroPore Biosurgery
reporting unit would obtain by virtue of the acquisition.
Finally,
with the consultation and assistance of a third party, we estimated the fair
value of our reporting units by using various estimation techniques. In
particular, in 2005, we estimated the fair value of our MacroPore Biosurgery
reporting unit based on an equal weighting of the market values of comparable
enterprises and discounted projections of estimated future cash flows. Clearly,
identifying comparable companies and estimating future cash flows as well
as
appropriate discount rates involve judgment. On the contrary, we estimated
the
fair value of our regenerative cell reporting unit solely using an income
approach, as we believe there are no comparable enterprises on which to base
a
valuation. The assumptions underlying this valuation method involve a
substantial amount of judgment, particularly since our regenerative cell
business has yet to generate any revenues and does not have a commercially
viable product.
Again,
the manner in which we assigned assets, liabilities, and goodwill to our
reporting units, as well as how we determined the fair value of such reporting
units, involves significant uncertainties and estimates. The judgments employed
may have an effect on whether a goodwill impairment loss is recognized.
Dispositions
In
2004,
we sold most of the assets and intellectual property rights in our (non-Japan)
Thin Film product line to MAST.
As
is
common in the life sciences industry, the sale agreements contained provisions
beyond the simple transfer of net assets to the acquiring enterprises for
a
fixed price. Specifically, as part of the arrangement, we also agreed to
perform
the following services:
|
·
|
Provide
training to MAST personnel on production and other aspects of the
Thin
Film product lines, and
|
|
·
|
Provide
a back-up supply of Thin Film products to MAST, at cost, for a
specified
period of time.
|
-37-
Disposing
of assets and product lines is not one of our core ongoing or central
activities. Accordingly, determining the appropriate accounting for these
transactions involved some of our most difficult, subjective and complex
judgments. In particular, we made assumptions around the appropriate manner
and
timing in which to recognize the gain on disposal for each transaction in
the
statement of operations. Moreover, we considered whether the dispositions
should
be reflected as discontinued operations in accordance with Statement of
Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
We
initially deferred recognition of the gain related to our disposition of
certain
Thin Film assets, which occurred in May 2004. Again, the Asset Purchase
Agreement governing the Thin Film sale obligated us to perform certain actions
for the benefit of the buyer - MAST - for a defined period of time, such
as
serving as a back-up supplier. We concluded, due to the arbitration proceedings
settled in August 2005, that we completed our remaining performance obligations
during the third quarter of 2005. Accordingly, we recognized the remaining
deferred gain on sale of assets as gain on sale of assets.
We
also
recognized a portion of the deferred gain when we sold products to MAST under
the back-up supply agreement. Refer to the “Revenue Recognition” section of this
Critical Accounting Policies and Significant Estimates discussion for further
details.
Variable
Interest Entity (Olympus-Cytori Joint Venture)
FASB
Interpretation No. 46 (revised 2003), “Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51” (“FIN 46R”)
requires
a variable interest entity (“VIE”) to be consolidated by its primary
beneficiary. Evaluating whether an entity is a VIE and determining its primary
beneficiary involves significant judgment.
In
concluding that the Joint Venture was a VIE, we considered the following
factors:
|
·
|
Under
FIN 46R, an entity is a VIE if it has insufficient equity to finance
its
activities. We recognized that the initial cash contributed to
the Joint
Venture formed by Olympus and Cytori ($30,000,000) would be completely
utilized by the first quarter of 2006. Moreover, it was highly
unlikely
that the Joint Venture would be able to obtain the necessary financing
from third party lenders without additional subordinated financial
support
- such as personal guarantees by one or both of the Joint Venture
stockholders. Accordingly, the joint venture will require additional
financial support from Olympus and Cytori to finance its ongoing
operations, indicating that the Joint Venture is a VIE. In fact,
in the
first quarter of 2006, both we and Olympus contributed $150,000
each to
fund the Joint Venture’s ongoing
operations.
|
|
·
|
Moreover,
Olympus has a contingent put option that would, in specified
circumstances, require Cytori to purchase Olympus’s interests in the Joint
Venture for a fixed amount of $22,000,000. Accordingly, Olympus
is
protected in some circumstances from absorbing all expected losses
in the
Joint Venture. Under FIN 46R, this means that Olympus may not be
an
“at-risk” equity holder, although Olympus clearly has decision rights over
the operations of the Joint Venture.
|
Because
the Joint Venture is undercapitalized, and because one of the Joint Venture’s
decision makers may be protected from losses, we have determined that the
Joint
Venture is a VIE under FIN 46R. Because of the complexities in applying FIN
46R,
it is reasonable to expect that others may reach a different
conclusion.
As
noted
previously, a VIE is consolidated by its primary beneficiary. The primary
beneficiary is defined in FIN 46R as the entity that would absorb the majority
of the VIE’s expected losses or be entitled to receive the majority of the VIE’s
residual returns (or both).
Significant
judgment was involved in determining the primary beneficiary of the Joint
Venture. Under FIN 46R, we believe that Olympus and Cytori are “de facto agents”
and, together, will absorb more than 50% of the Joint Venture’s expected losses
and residual returns. Ultimately, we concluded that Olympus, and not Cytori,
was
the party most closely related with the joint venture and, hence, its primary
beneficiary. Our conclusion was based on the following factors:
|
·
|
The
business operations of the Joint Venture will be most closely aligned
to
those of Olympus (i.e., the manufacture of
devices).
|
|
·
|
Olympus
controls the Board of Directors, as well as the day-to-day operations
of
the Joint Venture.
|
The
application of FIN 46R involves substantial judgment, and others may arrive
at a
conclusion that Cytori should consolidate the Joint Venture. Had we consolidated
the Joint Venture, though, there would be no effect on our net income or
shareholders’ equity at September 30, 2006 or for the quarter and nine months
then ended. However, certain balance sheet and income statement captions
would
have been presented in a different manner. For instance, we would not have
presented a single line item entitled investment in joint venture in our
balance
sheet but, instead, would have performed a line by line consolidation of
each of
the Joint Venture’s accounts into our financial statements.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155, “Accounting for Certain Hybrid Instruments - An Amendment of FASB
Statements Nos. 133 and 140” (“SFAS 155”). SFAS 155 allows companies to elect an
accounting policy choice for so-called “hybrid instruments”. A hybrid instrument
is a contract that contains one or more embedded derivatives. In many cases,
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedge Accounting” (“SFAS
133”) requires that an embedded derivative be separated from the “host contract”
and accounted for at fair value in the financial statements. SFAS 155 removes
the mandatory requirement to bifurcate an embedded derivative if the holder
elects to account for the entire instrument - that is, both the host contract
and the embedded derivative - at fair value, with subsequent changes in fair
value recognized in earnings. SFAS 155 is effective for all hybrid instruments
acquired or issued on or after September 15, 2006 and may be applied to hybrid
financial instruments that had been bifurcated under SFAS 133 in the past.
We do
not believe that the adoption of SFAS 155 will have a significant effect
on our
financial statements.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). This is an interpretation of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes. It prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006. We do not believe that the adoption of FIN 48 will have
a
significant effect on our financial statements.
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task
Force
on Issue No. 06-3, “How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement”
(“EITF 06-3”). EITF 06-3 requires a company to disclose its accounting
policy (i.e. gross vs. net basis) relating to the presentation of taxes within
the scope of EITF 06-3. Furthermore, for taxes reported on a gross basis,
an enterprise should disclose the amounts of those taxes in interim and annual
financial statements for each period for which an income statement is presented.
The guidance is effective for all periods beginning after December 15,
2006. We
do not
believe that the adoption of EITF 06-3 will have a significant effect on
our
financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying misstatements
in
the current year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement (“rollover”) and balance sheet
(“iron curtain”) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors
are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach,
no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is recorded in opening
accumulated earnings (deficit) as of the beginning of the fiscal year of
adoption. SAB 108 is effective for fiscal years ending on or after
November 15, 2006, with earlier adoption encouraged. We
do not
believe that the adoption of SAB 108 will have a significant effect on our
financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and accordingly, does not require
any
new fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. We
do not
believe that the adoption of SFAS 157 will have a significant effect on our
financial statements.
We
are
exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates.
Interest
Rate Exposure
We
are
not subject to market risk due to fluctuations in interest rates on our
long-term obligations as they bear a fixed rate of interest. Our exposure
relates primarily to short-term investments. These short-term investments,
reported at an aggregate fair market value of $4,834,000 as of September
30,
2006, consist primarily of investments in debt instruments of financial
institutions and corporations with strong credit ratings and United States
government obligations. These securities are subject to market rate risk
as
their fair value will fall if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 100 basis points from
the
levels prevailing at September 30, 2006, for example, and assuming average
investment duration of seven months, the fair value of the portfolio would
not
decline by a material amount. We do not use derivative financial instruments
to
mitigate the risk inherent in these securities. However, we do attempt to
reduce
such risks by generally limiting the maturity date of such securities,
diversifying our investments and limiting the amount of credit exposure with
any
one issuer. While we do not always have the intent, we do currently have
the
ability to hold these investments until maturity and, therefore, believe
that
reductions in the value of such securities attributable to short-term
fluctuations in interest rates would not materially affect our financial
position, results of operations or cash flows. Changes in interest rates
would,
of course, affect the interest income we earn on our cash balances after
re-investment.
Foreign
Currency Exchange Rate Exposure
Our
exposure to market risk due to fluctuations in foreign currency exchange
rates
relates primarily to our cash balances in Europe and Japan. Transaction gains
or
losses resulting from cash balances and revenues have not been significant
in
the past and we are not engaged in any hedging activity in the Euro, the
Yen or
other currencies. Based on our cash balances and revenues derived from markets
other than the United States for the quarter ended September 30, 2006, a
hypothetical 10% adverse change in the Euro or Yen against the U.S. dollar
would
not result in a material foreign currency exchange loss. Consequently, we
do not
expect that reductions in the value of such sales denominated in foreign
currencies resulting from even a sudden or significant fluctuation in foreign
exchange rates would have a direct material impact on our financial position,
results of operations or cash flows.
Notwithstanding
the foregoing, the indirect effect of fluctuations in interest rates and
foreign
currency exchange rates could have a material adverse effect on our business,
financial condition and results of operations. For example, foreign currency
exchange rate fluctuations may affect international demand for our products.
In
addition, interest rate fluctuations may affect our customers’ buying patterns.
Furthermore, interest rate and currency exchange rate fluctuations may broadly
influence the United States and foreign economies resulting in a material
adverse effect on our business, financial condition and results of
operations.
Under
our
Japanese Thin Film agreement with Senko, we would receive payments in the
nature
of royalties based on Senko’s net sales, which would be Yen denominated. We
expect such sales or royalties to begin early 2007.
Item
4. Controls and Procedures
Christopher
J. Calhoun, our Chief Executive Officer, and Mark E. Saad, our Chief Financial
Officer, after evaluating the effectiveness of our “disclosure controls and
procedures” (as defined in Securities Exchange Act Rule 13a-15(e)), have
concluded that as of September 30, 2006, our disclosure controls and procedures
are effective.
PART
II. OTHER INFORMATION
From
time
to time, we have been involved in routine litigation incidental to the conduct
of our business. As of September 30, 2006, we were not a party to any material
legal proceeding. We are not formally a party to the University of Pittsburgh
patent litigation. However, we are responsible for reimbursing certain related
litigation costs.
In
analyzing our company, you should consider carefully the following risk factors,
together with all of the other information included in this quarterly report
on
Form 10-Q. Factors that could adversely affect our business, operating results
and financial condition, as well as adversely affect the value of an investment
in our common stock, include those discussed below, as well as those discussed
above in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere throughout this quarterly report on Form
10-Q.
We
are
subject to the following significant risks, among others:
We
will need to raise more cash in the future
As
of
September 30, 2006, we had $18,449,000 of cash, cash equivalents and short-term
investments; we have always had negative cash flows from operations. Our
regenerative cell business will continue to result in a substantial requirement
for research and development expenses for several years, during which it
could
bring in no significant revenues. Our spine and orthopedics products business
is
doing poorly and is losing money. There can be no guarantee that adequate
funds
for our operations from any additional debt or equity financing, our operating
revenues, arrangements with distribution partners or from other sources will
be
available when needed or on terms attractive to us. The inability to obtain
sufficient funds would require us to delay, scale back or eliminate some
or all
of our research or product development programs, manufacturing operations,
clinical studies or regulatory activities or to license third parties to
commercialize products or technologies that we would otherwise seek to develop
ourselves, thus having a substantial negative effect on the results of our
operations and financial condition.
We
have never been profitable on an operational basis and we will have significant
operating losses for at least the next several years
We
have
incurred net operating losses in each year since we started doing business.
These losses have resulted primarily from expenses associated with our research
and development activities and general and administrative expenses.
Development-stage losses related to our development of regenerative cell
technology are expected to keep us in a loss position on a consolidated basis
for several years. We anticipate that our recurring operating expenses will
be
at high levels for the next several years, due to the continued need to fund
our
clinical research program as well as additional preclinical research. We
expect
to continue to incur operational losses in our spine and orthopedics business
at
least through the end of 2006, and the amount of future net losses and time
necessary to reach operational profitability in that business are somewhat
uncertain.
Our
business is high-risk
We
are
focusing our resources and efforts primarily on our regenerative cell technology
and its development-stage cash needs. This is a high-risk strategy because
there
can be no assurance that our regenerative cell technology will ever be developed
into commercially viable products (commercial risk), that we will be able
to
preclude other companies from depriving us of market share and profit margins
by
selling products based on our inventions and developments (legal risk), that
we
will be able to successfully manage a company in a different business than
we
have operated in the past (operational risk), that we will be able to deliver
regenerative cells into the body to achieve the desired therapeutic results
(scientific risk), or that our cash resources will be adequate to develop
the
regenerative cell technology until it becomes profitable, if ever (financial
risk). We are using our cash in one of the riskiest industries in the economy
(strategic risk). This may make our stock an unsuitable investment for some
investors.
The
financial risk in this strategy is significant, particularly since our
bioresorbable products are not currently independently cash-flow-positive.
Although we eliminated the negative cash flow of the early commercialization
stage of the (non-Japan) Thin Film business by selling that business to MAST
in
May 2004, even our core spine and orthopedics implants business fell back
into a
negative cash flow position in 2004 due to the sharp reduction in orders
from
and sales to Medtronic. This trend continued in 2005 despite stocking orders
for
the new MYSTIQUE™ line and since then the orders and sales have again declined
sharply.
We
must keep our joint venture with Olympus operating smoothly
Our
regenerative cell business cannot succeed on the current timelines unless
our
joint venture collaboration with Olympus goes well. We have given
Olympus-Cytori, Inc. an exclusive license to our regenerative cell therapeutic
device technology for use in future generation devices. If Olympus-Cytori,
Inc.
does not successfully develop and manufacture future generation devices for
sale
to us, we may not be able to commercialize any device or any therapeutic
products successfully into the market. In addition, any future disruption
in or
breakup of our relationship with Olympus would be extremely costly to our
reputation, in addition to causing many serious practical problems.
We
and
Olympus must overcome contractual and cultural barriers as we work together.
Our
relationship is formally measured by a set of complex contracts, which have
not
yet been tested in practice. In addition, many aspects of the relationship
will
be essentially non-contractual and must be worked out between the parties
and
the responsible individuals over time. The Joint Venture is intended to have
a
long life, and it is difficult to maintain cooperative relationships over
a long
period of time from a far distance in the face of various kinds of change.
Cultural differences, including a language barrier to some degree, may affect
the efficiency of the relationship as well.
Olympus-Cytori,
Inc. is 50% owned by us and 50% owned by Olympus. By contract, each side
must
consent before any of a wide variety of important business actions can occur.
This situation possesses a risk of potential time-consuming and difficult
negotiations which could at some point delay the Joint Venture from pursuing
its
business strategies.
Olympus
is entitled to designate the Joint Venture's chief executive officer and
a
majority of its board of directors, which means that day-to-day decisions
which
are not subject to a contractual veto will essentially be controlled by Olympus.
In addition, Olympus-Cytori, Inc. will need more money than its initial
capitalization in order to finalize development of and production of the
future
generation devices. If we are unable to help provide future financing for
Olympus-Cytori, Inc., our relative equity interest in Olympus-Cytori, Inc.
may
decrease.
Furthermore,
under a License/Joint Development Agreement among Olympus-Cytori, Inc., Olympus,
and us, Olympus will have a primary role in the development of Olympus-Cytori,
Inc.'s future generation devices. Although Olympus has extensive experience
in
developing medical devices, this arrangement will result in a reduction of
our
control over the development and manufacturing of the future generation
devices.
We
rely on Medtronic to distribute a majority of our current biomaterials products,
but Medtronic’s level of commitment to our products is doubtful
We
have
limited control over sales, marketing and distribution of our biomaterials
products. Our strategy for sales and marketing of our bioresorbable products
included entering into an agreement with Medtronic, a company with a large
distribution network, to market many of our current and certain future products
incorporating our technology. The sale of hard-tissue-fixation bioresorbable
implant products to our distribution partner, Medtronic, has constituted
the
majority of our revenues.
We
remain
significantly dependent on Medtronic to generate sales revenues for all of
our
spine and orthopedics bioresorbable products. The amount and timing of resources
which may be devoted to the performance of Medtronic’s contractual
responsibilities are not within our control. There can be no guarantee that
Medtronic will perform its obligations as expected or pay us any additional
option or license fees. There is also no guarantee that it will market any
new
products under the distribution agreements or that we will derive any
significant revenue from such arrangements. Medtronic’s sale of our products to
end customers in 2004 and 2005 and the first nine months of 2006, and its
rate
of product orders placed with us in the same periods, disappointed our
expectations with the exception of 2005 stocking orders for the new MYSTIQUE™
line. 2004 and 2005 results and the first nine months of 2006 were exceptionally
weak, and we are significantly disappointed with the marketing efforts of
Medtronic for our non-MYSTIQUE™ products at this time. We recorded an inventory
provision for slow-moving non-MYSTIQUE™ inventory in the second, third and
fourth quarters of 2005. We are also becoming concerned about Medtronic’s
commitment to MYSTIQUE™.
Our
dependence upon Medtronic to market and sell our bioresorbable products places
us in a position where we cannot accurately predict the extent to which our
products will be actively and effectively marketed, depriving us of some
of the
reliable data we need to make optimal operational and strategic decisions.
The
consequent lack of visibility is evidenced by the withdrawal of our announced
financial guidance for 2004, and our results falling within the lowest range
of
our guidance for 2005. The results of this business line so far in 2006 have
been below our internal expectations.
The
prices which Medtronic pays us are fixed (pending biannual price reviews
in
January and July of each year), based on a percentage of Medtronic’s historic
selling price to its customers. If our costs increase but our selling prices
remain fixed, our profit margin will suffer.
Medtronic
owns 5.38% of our stock, which may limit our ability to negotiate commercial
arrangements optimally with Medtronic. Although Medtronic has exclusive
distribution rights to our co-developed spinal implants, it also distributes
other products that are competitive to ours. Medtronic might choose to develop
and distribute existing or alternative technologies in preference to our
technology in the spine, or preferentially market competitive products that
can
achieve higher profit margins. We suspect that this has in fact been
happening.
There
can
be no assurance that our interests will coincide with those of Medtronic
or that
disagreement over rights or technology or other proprietary interests will
not
occur. The loss of the marketing services provided by Medtronic (or the failure
of Medtronic to satisfactorily perform these marketing services), or the
loss of
revenues generated by Medtronic, could have a substantial negative effect
on our
ability or willingness to continue our spine and orthopedics biomaterials
business. Indeed, even with Medtronic in place it seems the problems we have
experienced may be intractable, and we are considering the possibility that
the
business cannot succeed under our stewardship. Accordingly, we are considering
the possibility of divestment or other strategic alternatives for the
business.
Senko
has
not yet begun to distribute our Thin Film products in Japan; but if and when
they do, we cannot be assured that they will be successful.
We
have a limited operating history; our operating results can be
volatile
Our
prospects must be evaluated in light of the risks and difficulties frequently
encountered by emerging companies and particularly by such companies in rapidly
evolving and technologically advanced fields such as the biotechnology and
medical device fields. Due to our limited operating history, and the development
stage status of our regenerative cell business, comparisons of our year-to-year
operating results are not necessarily meaningful and the results for any
periods
should not necessarily be relied upon as an indication for future performance.
Since our limited operating history makes the prediction of future results
difficult or impossible, our recent revenue results should not be taken as
an
indication of any future growth or of a sustainable level of revenue. Operating
results will also be affected by our transition away from our revenue generating
medical device business and the focus of the vast majority of our resources
into
the development-stage regenerative cell business.
Moreover,
our operating results can vary substantially from our previously published
financial guidance (such as occurred in the second
quarter of 2004), from analyst expectations and from previous periodic results
for many reasons, including the timing of product introductions and distributor
purchase orders. Also, the 2002 sale of our CMF bone fixation implant and
accessory product line, which had represented a large portion of our revenues,
plus the 2004 sale of our (non-Japan) Thin Film surgical implants for separation
of soft tissues, have distorted and will distort quarterly and annual earning
comparisons through 2004, 2005 and 2006. Earnings surprises can have a
disproportionate effect on the stock prices of emerging companies such as
ours.
Also, our stock price is likely to be disproportionately affected by changes
which generally affect the economy, the stock market or the medical device
and
biotechnology industries.
From
time
to time, we have tried to influence our investors’ expectations as to our
operating results by periodically announcing financial guidance. However,
we
have in the past been forced to revise or withdraw such guidance due to lack
of
visibility and predictability of product demand. This lack of visibility
and
predictability of product demand for our bioresorbable implant products is
likely to occur in the future as well.
We
are
vulnerable to competition and technological change, and also to physicians’
inertia
We
compete with many domestic and foreign companies in developing our technology
and products, including biotechnical, medical device, pharmaceutical and
biopharmaceutical companies. Many of our competitors and potential competitors
have substantially greater financial, technological, research and development,
marketing and personnel resources than we do. There can be no assurance that
our
competitors will not succeed in developing alternative technologies and products
that are more effective, easier to use or more economical than those which
we
have developed or are in the process of developing or that would render our
technology and products obsolete and non-competitive in these fields. In
general, we may not be able to preclude other companies from developing and
marketing competitive regenerative cell therapies or bioresorbable products
that
are similar to ours or perform similar functions.
These
competitors may also have greater experience in developing therapeutic
treatments, conducting clinical trials, obtaining regulatory clearances or
approvals, manufacturing and commercializing therapeutic or biomaterials
products. It is possible that certain of these competitors may obtain patent
protection, approval or clearance by the U.S. Food and Drug Administration
“FDA”
or achieve commercialization earlier than we, any of which could have a
substantial negative effect on our business. Finally, Olympus, Medtronic
and our
other partners might pursue parallel development of other technologies or
products, which may result in a partner developing additional products that
will
compete with our products.
We
also
compete with other types of regenerative cell therapies such as bone marrow
derived cell therapies, and potentially embryonic derived therapies. Our
biomaterials business competes with manufacturers of traditional
non-bioresorbable implants, such as titanium implants. Doctors have historically
been slow to adopt new technologies such as ours, whatever the merits, when
older technologies continue to be supported by established providers. Overcoming
such inertia often requires very significant marketing expenditures or
definitive product superiority.
We
expect
physicians’ inertia and skepticism to also be a significant barrier as we
attempt to gain market penetration with our future regenerative cell products.
We believe we will need to finance lengthy time-consuming clinical studies
(so
as to provide convincing evidence of the medical benefit) in order to overcome
this inertia and skepticism.
Our
regenerative cell technology products are pre-commercialization, which
subjects
us to development and marketing risks
We
are in
a relatively early stage of the path to commercialization with many of our
products. We believe that our long-term viability and growth will depend
in
large part on our ability to develop commercial quality cell processing devices
and to establish the safety and efficacy of our therapies through clinical
trials and studies. We are presently pursuing regenerative cell opportunities
in
cardiovascular disease, spine and orthopedic conditions, gastrointestinal
disorders and new approaches for aesthetic and reconstructive surgery that
may
require extensive additional capital investment, research, development, clinical
testing and regulatory clearances or approvals prior to commercialization.
There
can be no assurance that our development programs will be successfully completed
or that required regulatory clearances or approvals will be obtained on a
timely
basis, if at all.
The
path
to commercial profit from our regenerative cell technology is unclear even
if we
demonstrate the medical benefit of our regenerative cell technology in various
applications. There is no proven path for commercializing the technology
in a
way to earn a durable profit commensurate with the medical benefit. Although
we
intend to develop proprietary therapeutic products which optimize or enhance
the
benefit of autologous stem cells for particular indications, we have no yet
actually developed any such products. Most of our cell-related products and/or
services (as opposed to our Celution™ device) are at least three to five years
away.
Moreover,
the successful development and market acceptance of our technologies and
products are subject to inherent developmental risks, including failure of
inventive imagination, ineffectiveness or lack of safety, unreliability,
failure
to receive necessary regulatory clearances or approvals, high commercial
cost
and preclusion or obsolescence resulting from third parties’ proprietary rights
or superior or equivalent products, as well as general economic conditions
affecting purchasing patterns. There can be no assurance that we or our partners
will be able to successfully develop and commercialize our technologies or
products, or that our competitors will not develop competing technologies
that
are less expensive or otherwise superior to ours. The failure to successfully
develop and market our new regenerative cell technologies would have a
substantial negative effect on the results of our operations and financial
condition.
We
have limited manufacturing experience
We
have
no experience in manufacturing the Celution™ system at a commercial level, and
although Olympus is a highly capable and experienced manufacturer of medical
devices, there can be no guarantee that the Olympus-Cytori joint venture
will be
able to successfully develop and manufacture the Celution™ system in a manner
that is cost-effective or commercially viable, or that development and
manufacturing capabilities might not take much longer than currently anticipated
to be ready for the market.
In
the
event that the Olympus-Cytori joint venture is not successful, Cytori may
not
have the required level of technical ability or other resources to self
manufacture commercially viable devices, and in any event this failure would
substantially extend the time it would take for us to bring a commercial
device
to market. This makes us significantly dependant on the continued dedication
and
skill of Olympus for the successful development of the Celution™
system.
In
addition, we have no experience in manufacturing the type of cell-related
therapeutic products which we hope to develop and introduce in the future.
In
addition, the future of our biomaterials business success is significantly
dependent on our ability to manufacture our bioresorbable implants in commercial
quantities, in compliance with regulatory requirements and in a cost-effective
manner. Production of some of our products in commercial-scale quantities
may
involve unforeseen technical challenges and may require significant scale-up
expenses for additions to facilities and personnel. There can be no guarantee
that we will be able to achieve large-scale manufacturing capabilities for
some
of our biomaterials products or that we will be able to manufacture these
products in a cost-effective manner or in quantities necessary to allow us
to
achieve profitability. Our 2002 sale of CMF production assets to Medtronic
and
our 2004 sale of the (non-Japan) Thin Film product line deprived us of some
economies of scale in manufacturing. Current demand for spine and orthopedics
products from Medtronic is so low that economies of scale are lacking in
regard
to that product line as well.
If
we are
unable to sufficiently meet Medtronic’s requirements for certain products as set
forth under its agreement, Medtronic itself may then manufacture and sell
such
product and only pay us royalties on the sales. The resulting loss of payments
from Medtronic for the purchase of these products may have a substantial
negative effect on the results of our operations and financial
condition.
We
have to maintain quality assurance certification and manufacturing
approvals
The
manufacture of our bioresorbable products is, and the manufacture of the
Celution™ system for regenerative cells will be, and the manufacture of any
future cell-related therapeutic products would be, subject to periodic
inspection by regulatory authorities and distribution partners. The manufacture
of devices and products for human use is subject to regulation and inspection
from time to time by the FDA for compliance with the FDA’s Quality System
Regulation “QSR” requirements, as well as equivalent requirements and
inspections by state and non-U.S. regulatory authorities. There can be no
guarantee that the FDA or other authorities will not, during the course of
an
inspection of existing or new facilities, identify what they consider to
be
deficiencies in our compliance with QSRs or other requirements and request,
or
seek, remedial action.
Failure
to comply with such regulations or a potential delay in attaining compliance
may
adversely affect our manufacturing activities and could result in, among
other
things, injunctions, civil penalties, FDA refusal to grant pre-market approvals
or clearances of future or pending product submissions, fines, recalls or
seizures of products, total or partial suspensions of production and criminal
prosecution. There can be no assurance that we will be able to obtain additional
necessary regulatory approvals or clearances on a timely basis, if at all.
Delays in receipt of or failure to receive such approvals or clearances or
the
loss of previously received approvals or clearances could have a substantial
negative effect on the results of our operations and financial
condition.
We
depend on a sole source supplier for our crucial raw material for our
bioresorbable products
We
currently purchase the high molecular weight, medical grade, lactic acid
copolymer used in manufacturing most of our bioresorbable products, from
a
single qualified source. Although we have a contract with B.I. Chemicals,
Inc.,
which guarantees continuation of supply through August 15, 2007, we cannot
guarantee that they will elect to continue the contract beyond that date,
or
that they will not elect to discontinue the manufacture of the material.
They
have agreed that if they discontinue manufacturing they will either find
a
replacement supplier, or provide us with the necessary technology to
self-manufacture the material, either of which could mean a substantial increase
in material costs. Also, despite this agreement they might fail to do these
things for us. Under the terms of the contract, B.I. Chemicals, Inc. may
choose
to raise their prices upon nine months’ prior notice which may also result in a
substantially increased material cost. Although we believe that we would
be able
to obtain the material from at least one other source in the event of a failure
of supply, there can be no assurance that we will be able to obtain adequate
increased commercial quantities of the necessary high quality within a
reasonable period of time or at commercially reasonable rates. Lack of adequate
commercial quantities or the inability to develop alternative sources meeting
regulatory requirements at similar prices and terms within a reasonable time
or
any interruptions in supply in the future could have a significant negative
effect on our ability to manufacture products, and, consequently, could have
a
material adverse effect on the results of our operations and financial
condition.
We
may
not be able to protect our proprietary rights
Our
success depends in part on whether we can obtain additional patents, maintain
trade secret protection and operate without infringing on the proprietary
rights
of third parties.
Our
recently amended regenerative cell technology license agreement with the
Regents
of the University of California contains certain developmental milestones,
which
if not achieved could result in the loss of exclusivity or loss of the license
rights. The loss of such rights could significantly impact our ability
to develop certain regenerative cell technology and commercialize related
products. Also, our power as licensee to successfully use these rights to
exclude competitors from the market is untested. In addition, further legal
risk
arises from a lawsuit, filed by the University of Pittsburgh naming all of
the
inventors who had not assigned their ownership interest in Patent 6,777,231
to
the University of Pittsburgh, seeking a determination that its assignors,
rather
than the University of California’s assignors, are the true inventors of Patent
6,777,231. We are the exclusive, worldwide licensee of the University of
California’s rights under this patent, which relates to adult stem cells
isolated from adipose tissue that can differentiate into two or more of a
variety of cell types. If the University of Pittsburgh wins the lawsuit,
our
license rights to this patent could be nullified or rendered non-exclusive
with
respect to any third party that might license rights from the University
of
Pittsburgh, and our regenerative cell strategy could be impacted.
We
have
various U.S. patents for the design of our bioresorbable plates and high
torque
screws and devices and we have filed applications for numerous additional
U.S.
patents, as well as certain corresponding patent applications outside the
United
States, relating to our technology. However, we believe we cannot patent
the use
of our lactic acid copolymer for surgical implants, nor are many of our
particular implants generally patentable.
There
can
be no assurance that any of the pending patent applications will be approved
or
that we will develop additional proprietary products that are patentable.
There
is also no assurance that any patents issued to us will provide us with
competitive advantages, will not be challenged by any third parties or that
the
patents of others will not prevent the commercialization of products
incorporating our technology. Furthermore, there can be no guarantee that
others
will not independently develop similar products, duplicate any of our products
or design around our patents.
Our
commercial success will also depend, in part, on our ability to avoid infringing
on patents issued to others. If we were judicially determined to be infringing
on any third party patent, we could be required to pay damages, alter our
products or processes, obtain licenses or cease certain activities. If we
are
required in the future to obtain any licenses from third parties for some
of our
products, there can be no guarantee that we would be able to do so on
commercially favorable terms, if at all. U.S. patent applications are not
immediately made public, so we might be surprised by the grant to someone
else
of a patent on a technology we are actively using. As noted above as to U
Pitt
lawsuit, even patents issued to us or our licensors might be judicially
determined to belong in full or in part to third parties.
Litigation,
which would result in substantial costs to us and diversion of effort on
our
part, may be necessary to enforce or confirm the ownership of any patents
issued
or licensed to us or to determine the scope and validity of third party
proprietary rights. If our competitors claim technology also claimed by us
and
prepare and file patent applications in the United States, we may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office or a foreign patent office to determine priority of invention,
which could result in substantial costs to and diversion of effort, even
if the
eventual outcome is favorable to us.
Any
such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming. We have been incurring substantial legal costs as a result
of the University of Pittsburgh lawsuit, and our president, Marc Hedrick,
is a
named individual defendant in that lawsuit because he is one of the inventors
identified on the patent. As a named inventor on the patent, Marc Hedrick
is
entitled to receive from the Regents of the University of California up to
7% of
royalty payments made by a license (us) to the Regents of the University
of
California. This agreement was in place prior to his employment with
us.
In
addition to patents, which alone may not be able to protect the fundamentals
of
our regenerative cell and bioresorbable businesses, we also rely on unpatented
trade secrets and proprietary technological expertise. We rely, in part,
on
confidentiality agreements with our partners, employees, advisors, vendors
and
consultants to protect our trade secrets and proprietary technological
expertise. There can be no guarantee that these agreements will not be breached,
or that we will have adequate remedies for any breach, or that our unpatented
trade secrets and proprietary technological expertise will not otherwise
become
known or be independently discovered by competitors.
Failure
to obtain or maintain patent protection, or protect trade secrets, for any
reason (or third party claims against our patents, trade secrets or proprietary
rights, or our involvement in disputes over our patents, trade secrets or
proprietary rights, including involvement in litigation), could have a
substantial negative effect on the results of our operations and financial
condition.
We
may
not be able to protect our intellectual property in countries outside the
United
States
Intellectual
property law outside the United States is uncertain and in many countries
is
currently undergoing review and revisions. The laws of some countries do
not
protect our patent and other intellectual property rights to the same extent
as
United States laws. We currently have pending patent applications in Europe,
Australia, Japan, Canada, China, Korea, and Singapore, among
others.
We
are, and Olympus-Cytori, Inc. will be, subject to intensive FDA
regulation
As
newly
developed medical devices, our and Olympus-Cytori’s regenerative cell
harvesting, isolation and delivery devices and our bioresorbable implants
must
receive regulatory clearances or approvals from the FDA and, in many instances,
from non-U.S. and state governments, prior to their sale. Our and
Olympus-Cytori’s current and future regenerative cell harvesting, isolation and
delivery devices and bioresorbable implants are subject to stringent government
regulation in the United States by the FDA under the Federal Food, Drug and
Cosmetic Act. The FDA regulates the design/development process, clinical
testing, manufacture, safety, labeling, sale, distribution and promotion
of
medical devices and drugs. Included among these regulations are pre-market
clearance and pre-market approval requirements, design control requirements,
and
the Quality System Regulations / Good Manufacturing Practices. Other statutory
and regulatory requirements govern, among other things, establishment
registration and inspection, medical device listing, prohibitions against
misbranding and adulteration, labeling and post market reporting.
The
regulatory process can be lengthy, expensive and uncertain. Before any new
medical device may be introduced to the United States market, the manufacturer
generally must obtain FDA clearance or approval through either the 510(k)
pre-market notification process or the lengthier pre-market approval application
“PMA” process. It generally takes from three to 12 months from submission to
obtain 510(k) pre-market clearance, although it may take longer. Approval
of a
PMA could take four or more years from the time the process is initiated.
The
510(k) and PMA processes can be expensive, uncertain and lengthy, and there
is
no guarantee of ultimate clearance or approval. We expect that some of our
future products under development as well as Olympus-Cytori’s will be subject to
the lengthier PMA process. Securing FDA clearances and approvals may require
the
submission of extensive clinical data and supporting information to the FDA,
and
there can be no guarantee of ultimate clearance or approval. Failure to comply
with applicable requirements can result in application integrity proceedings,
fines, recalls or seizures of products, injunctions, civil penalties, total
or
partial suspensions of production, withdrawals of existing product approvals
or
clearances, refusals to approve or clear new applications or notifications
and
criminal prosecution.
Medical
devices are also subject to post-market reporting requirements for deaths
or
serious injuries when the device may have caused or contributed to the death
or
serious injury, and for certain device malfunctions that would be likely
to
cause or contribute to a death or serious injury if the malfunction were
to
recur. If safety or effectiveness problems occur after the product reaches
the
market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing and promotion of devices for indications or uses that have not
been
cleared or approved by the FDA.
Our
current medical implants are at different stages of FDA review. We currently
have 510(k) clearances for a wide variety of bioresorbable surgical implant
products and we are constantly engaged in the process of obtaining additional
clearances for new and existing products. There can be no guarantee that
we will
be able to obtain the necessary 510(k) clearances or PMA approvals to market
and
manufacture our other products in the United States for their intended use
on a
timely basis, if at all. Delays in receipt of or failure to receive such
clearances or approvals, the loss of previously received clearances or
approvals, or failure to comply with existing or future regulatory requirements
could have a substantial negative effect on the results of our operations
and
financial condition.
To
sell in international markets, we will be subject to intensive regulation
in
foreign countries
In
cooperation with our distribution partners, we intend to market our current
and
future products both domestically and in many foreign markets. A number of
risks
are inherent in international transactions. In order for us to market our
products in Europe, Canada, Japan and certain other non-U.S. jurisdictions,
we
need to obtain and maintain required regulatory approvals or clearances and
must
comply with extensive regulations regarding safety, manufacturing processes
and
quality. For example, we still have not obtained regulatory approval for
our
Thin Film products in Japan. These regulations, including the requirements
for
approvals or clearances to market, may differ from the FDA regulatory scheme.
International sales also may be limited or disrupted by political instability,
price controls, trade restrictions and changes in tariffs. Additionally,
fluctuations in currency exchange rates may adversely affect demand for our
products by increasing the price of our products in the currency of the
countries in which the products are sold.
There
can
be no assurance that we will obtain regulatory approvals or clearances in
all of
the countries where we intend to market our products, or that we will not
incur
significant costs in obtaining or maintaining foreign regulatory approvals
or
clearances, or that we will be able to successfully commercialize current
or
future products in various foreign markets. Delays in receipt of approvals
or
clearances to market our products in foreign countries, failure to receive
such
approvals or clearances or the future loss of previously received approvals
or
clearances could have a substantial negative effect on the results of our
operations and financial condition.
We
depend on a few key officers
Our
performance is substantially dependent on the performance of our executive
officers and other key scientific staff, including Christopher J. Calhoun,
our
Chief Executive Officer, and Marc Hedrick, MD, our President. We rely upon
them
for strategic business decisions and guidance. We believe that our future
success in developing marketable products and achieving a competitive position
will depend in large part upon whether we can attract and retain additional
qualified management and scientific personnel. Competition for such personnel is
intense, and there can be no assurance that we will be able to continue to
attract and retain such personnel. The loss of the services of one or more
of
our executive officers or key scientific staff or the inability to attract
and
retain additional personnel and develop expertise as needed could have a
substantial negative effect on our results of operations and financial
condition. Three executive officers have left us in 2006, two in connection
with
a summer 2006 reduction of our headcount by 18%.
Companies
which make personnel cuts sometimes find the resulting loss of experience
and
lack of coverage can cause important business problems.
We
may
not have enough product liability insurance
The
testing, manufacturing, marketing and sale of our regenerative cell and
bioresorbable implant products involve an inherent risk that product liability
claims will be asserted against us, our distribution partners or licensees.
There can be no guarantee that our clinical trial and commercial product
liability insurance is adequate or will continue to be available in sufficient
amounts or at an acceptable cost, if at all. A product liability claim, product
recall or other claim, as well as any claims for uninsured liabilities or
in
excess of insured liabilities, could have a substantial negative effect on
the
results of our operations and financial condition. Also, well-publicized
claims
could cause our stock to fall sharply, even before the merits of the claims
are
decided by a court.
Our
charter documents contain anti-takeover provisions and we have adopted a
Stockholder Rights Plan to prevent hostile takeovers
Our
Amended and Restated Certificate of Incorporation and Bylaws contain certain
provisions that could prevent or delay the acquisition of the Company by
means
of a tender offer, proxy contest or otherwise. They could discourage a third
party from attempting to acquire control of the Company, even if such events
would be beneficial to the interests of our stockholders. Such provisions
may
have the effect of delaying, deferring or preventing a change of control
of the
Company and consequently could adversely affect the market price of our shares.
Also, in 2003 we adopted a Stockholder Rights Plan, of the kind often referred
to as a poison pill. The purpose of the Stockholder Rights Plan is to prevent
coercive takeover tactics that may otherwise be utilized in takeover attempts.
The existence of such a rights plan may also prevent or delay a change in
control of the Company, and this prevention or delay adversely affect the
market
price of our shares.
We
pay
no dividends
We
currently do not intend to pay any cash dividends for the foreseeable future.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Item
3.
Defaults Upon Senior
Securities
None
We
held
our annual meeting of stockholders on August 10, 2006. Of the
15,614,170 shares
of
our common stock which could be voted at the annual meeting,
10,565,814 shares
of
our common stock were represented at the annual meeting in person or by proxy,
which constituted a quorum. Voting results were as follows:
a.
Election
of the following persons to our Board of Directors to hold office until the
next
annual meeting of stockholders:
|
|
For
|
Withheld
|
|||||
|
|
|
|
|||||
|
Christopher
J. Calhoun
|
10,565,017
|
797
|
|||||
|
Marshall
G. Cox
|
10,565,204
|
610
|
|||||
|
Paul
W. Hawran
|
10,565,304
|
510
|
|||||
|
Marc
H. Hedrick, MD
|
10,565,304
|
510
|
|||||
|
Ronald
D. Henriksen
|
10,565,304
|
510
|
|||||
|
E.
Carmack Holmes, MD
|
10,565,304
|
510
|
|||||
|
David
M. Rickey
|
10,565,304
|
510
|
|||||
b.
The
proposal to ratify the selection of KPMG LLP as the Company’s independent
registered public accounting firm for the fiscal year ending December 31,
2006, received the following votes:
|
For
|
Against
|
Abstain
|
|||||
|
|
|
|
|||||
|
10,565,007
|
620
|
187
|
|||||
Other
Information
Material
Agreements
None
Property
On
May
24, 2005, we entered into a lease for 91,000 square feet located at 3020
and
3030 Callan Road, San Diego, California. We moved the majority of our operations
to this new facility during the second half of 2005 and the first quarter
of
2006. The agreement bears rent at a rate of $1.15 per square foot, with annual
increases of 3%. The lease term is 57 months, commencing on October 1, 2005
and
expiring on June 30, 2010.
We
also
have a facility located at 6740 Top Gun Street, San Diego, California. We
currently lease approximately 27,000 square feet of space at this location
of
which approximately 6,000 square feet is laboratory space, 12,000 square
feet is
office space and 9,000 square feet is manufacturing space. Our lease has
a
five-year term, expiring in 2008. We also lease:
|
·
|
16,000
additional square feet for research and development activities
located at
6749 Top Gun Street, San Diego, California for a five-year term
expiring
2008.
|
|
·
|
4,027
square feet of office space located at 9-3 Otsuka 2-chome, Bunkyo-ku,
Tokyo, Japan. The agreement bears rent at a rate of $3.66 per square
foot,
for a term of two years expiring on November 30,
2007.
|
On
the
properties stated above, we pay an aggregate of approximately $198,000 in
rent
per month.
Staff
As
of
September 30, 2006, we had 121 full-time equivalent employees, comprised
of 5 employees in manufacturing, 79 employees in research and
development, 4 employees in sales and marketing and 33 employees in
management and finance and administration. From time to time, we also employ
independent contractors to support our administrative organizations. Our
employees are not represented by any collective bargaining unit and we have
never experienced a work stoppage. A breakout by segment is as
follows:
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Corporate
|
Total
|
||||||||||
|
Manufacturing
|
—
|
5
|
—
|
5
|
|||||||||
|
Research
& Development
|
78
|
1
|
—
|
79
|
|||||||||
|
Sales
and Marketing
|
4
|
—
|
—
|
4
|
|||||||||
|
General
& Administrative
|
—
|
—
|
33
|
33
|
|||||||||
|
Total
|
82
|
6
|
33
|
121
|
|||||||||
|
10.32
|
Common
Stock Purchase Agreement, dated August 9, 2006, by and between
Cytori
Therapeutics, Inc. and Olympus Corporation (filed as Exhibit
10.32 to our
Form 8-K Current Report as filed on August 15, 2006 and incorporated
by
reference herein)
|
|
10.33
|
Form
of Common Stock Subscription Agreement, dated August 9, 2006
(Agreements
on this form were signed by Cytori and each of respective investors
in the
Institutional Offering) (filed as Exhibit 10.33 to our Form 8-K
Current
Report as filed on August 15, 2006 and incorporated by reference
herein)
|
|
|
|
|
10.34
|
Placement
Agency Agreement, dated August 9, 2006, between Cytori Therapeutics,
Inc.
and Piper Jaffray & Co. (filed as Exhibit 10.34 to our Form 8-K
Current Report as filed on August 15, 2006 and incorporated by
reference
herein)
|
|
10.35
#
|
Stock
Option Extension Agreement between Bruce A. Reuter and Cytori
Therapeutics, Inc. effective July 25, 2006
|
|
10.36
#
|
Stock
Option Extension Agreement between Elizabeth A. Scarbrough and
Cytori
Therapeutics, Inc. effective July 25, 2006
|
|
10.37
#
|
Employment
Agreement between Bruce A. Reuter and Cytori Therapeutics, Inc.
effective
July 25, 2006
|
|
10.38
#
|
Employment
Agreement between Elizabeth A. Scarbrough and Cytori Therapeutics,
Inc.
effective July 25, 2006
|
|
10.39
+
|
Amended
and Restated Exclusive License Agreement, effective September
26, 2006, by
and between The Regents of the University of California and Cytori
Therapeutics, Inc.
|
|
15.1
|
Letter
re unaudited interim financial information
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Securities Exchange Act
Rule
13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Securities Exchange Act
Rule
13a-14(a) As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule
13a-14(b), As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
____________________________
+
Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
#
Indicates management contract or compensatory plan or
arrangement.
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 San Diego, California, on November 14, 2006.
|
CYTORI
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
November 14, 2006
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
November 14, 2006
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|
||
EXHIBIT
10.35
STOCK
OPTION EXTENSION AGREEMENT
This
Stock Option Extension Agreement (“Agreement”) is entered into as of July 25,
2006 (the “Effective Date”), by and between Cytori Therapeutics, Inc., a
Delaware corporation located at 3020 Callan Road, San Diego, CA 92121 (the
“Company”), and Bruce A. Reuter, an employee
of the Company (the
“Optionee”).
WHEREAS,
as of July 25, 2006 Optionee holds a combined total of 224,686 vested stock
options to purchase shares of the Company’s common stock under the Company’s
1997 Incentive Stock Option Plan (the “1997 Plan”) and/or the Company’s 2004
Employee Stock Option Plan (the “2004 Plan”) (collectively the “Plans”);
and
WHEREAS,
Company agrees to modify the Plan agreements to extend the expiration dates
for
the exercise of stock options under the Plans subject to certain restrictions
and conditions on the sale of shares of the Company’s common stock held by
Optionee, and certain other consideration from the Optionee.
NOW,
THEREFORE, the Company and the Optionee agree as follows:
(a)
The
right of the Optionee to exercise Two Hundred and Twenty Four Thousand, Six
Hundred and Eighty Six (224,686) fully vested Plan stock options (which consists
of all of Optionee’s vested stock Options as of the Effective Date) is hereby
extended to December 31, 2007, irrespective of the date that Optionee’s services
to the Company terminate.
(b)
The
exercise extension provided for in Section (a) above is subject to the following
conditions and restrictions:
(i)
Immediately upon termination of Optionee’s employment as provided for in the
Employment Agreement between the Company and Optionee, Optionee shall execute
and sign a full release of all claims against the Company in the form attached
as Exhibit I, which is that Company’s standard employment related release of
claims.
(ii)
No
shares of common stock of the Company owned by Optionee may be sold by or on
behalf of Optionee during the initial 90-day period from July 25, 2006 through
October 23, 2006; (b) Optionee may sell up to 56,173 shares of common stock
owned by him beginning October 24, 2006; (c) and Optionee may sell an additional
56,171 beginning on January 21, 2007 and each ninety days thereafter until
July
20, 2007 when 100% of Optionee’s shares of common stock in the Company shall be
fully tradable. The trade restrictions listed above shall be eliminated once
the
per-share trading price of the Company’s common stock on the Nasdaq exchange
closes at or above $13 per share, or if the 30 day average daily stock volume
reaches 50,000 shares.
(c)
All
stock options previously granted to Optionee that are not vested as of the
Effective Date of this Agreement are hereby terminated as of the Effective
Date.
(d)
Except as specifically set forth herein, all other terms and conditions of
the
Plans and the Plan Agreements shall remain in full force and
effect.
IN
WITNESS WHEREOF, this Agreement has been executed and delivered by
the
parties on the Effective Date.
|
OPTIONEE:
Bruce
A. Reuter
/s/
Bruce A. Reuter
|
COMPANY:
Cytori
Therapeutics, Inc.
By:
/s/
Christopher J. Calhoun
Name:
Christopher J. Calhoun
Title: Chief
Executive Officer
|
Exhibit
10.36
STOCK
OPTION EXTENSION AGREEMENT
This
Stock Option Extension Agreement (“Agreement”) is entered into as of July 25,
2006 (the “Effective Date”), by and between Cytori Therapeutics, Inc., a
Delaware corporation located at 3020 Callan Road, San Diego, CA 92121 (the
“Company”), and Elizabeth A. Scarbrough, an employee
of the Company (the
“Optionee”).
WHEREAS,
as of July 25, 2006 Optionee holds a combined total of 103,878 vested stock
options to purchase shares of the Company’s common stock under the Company’s
1997 Incentive Stock Option Plan (the “1997 Plan”) and/or the Company’s 2004
Employee Stock Option Plan (the “2004 Plan”) (collectively the “Plans”);
and
WHEREAS,
Company agrees to modify the Plan agreements to extend the expiration dates
for
the exercise of stock options under the Plans subject to certain restrictions
and conditions on the sale of shares of the Company’s common stock held by
Optionee, and Optionees agreement to execute a release of claims.
NOW,
THEREFORE, the Company and the Optionee agree as follows:
(a)
The
right of the Optionee to exercise One Hundred and Three Thousand, Eight Hundred
and Seventy Eight (103,878) fully vested Plan stock options (which consists
of
all of Optionee’s vested stock Options as of the Effective Date) is hereby
extended to December 31, 2007, irrespective of the date that Optionee’s services
to the Company terminate.
(b)
The
exercise extension provided for in Section (a) above is subject to the following
conditions and restrictions:
(i)
Immediately upon termination of Optionee’s employment as provided for in the
Employment Agreement between the Company and Optionee, Optionee shall execute
and sign a full release of all claims against the Company in the form attached
as Exhibit I, which is that Company’s standard employment related release of
claims. In the event Employee elects not to sign the release of claims
immediately upon the termination of the Employment Agreement, Employee agrees
that all then outstanding Employee Stock Options shall then immediately
terminate.
(ii)
No
shares of common stock of the Company owned by Optionee may be sold by or on
behalf of Optionee during the initial 90-day period from July 25, 2006 through
October 23, 2006; (b) Optionee may sell up to 25,971 shares of common stock
owned by her beginning October 24, 2006; (c) and Optionee may sell an additional
25,969 shares beginning on January 21, 2007 and each ninety days thereafter
until July 20, 2007 when 100% of Optionee’s shares of common stock (and/or
options exercisable for common stock) in the Company shall be fully tradable.
The trade restrictions listed above shall be eliminated once the per-share
trading price of the Company’s common stock on the Nasdaq exchange closes at or
above $13 per share, or if the 30 day average daily stock volume reaches 50,000
shares.
(c)
All
stock options previously granted to Optionee that are not vested as of the
Effective Date of this Agreement are hereby terminated as of the Effective
Date.
(d)
Except as specifically set forth herein, all other terms and conditions of
the
Plans and the Plan Agreements shall remain in full force and
effect.
IN
WITNESS WHEREOF, this Agreement has been executed and delivered by the parties
on the Effective Date.
|
OPTIONEE:
Elizabeth
A. Scarbrough
/s/
Elizabeth A. Scarbrough
|
COMPANY:
Cytori
Therapeutics, Inc.
By:
/s/
Mark E. Saad
Name:
Mark E. Saad
Title: Chief
Financial Officer
|
EXHIBIT
10.37
EMPLOYMENT
AGREEMENT
THIS
AGREEMENT is entered into as of July 25, 2006 (the “Effective Date”), by and
between Cytori Therapeutics, Inc., a Delaware corporation located at 3020 Callan
Road, San Diego, CA 92121 (“Company”), and Bruce A. Reuter, an individual
(“Employee”).
Whereas,
the Company has eliminated the position of Senior Vice President, Business
Development on July 25, 2006; and
Whereas,
the Company and Employee wish to continue the Employment relationship in a
new
capacity through January 20, 2007;
Now
therefore, in consideration of the mutual promises made by the parties to this
Agreement, the parties agree as follows:
1.
Duties
and Compensation
(a)
Employee is engaged by the Company as its Strategic Business Development Advisor
with duties as directed by the CEO and otherwise customarily associated with
that position.
(b)
The
Company shall pay to Employee in exchange for the services to be rendered
hereunder a salary of Seventeen Thousand Five Hundred Dollars [$17,500.00]
per
month, payable twice a month on the fifteenth and last days of each month during
which this Agreement is in force.
2.
Guaranteed Duration
The
term
of this Agreement shall commence on July 25, 2006 and shall end on January
20,
2007 (the”Term”) unless extended by mutual agreement. The employment
relationship created by this Agreement is “at will” and may be terminated by
either the Company or Employee at any time, with or without cause. Should the
Company terminate Employee without cause prior to January 20, 2007, Employee
shall receive, as severance, the balance of his monthly salary payments that
would have otherwise been payable from such date of early termination through
January 20, 2007, plus Four Thousand Three Hundred and Seventy Five Dollars
[$4,375].
3.
Other
Compensation / Benefits
Employee
understands and agrees that by his employment hereunder he shall not earn or
accrue the right to any additional paid time off (or “PTO”), nor shall he be
eligible from the Effective Date of this Agreement to the vesting of any stock
options through the Company’s incentive stock option programs during the term of
this Agreement. Employee also understands and agrees that he is eligible to
participate in the Company’s flexible benefits plan for 2006/2007, but he agrees
not to submit for reimbursement of amounts in excess of that which he has paid
into the plan.
Employee
understands and agrees that he shall be entitled to participate in all other
standard benefits offered by the Company.
4.
Agreement Relating to Confidential Information
Employee
agrees that he shall continue to be covered by the Company’s Employment,
Confidentiality and Assignment Agreement which he executed on May 17, 2001.
5.
Noninterference
While
employed by the Company and for two (2) years immediately following the
termination of employment, Employee agrees not to interfere with the business
of
the Company by soliciting, attempting to solicit, inducing, or otherwise causing
any employee of the Company to terminate his or her employment in order to
become an employee, consultant or independent contractor to
or for
any competitor of the Company.
Employee
agrees that the duties under Sections 4 and 5 of this Agreement shall survive
termination of employment with the Company.
6.
Governing Law
This
Agreement and the rights and obligations of the parties shall be governed and
construed by the substantive laws of the State of California as applied to
contracts that are executed and performed entirely in California. Exclusive
jurisdiction and venue for any dispute arising out of or related to this
Agreement shall lie with the federal and state courts located in and serving
San
Diego County, California.
7.
Complete Agreement; Amendments
This
Agreement, together with the Stock Option Extension Agreement and the
Employment, Confidentiality and Assignment Agreement between Employee and the
Company, are the entire agreement of the parties with respect to the subject
matter hereof and thereof and may not be amended, supplemented, canceled or
discharged except by written instrument executed by both parties hereto. If
either party should waive any breach of any provision
of this Agreement, he, she or it shall not thereby be deemed to have waived
any
preceding or succeeding breach of the same or any other provision of this
Agreement.
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
|
EMPLOYEE:
Bruce
A. Reuter
/s/
Bruce A. Reuter
|
COMPANY:
Cytori
Therapeutics, Inc.
By:
/s/
Christopher J. Calhoun
Name:
Christopher J. Calhoun
Title: Chief
Executive Officer
|
EXHIBIT
10.38
EMPLOYMENT
AGREEMENT
THIS
AGREEMENT is entered into as of July 25, 2006 (the “Effective Date”), by and
between Cytori Therapeutics, Inc., a Delaware corporation located at 3020 Callan
Road, San Diego, CA 92121 (“Company”), and Elizabeth A. Scarbrough, an
individual (“Employee”).
Whereas,
the Company has eliminated the position of Vice President, Marketing &
Development on July 25, 2006; and
Whereas,
the Company and Employee wish to continue the Employment relationship in a
new
capacity through February 7, 2007;
Now
therefore, in consideration of the mutual promises made by the parties to this
Agreement, the parties agree as follows:
1.
Duties
and Compensation
(a)
Employee is engaged by the Company as its Strategic Marketing & Development
Advisor with duties as directed by the CEO and/or the President and otherwise
customarily associated with that position.
(b)
The
Company shall pay to Employee in exchange for the services to be rendered
hereunder a salary of Fifteen Thousand Four Hundred and Seventeen Dollars
[$15,417.00] per month, payable twice a month on the fifteenth and last days
of
each month during which this Agreement is in force.
(c)
In
exchange for Company agreeing to enter into this Agreement, Employee shall
be
required to sign a full release of claims with respect to her past employment
with the Company. The release shall be in the form attached hereto as Exhibit
A.
Company shall have the option to suspend its performance under this Agreement
and the Stock Option Extension Agreement until such time as Employee has
executed the full release of claims and the seven day period for revocation
of
the release has elapsed. In the event the release is not signed by Employee
within the 45 day period, or in the event Employee revokes the release prior
to
the expiration of the 7 day revocation period, the parties agree that this
Agreement and the Stock Option Extension Agreement shall immediately terminate
and Company shall have no obligations to Employee under this Agreement, and
all
outstanding Company stock options described in the Stock Option Extension
Agreement shall immediately terminate in their entirety.
2.
Guaranteed Duration
The
term
of this Agreement shall commence on July 25, 2006 and shall end on February
7,
2007 (the”Term”) unless extended by mutual agreement. The employment
relationship created by this Agreement is “at will” and may be terminated by
either the Company or Employee at any time, with or without cause. Should the
Company terminate Employee without cause prior to February 7, 2007, Employee
shall receive, as severance, the balance of her monthly salary payments that
would have otherwise been payable from such date of early termination through
February 7, 2007.
3.
Other
Compensation / Benefits / Acknowledgements
Employee
understands and agrees that by her employment hereunder that she shall not
earn
or accrue the right to any additional paid time off (or “PTO”), nor shall she be
eligible from the Effective Date of this Agreement to the vesting of any stock
options through the Company’s incentive stock option programs during the term of
this Agreement. Employee expressly acknowledges and agrees that this Agreement
shall serve as full and final compensation for any and all PTO that she may
have
accrued prior to the Effective Date. Employee also understands and agrees that
she is eligible to participate in the Company’s flexible benefits plan for
2006/2007, but she agrees to not to submit for reimbursement of amounts in
excess of that which she has paid into the plan.
Employee
understands and agrees that she shall be entitled to participate in all other
standard benefits offered by the Company through the term of this Agreement.
4.
Agreement Relating to Confidential Information
Employee
agrees that she shall continue to be covered by the Company’s Employment,
Confidentiality and Assignment Agreement which she executed on March 28, 2003.
5.
Noninterference
While
employed by the Company and for two (2) years immediately following the
termination of employment, Employee agrees not to interfere with the business
of
the Company by soliciting, attempting to solicit, inducing, or otherwise causing
any employee of the Company to terminate his or her employment in order to
become an employee, consultant or independent contractor to
or for
any competitor of the Company.
Employee
agrees that the duties under Sections 4 and 5 of this Agreement shall survive
termination of employment with the Company.
6.
Governing Law
This
Agreement and the rights and obligations of the parties shall be governed and
construed by the substantive laws of the State of California as applied to
contracts that are executed and performed entirely in California. Exclusive
jurisdiction and venue for any dispute arising out of or related to this
Agreement shall lie with the federal and state courts located in and serving
San
Diego County, California.
7.
Complete Agreement; Amendments
This
Agreement, together with the Stock Option Extension Agreement and the
Employment, Confidentiality and Assignment Agreement between Employee and the
Company (including all exhibits and attachments thereto), are the entire
agreement of the parties with respect to the subject matter hereof and thereof
and may not be amended, supplemented, canceled or discharged except by written
instrument executed by both parties hereto. If either party should waive any
breach of any provision
of this Agreement, he, she or it shall not thereby be deemed to have waived
any
preceding or succeeding breach of the same or any other provision of this
Agreement.
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
|
EMPLOYEE:
Elizabeth
A. Scarbrough
/s/
Elizabeth A. Scarbrough
|
COMPANY:
Cytori
Therapeutics, Inc.
By:
Mark
E. Saad
Name:
Mark E. Saad
Title: Chief
Financial Officer
|
Exhibit
10.39
AMENDED
AND RESTATED
EXCLUSIVE
LICENSE AGREEMENT
for
ADIPOSE-DERIVED
STEM CELLS
This
amended and restated exclusive license agreement ("Agreement") is made effective
this 6th
day
of
September, 2006 ("Effective Date"), between The Regents of the University
of
California, a California corporation, having its statewide administrative
offices at 1111 Franklin Street, 12th Floor, Oakland, California 94607-5200
("The Regents"), and Cytori Therapeutics, Inc., a Delaware corporation, having
a
principal place of business at 3020 Callan Road, San Diego, CA 92121
("Licensee").
BACKGROUND
IN CONNECTION WITH THE AMENDMENT AND RESTATEMENT
A.
The
Regents and StemSource, Inc. entered into that certain Exclusive License
Agreement for Adipose-Derived Stem Cells (U.C. Agreement Control Number
2002-03-0194) effective October 16, 2001 (the “License Agreement”), as amended
by the Amendment to Exclusive License Agreement between The Regents and
StemSource, Inc. dated January 23, 2002, and by the Consent Of Substitution
Of
Party dated November 8, 2002 pursuant to which Cytori Therapeutics, Inc
(formerly MacroPore Biosurgery, Inc.) was substituted in as the exclusive
licensee to The Regents interest in certain Inventions (as described below),
under terms and conditions set forth in the License Agreement.
B.
The
Regents and Licensee have recently reached a mutual understanding that the
License Agreement drafted in 2001 no longer accurately reflected the business
model of the Licensee, and that it contained certain restrictions and milestones
that were not optimal for the commercialization of the Invention
portfolio.
C.
In
light of these issues, the parties have agreed to amend and restate the License
Agreement to maximize the commercial potential for the Inventions, the interests
of the parties and the public good.
BACKGROUND
OF THE INVENTIONS
A.
Certain inventions, generally characterized as "Adipose-Derived Stem Cells
and
Lattices" ("Inventions"), were made in the course of research at the University
of California, Los Angeles by Drs. Marc H. Hedrick, H. Peter Lorenz, Prosper
Benhaim and Min Zhu ("Regents' Inventors") and as of the Effective Date named
inventors at the University of Pittsburgh ("Pittsburgh") include Drs. Adam
J.
Katz, J. Ramón Llull and J. William Futrell ("Pittsburgh's Inventors")
(collectively, the "Inventors"). The Inventions are disclosed in UC Case
No.
2000-310 and are covered by Patent Rights as defined below.
B.
Licensee acknowledges that The Regents and Pittsburgh have not entered into
any
agreement that sets out the rights of each in regards to patent prosecution
matters, inventorship, or licensing of the Inventions.
C.
Licensee acknowledges that Pittsburgh has filed and taken the lead in
prosecuting PCT/US00/06232 (filed 03/10/2000 and designating the US) and
The
Regents has filed and taken the lead in prosecuting a Continuation-in-Part
application (filed 09/10/2001). No decisions have been made by the parties
concerning Patent Rights.
D.
Licensee acknowledges that certain of the Inventions may be jointly owned
by The
Regents and Pittsburgh and that each party is licensing its interest in Patent
Rights independently of the other.
E.
Licensee acknowledges and agrees that the rights granted under this Agreement
may be limited by Pittsburgh's joint ownership or sole ownership in certain
claims under Patent Rights, and the licenses granted under this Agreement
are
granted solely under The Regents undivided interest in Patent Rights, whatever
those rights might be.
F.
Licensee wishes to obtain rights from The Regents for the exclusive commercial
development, use and sale of products from The Regents' interest in the
Inventions, and The Regents is willing to grant those rights so that the
Inventions may be developed to their fullest and the benefits enjoyed by
the
general public.
G.
Licensee is "a small business firm" as defined in 15 U.S.C. § 632.
H.
Licensee and The Regents recognize and agree that (subject to Sections 2.2
and
2.3 below) royalties due under this Agreement on products and methods will
be
paid by Licensee on both pending patent applications and issued
patents.
In
view
of the foregoing, the parties agree:
| 1. |
DEFINITIONS
|
"Affiliate"
means any corporation or other business entity: (i) in which Licensee owns
or
controls, directly or indirectly, at least fifty percent (50%) of the
outstanding stock or other voting rights entitled to elect directors; or
(ii)
which owns, directly or indirectly, at least fifty percent (50%) of the
outstanding stock or other voting rights entitled to elect directors of the
Licensee; or (iii) which is under common ownership or control with Licensee
to
the extent of at least fifty percent (50%) of the outstanding stock or other
voting rights entitled to elect directors. Notwithstanding the foregoing,
in any
country where the local law does not permit foreign equity participation
of at
least fifty percent (50%), then an "Affiliate" includes any company in which
Licensee owns or controls, or is owned or controlled by, or is under common
ownership or control with, directly or indirectly, the maximum percentage
of
outstanding stock or voting rights permitted by local law.
"Licensed
Method"
means any method that is covered by or claimed in Patent Rights, or the use
of
which would constitute, but for the license granted to Licensee under this
Agreement, an infringement of any unexpired claim of a patent or pending
claim
of a patent application included in Patent Rights.
"Licensed
Product"
means any product that is covered by or claimed in Patent Rights; that is
used
in a manner requiring the performance of the Licensed Method; that is produced
by the Licensed Method or that the manufacture, use or sale of which would
be an
infringement, but for the license granted to Licensee pursuant to this
Agreement, of an unexpired claim of a patent or pending claim of a patent
application included in Patent Rights. This definition of Licensed Product
also
includes a service either used by Licensee or an Affiliate or sublicensee
or
provided by Licensee an Affiliate or sublicensee to its customers when such
service requires the use of Licensed Product or performance of Licensed
Method.
“Research
Product”
means a Licensed Product that is not a Clinical Product and is sold for research
purposes or drug discovery purposes, i.e. an assay for identifying or validating
human therapeutic drugs.
“Clinical
Product”
means a Licensed Product which, were it sold in the United States, would
require
regulatory approval from the United States Food and Drug
Administration.
“Product”
means Research Product and Clinical Product.
1.7 “Field”
means
any and all products and/or services for the research, diagnosis, and/or
therapy
of disease and/or dissorders in humans and for cosmetic applications in humans.
1.8 "Net
Sales"
means
the total of the gross invoice prices from the Final Sale of Product, or
Licensed Method performed by Licensee or an Affiliate, less the sum of the
following actual and customary deductions where applicable: cash, trade or
quantity discounts; sales, use, tariff, import/export duties or other excise
taxes imposed on particular sales (excepting value added taxes or income
taxes);
transportation charges, including insurance; and allowances or credits to
customers because of rejections or returns. Final Sale means the last sale
within the control of Licensee or an Affiliate to an independent third party
(including without limitation to distributors and agents). If the Licensee
or an
Affiliate sells Licensed Products to a sublicense, an Affiliate or the Licensee
for the recipient’s end use (and not for resale, clinical studies, clinical
trials, or other research to promote commercialization), then such sales
will be
considered a Final sale at the price normally charged to independent,
unaffiliated third parties at the time of such end use sale or, if there
is no
such price, at the fair market value thereof at the time of such end use
sale.
Any sale of a Product by Licensee or an Affiliate to an Affiliate, the Licensee,
or a sublicensee will not be considered a Final Sale where such sale is not
for
end use by Licensee, an Affiliate or a sublicensee. If Licensee
or
an
Affiliate
sells at
a single price or rate a packaged combination of products (or “Kit”), not all of
which if sold individually would be Licensed Products, then “Net Sales” with
respect to such sales of such Kit or packaged products shall equal the number
of
units of Licensed Products sold as part of such Kit (less rejections, defects
and returns) multiplied by either (i) the respective average net selling
price
during such period of the same type of Licensed Product sold individually,
or
(ii) the average net selling price during such period for a comparable product
(if the same type of Product is not sold individually), in either case excluding
sales, use or excise tax, freight, duty or insurance included therein.
***.
Additionally,
for the avoidance of doubt, if such product is an indivisible component of
a
larger product, composition of matter or combination product (the components
of
which cannot be sold separately), then such composition of matter or combination
product is deemed in its entirety to be a Licensed Product for purposes of
this
definition.
1.9 "Patent
Rights"
means The Regents' undivided interest in the following United States patents
and
patent applications, corresponding foreign patents and patent applications,
and
any reissues, extensions, substitutions, continuations, divisions, and
continuation-in-part applications but excluding continuation-in-part
applications (to the extent that claims are not supported in the
parent);
1.9.1 United
States Patent Application No. 60/123,711 entitled “Isolation of Stromal Cells
from Adipose Tissue,” filed March 10, 1999, by Dr. Marc Hedrick et al (UC Case
2000-310-1) - inactive;
1.9.2. United
States Patent Application No. 60,162,462 entitled “Isolation of Mesenchymal Stem
Cells from Adipose Tissue,” filed October 29, 1999, by Dr. Marc Hedrick et al.
(UC Case No. 2000-301-2) - converted;
1.9.3 United
States Patent Application No. 09/947,985 entitled “Adipose-Derived Stem Cells
and Lattices,” filed Sept. 6, 2001, by Adam Katz et al (UC Case No. 2000-310-3),
abandoned;
1.9.4 United
States Patent Serial No. 6,777,231 entitled “Adipose-Derived Stem Cells and
Lattices,” issued August 17, 2004 by Dr. Marc Hedrick et al (UC Case
2000-310-4).;
1.9.5 United
States Patent Application No. 09/952,522 entitled “Adipose-Derived Stem Cells
and Lattices,” filed September 10, 2001, by Dr. Marc Hedrick et al.; (UC Case
No. 2000-310-5) now abandoned;
1.9.6 United
States Patent Application No.10/651,564 entitled ‘Adipose-Derived Stem Cells and
Lattices,” filed August 29, 2003, by Dr. Adam J. Katz et al.; (UC Case No.
2000-310-6);
1.9.7 United
States Patent Application No. 10/740,315 entitled “Adipose-Derived Stem Cells
and Lattices,” filed December 17, 2003, by Dr. Dr. Marc Hedrick et al.; (UC Case
No. 2000-310-7);
1.9.8 United
States Patent Application No. 10/797,371 entitled “Adipose-Derived Stem Cells
and Lattices,” filed March 9, 2004, by Dr. Adam Katz et al.; (UC Case No.
2000-310-8);
1.9.9 United
States Patent Application No. 10/845,315 entitled “Adipose-Derived Stem Cells
and Lattices,” filed May 12, 2004, by Dr. Adam Katz et al.; (UC Case No.
2000-310-9);
1.9.10 United
States Patent Application No. 11/211,114 entitled “Adipose-Derived Stem Cells
and Lattices,” filed August 24, 2005, by Dr. Marc Hedrick et al.; (UC Case No.
2000-310-A).
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
2. LIFE
OF PATENT EXCLUSIVE GRANT
2.1 Subject
to the limitations set forth in this Agreement, The Regents grants to Licensee
a
world-wide license under The Regents' undivided interest in Patent Rights
to
make, have made, use, sell, offer to sell and import Product and to practice
Licensed Method in the Field to the extent permitted by
law.
2.2 The
Regents acknowledge Licensee is currently commercializing an automated device
called “Celution”, which when operated in conjunction with various disposable
component parts is capable of producing a heterogeneous isolate of the material
naturally occurring in adipose tissue including unmodified amounts of stem
cells
and other regenerative cells ( hereafter “PLA”), intended for human therapeutic,
diagnostic, cosmetic and other uses;
2.3
Licensee
and the Regents acknowledge and agree that (except as provided below in this
Paragraph 2.3) Licensee’s Celution device and PLA shall be deemed not to be
included in or covered by the Patent Rights for purposes of this License,
and
that such exclusion shall not constitute an admission by The Regents that
the
Celution device or the PLA are not encompassed, either in whole or in part,
within the Regents Patent Rights. Nor shall the Regents be barred from later
requiring that the Celution device and PLA be governed by the terms of this
Agreement in the event (and to the extent) of any subsequent issuance of
claims
under prosecution in the Patent Rights that would cause either Licensees
Celution device or PLA to fall within the category of “Licensed Products” or
“Licensed Methods”. In no event shall any subsequent royalty associated with
Licensees Celution device or the PLA exceed ***.
2.4 Licensee
acknowledges that Pittsburgh has the right to grant licenses to its undivided
interest in Patent Rights.
2.5 Except
as otherwise provided in this Agreement, the license granted in Paragraph
2.1
is exclusive for the life of the Agreement.
2.6 The
Regents reserves the right to practice, and for other educational and non-profit
institutions to practice, the Inventions and associated technology for
educational and research purposes, including publication and other communication
of research results.
3. SUBLICENSES
3.1 The
Regents also grants to Licensee the right to issue sublicenses to third parties
to make, have made, use, sell, and offer to sell and import Products and
to
practice Licensed Method, as long as Licensee has current exclusive rights
thereto under this Agreement, except that the sublicensee may not be granted
the
right to further sublicense the technology without the prior approval by
The
Regents, which approval shall be granted only upon Licensees provision of
substantial assurances that the Regents interests in the technology will
at all
times be maintained. To the extent applicable, sublicenses must include all
of
the rights of and obligations due to The Regents contained in this Agreement.
The Licensee will not issue additional paid-up sublicenses without prior
written
approval of The Regents. For the avoidance of doubt, Licensee’s Affiliates are
not licensed under this Agreement, except by a written sublicense agreement
under this Article 3. And furthermore, The Regents hereby acknowledges and
approves the sublicense issued by Licensee to Olympus-Cytori, Inc, entitled
License/Commercial Agreement dated November 4, 2005, and acknowledges
additionally that such sublicense is fully paid-up with respect to the Regents
for the life thereof.
3.2 The
Licensee will pay to The Regents *** under each sublicense agreement issued
for
the purpose of development or commercialization of Products (the “Purpose”)
after the Effective Date (“Sublicensing Revenue”). Sublicensing Revenue will be
the sole form of compensation payable to the Regents by Licensee with respect
to
any and all sublicenses granted hereunder. Sublicensing Revenue will not
include
the following: *** The
operations of all sublicensees will be deemed to be the operations of the
Licensee, for which the Licensee will be responsible. The Licensee will notify
The Regents of each sublicense granted hereunder and provide The Regents
with a
complete copy
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
of
each sublicense within thirty (30) days of issuance of the sublicense. The
Licensee will pay to The Regents all Sublicensing Revenue due in accordance
with
Article 4 (Sublicenses) below on or before the due date of the royalty report
applicable to the quarter in which the Sublicensing Revenue is due to The
Regents, in accordance with Section 4.1. The Licensee will require the
sublicensees to provide it with Progress Reports and royalty reports in
accordance with the provisions herein, and the Licensee will collect and
deliver
to The Regents all such reports due from the sublicensees. For avoidance
of
doubt, ***.
3.3 In
the
event that The Regents rights to United States Patent Serial No. 6,777,231
are
finally determined not to be solely owned and assigned to The Regents in
connection with the pending Complaint for Correction of Inventorship by the
University of Pittsburgh vs. Hedrick et al. (U.S. Disc. Ct., C.D. Cal, Case
No.
CV 04-9014 CBM (AJWX)) (the “Complaint”), or ***.
3.4 Upon
termination of this Agreement for any reason, The Regents, will enter into
written agreements with all sublicensees then in compliance with their
obligations under this Agreement and who are willing to enter into direct
agreements with The Regents on terms no less favorable to such sublicensees
than
set forth in their respective sublicense agreements. In no case, however,
will
The Regents be bound by duties and obligations contained in any sublicense
that
extend beyond the duties and obligations of The Regents set forth in this
Agreement.
| 4. |
PAYMENT
TERMS
|
4.1 Paragraphs
1.9, 1.2 and 1.3 define Patent Rights, Licensed Method, and Licensed Product
so
that royalties are payable on products and methods covered by both pending
patent applications and issued patents (subject to Paragraphs 2.1 and 2.3).
Royalties will accrue in each country for the duration of Patent Rights in
that
country and are payable to The Regents thirty (30) days after the Product
is
invoiced or if not invoiced, when delivered to a third party. Sublicensing
Revenue will accrue in each country for the duration of Patent Rights in
that
country and are payable to The Regents thirty (30) days after payment is
due to
the Licensee under the sublicense agreement.
4.2 Licensee
will pay to The Regents earned royalties and Sublicensing Revenue quarterly
on
or before February 28, May 31, August 31 and November 30 of each calendar
year.
Each payment will be for earned royalties and Sublicensing Revenue accrued
within Licensee's most recently completed calendar
quarter.
4.3 All
monies due The Regents are payable in U.S. dollars. Licensee is responsible
for
all bank transfer charges. When Product is sold for monies other than U.S.
dollars, Licensee will first determine the earned royalty in the currency
of the
country in which Product was sold and then convert the amount into equivalent
U.S. funds, using the exchange rate quoted in The Wall Street Journal on
the
last business day of the reporting period.
4.4 Sublicensing
Revenue and royalties earned on sales occurring in any country outside the
U.S.
may not be reduced by any taxes, fees or other charges imposed by the government
of such country on the payment of royalty income. Notwithstanding the foregoing,
all payments made by Licensee in fulfillment of The Regents' tax liability
in
any particular country will be credited against earned royalties or fees
due The
Regents for that country.
4.5 If
at any time legal restrictions prevent the prompt remittance of royalties
by
Licensee from any country where a Product is sold or Sublicensing Revenue
accrued, then Licensee will deposit the amount owed to The Regents into an
interest bearing account and will pay The Regents directly from this account
or
from its U.S. source of funds within a year of the due
date.
4.6 If
any patent or patent claim within Patent Rights is abandoned or held invalid
in
a final decision by a court of competent jurisdiction and last resort and
from
which no appeal has or can be taken, then all obligation to pay royalties
or
Sublicensing Revenue based on that patent or claim or any claim patentably
indistinct there from will cease as of the date of final decision. Licensee
will
not, however, be relieved from paying any royalties that accrued before the
final decision or that are based on another patent or claim not involved
in the
final decision or that are based on The Regents' property
rights.
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
4.7 In
the event payments, rebillings or fees are not received by The Regents when
due,
Licensee will pay to The Regents interest charges at a rate of ten percent
(10%)
per annum. Interest is calculated from the date payment was due until actually
received by The Regents.
5. LICENSE
AMENDMENT CONSIDERATION
5.1 As
consideration for this amendment and restating of the Agreement, the Licensee
will issue to The Regents one hundred thousand (100,000) shares of common
stock
(“the Stock”) of Cytori Therapeutics, Inc, within seven (7) days of the
Effective Date of this Agreement or of the date Licensee receives notice
from
The Regents that The Regents’ Office of the President has approved acceptance of
Stock, whichever is later. Licensee will use reasonable efforts to, within
sixty
(60) business days after such issuance, prepare and file with the US Securities
and Exchange Commission (the "Commission") a Registration Statement covering
the
resale of the Shares for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement will be on Form S-3 (except if Licensee
is not then eligible to register for resale the Shares on Form S-3, in which
case such registration will be on another appropriate form in accordance
with
the US Securities Act and the rules promulgated there under). Licensee will
use
its reasonable efforts to cause the Registration Statement to be declared
effective under the US Securities Act within ninety (90) business days after
such filing. Licensee will keep such Registration Statement continuously
effective under the Securities Act for a period of two (2) years (the
“Effectiveness Period”). The Regents represents that they would acquire the
Shares for their own account for investment, and not with a view to any
distribution, which would violate any applicable securities laws. The Regents
acknowledges that they have not received and are not relying upon any advice,
representations or assurances made by or on behalf of the Licensee or any
Licensee affiliate or any employee of or counsel to Licensee regarding the
Shares. The Regents may transfer, or direct Licensee to transfer, to Regents’
Inventors an inventor share portion of the Stock under Regent’s Patent
Policy.
6. LICENSE
MAINTENANCE FEE AND MILESTONE PAYMENTS
6.1 Licensee
will also pay to The Regents a royalty in the form of a license maintenance
fee
as follows:
6.1.1 Fifty
Thousand Dollars ($50,000) on or before June 30, 2008;
6.1.2 Fifty
Thousand Dollars ($50,000), on or before June 30, 2009;
6.1.3 Seventy-Five
Thousand Dollars ($75,000) on or before June 30, 2010;
| 6.1.4 |
One
Hundred Thousand Dollars ($100,000) on or before June 30,
2011;
|
| 6.1.5 |
One
Hundred Thousand Dollars ($100,000) on or before June 30, 2012;
and,
|
| 6.1.6 |
One
Hundred Thousand Dollars ($100,000) on or before June 30,
2013.
|
| 6.2 |
The
license maintenance fee is not due on any anniversary of the Effective
Date if Licenseeis commercially selling Product on that date and
paying an
earned royalty to The Regents on the sales of that Licensed Product.
License maintenance fees are non-refundable and not an advance against
earned royalties.
|
7. EARNED
ROYALTIES AND MINIMUM ANNUAL ROYALTIES
7.1 Licensee
will also pay to The Regents an earned royalty of *** based on the Net Sales
of
Product sold by the Licensee.
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
7.2 In
the event that it becomes necessary for Licensee to license patent rights
owned
by third parties to make, have made, use or sell Clinical Product, then the
Licensee will have the right to obtain the patent rights from such third
party
***.
7.3 Licensee
will pay to The Regents a minimum annual royalty for the life of Regents'
Patent
Rights beginning in the year of the first commercial sale of Product or Licensed
Method but no later than ***. Minimum annual royalties will be as
follows:
7.3.1. ***;
7.3.2 ***;
7.3.3 ***.
7.4 The
minimum annual royalty will be paid semi-annually to The Regents on February
28
and July 31 of each year and will be credited against the earned royalty
due for
the calendar year in which the minimum payment was
made.
8. DUE
DILIGENCE
8.1 Licensee,
upon execution of this Agreement, will diligently proceed with the development,
manufacture and sale of Product and will earnestly and diligently endeavor
to
market the same within a reasonable time after execution of this Agreement
and
in quantities sufficient to meet market demands.
8.2 Licensee
will endeavor to obtain all necessary governmental approvals for the
manufacture, use and sale of Licensed Product.
8.3 Licensee,
or its sublicense(s), will develop and commercialize a Research Product and
will
develop and commercialize a Clinical Product in the diagnostic field and/or
in
the therapeutic or cosmetic field as follows:
8.3.1 ***;
and will fill the market demand for such Research Product following commencement
of marketing at any time during the exclusive period of this
Agreement;
8.3.2 Licensee
will complete the following for a Clinical Product in the diagnostic field
(i.e.
a Clinical Product intended to diagnosis, prognosis or monitoring of disease
in
humans):
(i) ***,
and
market such Clinical Product in the United States within six (6) months of
receiving marketing approval;
(ii) Fill
the
market demand for such Clinical Product following commencement of marketing
at
any time during the exclusive period of this Agreement; and/or,
8.3.3 Licensee
will complete the following for a Clinical Product in the therapeutic field
(i.e. intended to treat or ameliorate disease in humans or intended for cosmetic
applications);
(i) ***;
(ii) ***;
and
(iii) ***;
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
(iv) ***;
(v) ***;
(vi) ***;
and
(vii)
Fill
the
market demand for such Clinical Products following commencement of marketing
at
any time during the exclusive period of this Agreement.
Licensee’s
completion of Paragraph 8.3.2 or 8.3.3 above will be considered fulfillment
of
Licensee’s obligation to develop a Clinical Product
hereunder.
8.4 If
Licensee (or a sublicense) is unable to perform any of the above diligence
provisions, then The Regents may terminate this Agreement and its licenses
or
reduce the licenses hereunder to non-exclusive licenses. Notwithstanding
the
foregoing, if the Licensee is in compliance with diligence provisions for
the
Research Product and fails to meet a diligence provision for the Clinical
Product, or vice-versa, under Paragraph 8.3 above, then The Regents’ may
terminate or reduce the exclusivity for the Product for which the diligence
provision is unmet but not for the Product for which diligence is met. Moreover,
if the Licensee can demonstrate to The Regents’ reasonable satisfaction that a
milestone at issue for Clinical Product has been determined to be impracticable
for commercialization, then The Licensee and The Regents will negotiate revised
due diligence for Clinical Products. If the Licensee fails to meet a diligence
provision for Clinical Product and cannot demonstrate that the milestone
at
issue for has been determined impractical for commercialization, then the
Regents has the right to terminate the licenses granted hereunder or reduce
such
licenses for Clinical Products to non-exclusive licenses. The right, if
exercised by The Regents, supersedes the rights granted for such Products
in
Article 2 (Life of Patent Exclusive Grant).
8.5 Licensee
will endeavor to develop Products through research performed at the University
of California, Los Angeles in the amount of fifty thousand dollars ($50,000)
in
research funding by Licensee per year for six (6) years, beginning in the
year
2007. Both parties will endeavor to combine the research funding provided
by
Licensee with UC Discovery grants and/or the BioStar research programs (or
any
similar research fund matching programs then in effect), and Licensee will
have
sole discretion with respect to the development and design of such research.
In
accordance with the disclosure and licensing terms of the research agreement(s)
executed by The Regents and the License, The Regents will disclose, and offer
to
license The Regents’ interest in patent rights claiming, inventions made and
reduced to practice under such research agreements. Licensee will be released
from the requirement to provide research funding in the event that this
Agreement is terminated for any reason.
8.6 The
due diligence provisions of this Article 8 (Earned Royalties and Minimum
Annual
Royalties) shall not apply to, or effect Licensee’s rights to Celution Product
and/or PLA., if any such rights are later deemed to be covered by this License
pursuant to Paragraph 2.3.
9. PROGRESS
AND ROYALTY REPORTS
9.1 During
the life of this Agreement Licensee will submit to The Regents a written
progress report covering Licensee's (and any Affiliate's or sublicensee's)
activities related to the development and testing of all Products and the
obtaining of the governmental approvals necessary for marketing. Progress
reports are due on August 15 and on February 15 of each year and will cover
the
Licensee’s activities for the preceding January 1 through June 30 and July 1
through December 31, respectively. Progress reports are required for each
Product until the first commercial sale of that Product occurs in the U.S.
and
will be again required if commercial sales of such Product are suspended
or
discontinued.
__________
***Material
has been omitted pursuant to a request for confidential treatment filed
separately with the Securities and Exchange Commission.
9.2 Progress
reports submitted under Paragraph 9.1 will include, but are not limited to,
the
following topics:
9.2.1 Summary
of work completed;
9.2.2 Key
scientific discoveries;
9.2.3 Summary
of work in progress;
9.2.4 Current
schedule of anticipated events or milestones;
9.2.5 Market
plans for introduction of Licensed Product; and
9.2.6 A
summary of resources (dollar value) spent in the reporting
period.
9.3 Licensee
has a continuing responsibility to keep The Regents informed of the large
and
small business entity status as defined by the U.S. Patent and Trademark
Office
of itself and its sublicensees and Affiliates.
9.4 Licensee
will report to The Regents in its immediately subsequent progress and royalty
report the date of first commercial sale of a Product in each
country.
9.5 After
the first commercial sale of a Product anywhere in the world, Licensee will
make
quarterly royalty reports to The Regents on or before each February 28 (for
the
quarter ending December 31), May 31 (for the quarter ending March 31), August
31
(for the quarter ending June 30) and November 30 (for the quarter ending
September 30) of each year. Each royalty report will cover Licensee's most
recently completed calendar quarter and will show:
9.5.1 The
gross sales and Net Sales of Product sold during the most recently completed
calendar quarter;
9.5.2 The
number of Product and sold;
9.5.3 The
royalties, in U.S. dollars, payable with respect to sales of
Product;
9.5.4 The
method used to calculate the royalty;
9.5.5 The
exchange rates used;
9.5.6 Sublicensing
Revenue accrued during the previous quarter;
9.5.7If
no sales of Product are made during any reporting period, then the Licensee
will
so state in the subsequent royalty report.
10. BOOKS
AND RECORDS
10.1 Licensee
will keep accurate books and records showing all
Product,
developed,
manufactured, used and/or sold under the terms of this Agreement, as well
as all
Sublicensing Revenue owed to The Regents under the terms of this Agreement.
Books and records must be preserved for at least five (5) years from the
date of
the royalty payment to which they pertain.
10.2 Books
and records must be open to inspection by representatives or agents of The
Regents at reasonable times. The Regents will bear the fees and expenses
of
examination but if an error in royalties of more than five percent (5%) of
the
total royalties or Sublicensing Revenue due for any year is discovered in
any
examination, then Licensee will bear the fees and expenses of that
examination.
11. LIFE
OF THE AGREEMENT
11.1 Unless
otherwise terminated by operation of law, Paragraph 11.2, or by acts of the
parties in accordance with the terms of this Agreement, this Agreement will
remain in effect from the Effective Date until the expiration or abandonment
of
the last of the Patent Rights licensed hereunder.
11.2 This
Agreement will become immediately terminable by either party upon the insolvency
of the Licensee.
11.3 Any
termination or expiration of this Agreement will not affect the rights and
obligations set forth in the following Articles:
Article
1 Definitions
Article
5 Payment
Terms
Article
10 Books
and
Records
Article
14 Disposition
of Product on Hand upon Termination
Article
15 Use
of
Names
Article
16 Limitation
of Liability
Paragraphs
17.5 and 17.6 Patent
Prosecution and Maintenance
Article
20 Indemnification
Article
21 Notices
Article
25 Governing
Laws; Venue; Attorneys’ Fees
Article
29 Secrecy
11.4 The
termination or expiration of this Agreement will not relieve the Licensee
of its
obligation to pay any fees, royalties, reimbursements for Patent Prosecution
Costs, or other payments owed to the Regents at the time of such termination
or
expiration and will not impair any accrued right of The Regents, including
the
right to receive earned royalties and other consideration in accordance with
Articles 3, 4, 8, and 15.
12. TERMINATION
BY THE REGENTS
12.1 Subject
to Paragraph 8.4, if Licensee fails to perform or violates any term of this
Agreement, then The Regents may give written notice of default ("Notice of
Default") to Licensee. If a Notice of Default is issued for non-payment of
a fee
or patent prosecution cost reimbursement owed hereunder, the Licensee must
cure
the default within sixty (60) days of the effective date of Notice of Default.
If a Notice of Default is issued for something other than a payment of monies
owed hereunder then the Licensee must cure the default within ninety (90)
days
of effective date of Notice of Default. If the Licensee fails to cure the
material default within the time required above, The Regents may terminate
this
Agreement and its licenses by a second written notice ("Notice of Termination").
If a Notice of Termination is sent to Licensee, then this Agreement will
automatically terminate on the effective date of that notice. Such termination
will not relieve Licensee of its obligation to pay any fees owing at the
time of
termination and will not impair any accrued right of The Regents. These notices
are subject to Article 21 (Notices). These notices will be subject to Article
21
(Notices).
13. TERMINATION
BY LICENSEE
13.1 Licensee
has the right at any time to terminate this Agreement in whole or as to any
portion of Patent Rights by giving notice in writing to The Regents. Such
notice
of termination will be subject to Article 20 (Notices) and termination of
this
Agreement will be effective sixty (60) days from the effective date of such
notice.
13.2 Any
termination under the above Paragraph 13.1 does not relieve Licensee of any
obligation or liability accrued under this Agreement prior to termination
or
rescind any payment made to The Regents or anything done by Licensee prior
to
the time termination becomes effective. Termination does not affect in any
manner any rights of The Regents arising under this Agreement prior to
termination.
14. DISPOSITION
OF PRODUCT ON HAND UPON TERMINATION
14.1 Upon
termination of this Agreement, Licensee is entitled to dispose of all previously
made or partially made Product, but no more, within a period of one hundred
and
twenty (120) days provided that the sale of Product is subject to the terms
of
this Agreement, including, but not limited to, the rendering of reports and
payment of royalties required under this Agreement.
15. USE
OF NAMES AND TRADEMARKS
15.1 Nothing
contained in this Agreement confers any right to use in advertising, publicity
or other promotional activities any name, trade name, trademark or other
designation of either party hereto (including contraction, abbreviation or
simulation of any of the foregoing). Unless required by law, the use by Licensee
of the name "The Regents of the University of California" or the name of
any
campus of the University of California is prohibited.
15.2 The
Regents is free to release to the inventors and senior administrators employed
by The Regents the terms and conditions of this Agreement. If such release
is
made, then The Regents will give notice of the confidential nature and will
request that the recipient does not disclose such terms and conditions to
others. If a third party inquires whether a license to Patent Rights is
available, then The Regents may disclose the existence of this Agreement
and the
extent of the grant in Article 2 (Life of Patent Exclusive Grant) to such
third
party, but will not disclose the name of Licensee or any other terms or
conditions of this Agreement, except where The Regents is required to release
information under either the California Public Records Act, a governmental
audit
requirement or other applicable law.
16. LIMITED
WARRANTY
16.1 The
Regents warrants to Licensee that it has the lawful right to grant this
license.
16.2 This
license and the associated Inventions are provided WITHOUT WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY,
EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT
PRODUCT
OR LICENSED METHOD WILL NOT INFRINGE ANY PATENT OR OTHER PROPRIETARY
RIGHT.
16.3 IN
NO EVENT MAY THE REGENTS BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL
DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF THE INVENTIONS
OR
PRODUCT.
16.4 This
Agreement does not:
16.4.1 Express
or imply a warranty or representation as to the validity or scope of any
of
Patent Rights;
16.4.2 Express
or imply a warranty or representation that anything made, used, sold, offered
for sale or imported or otherwise disposed of under any license granted in
this
Agreement is or will be free from infringement of patents of third
parties;
16.4.3 Obligate
The Regents to bring or prosecute actions or suits against third parties
for
patent infringement except as provided in Article 19 (Patent
Infringement);
16.4.4 Confer
by implication, estoppel or otherwise any license or rights under any patents
of
The Regents other than Patent Rights as defined in this Agreement, regardless
of
whether those patents are dominant or subordinate to Patent Rights;
or,
16.4.5 Obligate
The Regents to furnish any know-how not provided in Patent
Rights.
17. PATENT
PROSECUTION AND MAINTENANCE
17.1 In
regard to PCT/US00/06232, filed by Pittsburgh, The Regents does not control
patent prosecution and there is no agreement in place between The Regents
and
Pittsburgh regarding patent prosecution matters. This Agreement may need
to be
amended to take into account the provisions of any agreement reached between
Pittsburgh and The Regents in regard to patent prosecution matters and the
payment of patent costs by The Regents.
17.2 In
regard to Patent Rights filed by and assigned solely to The Regents, as long
as
Licensee has paid patent costs as provided for in this Article 17 (Patent
Prosecution and Maintenance), The Regents will diligently endeavor to prosecute
and maintain the U.S. and foreign patents using counsel of its choice. The
Regents will provide Licensee with copies of all relevant documentation so
that
Licensee may be informed of the continuing prosecution. Licensee agrees to
keep
this documentation confidential. The Regents' counsel will take instructions
only from The Regents, but The Regents will consider input from the Licensee
in
its choice of patent counsel and, if the Licensee so requests, The Regents
will
suggest three patent attorneys from which the Licensee may choose one to
prosecute and maintain Patent Rights, provided The Regents concur that a
change
of prosecution counsel is warranted.
17.3 The
Regents will use reasonable effort to amend any patent application to include
claims reasonably requested by Licensee to protect the products contemplated
to
be sold under this Agreement.
17.4 Licensee
may request that The Regents obtain patent protection on the Inventions in
foreign countries if available and if it so desires. Licensee will notify
The
Regents of its decision to obtain or maintain foreign patents not less than
sixty (60) days prior to the deadline for any payment, filing or action to
be
taken in connection therewith. This notice concerning foreign filing must
be in
writing, must identify the countries desired and must reaffirm Licensee's
obligation to underwrite the costs thereof. The absence of such a notice
from
Licensee to The Regents will be considered an election not to obtain or maintain
foreign rights.
17.5 Licensee
will bear The Regents' costs of preparing, filing, prosecuting and maintaining
all U.S. and foreign patent applications contemplated by this Agreement.
Costs
billed by The Regents' counsel will be rebilled to Licensee and are due within
thirty (30) days of rebilling by The Regents. These costs include patent
prosecution costs for the Inventions incurred by The Regents prior to the
execution of this Agreement and any patent prosecution costs that may be
incurred for patentability opinions, re-examination, re-issue, interferences,
oppositions and inventorship determinations, as well as the existing Complaint
for Correction of Inventorship by the University of Pittsburgh vs. Hedrick
et
al. (U.S. Disc. Ct., C.D. Cal, Case No. CV 04-9014 CBM
(AJWX)
and any
other filings in this case, including counterclaims and appeals.
Prior prosecution costs will be due upon execution of this Agreement and
billing
by The Regents.
17.6 Licensee's
obligation to underwrite and to pay patent prosecution costs will continue
for
so long as this Agreement remains in effect, but Licensee may terminate its
obligations with respect to any given patent application or patent upon three
(3) months' written notice to The Regents. The Regents will use its best
efforts
to curtail patent costs when a notice of termination is received from Licensee.
The Regents may prosecute and maintain such application(s) or patent(s) at
its
sole discretion and expense, but Licensee will have no further right or licenses
hereunder. Non-payment of patent costs may be deemed by The Regents as an
election by Licensee not to maintain application(s) or
patent(s).
17.7 The
Regents may file, prosecute or maintain patent applications at its own expense
in any country in which Licensee has not elected to file, prosecute or maintain
patent applications in accordance with this Article 17 (Patent Prosecution
and
Maintenance) and those applications and resultant patents will not be subject
to
this Agreement.
17.8 Licensee
will apply for an extension of the term of any patent included within Patent
Rights under the Drug Price Competition and Patent Term Restoration Act of
1984
and/or European, Japanese and other foreign counterparts of this Law. Licensee
will prepare all documents and The Regents agrees to execute the documents
and
to take additional action as Licensee reasonably requests in connection
therewith.
17.9 If
either party (in the case of The Regents: the Licensing Officer responsible
for
administration of this Agreement) receives notice pertaining to infringement
or
potential infringement of any issued patent included within Patent Rights
under
the Drug Price Competition and Patent Term Restoration Act of 1984 and/or
foreign counterparts of this Law, then that party will notify the other party
within ten (10) days after receipt of notice of
infringement.
18. PATENT
MARKING
18.1 Licensee
will mark all Products made, used or sold under the terms of this Agreement,
or
their containers, in accordance with the applicable patent marking
laws.
19. PATENT
INFRINGEMENT
19.1 If
Licensee learns of the substantial infringement of any patent licensed under
this Agreement, then Licensee will call The Regents' attention thereto in
writing and provide The Regents with reasonable evidence of infringement.
Neither party will notify a third party of the infringement of any of Patent
Rights without first obtaining consent of the other party, which consent
will
not be unreasonably denied. Both parties will use their best efforts in
cooperation with each other to terminate infringement without
litigation.
19.2 Licensee
may request that The Regents take legal action against the infringement of
Patent Rights. Such request must be in writing and must include reasonable
evidence of infringement and damages to Licensee. If the infringing activity
has
not abated within ninety (90) days following the effective date of request,
then
The Regents has the right to:
19.2.1 Commence
suit on its own account; or,
19.2.2 Refuse
to participate in the suit, and,
The
Regents will give notice of its election in writing to Licensee by the end
of
the one-hundredth (100th) day after receiving notice of written request from
Licensee. Licensee may thereafter bring suit for patent infringement, at
its own
expense, if and only if The Regents elects not to commence suit and if the
infringement occurred during the period and in a jurisdiction where Licensee
had
exclusive rights under this Agreement. If, however, Licensee elects to bring
suit in accordance with this Paragraph 19.2, then The Regents may thereafter
join that suit at its own expense. Licensee agrees not to bring suit for
patent
infringement without following the procedures of this Paragraph 19.2, and
both
parties agree to be bound by an order of a court for patent infringement,
patent
infringement issues and patent infringement defenses raised through the pendency
of such a suit under this Paragraph 19.2.
19.3 Legal
action, as is decided on, will be at the expense of the party bringing suit
and
all damages recovered thereby will belong to the party bringing suit, but
legal
action brought jointly by The Regents and Licensee and fully participated
in by
both will be at the joint expense of the parties and all recoveries will
be
shared jointly by them in proportion to the share of expense paid by each
party.
19.4 Each
party will cooperate with the other in litigation proceedings instituted
hereunder but at the expense of the party bringing suit. Litigation will
be
controlled by the party bringing the suit, except that The Regents may be
represented by counsel of its choice in any suit brought by
Licensee.
20. INDEMNIFICATION
20.1 Licensee
will indemnify, hold harmless and defend The Regents, its officers, employees
and agents, the sponsors of the research that led to the Inventions and the
inventors of the patents and patent applications in Patent Rights and their
employers against any and all claims, suits, losses, liabilities, damages,
costs, fees and expenses resulting from or arising out of exercise of this
license or any sublicense. This indemnification includes, but is not limited
to,
any product liability.
20.2 Licensee,
at its sole cost and expense, will insure its activities in connection with
the
work under this Agreement and obtain, keep in force and maintain
insurance.
20.3 Licensee
will maintain the following or an equivalent program of self-insurance while
Products are not being tested or used in-vivo in
humans:
Comprehensive
or commercial form general liability insurance (contractual liability included)
with limits as follows:
-
Each
Occurrence $ 2,000,000 ($7MI Umbrella
policy)
-
Products/Completed Operations Aggregate $5,000,000
-
Personal and Advertising Injury $1,000,000 ($7MI Umbrella
policy)
-
General
Aggregate (commercial form only) $2,000,000 ($7MI Umbrella
policy)
The
Licensee increasing the required insurance levels as follows, prior to using
or
testing Products in-vivo in humans:
-
Each
Occurrence $5,000,000
-
Products/Completed Operations Aggregate $10,000,000
-
Personal and Advertising Injury $5,000,000
-
General
Aggregate (commercial form only) $10,000,000
The
coverage and limits referred to in this Paragraph 20.3 do not in any way
limit
the liability of Licensee. Licensee will furnish The Regents with certificates
of insurance showing compliance with all requirements. Certificates
must:
|
-
|
Provide
for thirty (30) days' advance written notice to The Regents of
any
modification.
|
|
-
|
Indicate
that The Regents has been endorsed as an additional Insured under
the
coverage referred to under the
above.
|
|
-
|
Include
a provision that the coverage will be primary and will not participate
with nor will be excess over any valid and collectable insurance
or
program of self-insurance carried or maintained by The
Regents.
|
20.4 The
Regents will notify Licensee in writing of any claim or suit brought against
The
Regents in respect of which The Regents intends to invoke the provisions
of this
Article 20 (Indemnification). Licensee will keep The Regents informed on
a
current basis of its defense of any claims under this Article 20
(Indemnification).
21. NOTICES
21.1 Any
notice or payment required to be given to either party will be deemed to
have
been properly given and to be effective as of the date specified below if
delivered to the respective address given below or to another address as
designated by written notice given to the other
party:
on
the
date of delivery if delivered in person;
on
the
date of mailing if mailed by first-class certified mail, postage paid;
or
on
the
date of mailing if mailed by any global express carrier service that requires
recipient to sign the documents demonstrating the delivery of such notice
or
payment.
In
the
case of Licensee: Cytori
Therapeutics, Inc.
3020
Callan Rd.
San
Diego, CA 92121
Attention: Mark
Saad
Chief
Financial Officer
In
the
case of The Regents: The
Regents of the University of California
Office
of
Intellectual Property Administration
10920
Wilshire Blvd., Ste. #1200
Westwood,
CA 90024
Attention:
Director
22. ASSIGNABILITY
22.1 This
Agreement may be assigned by The Regents, but is personal to Licensee and
assignable by Licensee only with the written consent of The Regents, which
consent will not be unreasonably withheld.
23. NO
WAIVER
23.1 No
waiver by either party of any default of this Agreement may be deemed a waiver
of any subsequent or similar default. A suspension of duty under this Agreement
due to force majeure will not be for a period longer than one (1)
year.
24. FAILURE
TO PERFORM
24.1 If
either party finds it necessary to undertake legal action against the other
on
account of failure of performance due under this Agreement, then the prevailing
party is entitled to reasonable attorney's fees in addition to costs and
necessary disbursements.
25. GOVERNING
LAWS
25.1 THIS
AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE
STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICT OF LAWS OR TO WHICH PARTY
DRAFTED
PARTICULAR PROVISIONS OF THIS AGREEMENT, but the scope and validity of any
patent or patent application will be governed by the applicable laws of the
country of the patent or patent application. Disputes between the parties
regarding this Agreement will utilize only trial courts within California
for
disputes that go to court.
26. PREFERENCE
FOR U.S. INDUSTRY
26.1 Because
this Agreement grants the exclusive right to use or sell the Inventions in
the
U.S., Licensee agrees that any products sold in the U.S. embodying this
Invention or produced through the use thereof will be manufactured substantially
in the U.S.
27. GOVERNMENT
APPROVAL OR REGISTRATION
27.1 Licensee
will notify The Regents if it becomes aware that this Agreement is subject
to
any U.S. or foreign government reporting or approval requirement. Licensee
will
make all necessary filings and pay all costs including fees, penalties and
all
other out-of-pocket costs associated with such reporting or approval
process.
28. EXPORT
CONTROL LAWS
28.1 Licensee
will observe all applicable U.S. and foreign laws with respect to the transfer
of Product and related technical data to foreign countries, including, without
limitation, the International Traffic in Arms Regulations (ITAR) and the
Export
Administration Regulations.
29
SECRECY
29.1 With
regard to confidential information (“Data”), which can be oral or written or
both, received from The Regents regarding this Inventions, Licensee
agrees:
29.1.1
Not to use the Data except for the sole purpose of performing under the terms
of
this Agreement;
29.1.2 To
safeguard Data against disclosure to others with the same degree of care
as it
exercises with its own data of a similar nature;
29.1.3 Not
to disclose Data to others (except to its employees, agents or consultants
who
are bound to Licensee by a like obligation of confidentiality) without the
express written permission of The Regents, except that Licensee is not prevented
from using or disclosing any of the Data that:
(i)
Licensee
can demonstrate by written records was previously known to it;
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(ii)
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is
now or becomes in the future, public knowledge other than through
acts or
omissions of Licensee; or
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(iii) is
lawfully obtained by Licensee from sources independent of The Regents;
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(iv)
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is
required to be disclosed to a governmental entity or agency in
connection
with seeking any governmental or regulatory approval, or pursuant
to the
lawful requirement or request of a governmental entity or agency;
and
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29.1.4 that
the secrecy obligations of Licensee with respect to Data will continue for
a
period ending five (5) years from the termination date of this
Agreement.
29.2 Upon
the termination of this Agreement, Licensee must destroy or return to The
Regents any Data in its possession within thirty (30) days following the
effective date of termination. However, Licensee may retain one copy of Data
solely for archival purposes, provided that such Data is subject to the
confidentiality provisions set forth in this Paragraph 29.2 (Secrecy). Within
sixty (60) days following termination, Licensee must provide The Regents
with a
written notice that Data has been returned or
destroyed.
29.3 With
regard to biological material received by Licensee from The Regents, if any,
including any cell lines, vectors, genetic material, derivatives, products
progeny or material derived there from (“Biological Material”), Licensee
agrees:
29.3.1 Not
to use Biological Material except for the sole purpose of performing under
the
terms of this Agreement;
29.3.2 Not
to transfer Biological Material to others (except to its employees, agents
or
consultants who are bound to Licensee by like obligations conditioning and
restricting access, use and continued use of Biological Material) without
the
express written permission of The Regents, except that Licensee is not prevented
from transferring Biological Material that:
(i) becomes
publicly available other than through acts or omissions of Licensee;
or
(ii) is
lawfully obtained by Licensee from sources independent of The Regents;
and
29.3.3 To
safeguard Biological Material against disclosure and transmission to others
with
the same degree of care as it exercises with its own biological materials
of a
similar nature; and,
29.3.4 to
destroy all copies of Biological Material at the termination of this
Agreement.
30. MISCELLANEOUS
30.1 The
headings of the several sections are inserted for convenience of reference
only
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement.
30.2 This
Agreement is not binding on the parties until it has been signed below on
behalf
of each party. It is then effective as of the Effective
Date.
30.3 No
amendment or modification of this Agreement is valid or binding on the parties
unless made in writing and signed on behalf of each
party.
30.4 This
Agreement embodies the entire understanding of the parties and will supersede
all previous communications, representations, or understandings, either oral
or
written, between the parties relating to the subject matter
hereof.
30.5 In
case any of the provisions contained in this Agreement is held to be invalid,
illegal or unenforceable in any respect, that invalidity, illegality or
unenforceability will not affect any other provisions of this Agreement and
this
Agreement will be construed as if the invalid, illegal or unenforceable
provisions had never been contained in it.
30.6 None
of the provisions of this Agreement is intended to create any form of joint
venture
between the parties, rights in third parties or rights that are enforceable
by
any third party.
IN
WITNESS WHEREOF, both The Regents and Licensee have executed this Agreement,
in
duplicate originals, by their respective and duly authorized officers on
the day
and year written.
CYTORI
THERAPEUTICS, INC THE
REGENTS OF THE UNIVERSITY
OF
CALIFORNIA
By: /s/
Christopher J. Calhoun By: /s/
Emily
Loughran
Name: Christopher
J. Calhoun Name:
Emily
Loughran
Title: CEO Title: Director
of Licensing
Date: September
18, 2006 Date: September
26, 2006
EXHIBIT
15.1
Letter
Re Unaudited Interim Financial Information
November
14, 2006
Cytori
Therapeutics, Inc.
3020
Callan Rd
San
Diego, CA 92121
Re:
Registration Statement Nos. 333-82074, 333-122691, and 333-134129
With
respect to the subject registration statements, we acknowledge our awareness
of
the use therein of our report dated November 14, 2006 related to our review
of
interim financial information.
Pursuant
to Rule 436 under the Securities Act of 1933 (the Act), such report is not
considered part of a registration statement prepared or certified by an
independent registered public accounting firm, or a report prepared or certified
by an independent registered public accounting firm within the meaning of
Sections 7 and 11 of the Act.
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/s/
KPMG, LLP
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|
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San
Diego,
California
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EXHIBIT
31.1
Certification
of Chief Executive Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a)
As
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Christopher J. Calhoun, the Chief Executive Officer of Cytori Therapeutics,
Inc., certify that:
1. I
have
reviewed this quarterly report on Form 10-Q of Cytori Therapeutics,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for
the
registrant and have:
(a) designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
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Date:
November 14, 2006
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|
|
/s/
Christopher J. Calhoun
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|
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Christopher
J. Calhoun,
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|
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Chief
Executive Officer
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EXHIBIT
31.2
Certification
of Chief Financial Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a)
As
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Mark
E. Saad, the Chief Financial Officer of Cytori Therapeutics, Inc., certify
that:
1. I
have
reviewed this quarterly report on Form 10-Q of Cytori Therapeutics,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) for
the
registrant and have:
(a) designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
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Date:
November 14, 2006
|
|
|
/s/
Mark E. Saad
|
|
|
Mark
E. Saad,
|
|
|
Chief
Financial Officer
|
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EXHIBIT
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350/ SECURITIES EXCHANGE ACT RULE 13a-14(b),
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF
2002
In
connection with the Quarterly Report on Form 10-Q of Cytori Therapeutics, Inc.
for the quarterly period ended September 30, 2006 as filed with the Securities
and Exchange Commission on the date hereof, Christopher J. Calhoun, as Chief
Executive Officer of Cytori Therapeutics, Inc., and Mark E. Saad, as Chief
Financial Officer of Cytori Therapeutics, Inc., each hereby certifies,
respectively, that:
1. The
Form
10-Q report of Cytori Therapeutics, Inc., that this certification accompanies
fully complies with the requirements of section 13(a) of the Securities
Exchange Act of 1934.
2. The
information contained in the Form 10-Q report of Cytori Therapeutics, Inc.,
that
this certification accompanies fairly presents, in all material respects, the
financial condition and results of operations of Cytori Therapeutics,
Inc.
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By:
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/s/
Christopher J. Calhoun
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|
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Dated:
November 14, 2006
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Christopher
J. Calhoun
|
|
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Chief
Executive Officer
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||
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By:
|
/s/
Mark E. Saad
|
|
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Dated:
November 14, 2006
|
Mark
E. Saad
|
|
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Chief
Financial Officer
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