SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-K
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(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2006
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OR
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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.
(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
Securities
registered pursuant to Section 12(b) of the Act:
Common
stock, par value $0.001
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act. Yes o No ý
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act.
Yes o No ý
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in
Part
III
of this Form 10-K or any amendment to this Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act. 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
The
aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant on June 30, 2006, the last business day
of the
registrant’s most recently completed second fiscal quarter, was $74,714,461
based on the closing sales price of the registrant’s common stock on June 30,
2006 as reported on the Nasdaq Global Market, of $7.19 per share.
As
of
March 1, 2007, there were 22,534,622 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2007 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of the year ended December 31, 2006, are
incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this
Form
10-K.
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PART
I
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PART
II
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PART
III
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PART
IV
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PART
I
General
Cytori
Therapeutics, Inc. is developing and seeks to commercialize stem and
regenerative cell therapies for cardiovascular disease, reconstructive surgery
and many other serious, chronic, and life threatening conditions. These
therapies will be commercialized through the sale of the Celution™ System, a
device that quickly removes stem and regenerative cells from a patient’s own
adipose tissue. To deliver these therapies, physicians remove a small
amount of a patient’s fat, also known as adipose tissue, and process it inside
the Celution™ System. About an hour later, a purified concentration of stem and
regenerative cells are administered back to the same patient.
The
Celution™ System is expected to be launched in Europe in early 2008.
In 2007, we will begin a clinical study of the Celution™ System
specifically for use in breast reconstruction following partial mastectomy
in
breast cancer patients. Cardiovascular disease is another application of
the
Celution™ System under development. A European safety and feasibility
clinical study is underway for patients with chronic ischemia, a severe form
of
coronary artery disease. A separate European study is expected to begin in
the
second quarter of 2007 for use in heart attack patients.
Our
MacroPore Biosurgery operating segment owns manufacturing rights to two product
families that are no longer central to our business focus. The HYDROSORB™ family
of bioresorbable spine and orthopedic implants, including MYSTIQUE ™, is
distributed worldwide exclusively by Medtronic, Inc. (“Medtronic”). Our Thin
Film bioresorbable soft tissue separation implant product line will be marketed
exclusively in Japan by Senko Medical Trading Co. (“Senko”) following regulatory
approval of the product in Japan. We sold all of our non-Japan Thin Film
product
lines in 2004.
We
were
initially formed as a California general partnership in July 1996, and
incorporated in the State of Delaware in May 1997. We were formerly known
as
MacroPore Biosurgery, Inc., and before that as MacroPore, Inc. Over the past
five years we have aggressively shifted the focus of our business from our
bioresorbable implants business to our regenerative cell technology business,
including the formation of a strategic joint venture with Olympus Corporation
in
2005. We are actively pursuing a buyer (or buyers) for the bioresorbable
implants business.
Products
and Markets
Regenerative
cell technology
The
Celution™ System
Cytori’s
Celution™ System is a sophisticated medical device that allows physicians to
offer regenerative therapies at the point of care using the patients' own
cells. It standardizes and automates a process that releases stem and
regenerative cells residing naturally within a patient’s own adipose (fat)
tissue. The adipose tissue is taken from the patient using a minor
liposuction-like procedure, placed into the system and, with the touch of
a
button, the processing begins. About an hour later, following a tissue wash,
cell separation and concentration by the Celution™ System, a prescribed dose of
stem and regenerative cells may be delivered back to the patient.
Our
Celution™ System will utilize a single-use therapeutic sets containing
proprietary Cytori technology, to be used on a per-patient basis. Each
therapeutic set is unique and specific for each therapeutic application.
For
example, the therapeutic set for cardiovascular disease is distinct from
that
used in reconstructive surgery.
Celution™
PRS System
The
Celution™ PRS (Plastic & Reconstructive Surgery) System is expected to be
launched in early 2008 in Europe. We will initially target select surgeons
and
hospitals for general use in plastic and reconstructive surgery and, pending
supporting clinical data, commercialize the Celution™ System for more specific
applications such as breast reconstruction.
In
November 2006, preliminary safety was reported from an 11 patient
investigator-initiated study using adipose-derived stem and regenerative
cells
to reconstruct breast tissue following partial mastectomy and radiation therapy.
The cells were extracted using our Celution™ System and the study took place at
Kyushu Central Hospital in Japan. The study was expanded to include eight
additional patients. Evaluation of the 19 patients continues to support our
preliminary safety and feasibility findings. Full results from the study
are
expected to be reported later in 2007.
In
2007,
we will begin a clinical study using the Celution™ System to support adoption
and reimbursement for breast reconstruction. Over
five
hundred thousand patients are diagnosed with breast cancer each year worldwide.
Approximately 60% of these patients will be treated with lumpectomy procedures,
a trend that is increasing with early detection. In addition, there are an
estimated 3.0 million breast cancer survivors in Europe and 2.2 million in
the
US. The reconstruction of partial mastectomy defects represents an important
unmet medical need throughout the world.
Celution™
CV System
We
are
sponsoring two clinical trials for cardiovascular disease. The first is a
trial
for chronic myocardial ischemia, a severe form of coronary artery disease,
which started enrolling patients in early 2007 (“PRECISE trial”). Our study
for heart disease is scheduled to begin in the second quarter of 2007 (“APOLLO
trial”). Results from both of these studies are expected in the second half of
2008.
Our
PRECISE trial is a 36 patient safety and feasibility study evaluating adipose
stem and regenerative cells as a treatment for chronic ischemia. The patients’
cells are extracted from their own adipose tissue using the Celution™
System. Next, the cells are injected around the injured oxygen-deprived
areas of their hearts through a specially designed catheter. The patients
will
be followed for six months before evaluation. Full results are expected to
be
reported in 2008. The study is being conducted at Gregorio Marañón Hospital in
Madrid Spain and led by Drs. Francisco J. Fernández-Avilés and Emerson Perin.
Cytori's
APOLLO trial will be a 48 patient safety and feasibility study to evaluate
adipose stem and regenerative cells as a treatment for heart attacks. The
patients' cells will be extracted from their own adipose tissue using the
Celution™ System. Next, the cells will be injected into their coronary
artery down a catheter. The patients will be followed for six months
before evaluation. Full results are expected to be reported in 2008. The
study
is being conducted at Thoraxcenter, Erasmus Medical Center Hospital in
Rotterdam, the Netherlands and led by Dr. Patrick Serruys.
The
American Heart Association estimates that in the United States alone, there
are
approximately 1.2 million heart attacks each year and more than 5.2 million
people suffer from a form of chronic heart disease.
Celution™
System Pipeline
Other
applications of the Celution™ System that are being investigated include:
gastrointestinal disorders, which could address fistulas and wounds associated
with inflammatory disorders such as Crohn’s disease, vascular disease, and
orthopedic applications such as bone or spinal disc repair. Our scientists
are,
to a varying degree, investigating these applications in pre-clinical models.
The full pipeline and the relative stages of progress for all the targeted
therapeutic areas is detailed below:
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Therapeutic
Application
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Discovery
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Preclinical
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Clinical
Testing
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Notes
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Reconstructive
Surgery
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Breast
reconstruction
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X
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Efficacy
study expected to start in 2007
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Cardiovascular
Disease
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Chronic
Myocardial Ischemia
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X
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Safety
and feasibility trial underway
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Heart
Attack
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X
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Safety
and feasibility trial expected to start Q2 2007
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Gastrointestinal
Disorders
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Crohn’s
Disease
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X
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Intestinal
Repair
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X
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Vascular
Repair
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Peripheral
Vascular Disease
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X
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Orthopedics
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Spinal
Disc Disease
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X
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Bone
Repair
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X
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Stem
Cell Banking
We
operate a California state-licensed tissue bank facility for the preservation
of
stem and regenerative cells extracted from adipose tissue. This service is
being
offered on a very limited basis to surgical patients undergoing liposuction
procedures. Typically arranged through a patient’s physician, cell preservation
is the process by which regenerative cells, taken from a liposuction or other
procedure, are stored (cryopreserved) in a liquid nitrogen freezer at -320˚F
(-196˚C) exclusively for the patient who preserved them. The cells can be
preserved indefinitely.
MacroPore
Biosurgery Products
Our
MacroPore Biosurgery business manufactures surgical implants derived from
our
bioresorbable technology. The HYDROSORB™ family of spine and orthopedic implant
products, including MYSTIQUE™ products, is distributed exclusively by Medtronic.
HYDROSORB™ and MYSTIQUE™ are trademarks of Medtronic. This product line
accounted for 85.9% of our total revenues in 2005 but only 18.3% of our total
revenues in 2006. Our sales of these products declined significantly in 2006.
The Thin Film line of products, pending regulatory approval in Japan, would
be
distributed exclusively through Senko for anti-adhesion applications, soft
tissue support, and minimization of the attachment of soft tissues throughout
the body. We sold our non-Japan Thin Film business in 2004.
Manufacturing
Starting
in late 2008, the Celution™ System will be manufactured by a joint venture
between Cytori and Olympus Corporation (“Olympus”), a global optics and life
science company. The joint venture, Olympus-Cytori Inc. (the “Joint Venture”),
enables Cytori to access Olympus’ expertise in engineering, manufacturing and
servicing of sophisticated medical devices. The Joint Venture will supply
the
Celution™ System for all therapeutic applications solely to Cytori at a
formula-based transfer price. Cytori owns Celution™ System marketing rights for
all therapeutic applications.
Before
the Joint Venture manufacturing is available, demand for the Celution™ System
will be fulfilled by Cytori’s internal manufacturing capabilities. Cytori has
built and refined a manufacturing process that is currently supplying the
earlier-generation Celution™ Systems for use in clinical trials and which can be
expanded to supply the anticipated required number of systems and per-patient
use therapeutic sets upon market launch in early 2008.
Technology
Adipose
tissue, also known as fat tissue, is the richest and most accessible known
source in the human body of adult stem cells. In addition to stem cells,
within
adipose tissue there lies a defined population of cell types that are also
major
contributors to healing, referred to as ‘regenerative cells.’ Together, these
stem and regenerative cells represent tremendous opportunities for
cardiovascular disease treatment, reconstructive surgery, spine and orthopedic
disorders and vascular conditions, as well as a variety of other areas of
medicine.
Adipose
tissue contains at least ten times more stem cells than the same amount of
bone
marrow, a commonly-used source for stem cells. While most adult stem cell
therapies can take days or weeks of culturing, a meaningful dose can be
extracted from adipose tissue in about an hour without the need for further
cell
culturing (expansion) or manipulation. This enables “real-time” treatment in the
clinical setting, in which a patient can have his or her own cells harvested
and
administered without the cells ever leaving the hospital or surgery
room.
Competition
We
compete with many pharmaceutical, biotechnology and medical device companies
as
well as universities, government agencies and private organizations that
are
involved in varying degrees in the discovery, development and commercialization
of medical technologies and therapeutic products.
The
field
of regenerative medicine is rapidly progressing, as many organizations are
initiating or expanding their research efforts in this area. Most of these
organizations are involved in research using cell sources other
than adipose tissue, including bone marrow, embryonic and fetal tissue,
umbilical cord and peripheral blood, and skeletal muscle. We work exclusively
with adult regenerative cells from adipose tissue.
Companies
performing regenerative cell research and development include, among others,
Aastrom Biosciences, Inc., Baxter International, Inc., BioHeart, Inc., Cellerix
SA, Genzyme, Inc., Geron Corporation, Medtronic, MG Biotherapeutics (a joint
venture between Genzyme and Medtronic), Osiris Therapeutics, Inc., Stem Cells,
Inc., and ViaCell, Inc. We cannot with any accuracy forecast when or if these
companies are likely to bring cell therapies to market for indications that
we
are also pursuing.
In
addition to our own sponsored clinical trials, we are aware of two other
clinical studies using adipose-derived cells. One is sponsored by
Cellerix, which is performing a 50 patient, Phase IIb clinical trial in Spain
where adipose-derived cultured cells are being used to treat fistulas associated
with Crohn’s disease. The other is sponsored by the University of Tokyo, where
researchers are examining the potential of adipose-derived regenerative cells
in
soft tissue repair and breast tissue augmentation. Neither study uses an
automated system to remove cells from adipose tissue, but rather rely upon
a
manual laboratory procedure.
Companies
researching and developing cell-based therapies for cardiovascular disease
include Baxter, BioHeart, MG Biotherapeutics, Osiris, and ViaCell. Baxter
supports a Phase II study in the United States using stem cells extracted
from
peripheral blood for chronic myocardial ischemia. BioHeart is conducting
multiple ongoing clinical trials in the United States and Europe for its
investigational product MyoCell™, which are cultured autologous skeletal
myoblasts. Its most advanced study is a 46 patient phase II trial in Europe
for
treatment of severe non-acute damage to the heart in patients. Osiris
Therapeutics, Inc. is currently conducting a Phase I clinical trial using
Provacel™, which are allogeneic (donor), mesenchymal stem cells, for acute
myocardial infarction. ViaCell, Inc. is currently in pre-clinical development
using allogeneic cells derived from umbilical cord blood for cardiac
disease.
No
company is currently commercializing any approved adipose tissue derived
stem
cell therapies.
Research
and Development
Research
and development expenses were $21,977,000, $15,450,000 and $10,384,000 for
the
years ended December 31, 2006, 2005 and 2004, respectively. For 2006,
$20,747,000 of the total was related to our regenerative cell technology
and
$1,230,000 was related to our bioresorbable technology.
Our
research and development efforts in 2006 focused predominantly on the following
areas:
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Design
and implementation for two cardiovascular disease clinical trials
in Spain
and The Netherlands for chronic myocardial ischemia and heart attacks,
respectively;
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Collaboration
with clinical investigators using the Celution™ System in breast
reconstruction applications in Japan;
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Conducting
extensive pre-clinical studies investigating the use of adipose-derived
stem and regenerative cells for cardiovascular disease, plastic and
reconstructive surgery, spinal disc repair, and gastrointestinal
disorders;
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Preparation
and submission of multiple regulatory filings in the United States
and
Europe related to various cell processing systems under development;
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Optimization
of the design, functionality and manufacturing process for the Celution™
System; and
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Investigating
the cellular and molecular properties and characteristics of stem
and
regenerative cells residing in adipose tissue towards improving our
intellectual property position and towards understanding how to improve
and control the therapeutic products;
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Multiple
cardiovascular disease pre-clinical studies were conducted in 2006 to
investigate safety, efficacy, dosing and delivery optimization,
mechanisms-of-action, cell distribution, among other considerations required
for
entering clinical studies.
In
2006,
results from a pre-clinical myocardial ischemia study showed adipose-derived
stem and regenerative cells are safe and able to improve heart function.
The
study was conducted in collaboration with Emerson Perin, M.D., Ph.D., at
The
Texas Heart Institute. Specifically, in the blinded, randomized pre-clinical
study, either adipose stem and regenerative cells (treated) or a saline
injection (control) were administered. Autologous adipose stem and regenerative
cells were extracted and concentrated using the Celution™ System. The cells were
then delivered via a state of the art delivery system directly into the
ischemic sites. Thirty days following treatment, the cell treated group
exhibited a 13% (p ≤ 0.03) absolute improvement in ejection fraction over the
control group. Ejection fraction is a common measure of the heart's pumping
efficiency. Consistent with this functional improvement, heart structure
was
preserved as evidenced by a 37% (p ≤ 0.0001) thicker ventricular wall in the
cell treated groups, versus the control. Improved wall thickness leads to
improved mechanical properties of the heart, which may slow deterioration
of its
pumping ability.
We
also
conducted several additional pre-clinical studies and analyses of
adipose-derived stem and regenerative cells with multiple other major U.S.
and
European academic research institutions to optimize their application in
cardiovascular disease. In addition, we have pre-clinical research underway
both
internally and with multiple collaborators in Europe exploring potential
spine
and orthopedic applications for adipose stem and regenerative cells.
Our
internal research team continued to investigate the cellular properties of
stem
and regenerative cells residing in adipose tissue. Specifically, we are
expanding our knowledge of the mechanisms and signaling that contribute to
the
formation of new blood vessel growth. In addition, we are further characterizing
the cell output, which has provided us with important propriety insight that
should help optimize therapeutic development.
In
parallel, our engineering team has further optimized the Celution™ System.
Progress in 2006 included: maximizing the cell yield and output through the
development and implementation of our proprietary methods, design
modifications to decrease the processing time, and improvements in manufacturing
processes that will lead to more efficient, robust, and cost-effective
manufacturing capabilities.
The
most
significant regulatory development in 2006 was that the Celution™ System
received European regulatory approval (CE Mark) in January 2006. The CE Mark
grants regulatory approval in the European Union and other countries that
recognize the CE Mark. European claims include the extraction, wash, and
concentration of a patient's own stem cells and other associated progenitor
cells from their own adipose tissue for re-implantation or re-infusion during
the same surgical procedure. The regenerative (progenitor) cells are those
cells
within adipose tissue that can differentiate into a single tissue type, while
pluripotent stem cells have the ability to differentiate into various
mesenchymal lineages.
Customers
In
our
primary business (regenerative cell technology), we do not yet have any
commercial customers.
Medtronic
is our primary distributor and our principal customer for our bioresorbable
implant products, directly accounting for $1,451,000 or 100% of our product
revenues in 2006, $5,634,000 or 100% of our product revenues in 2005, and
$4,085,000 or 64.6% of our product revenues in 2004.
Under
our
global co-development and supply agreement with Medtronic, we co-develop
bioresorbable implants for spinal or reconstructive fixation, stabilization
and
fusion. Medtronic has exclusive worldwide rights to market and sell all of
the
bioresorbable products that we co-develop for this application through January
2012. Currently our only commercially available product line under this
agreement is the HYDROSORB™ family of spine and orthopedic implants. We are
concerned about Medtronic’s level of commitment to this product line and we are
actively seeking a buyer (or buyers) for this product line.
In
July
2004, we entered into a Distribution Agreement with Senko under which we
granted
to Senko an exclusive license to sell and distribute Thin Film products in
Japan. The sale of products through Senko commences upon “commercialization,”
which requires regulatory clearance from the Japanese regulatory authorities.
We
expect to gain the required regulatory clearance in 2007. Following
commercialization, the Distribution Agreement has a five-year duration and
is
renewable for an additional five years after reaching mutually agreed minimum
purchase guarantees. In 2004, we sold all of our non-Japan Thin Film
business.
Sales
by Geographic Region
Currently,
our only product sales come from our bioresorbable surgical implants, which
are
no longer core to our business focus. We sell our products predominantly
in the
United States and to a lesser extent internationally through Medtronic. Our
existing distribution agreements all provide for payment in U.S. dollars
and we
intend to include similar payment provisions in future distribution agreements.
Fluctuations in currency exchange rates may affect demand for our products
by
increasing the price of our products relative to the currency of the countries
in which the products are sold.
Regenerative
Cell Technology
Our
balance sheet includes a line item entitled deferred revenues, related party.
This 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. We recognize deferred revenues, related party, as
development revenue when certain performance obligations are met. Such revenue
recognition results from completion of certain milestones, such as completion
of
pre-clinical and clinical studies, product development efforts, and seeking
regulatory approval for the treatment of various therapeutic conditions with
adult stem and regenerative cells residing in adipose (fat) tissue. In 2006,
we
recognized $5,905,000 of revenue associated with our arrangements with Olympus.
There was no similar revenue in 2005 or 2004.
For
the
years ended December 31, 2006, 2005, and 2004, we recorded $310,000, $312,000,
and $328,000 in grant revenue related to our agreement with the National
Institutes of Health (“NIH”), respectively. Under this agreement, the NIH
reimburses us for “qualifying expenditures” related to research on
Adipose-Derived Cell Therapy for Myocardial Infarction.
We
also
recorded stem cell banking revenue of $7,000, $8,000, and $10,000 for the
years
ended December 31, 2006, 2005, and 2004, respectively, related to the
preservation of stem and regenerative cells extracted from adipose tissue
at our
California state-licensed tissue bank facility.
MacroPore
Biosurgery
In
2006,
2005, and 2004 our product sales were $1,451,000, $5,634,000 and 4,085,000,
respectively, all of which relate to the MacroPore Biosurgery segment. These
revenues were primarily related to orders for our radiographically identifiable
Spine System products, marketed under the name MYSTIQUE™. As noted above, we are
concerned about the level of commitment to these products from Medtronic,
our
exclusive distributor, and we have changed the focus of our business away
from
these products.
Under
a
distribution agreement with Senko, we are responsible for the completion
of the
initial regulatory application to the MHLW (the Japanese equivalent of the
U.S.
Food and Drug Administration). We recognized development revenue based on
milestones defined within this agreement of $152,000, $51,000, and $158,000
for
the years ended December 31, 2006, 2005, and 2004, respectively. We have
not
received any Thin Film product revenue in Japan yet, and we sold all our
non-Japan Thin Film business in 2004.
We
anticipate that our future international product revenues will increase as
a
result of our Distribution Agreement with Senko once our Thin Film products
reach commercialization in Japan.
Planned
Capital Expenditures
Although
capital expenditures may vary significantly depending on a variety of factors,
we presently intend to spend approximately $1,000,000 on capital equipment
purchases in 2007. A portion of these may be paid with our available
cash.
Raw
Materials
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, B.I. Chemicals, Inc. Although we have a contract with B.I.
Chemicals, which guarantees continuation of supply through August 15, 2008,
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 fulfill
their obligations. Under the terms of the contract, B.I. Chemicals, Inc.
may
choose to raise their prices upon six 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 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 bioresorbable products.
Intellectual
Property
Our
success depends in large part on our ability to protect our proprietary
technology and information, and operate without infringing on the proprietary
rights of third parties. We rely on a combination of patent, trade secret,
copyright and trademark laws, as well as confidentiality agreements, licensing
agreements and other agreements, to establish and protect our proprietary
rights. Our success also depends, in part, on our ability to avoid infringing
patents issued to others. If we were judicially determined to be infringing
any
third party patent, we could be required to pay damages, alter our products
or
processes, obtain licenses or cease certain activities.
To
protect our proprietary regenerative cell technology we have filed applications
for 27 United States patents, as well as an additional 87 corresponding
international patent applications. We are also the exclusive, worldwide licensee
of the Regents of the University of California’s rights to one U.S. Patent
(Patent No. 6,777,231) related to isolated adipose derived stem cells that
can
differentiate into two or more of a variety of cell types, three related
issued
foreign patents, five related U.S. patent applications, and 18 related
international patent applications. With respect to our bioresorbable implant
products and technology, we have obtained 17 U.S. patents, three of which
were
sold in product line dispositions. Our three U.S. patents related to the
design
of our macro-porous bioresorbable sheets for skeletal repair and regeneration
were issued in July 1999, August 2001 and March 2004. Our three U.S. patents
for
the design of our high torque bioresorbable screws were issued in August
2001,
February 2002 and November 2002. Our U.S patent related to our membrane with
tissue guiding surface corrugations was issued in May 2002. Our two U.S.
patents
related to our bioresorbable barrier film for the control of postsurgical
adhesions were issued in March 2003 and January 2004 and assigned to MAST
as
part of the Thin Film product line sale agreement. Our U.S. patent related
to
stereotaxic detachable needle extensions was issued in June 2003. Our U.S.
patent related to non-scatterable radio-opaque material for imaging applications
was issued in October 2003. Our U.S. patents related to a resorbable posterior
spinal fusion system were issued in April 2004 and July 2006. Our U.S. patent
related to thermally pliable and carbon fiber stents was issued in March
2006.
Our U.S. patent for a time release substance delivery device was issued in
August 2006. Our U.S. patent for a heating pen, tack seating device and tap
was
issued in September 2006. We also have two Australian patents, one Canadian
patent and one European patent related to our bioresorbable mesh, one Australian
patent for the design of our high torque bioresorbable screws and one Australian
patent and one European patent related to our membrane with tissue guiding
surface corrugations. Our four Australian patents were issued in August 2000,
January 2003 and September 2003. Our Canadian patent was issued November
2004.
Our two European patents were issued January 2005 and June 2006. Each of
our
patents will expire 20 years from the filing date of the original patent
application. In addition, we have filed applications for 10 additional U.S.
patent applications as well as 46 corresponding international patents relating
to our bioresorbable technology.
We
cannot
assure that any of the pending patent applications will be issued, that we
will
develop additional proprietary products that are patentable, that any patents
issued to us will provide us with competitive advantages or 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,
we
cannot assure that others will not independently develop similar products,
duplicate any of our products or design around our patents. 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.
Patent
law outside the United States is uncertain and in many countries is currently
undergoing review and revisions. The laws of some countries may not protect
our
proprietary rights to the same extent as the laws of the U.S. Third parties
may
attempt to oppose the issuance of patents to us in foreign countries by
initiating opposition proceedings. Opposition proceedings against any of
our
patent filings in a foreign country could have an adverse effect on our
corresponding patents that are issued or pending in the U.S. It may be necessary
or useful for us to participate in proceedings to determine the validity
of our
patents or our competitors’ patents that have been issued in countries other
than the U.S. This could result in substantial costs, divert our efforts
and
attention from other aspects of our business, and could have a material adverse
effect on our results of operations and financial condition. We currently
have
pending patent applications in Europe, Australia, Japan, Canada, China, Korea,
and Singapore, among others.
Patent
litigation results in substantial costs to us and diversion of effort, and
may
be necessary from time to time 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. In particular, in the fourth quarter
of
2004, the University of Pittsburgh filed a lawsuit 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
No. 6,777,231. 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 certain aspects of our strategy related to our regenerative cell technology
could be impacted. We have incurred and expect to continue to incur
substantial legal costs as a result of the University of Pittsburgh
lawsuit. Our President, Marc Hedrick, M.D., is a named individual
defendant in that lawsuit.
In
addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We cannot assure you that others will
not
independently develop or otherwise acquire substantially equivalent
techniques, somehow gain access to our trade secrets and proprietary
technological expertise or disclose such trade secrets, or that we can
ultimately protect our rights to such unpatented trade secrets and proprietary
technological expertise. We rely, in part, on confidentiality agreements
with
our marketing partners, employees, advisors, vendors and consultants to protect
our trade secrets and proprietary technological expertise. We cannot assure
you
that these agreements will not be breached, 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, 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, cash flows
and
financial condition.
Government
Regulation
Most
medical devices, therapies and treatments for use in humans, including our
investigational stem cell-based treatments, are subject to stringent government
regulation in the United States by the Food and Drug Administration, or “FDA,”
under the federal Food, Drug and Cosmetic Act, or “FDC” Act and by the European
Union. The FDA regulates the clinical testing, manufacture, safety, labeling,
sale, distribution and promotion of medical devices and therapies. Included
among these regulations are pre-market clearance, pre-market approval, biologic
license application, new drug application, and Quality System Regulation,
or
“QSR,” requirements. Other statutory and regulatory requirements govern, among
other things, registration and inspection, medical device listing, prohibitions
against misbranding and adulteration, labeling and post-market reporting.
The
regulatory process may be lengthy, expensive and uncertain. Securing FDA
approvals and clearances may require us to submit extensive clinical data
and
supporting information to the FDA. 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, refusal
to approve or clear new applications or notifications, and criminal
prosecution.
Under
the
FDC Act, medical devices are classified into Class I, Class II or Class III
devices, based on their risks and the control necessary to reasonably ensure
their safety and effectiveness. Class I devices are subject to general controls
such as labeling, pre-market notification and adherence to QSR requirements.
Class II devices are subject to general controls, and may be subject to specific
controls such as performance standards, post-market surveillance and patient
registries. Class II devices require pre-market notification to the FDA in
the
form of a 510(k) application that demonstrates the new device to be
“substantially equivalent” to an existing FDA 510(k) cleared device. Generally,
Class III devices, which include certain life-sustaining, life-supporting
and
implantable devices or new devices which have been found not to be substantially
equivalent to certain legally marketed devices, must receive pre-market approval
from the FDA. All of our bioresorbable implant products to date are Class
II
medical devices.
Before
any new Class II or III medical device may be introduced to the market, the
manufacturer generally must obtain either pre-market clearance through the
510(k) pre-market notification process or pre-market approval through the
lengthier Pre-market Approval Application, or “PMA,” process. The FDA will grant
a 510(k) pre-market notification if the submitted data establishes that the
proposed device is “substantially equivalent” to a legally marketed Class I or
Class II medical device. The FDA may request data, including clinical studies,
before it can make a determination of substantial equivalence. It generally
takes from three to 12 months from submission to obtain 510(k) pre-market
clearance, although it may take longer. There is no assurance that clearance
will be granted. We must file a PMA if one of our products is found not to
be
substantially equivalent to a legally marketed Class II device or if it is
a
Class III device for which the FDA requires PMAs. A PMA must be supported
by
extensive data to demonstrate the safety and effectiveness of the device,
including laboratory, pre-clinical and clinical trial data, as well as extensive
manufacturing information. Before initiating human clinical trials on devices
that present a significant risk, we must first obtain an Investigational
Device
Exemption, or IDE, for the proposed medical device. Obtaining FDA approval
of
the Investigational Device Exemption allows the sponsor to begin the collection
of clinical data according to a protocol that must be approved by the FDA.
Several factors influence the overall time frame of the IDE process. These
include: the number of patients required for statistical significance, the
requirement for a pilot (safety) study in advance of initiating a pivotal
study,
and the duration of follow-up required before the IDE can be closed and the
PMA
prepared for submission to FDA. This follow-up period typically ranges from
12-24 months on the last patient to be enrolled in the study. Toward the
end of
the PMA review process, the FDA will generally conduct an inspection of the
manufacturing facilities to ensure compliance with QSRs. Approval of a PMA
could
take up to one or more years from the date of submission of the application
or
petition; however, the entire process of IDE submission /approval, clinical
data
collection, patient follow-up, PMA preparation and approval typically requires
4
years or more. The PMA process can also be expensive and uncertain, and there
is
no guarantee of ultimate approval.
Modifications
or enhancements of products that could affect the safety or effectiveness
or
effect a major change in the intended use of a device that was either cleared
through the 510(k) process or approved through the PMA process may require
further FDA review through new 510(k) or PMA submissions.
As
a
medical device manufacturer, we are subject to periodic inspections by
the FDA
to ensure that devices continue to be manufactured in accordance with QSR
requirements. We are also subject to post-market reporting requirements
for
deaths or serious injuries when a device may have caused or contributed
to 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. Post-market reporting also may be required for certain corrective
actions
undertaken for distributed devices. 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 of devices for indications or uses that
have
not been cleared or approved by the FDA.
Under
the
terms of our development and supply agreement with Medtronic, Medtronic
is
responsible for preparing and filing applications for, and obtaining regulatory
approval of the products we co-develop for use in spinal fixation, stabilization
or fusion applications. We or our marketing partners may not be able to
obtain
necessary 510(k) clearances or PMA approvals to market the products we
are
developing in the United States for their intended use on a timely basis,
if at
all.
We
must
comply with extensive regulations from foreign jurisdictions regarding safety,
manufacturing processes and quality. These regulations, including the
requirements for marketing authorization, may differ from the United States
FDA
regulatory scheme. Specifically, in regard to our licensing agreement with
Senko, marketing authorization from the Japanese Ministry of Health, Labour
and
Welfare is necessary for commercialization of the Thin Film product line
in
Japan.
We
may
not be able to obtain marketing authorization in all of the countries where
we
intend to market our products, may incur significant costs in obtaining
or
maintaining our foreign marketing authorizations, or may not be able to
successfully commercialize our current or future products in any foreign
markets. Delays in receipt of marketing authorizations for our products
in
foreign countries, failure to receive such marketing authorizations or
the
future loss of previously received marketing authorizations could have
a
material adverse effect on our results of operations, cash flows and financial
condition.
The
Food
and Drug Administration (FDA) has granted 510(k) marketing clearance to Cytori
Therapeutics for the following medical devices:
|
Product
Line
|
Cleared
Indications
|
Clearance
Date
|
||
|
Celution™
System
|
Collection,
concentration, washing, and reinfusion of atutologous cells collected
intraoperatively or postoperatively to obtain concentrated blood
cells for
reinfusion in various surgical procedures to include General
Surgery,
Plastics and Reconstructive Surgery, and Cardiovascular
Surgery.
|
28
September 2006
|
Cytori
Therapeutics has also received the following CE Mark approvals from its European
Notified Body:
|
Product
Line
|
Cleared
Indications
|
Clearance
Date
|
||
|
Celution™
System
|
To
extract, wash, and concentrate stromal stem cells and other associated
progenitor cells from digested adipose tissues for autologous
re-implantation or re-infusion into the same patient.
|
24
January 2006
|
||
|
Ceparator
Device
|
To
collect, digest and liquefy adipose tissue to release stem cells
for
further processing
|
24
January 2006
|
||
|
Celase
Enzyme
|
To
digest and liquefy adipose tissue to release stem cells for further
processing
|
24
January 2006
|
Staff
As
of
December 31, 2006, we had 133 employees, including part-time and full-time
employees. These employees are comprised of 4 employees in manufacturing,
89
employees in research and development, 5 employees in sales and marketing
and 35
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
|
—
|
4
|
—
|
4
|
|||||||||
|
Research
& Development
|
88
|
1
|
—
|
89
|
|||||||||
|
Sales
and Marketing
|
5
|
—
|
—
|
5
|
|||||||||
|
General
& Administrative
|
—
|
—
|
35
|
35
|
|||||||||
|
Total
|
93
|
5
|
35
|
133
|
|||||||||
The
above
figures reflect a reduction in force which we effected in July 2006, resulting
in the elimination of 29 positions.
Web
Site Access to SEC Filings
We
maintain an Internet website at www.cytoritx.com. Through this site, we make
available free of charge our annual reports on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934
as
soon as reasonably practicable after we electronically file such material
with,
or furnish it to, the U.S. Securities and Exchange Commission (SEC). In
addition, we publish on our website all reports filed under Section 16(a)
of the
Securities Exchange Act by our directors, officers and 10% stockholders.
These
materials are accessible via the Investor Relations section of our website
within the “SEC Filings” link. Some of the information is stored directly on our
website, while other information can be accessed by selecting the provided
link
to the section on the SEC website, which contains filings for our company
and
its insiders.
We
file
electronically with the SEC our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of
the
Securities Exchange Act of 1934. The SEC maintains an Internet site that
contains reports, proxy information and information statements, and other
information regarding issuers that file electronically with the SEC. The
address
of that website is http://www.sec.gov.
The
materials are also available at the SEC’s Public Reference Room, located at 100
F Street, Washington, D.C. 20549. The public may obtain information through
the
public reference room by calling the SEC at 1-800-SEC-0330.
In
analyzing our company, you should consider carefully the following risk factors,
together with all of the other information included in this annual report
on
Form 10-K. 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 annual report on Form 10-K.
We
are
subject to the following significant risks, among others:
We
will need to raise more cash in the future
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 cash and /or revenues. Our spine and orthopedics products business
has performed poorly and we are actively seeking to divest these
assets. 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 expect to have
significant operating losses for the next few 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. 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
few
years, due to the continued need to fund our clinical research program as
well
as additional pre-clinical research.
Our
business strategy is high-risk
We
are
focusing our resources and efforts primarily on our regenerative cell technology
and its cash needs for research and development activities. 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 has continued throughout 2005 and 2006.
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 historically has been
poor
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, 2005 and 2006, and its rate of product orders placed
with
us in the same periods, disappointed our expectations.
We
remain
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 as well as in the second and third quarters of 2006. 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
results of this business line in each year from 2004 through 2006 have been
below our internal expectations.
The
prices which Medtronic pays us are fixed (pending semiannual 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 4.45% of our stock subsequent to the offering in February 2007, 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, it seems the problems we have already experienced with
Medtronic may be intractable. Accordingly, we are actively seeking
divestiture 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 of the 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 quarterly and annual earning comparisons through 2004 and 2005.
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, aesthetic and reconstructive surgery, spine and
orthopedic conditions, and gastrointestinal disorders 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.
There
is
no proven path for commercializing our regenerative cell technology in a
way to earn a durable profit commensurate with the medical benefit. Although
we
are working to develop proprietary therapeutic products which optimize or
enhance the benefit of autologous stem and regenerative cells for a variety
of
particular indications, most of our cell-related products and/or
services are at least two 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 resources or ability to self manufacture commercially viable
devices, and in any event this failure may 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, as a company we have limited experience in manufacturing the type
of
cell-related therapeutic products which we intend to introduce in 2008.
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.
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, 2008, 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 six 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 impact our ability to develop certain
regenerative cell technology 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 the
University of Pittsburgh 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 licensee (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. Two executive officers left us in 2006, one 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.
Not
applicable.
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.
Our
lease
on the facility located at 6740 Top Gun Street, San Diego, California was
amended and terminated on December 31, 2006. We will continue to occupy a
portion of the building and pay rent to the new lessee until June 30, 2007.
We
also lease:
| · |
16,000
additional square feet for research and development activities
located at
6749 Top Gun Street, San Diego, California that has been amended
to
terminate on April 30, 2007.
|
| · |
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,
expiring on November 30, 2007.
|
On
the
properties stated above, we pay an aggregate of approximately $140,000 in
rent
per month.
From
time
to time, we have been involved in routine litigation incidental to the conduct
of our business. As of December 31, 2006, we were not a party to any material
legal proceeding.
Item
4. Submission of Matters to a Vote of
Security Holders
None
PART
II
Item
5. Market for Registrant’s Common Equity
Related Stockholder Matters
Market
Prices
Since
our
initial public offering in Germany in August 2000, our common stock has been
quoted on the Frankfurt Stock Exchange under the symbol “XMPA” (formerly XMP).
Until December 19, 2005, the Frankfurt Stock Exchange had served as the primary
market for our securities. Effective December 19, 2005, we began trading
on the
Nasdaq Capital Market under the symbol “CYTX,” and have since transferred to the
Nasdaq Global Market effective February 14, 2006. The following table shows
the
high and low sales prices for our common stock for the periods indicated,
as
reported by the Frankfurt Stock Exchange and the Nasdaq Stock Market. These
prices do not include retail markups, markdowns or commissions.
Frankfurt
Stock Exchange (XETRA)
|
High Euro
|
High U.S.
|
Low Euro
|
Low U.S.
|
||||||||||
|
2004
|
|||||||||||||
|
Quarter
ended March 31, 2004
|
€3.45
|
$
|
4.30
|
€2.00
|
$
|
2.58
|
|||||||
|
Quarter
ended June 30, 2004
|
€3.80
|
$
|
4.61
|
€3.02
|
$
|
3.67
|
|||||||
|
Quarter
ended September 30, 2004
|
€3.60
|
$
|
4.40
|
€1.93
|
$
|
2.38
|
|||||||
|
Quarter
ended December 31, 2004
|
€2.73
|
$
|
3.37
|
€1.77
|
$
|
2.43
|
|||||||
|
2005
|
|||||||||||||
|
Quarter
ended March 31, 2005
|
€2.13
|
$
|
2.78
|
€2.00
|
$
|
2.61
|
|||||||
|
Quarter
ended June 30, 2005
|
€2.55
|
$
|
3.08
|
€2.50
|
$
|
3.02
|
|||||||
|
Quarter
ended September 30, 2005
|
€4.49
|
$
|
5.41
|
€4.21
|
$
|
5.07
|
|||||||
|
Quarter
ended December 31, 2005
|
€6.85
|
$
|
8.13
|
€6.47
|
$
|
7.68
|
|||||||
Nasdaq
Stock Exchange
|
High
U.S.
|
Low
U.S.
|
||||||
|
2005
|
|||||||
|
Quarter
ended December 31, 2005
|
$
|
10.01
|
$
|
7.60
|
|||
|
2006
|
|||||||
|
Quarter
ended March 31, 2006
|
$
|
9.20
|
$
|
6.65
|
|||
|
Quarter
ended June 30, 2006
|
$
|
9.16
|
$
|
6.66
|
|||
|
Quarter
ended September 30, 2006
|
$
|
8.00
|
$
|
4.05
|
|||
|
Quarter
ended December 31, 2006
|
$
|
7.43
|
$
|
3.87
|
|||
In
preparation for our Nasdaq listing, we changed depository agents from
Clearstream Banking AG, Frankfurt, Germany, to the Depository Trust &
Clearing Corporation, U.S (“DTCC”). All of our outstanding shares have been
deposited with DTCC since December 9, 2005.
Dividends
We
have
never declared or paid any dividends and do not currently anticipate paying
any
cash dividends on our outstanding shares of common stock in the foreseeable
future.
German
Securities Laws
As
a
United States company with securities trading on a German stock exchange,
we are
subject to various laws and regulations in both jurisdictions. Some of these
laws and regulations, in turn, can affect the ability of holders of some
of our
securities to transfer or sell those securities.
There
are
no limitations imposed by German law or our certificate of incorporation
or
bylaws on the right of owners to hold or vote the shares.
Equity
Compensation Plan Information
|
Plan Category
|
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price
of outstanding options, warrants
and rights
|
Number
of securities remaining
available
for future
issuance under equity compensation
plans (excluding securities reflected
in column(a))
|
|||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plans approved by security holders
|
4,409,286
|
$
|
4.22
|
430,653
|
||||||
|
Equity
compensation plans not approved by security holders(1)
|
1,524,743
|
$
|
5.80
|
2,413,691
|
||||||
|
Total
|
5,934,029
|
$
|
4.62
|
2,844,344
|
||||||
________________________________________
|
(1)
|
The
maximum number of shares shall be cumulatively increased on the
first
January 1 after the Effective Date, August 24, 2004, and each January
1
thereafter for 9 more years, by a number of shares equal to the
lesser of
(a) 2% of the number of shares issued and outstanding on the immediately
preceding December 31, and (b) a number of shares set by the
Board.
|
Comparative
Stock Performance Graph
The
following graph shows how (assuming reinvestment of all dividends) an initial
investment of $100 in our common stock would have compared to an equal
investment in the Nasdaq Composite Index and the Amex Biotechnology Index
during
the period from December 31, 2001, through December 31, 2006. The performance
shown is not necessarily indicative of future price performance.
Item
6. Selected Financial
Data
The
selected data presented below under the captions “Statements of Operations
Data,” “Statements of Cash Flows Data” and “Balance Sheet Data” for, and as of
the end of, each of the years in the five-year period ended December 31,
2006,
are derived from our audited financial statements. The consolidated balance
sheets as of December 31, 2006 and 2005, and the related consolidated statements
of operations and comprehensive loss, stockholders’ equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 2006,
which have been audited by KPMG LLP, an independent registered public accounting
firm, and their report thereon, are included elsewhere in this annual report.
The consolidated balance sheets as of December 31, 2004, 2003 and 2002, and
the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity (deficit), and cash flows for the years ended December 31,
2003 and 2002, which were also audited by KPMG LLP, are included with our
annual
reports previously filed.
The
information contained in this table should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements and related notes thereto included
elsewhere in this report (in thousands except share and per share
data):
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||
|
Product
revenues:
|
||||||||||||||||
|
Sales
to related party
|
$
|
1,451
|
$
|
5,634
|
$
|
4,085
|
$
|
12,893
|
$
|
8,605
|
||||||
|
Sales
to third parties
|
—
|
—
|
2,237
|
1,186
|
561
|
|||||||||||
|
1,451
|
5,634
|
6,322
|
14,079
|
9,166
|
||||||||||||
|
Cost
of product revenues
|
1,634
|
3,154
|
3,384
|
4,244
|
4,564
|
|||||||||||
|
Gross
profit (loss)
|
(183
|
)
|
2,480
|
2,938
|
9,835
|
4,602
|
||||||||||
|
Development
revenues:
|
||||||||||||||||
|
Development
|
6,057
|
51
|
158
|
9
|
—
|
|||||||||||
|
Research
grants and other
|
419
|
320
|
338
|
—
|
—
|
|||||||||||
|
6,476
|
371
|
496
|
9
|
—
|
||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
21,977
|
15,450
|
10,384
|
8,772
|
5,816
|
|||||||||||
|
Sales
and marketing
|
2,055
|
1,547
|
2,413
|
4,487
|
4,121
|
|||||||||||
|
General
and administrative
|
12,547
|
10,208
|
6,551
|
5,795
|
4,894
|
|||||||||||
|
Change
in fair value of option liabilities
|
(4,431
|
)
|
3,645
|
—
|
—
|
—
|
||||||||||
|
Restructuring
charge
|
—
|
—
|
107
|
451
|
—
|
|||||||||||
|
Equipment
impairment charge
|
—
|
—
|
42
|
—
|
370
|
|||||||||||
|
In-process
research and development
|
—
|
—
|
—
|
—
|
2,296
|
|||||||||||
|
Total
operating expenses
|
32,148
|
30,850
|
19,497
|
19,505
|
17,497
|
|||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Gain
on sale of assets
|
—
|
5,526
|
—
|
—
|
—
|
|||||||||||
|
Gain
on the sale of assets, related party
|
—
|
—
|
13,883
|
—
|
—
|
|||||||||||
|
Interest
income
|
708
|
299
|
252
|
417
|
1,037
|
|||||||||||
|
Interest
expense
|
(199
|
)
|
(137
|
)
|
(177
|
)
|
(126
|
)
|
(241
|
)
|
||||||
|
Other
income (expense)
|
(27
|
)
|
(55
|
)
|
15
|
87
|
(22
|
)
|
||||||||
|
Equity
loss in investments
|
(74
|
)
|
(4,172
|
)
|
—
|
—
|
(882
|
)
|
||||||||
|
Net
loss
|
$
|
(25,447
|
)
|
$
|
(26,538
|
)
|
$
|
(2,090
|
)
|
$
|
(9,283
|
)
|
$
|
(13,003
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(1.53
|
)
|
$
|
(1.80
|
)
|
$
|
(0.15
|
)
|
$
|
(0.64
|
)
|
$
|
(0.91
|
)
|
|
|
Basic
and diluted weighted average common shares
|
16,603,550
|
14,704,281
|
13,932,390
|
14,555,047
|
14,274,254
|
|||||||||||
|
Statements
of Cash Flows Data:
|
||||||||||||||||
|
Net
cash used in operating activities
|
$
|
(16,483
|
)
|
$
|
(1,101
|
)
|
$
|
(12,574
|
)
|
$
|
(7,245
|
)
|
$
|
(6,886
|
)
|
|
|
Net
cash provided by investing activities
|
591
|
911
|
13,425
|
5,954
|
17,265
|
|||||||||||
|
Net
cash provided by (used in) financing activities
|
16,787
|
5,357
|
(831
|
)
|
(997
|
)
|
(7,971
|
)
|
||||||||
|
Net
increase (decrease) in cash
|
895
|
5,167
|
20
|
(2,288
|
)
|
2,408
|
||||||||||
|
Cash
and cash equivalents at beginning of year
|
8,007
|
2,840
|
2,820
|
5,108
|
2,700
|
|||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
8,902
|
$
|
8,007
|
$
|
2,840
|
$
|
2,820
|
$
|
5,108
|
||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$
|
12,878
|
$
|
15,845
|
$
|
13,419
|
$
|
14,268
|
$
|
24,983
|
||||||
|
Working
capital
|
7,392
|
10,459
|
12,458
|
12,432
|
25,283
|
|||||||||||
|
Total
assets
|
24,868
|
28,166
|
25,470
|
28,089
|
39,319
|
|||||||||||
|
Deferred
revenues
|
2,389
|
2,541
|
2,592
|
—
|
—
|
|||||||||||
|
Deferred
revenues, related party
|
23,906
|
17,311
|
—
|
—
|
—
|
|||||||||||
|
Option
liabilities
|
900
|
5,331
|
—
|
—
|
—
|
|||||||||||
|
Deferred
gain on sale of assets
|
—
|
—
|
5,650
|
—
|
—
|
|||||||||||
|
Deferred
gain on sale of assets, related party
|
—
|
—
|
—
|
7,539
|
9,623
|
|||||||||||
|
Long-term
deferred rent
|
741
|
573
|
80
|
—
|
—
|
|||||||||||
|
Long-term
obligations, less current portion
|
1,159
|
1,558
|
1,128
|
1,157
|
770
|
|||||||||||
|
Total
stockholders’ equity (deficit)
|
$
|
(10,813
|
)
|
$
|
(6,229
|
)
|
$
|
12,833
|
$
|
14,909
|
$
|
25,995
|
||||
Item
7. 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 I above.
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
Regenerative
cell technology
Cytori
is
developing its Celution™ System, an innovative medical device that removes a
patient's own stem and regenerative cells from their fat tissue so that these
cells can be delivered to the same patient in about an hour. The
commercialization model will be based on the sale of the system and related
single-use therapeutic sets that are tailored to each therapeutic application.
We are focused initially on bringing applications to market for reconstructive
surgery and cardiovascular disease. Success is dependent on conducting
well-designed clinical trials that demonstrate patient benefit and support
reimbursement and physician adoption, gaining regulatory clearance for the
Celution™ System, and building out our commercialization and manufacturing
infrastructure.
The
Celution™ System may potentially be applied to other important therapeutic
areas, which include gastrointestinal disorders, peripheral vascular disease,
spinal disc repair, and urinary incontinence. For this reason, a significant
part of our strategy is to seek commercialization partnerships with medical
device or pharmaceutical companies that possess development expertise and
have
sales forces dedicated to specific therapeutic areas. The goal is to broaden
the
number of applications for which the Celution™ System may be sold, accelerate
the development of applications outside of our core expertise and to bring
in
capital through partnering agreements that will offset the development of
reconstructive surgery and cardiovascular disease applications.
Breast
Reconstruction
We
made
significant progress in 2006 toward commercializing the Celution™ System in
Europe in early 2008 for reconstructive surgery. Through placement of a
Celution™ System in a 19 patient investigator-initiated breast reconstruction
clinical study in Japan, we gained substantial knowledge on how to optimize
use
of the device in a hospital setting and we learned from preliminary observations
that adipose stem and regenerative cells are safe in this indication.
In
2007,
we will initiate a larger company-sponsored clinical study to evaluate efficacy
in breast reconstruction following partial mastectomy. In parallel, we will
build out our manufacturing capabilities and enter into European distribution
agreements. Starting in late 2008, we expect that the Olympus-Cytori Joint
Venture, described below, will assume device manufacturing, and in that same
time frame we expect to announce results from our breast reconstruction trial
in
Europe and thus anticipate increased product demand.
Currently,
there are few if any options available to patients who undergo a partial
mastectomy and desire a breast reconstruction. In Europe, there are 300,000
patients diagnosed with breast cancer each year and an estimated 60% are
considered eligible for a partial mastectomy. Approximately 3 million women
in
Europe already have breast cancer. In the United States, 215,000 are diagnosed
each year with breast cancer and 2.2 million are estimated to already have
the
condition. During 2007, Cytori plans to begin preparing and designing breast
reconstruction clinical trials to begin in the United States in 2008.
Cardiovascular
Disease
Over
the
past three years, a significant percentage of our research and development
has
been dedicated to performing several cardiovascular disease pre-clinical
studies
and analysis to demonstrate safety, efficacy, expand our understanding of
mechanisms and distribution in order to optimize delivery techniques. This
has resulted in a compilation of extensive pre-clinical data to support the
initiation of human clinical trials, which was the highest development priority
during 2006.
Based
on these results, we started a clinical trial for chronic ischemia in
January 2007. It is a 36 patient safety and feasibility study evaluating
adipose stem and regenerative cells as a treatment for chronic ischemia.
The
patients’ cells are extracted from their adipose tissue using the Celution™
System then injected into the injured oxygen-deprived areas of their hearts
through a specially designed catheter. The patients will be evaluated for
six months after treatment. The study is being conducted at Gregorio Marañón
Hospital in Madrid Spain and led by Drs. Francisco J. Fernández-Avilés and
Emerson Perin. Enrollment for this trial remains on track and full results
are
expected to be reported in the fourth quarter of 2008.
We
expect
to start a clinical trial in heart attack patients in the second quarter
of
2007. This trial will be a 48 patient safety and feasibility study to
evaluate adipose stem and regenerative cells as a treatment for heart attacks.
The cells are extracted from their adipose tissue using the Celution™
System and injected into their coronary artery. The patients will be
evaluated six months after treatment. Full results are expected to be
reported in 2008. The study is being conducted at Thoraxcenter, Erasmus Medical
Center Hospital in Rotterdam, the Netherlands and led by Dr. Patrick Serruys.
Preparations for initiating this trial remain on schedule and results are
expected to be reported in the fourth quarter of 2008.
The
American Heart Association estimates that in the United States alone, there
are
approximately 1.2 million heart attacks each year and more than 5.2 million
people suffer from a form of chronic heart disease. Given the size of this
market and the pre-clinical data demonstrating functional improvement,
cardiovascular disease represents a very important application for our Celution™
System and we believe that outcome of the clinical data from these safety
and
feasibility studies could have a significant impact on our future operations.
Olympus
Partnership
On
November 4, 2005, we entered into a strategic development and manufacturing
joint venture agreement and other related agreements (“JV Agreements”) with
Olympus Corporation (“Olympus”). As part of the terms of the JV Agreements, we
formed a joint venture, Olympus-Cytori, Inc. (the “Joint Venture”), to develop
and manufacture future generation devices based on our Celution™ System.
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.
|
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, 2006 and 2005, the fair value of the Put was $900,000 and
$1,600,000, respectively. Fluctuations in the Put value are 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
as a
long-term liability on the balance sheet in the caption option
liabilities.
The
following assumptions were employed in estimating the value of the
Put:
|
December
31, 2006
|
December
31, 2005
|
November
4, 2005
|
||||||||
|
Expected
volatility of Cytori
|
66.00
|
%
|
63.20
|
%
|
63.20
|
%
|
||||
|
Expected
volatility of the Joint Venture
|
56.60
|
%
|
69.10
|
%
|
69.10
|
%
|
||||
|
Bankruptcy
recovery rate for Cytori
|
21.00
|
%
|
21.00
|
%
|
21.00
|
%
|
||||
|
Bankruptcy
threshold for Cytori
|
$
|
10,110,000
|
$
|
10,780,000
|
$
|
10,780,000
|
||||
|
Probability
of a change of control event for Cytori
|
1.94
|
%
|
3.04
|
%
|
3.04
|
%
|
||||
|
Expected
correlation between fair values of Cytori and the Joint Venture
in the
future
|
99.00
|
%
|
99.00
|
%
|
99.00
|
%
|
||||
|
Risk
free interest rate
|
4.71
|
%
|
4.39
|
%
|
4.66
|
%
|
||||
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 would 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.
In
2006,
Cytori worked closely with Olympus’ team of scientists and engineers to design
future generations of the Celution™ System that contain certain product
enhancements and that can be manufactured in a streamlined manner. For 2007,
the
Joint Venture will continue its efforts with the goal of scale-up manufacturing
available in late 2008.
Other
Related Party Transactions
As
part
of the formation of the Joint Venture and as discussed above, the Joint Venture
agreed to purchase development services from Olympus. In December 2005, the
Joint Venture paid to Olympus $8,000,000 as a payment for those services.
The
payment has been recognized in its entirety as an expense on the books and
records of the Joint Venture as the expenditure represents a payment for
research and development services that have no alternative future uses. Our
share of this expense has been reflected within the account, equity loss
from
investment in joint venture, within the consolidated statement of
operations.
In
a
separate agreement entered into on February 23, 2006, we granted Olympus
an
exclusive right to negotiate 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 a $1.5
million
payment from Olympus. 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.
MacroPore
Biosurgery
Spine
and orthopedic products
We
manufacture bioresorbable implants used in spine and orthopedic procedures.
Medtronic is the sole distributor of our products but due to a substantial
decrease in their orders of this product, we experienced negative profit
margins
for our MacroPore Biosurgery segment for the year ended December 31, 2006
and
are actively pursuing a buyer (or buyers) for this line of business.
Thin
Film Japan Distribution Agreement
In
2004,
we sold the majority of our Thin Film business to MAST.
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 $361,000
in development revenues ($152,000, $51,000, and $158,000 for the years ended
December 31, 2006, 2005, and 2004, 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.
Capital
Requirements and Liquidity
Research
and development for the Celution™ System and clinical applications of
adipose-derived stem and regenerative cell therapies has been and will continue
to be very costly. We anticipate expanding our research and development expenses
to fund clinical trials costs (which we will be initiating for the first
time in
2007), pre-clinical research, and general and administrative activities.
As a
result, we expect to continue incurring losses for the foreseeable
future.
Over
94%
of our 2006 research and development expenses of $21,977,000 were related
to our
regenerative cell technology business, and the majority of those were related
to
research and development of applications of adipose stem and regenerative
cells
for cardiovascular disease. We believe our research and development expenses
will continue to increase should we advance more products into and through
clinical trials and as we prepare for a commercial launch. We plan to fund
this
anticipated research and development from the following:
| · |
Existing
cash and short-term investments;
|
| · |
Potential
future financings,
|
| · |
Payments,
if any, related to potential Celution™ System commercialization
partnerships or stem cell banking licensing
agreements
|
| · |
Payments,
if any, related to potential biomaterial product line divestitures;
and
|
| · |
Potential
research grants
|
As
of
December 31, 2006, we had cash and cash equivalents and short-term investments
on hand of $12,878,000 and an accumulated deficit of $103,460,000.
On
February 28, 2007, we completed a registered direct public offering of units
consisting of common stock and warrants, which raised approximately $19,700,000
after expenses. On March 29, 2007, we entered into an agreement to sell
1,000,000 shares of common stock at $6.00 per share to Green Hospital Supply,
Inc. in a private placement.
Results
of Operations
Product
revenues
Product
revenues relate entirely to our MacroPore Biosurgery segment and include
revenues from our spine and orthopedic products, thin film products and CMF
products. The following table summarizes the components for the years ended
December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Product
Revenues:
|
||||||||||||||||||||||
|
Spine
and orthopedics products
|
$
|
1,451,000
|
$
|
5,634,000
|
$
|
3,803,000
|
$
|
(4,183,000
|
)
|
$
|
1,831,000
|
(74.2
|
)%
|
48.1
|
%
|
|||||||
|
Thin
film products:
|
||||||||||||||||||||||
|
Product
sales (non-MAST related)
|
—
|
—
|
559,000
|
—
|
(559,000
|
)
|
—
|
—
|
||||||||||||||
|
Product
sales to MAST
|
—
|
—
|
906,000
|
—
|
(906,000
|
)
|
—
|
—
|
||||||||||||||
|
Amortization
of gain on sale (MAST)
|
—
|
—
|
772,000
|
—
|
(772,000
|
)
|
—
|
—
|
||||||||||||||
|
|
—
|
—
|
2,237,000
|
—
|
(2,237,000
|
)
|
—
|
—
|
||||||||||||||
|
CMF
products:
|
||||||||||||||||||||||
|
Product
sales
|
—
|
—
|
126,000
|
—
|
(126,000
|
)
|
—
|
—
|
||||||||||||||
|
Amortization
of gain on sale
|
—
|
—
|
156,000
|
—
|
(156,000
|
)
|
—
|
—
|
||||||||||||||
|
|
—
|
282,000
|
—
|
(282,000
|
)
|
—
|
—
|
|||||||||||||||
|
Total
product revenues
|
$
|
1,451,000
|
$
|
5,634,000
|
$
|
6,322,000
|
$
|
(4,183,000
|
)
|
$
|
(688,000
|
)
|
(74.2
|
)%
|
(10.9
|
)%
|
||||||
|
%
attributable to Medtronic
|
100
|
%
|
100
|
%
|
64.6
|
%
|
||||||||||||||||
MacroPore
Biosurgery:
| · |
Spine
and orthopedic product revenues represent sales of bioresorbable
implants
used in spine and orthopedic surgical procedures. For the years
ended
December 31, 2006 and 2005, these revenues were primarily related
to
orders 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.
However, subsequent to the initial product launch, Medtronic has
substantially decreased its orders of this product, and we are
concerned
about Medtronic’s ongoing level of commitment to this product. As a result
of this decrease, we experienced negative profit margins for our
MacroPore
Biosurgery segment for the year ended December 31, 2006. As a result,
we
are actively seeking a buyer (or buyers) for this line of
business.
|
|
Medtronic
owned approximately 5.34% of our outstanding common stock as of
December
31, 2006 (4.45% after our February 28, 2007 stock
issuance).
|
| · |
Thin
Film product revenues in 2004 represent sales of SurgiWrap™ bioresorbable
Thin Film. We sold most, but not all, of our intellectual property
rights
and tangible assets related to our Thin Film product line to MAST
Biosurgery in the second quarter of 2004. We were obliged by contract
to
act as a back-up supplier for these products and to sell them to
MAST at
our manufacturing costs. However, as MAST assumed the manufacturing
process, domestic revenue from Thin Film products ended in 2004.
No
revenues from the Thin Film product line were recognized during
the years
ended December 31, 2006 and 2005. We have never received any Thin
Film
revenues from Japan, because the MHLW has not approved Thin Film
for sale
in Japan yet.
|
| · |
The
CMF product revenues represent sales of the CMF surgical implants
product
line used for trauma and reconstructive procedures in the mid-face
and
craniofacial skeleton (the head and skull). We sold this product
line to
Medtronic in 2002. As with the Thin Film products, we sold CMF
products at
cost in 2004 under a contractual back-up supply agreement with
Medtronic.
A portion of the deferred gain on sale of assets, related party
was
recognized as revenue in order to reflect the fair value of products
sold,
based on historical selling prices of similar products, over our
manufacturing cost. During the third quarter of 2004, we completed
all
remaining performance obligations related to the 2002 sale of the
CMF
product line to Medtronic. Therefore, we did not earn any CMF product
revenues during the years ended December 31, 2006 and 2005 and
will not
generate revenue from this product line in the future.
|
The
future:
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 2007. 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. We are
trying
to scale back MacroPore Biosurgery’s expenses to reflect our modest expectations
of future revenues.
All
product revenues are currently 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, which
we
believe will happen in 2007.
Cost
of product revenues
Cost
of
product revenues includes material, manufacturing labor, overhead costs and
an
inventory provision. The following table summarizes the components of our
cost
of revenues for the years ended December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
and % Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Cost
of product revenues:
|
||||||||||||||||||||||
|
Cost
of product revenues
|
$
|
1,472,000
|
$
|
2,874,000
|
$
|
3,139,000
|
$
|
(1,402,000
|
)
|
$
|
(265,000
|
)
|
(48.8
|
)%
|
(8.4
|
)%
|
||||||
|
%
of product revenues
|
101.4
|
%
|
51.0
|
%
|
49.7
|
%
|
50.4
|
%
|
1.3
|
%
|
98.8
|
%
|
2.6
|
%
|
||||||||
|
Inventory
provision
|
88,000
|
280,000
|
242,000
|
(192,000
|
)
|
38,000
|
(68.6
|
)%
|
15.7
|
%
|
||||||||||||
|
%
of product revenues
|
6.1
|
%
|
5.0
|
%
|
3.8
|
%
|
1.1
|
%
|
1.2
|
%
|
22.0
|
%
|
31.6
|
%
|
||||||||
|
Stock-based
compensation
|
74,000
|
—
|
3,000
|
74,000
|
(3,000
|
)
|
—
|
—
|
||||||||||||||
|
%
of product revenues
|
5.1
|
%
|
—
|
—
|
5.1
|
%
|
—
|
—
|
—
|
|||||||||||||
|
Total
cost of product revenues
|
$
|
1,634,000
|
$
|
3,154,000
|
$
|
3,384,000
|
$
|
(1,520,000
|
)
|
$
|
(230,000
|
)
|
(48.2
|
)%
|
(6.8
|
)%
|
||||||
|
Total
cost of product revenues as % of Product revenues
|
112.6
|
%
|
56.0
|
%
|
53.5
|
%
|
||||||||||||||||
MacroPore
Biosurgery:
| · |
Our
product revenues are currently generated only through sales of
bioresorbable products and therefore, cost of revenues is related
only to
our MacroPore Biosurgery segment.
|
| · |
The
change in cost of revenues for the year ended December 31, 2006
as
compared to the same period in 2005 as well as between 2005 and
2004 were
due primarily to amounts of fixed labor and overhead costs applied
to
product revenues in each period. As MacroPore revenues have declined,
gross margins have been negatively affected by fixed costs.
|
| · |
In
response to MacroPore Biosurgery’s declining revenues, we are seeking to
reduce expenses. We reduced our headcount by 29 people in the third
quarter of 2006. A portion of the affected personnel related to
the
MacroPore Biosurgery segment.
|
| · |
Cost
of product revenues includes approximately $74,000, $0 and $3,000
of
stock-based compensation expense for the years ended December 31,
2006,
2005 and 2004, respectively. For further details, see stock-based
compensation discussion below.
|
| · |
During
the years ended December 31, 2006, 2005, and 2004, we recorded
a provision
of $88,000, $280,000, and $242,000, respectively, related primarily
to
excess and slow-moving inventory. In 2006 and 2005, this inventory
was
produced in anticipation of stocking orders from Medtronic which
did not
materialize.
|
| · |
The
$242,000 inventory provision during 2004 related to excess inventory
produced in consideration of our responsibility to be a back-up
supplier
for the CMF product line. We sold the assets related to this product
line
to a subsidiary of Medtronic in September 2002. In April of
2004, Medtronic indicated that it would no longer purchase CMF
inventory
from us under the back-up supply arrangement, leading to our determination
that the remaining CMF inventory on hand would not be recoverable.
|
The
future.
Ceasing
to manufacture the CMF product line and the non-Japan bioresorbable Thin
Film
product line, combined with the poor rate 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 in the future.
In
an
effort to reduce overhead costs related to the MacroPore Biosurgery segment,
we
have accelerated termination of two of our leases. As a result, one of our
leases will terminate in April 2007 and we will be subletting only a
small portion of the other building during the first half of 2007.
As
mentioned above, 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
years ended December 31, 2006, 2005, and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||
|
Milestone
revenue (Olympus)
|
$
|
5,905,000
|
$
|
—
|
$
|
—
|
$
|
5,905,000
|
$
|
—
|
—
|
—
|
||||||||||
|
Research
grant (NIH)
|
310,000
|
312,000
|
328,000
|
(2,000
|
)
|
(16,000
|
)
|
(0.6
|
)%
|
(4.9
|
)%
|
|||||||||||
|
Regenerative
cell storage services
|
7,000
|
8,000
|
10,000
|
(1,000
|
)
|
(2,000
|
)
|
(12.5
|
)%
|
(20.0
|
)%
|
|||||||||||
|
Other
|
102,000
|
—
|
—
|
102,000
|
—
|
—
|
—
|
|||||||||||||||
|
Total
regenerative cell technology
|
6,324,000
|
320,000
|
338,000
|
6,004,000
|
(18,000
|
)
|
1,876.3
|
%
|
(5.3
|
)%
|
||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||
|
Development
(Senko)
|
152,000
|
51,000
|
158,000
|
101,000
|
(107,000
|
)
|
198.0
|
%
|
(67.7
|
)%
|
||||||||||||
|
Total
development revenues
|
$
|
6,476,000
|
$
|
371,000
|
$
|
496,000
|
$
|
6,105,000
|
$
|
(125,000
|
)
|
1,645.6
|
%
|
(25.2
|
)%
|
|||||||
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 year ended December 31, 2006,
we
recognized $5,905,000 of revenue associated with our arrangements
with
Olympus. The revenue recognized in 2006 was a result of completing
a
pre-clinical study in the first quarter of 2006, receiving a CE
mark for
the first generation Celution™ System, and reaching three additional
milestones in the fourth quarter of 2006. One milestone related
to the
completion of a pre-clinical study while the other two were results
of
product development efforts. There was no similar revenue in
2005.
|
| · |
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 year ended December 31, 2006, we incurred $479,000 in expenditures, of
which
$310,000 were qualified. We recorded a total of $310,000 in revenues for
the
year ended December 31, 2006, which included allowable grant fees as well
as
cost reimbursements. During the year ended December 31, 2005, we incurred
$306,000 in qualifying expenditures. During the year ended December 31, 2004,
we
incurred $339,000 of costs, of which only $328,000 were qualified expenditures.
We recorded a total of $312,000 and $328,000 in revenues for the years ended
December 31, 2005 and 2004, respectively, which include allowable grant fees
as
well as cost reimbursements.
MacroPore
Biosurgery (Thin Film):
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 December 31, 2006, of the amount deferred, we
have
recognized development revenues of $361,000 ($152,000 in 2006,
$51,000 in
2005, and $158,000 in 2004).
|
| · |
We
are also entitled to a nonrefundable payment of $250,000 once we
achieve
commercialization.
|
| · |
Finally,
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. Because the $1,500,000 in license fees is 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:
We
expect to recognize revenues from our regenerative cell technology segment
during 2007 as we complete certain pre-clinical studies and certain phases
of
our product development performance obligations. If we are successful in
achieving certain milestone points related to these activities, we will
recognize approximately $2,500,000 in revenues in 2007. 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. The cash for these performance obligations was received when
the agreement was signed and no further related cash payments will be made
to
us.
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
as
compared 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 2007. Accordingly, we expect to
recognize approximately $1,139,000 (consisting of $889,000 in deferred revenues
plus a non-refundable payment of $250,000 to be received upon commercialization)
in revenues associated with this milestone arrangement in 2007. 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 years ended December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||
|
Regenerative
cell technology
|
$
|
11,967,000
|
$
|
11,487,000
|
$
|
6,910,000
|
$
|
480,000
|
$
|
4,577,000
|
4.2
|
%
|
66.2
|
%
|
||||||||
|
Development
milestone (Joint Venture)
|
7,286,000
|
1,136,000
|
—
|
6,150,000
|
1,136,000
|
541.4
|
%
|
—
|
||||||||||||||
|
Research
grants (NIH)
|
479,000
|
306,000
|
339,000
|
173,000
|
(33,000
|
)
|
56.5
|
%
|
(9.7
|
)%
|
||||||||||||
|
Stock-based
compensation
|
1,015,000
|
67,000
|
—
|
948,000
|
67,000
|
1,414.9
|
%
|
—
|
||||||||||||||
|
Total
regenerative cell technology
|
20,747,000
|
12,996,000
|
7,249,000
|
7,751,000
|
5,747,000
|
59.6
|
%
|
79.3
|
%
|
|||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||
|
Bioresorbable
polymer implants
|
1,027,000
|
2,213,000
|
2,933,000
|
(1,186,000
|
)
|
(720,000
|
)
|
(53.6
|
)%
|
(24.5
|
)%
|
|||||||||||
|
Development
milestone (Senko)
|
178,000
|
129,000
|
170,000
|
49,000
|
(41,000
|
)
|
38.0
|
%
|
(24.1
|
)%
|
||||||||||||
|
Stock-based
compensation
|
25,000
|
112,000
|
32,000
|
(87,000
|
)
|
80,000
|
(77.7
|
)%
|
250.0
|
%
|
||||||||||||
|
Total
MacroPore Biosurgery
|
1,230,000
|
2,454,000
|
3,135,000
|
(1,224,000
|
)
|
(681,000
|
)
|
(49.9
|
)%
|
(21.7
|
)%
|
|||||||||||
|
Total
research and development expenses
|
$
|
21,977,000
|
$
|
15,450,000
|
$
|
10,384,000
|
$
|
6,527,000
|
$
|
5,066,000
|
42.2
|
%
|
48.8
|
%
|
||||||||
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 increased by $2,315,000
for the year ended December 31, 2006 as compared to the same period
in
2005. This increase does not include the $948,000 increase in stock-based
compensation for the year ended December 31, 2006 as compared to
2005.
Professional services expense, which includes pre-clinical and
clinical
study costs, increased by $1,772,000 for the year ended December
31, 2006
as compared to the same period in 2005. Rent and utilities expense
increased by $767,000 from 2005 to 2006 as a result of the addition
of our
new facility. Production and other supplies increased by $689,000
during
the year ended December 31, 2006 as compared to 2005. Other notable
increases included repairs and maintenance of $486,000 and depreciation
expense increases of $581,000, for the year ended December 31,
2006,
respectively, as compared to the same period in 2005. The remaining
increase of $193,000 related to miscellaneous charges, such as
regulatory
costs.
|
|
The
increase in regenerative cell technology expenses from 2004 to
2005 was
due primarily to the hiring of additional researchers, engineers,
and
support staff. It was also a result of increased costs for pre-clinical
studies conducted in 2005 as compared with 2004 as well as increased
rent
and utility expense due to the addition of our new facility during
the
latter half of 2005.
|
| · |
Expenditures
related to the Joint Venture with Olympus, which are included in
the
variation analysis above, include costs that are necessary to support
the
commercialization of future generation devices based on our Celution™
System. These development activities, which began in November 2005,
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 years ended December 31, 2006 and 2005, costs
associated
with the development of the device were $7,286,000 and $1,136,000,
respectively. These expenses were composed of $3,663,000 and $565,000
in
labor and related benefits, $2,405,000 and $571,000 in consulting
and
other professional services, $872,000 and $0 in supplies and $346,000
and
$0 in other miscellaneous expense, respectively. There were no
comparable
expenditures in 2004.
|
| · |
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 years ended December 31, 2006, 2005,
and
2004, we incurred $479,000, $306,000 and $339,000, respectively,
of direct
expenses relating entirely to Phase I and II. Of these expenses,
$169,000
and $11,000 were not reimbursed in 2006 and 2004, respectively.
To date,
we have incurred $1,125,000 of direct expenses ($180,000 of which
were not
reimbursed) relating to both Phases I and II of the agreement.
Our work
under the NIH agreement was completed during 2006.
|
| · |
Stock-based
compensation for the regenerative cell technology segment of research
and
development was $1,015,000 and $67,000 for the years ended December
31,
2006 and 2005. There was no similar expenditure in 2004. See stock-based
compensation discussion below for more
details.
|
MacroPore
Biosurgery:
| · |
Our
bioresorbable surgical implants platform technology is used for
development of spine and orthopedic products and Thin Film products.
The
decrease in research and development costs associated with bioresorbable
implants for the year ended December 31, 2006 as compared with
the same
period in 2005 and 2004 was due primarily to our ongoing strategy
of
reallocating resources toward our regenerative cell technology
segment.
Labor and related benefits expense, including stock-based compensation,
decreased by $778,000 for the year ended December 31, 2006 as compared
to
2005. In July 2006, we laid off 29 employees, a portion of which
related
to the MacroPore Biosurgery business. Other notable decreases from
2005 to
2006 were caused by decreases in travel and entertainment, professional
services, and depreciation expense.
|
|
Notable
decreases from 2004 to 2005 were caused by decreases in labor and
related
benefit expense, as well as decreases in professional service expense
and
pre-clinical expense.
|
| · |
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 years ended December 31, 2006, 2005 and 2004, we incurred $178,000,
$129,000 and $170,000, respectively, of expenses related to this
regulatory and registration process.
|
| · |
Stock-based
compensation for the MacroPore Biosurgery segment of research and
development for the years ended December 31, 2006, 2005, and 2004
was
$25,000, $112,000 and $32,000, respectively. See stock-based compensation
discussion below for more details.
|
The
future:
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 $22,000,000 to $24,000,000 in 2007. We
are
researching therapies for cardiovascular disease, new approaches for aesthetic
and reconstructive surgery, gastrointestinal disorders and spine and orthopedic
conditions. The expenditures have and will continue to primarily relate
to
developing therapeutic applications and conducting pre-clinical and clinical
studies on adipose-derived stem and regenerative cells.
We
continue to reduce research and development expenditures in the bioresorbable
technology platform. We anticipate minimal further expenditures in this
area of
research in 2007. We are currently seeking a buyer (or buyers) for this
segment
of our 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.
Our bioresorbable Thin Film product line (before the sale of the non-Japan
Thin
Film business to MAST in May 2004) was distributed domestically through a
dedicated sales force, independent sales representatives and internationally
through independent distributors. The following table summarizes the components
of our sales and marketing expenses for the years ended December 31, 2006,
2005
and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||
|
International
sales and marketing
|
$
|
1,271,000
|
$
|
494,000
|
$
|
—
|
$
|
777,000
|
$
|
494,000
|
157.3
|
%
|
—
|
|||||||||
|
Stock-based
compensation
|
517,000
|
—
|
—
|
517,000
|
—
|
—
|
—
|
|||||||||||||||
|
Total
regenerative cell technology
|
1,788,000
|
494,000
|
—
|
1,294,000
|
494,000
|
261.9
|
%
|
—
|
||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||
|
General
corporate marketing
|
154,000
|
388,000
|
769,000
|
(234,000
|
)
|
(381,000
|
)
|
(60.3
|
)%
|
(49.5
|
)%
|
|||||||||||
|
Domestic
sales and marketing
|
—
|
—
|
846,000
|
—
|
(846,000
|
)
|
—
|
—
|
||||||||||||||
|
International
sales and marketing
|
104,000
|
552,000
|
776,000
|
(448,000
|
)
|
(224,000
|
)
|
(81.2
|
)%
|
(28.9
|
)%
|
|||||||||||
|
Stock-based
compensation
|
9,000
|
113,000
|
22,000
|
(104,000
|
)
|
91,000
|
(92.0
|
)%
|
413.6
|
%
|
||||||||||||
|
Total
MacroPore Biosurgery
|
267,000
|
1,053,000
|
2,413,000
|
(786,000
|
)
|
(1,360,000
|
)
|
(74.6
|
)%
|
(56.4
|
)%
|
|||||||||||
|
Total
sales and marketing
|
$
|
2,055,000
|
$
|
1,547,000
|
$
|
2,413,000
|
$
|
508,000
|
$
|
(866,000
|
)
|
32.8
|
%
|
(35.9
|
)%
|
|||||||
Regenerative
Cell Technology:
| · |
International
sales and marketing expenditures for the years ended December 31,
2006 and
2005 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. There were no similar expenses in
2004.
|
| · |
Stock-based
compensation for the regenerative cell segment of sales and marketing
for
the year ended December 31, 2006 was $517,000. There was no similar
expense in 2005 or 2004. 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 decrease from the year ended December 31, 2006
as
compared to 2005 was due to a strategic decision to allocate resources
towards our regenerative cell technology marketing, which in turn
prompted
a reduction in headcount in biomaterials and general corporate
marketing.
The decrease in 2005 as compared to 2004 was due to one-time costs
incurred for an educational program we created in 2004 to inform
end-users
and distributors of the benefits and surgical applications for our
biomaterials products.
|
| · |
Domestic
sales and marketing expenditures related to expenses associated
with
managing our domestic bioresorbable Thin Film product distribution,
which
included independent sales representatives and our domestic Thin
Film
sales consultants and marketing staff. The elimination of such
expenses in
2005 was due to the transfer of our sales force and marketing staff
to
MAST upon the sale of the Thin Film product line to MAST in May
2004.
|
| · |
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 and 2005 as compared to 2004 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 years ended December 31, 2006, 2005 and 2004 was $9,000,
$113,000
and $22,000, respectively. See stock-based compensation discussion
below
for more details.
|
The
future.
We
expect sales and marketing expenditures related to the regenerative cell
technology to increase as we continue to expand our pursuit of strategic
alliances and co-development partners, as well as market our Celution™ System
expected to be commercialized in 2008.
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 years ended
December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
General
and administrative
|
$
|
10,967,000
|
$
|
10,096,000
|
$
|
6,480,000
|
$
|
871,000
|
$
|
3,616,000
|
8.6
|
%
|
55.8
|
%
|
||||||||
|
Stock-based
compensation
|
1,580,000
|
112,000
|
71,000
|
1,468,000
|
41,000
|
1,310.7
|
%
|
57.7
|
%
|
|||||||||||||
|
Total
general and administrative expenses
|
$
|
12,547,000
|
$
|
10,208,000
|
$
|
6,551,000
|
$
|
2,339,000
|
$
|
3,657,000
|
22.9
|
%
|
55.8
|
%
|
||||||||
| · |
General
and administrative expense, for the year ended December 31, 2006
as
compared to the same period in 2005 increased by $2,339,000. This
was a
result of increased stock-based compensation of $1,468,000 as well
as
increases in other salary and related benefit expense of $677,000.
Professional services for the year ended December 31, 2006 as compared
with 2005 increased by $935,000, which includes an increase of
$777,000 in
legal expenses partly incurred in connection with the University
of
Pittsburgh’s lawsuit challenging the inventorship of our licensor’s U.S.
patent relating to adult stem cells isolated from adipose tissue.
Also contributing $487,000 to the lincrease in legal expense was
the
issuance of 100,000 shares of stock to the Regents of the University
of
California ("UC") at a stock price of $4.87 per share. This was a
result of an amended technology license agreement that was finalized
in
the third quarter of 2006.
|
|
Salary
and related benefit expense increased by $981,000 during the year
ended
December 31, 2005, with respect to the same period in 2004. This
increase
was primarily caused by the addition of seven managerial employees.
Legal
expenses also increased for the year ended December 31, 2005 as
compared
to the same period in 2004 primarily in connection with the lawsuit
mentioned above. Other notable expenditures were additional professional
services costs and higher travel
expenditures.
|
| · |
In
the second and fourth quarters of 2006, we recorded an additional
$118,000
and $103,000 of depreciation expense to accelerate the estimated
remaining
lives for certain assets determined to be no longer in use. The
second
quarter 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 related to both our regenerative cell technology
and
MacroPore Biosurgery operating segments. We recorded the charge
as an
increase to general and administrative expenses. The fourth quarter
assets
related to leasehold improvements that had a shortened useful life
due to
the termination of one of our leases. The charge was allocated
to each
department based on square footage occupied at this terminated
location.
|
| · |
Stock-based
compensation related to general and administrative expense for
the years
ended December 31, 2006, 2005 and 2004 was $1,580,000, $112,000
and
$71,000, respectively. See stock-based compensation discussion
below for
more details.
|
The
future.
We
expect general and administrative expenses of approximately $9,000,000 to
$11,000,000 in 2007. 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 affected. The amended UC license agreement signed in the third quarter
of 2006 clarified that 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.
Stock-based
compensation expenses include charges related to options issued to employees,
directors and non-employees. Prior to January 1, 2006, the stock-based
compensation expenditures connected to options granted to employees and
directors (in their capacity as board members) is the difference between
the
exercise price of the stock based awards and the market value of our underlying
common stock on the date of the grant. Unearned employee stock-based
compensation is amortized over the remaining vesting periods of the options,
which generally vest over a four-year period from the date of grant. From
January 1, 2006 onwards, we adopted FASB No. 123 (revised 2004), “Share-based
payments.” Under this pronouncement, we measure stock-based compensation expense
based on the grant-date fair value of any awards granted to our employees.
Such
expense is recognized over the period of time that employees provide service
to
us and earn all rights to the awards.
Stock-based
compensation expense related to common stock issued to non-employees is the
fair
value of the stock on the date of issuance, even if such stock contains sales
restrictions. The following table summarizes the components of our stock-based
compensation for the years ended December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||
|
Research
and development related
|
$
|
1,015,000
|
$
|
67,000
|
$
|
—
|
$
|
948,000
|
$
|
67,000
|
1,414.9
|
%
|
—
|
|||||||||
|
Sales
and marketing related
|
517,000
|
—
|
—
|
517,000
|
—
|
—
|
—
|
|||||||||||||||
|
Total
regenerative cell technology
|
1,532,000
|
67,000
|
—
|
1,465,000
|
67,000
|
2,186.6
|
%
|
—
|
||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||
|
Cost
of product revenues
|
74,000
|
—
|
3,000
|
74,000
|
(3,000
|
)
|
—
|
—
|
||||||||||||||
|
Research
and development related
|
25,000
|
112,000
|
32,000
|
(87,000
|
)
|
80,000
|
(77.7
|
)%
|
250.0
|
%
|
||||||||||||
|
Sales
and marketing related
|
9,000
|
113,000
|
22,000
|
(104,000
|
)
|
91,000
|
(92.0
|
)%
|
413.6
|
%
|
||||||||||||
|
Total
MacroPore Biosurgery
|
108,000
|
225,000
|
57,000
|
(117,000
|
)
|
168,000
|
(52.0
|
)%
|
294.7
|
%
|
||||||||||||
|
General
and administrative related
|
1,580,000
|
112,000
|
71,000
|
1,468,000
|
41,000
|
1,310.7
|
%
|
57.7
|
%
|
|||||||||||||
|
Total
stock-based compensation
|
$
|
3,220,000
|
$
|
404,000
|
$
|
128,000
|
$
|
2,816,000
|
$
|
276,000
|
697.0
|
%
|
215.6
|
%
|
||||||||
Regenerative
cell technology:
| · |
In
the first quarter of 2006, we issued 2,500 shares of restricted
common
stock to a non-employee scientific advisor. Similarly, in the second
quarter of 2005, we issued 20,000 shares of restricted common stock
to a
non-employee scientific advisor. The stock is restricted in that
it cannot
be sold for a specified period of time. There are no vesting requirements.
Because the shares issued 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) constitutes the entire expense related to these
grants,
and no future period charges will be reported. The scientific advisors
also receive cash consideration as services are performed.
|
General
and Administrative:
| · |
Of
the $3,220,000 charge to stock-based compensation for the year
ended
December 31, 2006, $567,000 related to extensions and cancellations
of
awards previously granted to (a) our former Senior Vice President
of
Finance and Administration, who retired in May 2006, and (b) (i)
our
former Senior Vice President, Business Development, (ii) our former
Vice
President, Marketing and Development, and (iii) the position of
a less
senior employee, whose positions were eliminated during 2006. 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 the acceleration of unrecognized compensation cost associated
with
cancelled option awards that would have been recognized if the
four
individuals continued to vest in their options until the end of
their
employment term. There will be no further charges related to these
modifications.
|
| · |
In
August 2005, our Chief Operating Officer (“COO”), ceased employment with
us. We agreed to pay the former COO a lump sum cash severance payment
of
$155,164 and extended the exercise period for two years on 253,743
vested
stock options. The incremental value of the options due to the
modification was $337,000. We recorded an expense in the third
quarter of
2005 to reflect the lump sum cash severance payment and the value
of the
vested stock options, which constitutes the entire expense related
to
these options, and no future period charges will be required. This
$337,000 was allocated in the table above in equal portions among
three
departmental categories, consistent with previous allocations of
the
former COO’s compensation expense.
|
The
future.
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
original terms. As of December 31, 2006, the total compensation cost related
to
non-vested stock options not yet recognized for all our plans is approximately
$4,123,000. These costs are expected to be recognized over a weighted average
period of 1.86 years.
Change
in fair value of option liabilities
The
following is a table summarizing the change in fair value of option liabilities
for the years ended December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to
2005
|
2005
to
2004
|
2006
to
2005
|
2005
to 2004
|
||||||||||||||||
|
Change
in fair value of option liability
|
$
|
(3,731,000
|
)
|
$
|
3,545,000
|
$
|
—
|
$
|
(7,276,000
|
)
|
$
|
3,545,000
|
(205.2
|
)%
|
—
|
|||||||
|
Change
in fair value of put option liability
|
(700,000
|
)
|
100,000
|
—
|
(800,000
|
)
|
100,000
|
(800.0
|
)%
|
—
|
||||||||||||
|
Total
change in fair value of option liabilities
|
$
|
(4,431,000
|
)
|
$
|
3,645,000
|
$
|
—
|
$
|
(8,076,000
|
)
|
$
|
3,645,000
|
(221.6
|
)%
|
—
|
|||||||
| · |
We
granted Olympus an option to acquire 2,200,000 shares of our common
stock
which expired December 31, 2006. The exercise price of the option
shares
was $10 per share. We had accounted for this grant as a liability
because
had the option been exercised, we would have been 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 was 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.
|
| · |
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 interest
rate.
|
The
following assumptions
were employed in estimating the value of the Put:
|
December
31, 2006
|
December
31, 2005
|
November
4, 2005
|
||||||||
|
Expected
volatility of Cytori
|
66.00
|
%
|
63.20
|
%
|
63.20
|
%
|
||||
|
Expected
volatility of the Joint Venture
|
56.60
|
%
|
69.10
|
%
|
69.10
|
%
|
||||
|
Bankruptcy
recovery rate for Cytori
|
21.00
|
%
|
21.00
|
%
|
21.00
|
%
|
||||
|
Bankruptcy
threshold for Cytori
|
$
|
10,110,000
|
$
|
10,780,000
|
$
|
10,780,000
|
||||
|
Probability
of a change of control event for Cytori
|
1.94
|
%
|
3.04
|
%
|
3.04
|
%
|
||||
|
Expected
correlation between fair values of Cytori and the Joint Venture
in the
future
|
99.00
|
%
|
99.00
|
%
|
99.00
|
%
|
||||
|
Risk
free interest rate
|
4.71
|
%
|
4.39
|
%
|
4.66
|
%
|
||||
The
future.
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.
Restructuring
charges
The
following table summarizes the restructuring charges for the years ended
December 31, 2006, 2005 and 2004:
|
Years ended
|
$
Differences
|
% Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006 to 2005
|
2005 to 2004
|
2006 to 2005
|
2005 to 2004
|
||||||||||||||||
|
Restructuring
charge
|
$
|
—
|
$
|
—
|
$
|
107,000
|
$
|
—
|
$
|
(107,000
|
)
|
—
|
—
|
%
|
||||||||
A
restructuring charge of $107,000 was recorded in 2004 as a result of a
negotiated settlement related to our remaining lease obligation for the property
in Germany.
The
future.
It is
possible that we may incur a restructuring charge related to our remaining
lease
obligation at our Top Gun facility; however, at this time this facility is
still
in use. We will continue analysis of this contingency each quarter.
Equipment
impairment charges
The
following table summarizes the components of equipment impairment charges
for
the years ended December 31, 2006, 2005, and 2004:
|
Years ended
|
$
Differences
|
% Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006 to 2005
|
2005 to 2004
|
2006 to 2005
|
2005 to 2004
|
||||||||||||||||
|
Equipment
impairment charge
|
$
|
—
|
$
|
—
|
$
|
42,000
|
$
|
$(42,000
|
)
|
—
|
—
|
|||||||||||
During
the fourth quarter of 2004, as a result of our normal periodic fixed asset
review, we determined that certain biomaterials production assets were impaired.
We recorded an impairment charge that represented the excess of the net book
value over the estimated fair value of the assets; as the production assets
were
held for sale, fair value was based on the estimated net proceeds we expect
to
receive upon the sale of these assets, net of selling costs.
Other
income (expense)
The
following table summarizes the gain on sale of assets for the years ended
December 31, 2006, 2005 and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to
2005
|
2005
to
2004
|
2006
to
2005
|
2005
to 2004
|
||||||||||||||||
|
Gain
on the sale of assets
|
$
|
—
|
$
|
5,526,000
|
$
|
—
|
$
|
(5,526,000
|
)
|
$
|
5,526,000
|
—
|
—
|
|||||||||
|
Gain
on the sale of assets, related party
|
—
|
—
|
13,883,000
|
—
|
(13,883,000
|
)
|
—
|
—
|
||||||||||||||
|
Total
|
$
|
—
|
$
|
5,526,000
|
$
|
13,883,000
|
$
|
(5,526,000
|
)
|
$
|
(8,357,000
|
)
|
—
|
(60.2
|
)%
|
|||||||
| · |
The
$5,526,000 gain on sale of assets recorded in the third quarter
of 2005
was related to the sale of the majority of our Thin Film product
line in
May 2004 to MAST. As part of the disposal arrangement, we agreed
to
complete certain performance obligations which prevented us from
recognizing 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, 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
gain on sale of assets, related party related to the initial payment
as
well as milestone payments from Medtronic for the disposition of
our CMF
product line in 2002. Specifically, as part of the disposal arrangement,
we agreed to complete clinical research regarding Faster Resorbable
Polymer, an area that directly relates to the CMF product line
we
transferred to Medtronic. In January 2004, we received the $5,000,000
payment after fulfilling the research requirements set out in the
CMF sale
agreement. We were also obliged to transfer certain “know-how,” including
manufacturing processes, patents, and other intellectual property,
to
Medtronic. This obligation was fulfilled and in the third quarter
of 2004
we received $1,500,000 from Medtronic. These milestones represented
the
last of all remaining performance obligations and therefore, we
were able
to recognize the remaining deferred gain on the sale of assets,
related
party, of $7,383,000, in the statement of operations.
|
The
future.
No
additional gains will be recognized related to either sale.
Financing
items
The
following table summarizes interest income, interest expense, and other income
and expenses for the years ended December 31, 2006, 2005, and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Interest
income
|
$
|
708,000
|
$
|
299,000
|
$
|
252,000
|
$
|
409,000
|
$
|
47,000
|
136.8
|
%
|
18.7
|
%
|
||||||||
|
Interest
expense
|
(199,000
|
)
|
(137,000
|
)
|
(177,000
|
)
|
(62,000
|
)
|
40,000
|
45.3
|
%
|
(22.6
|
)%
|
|||||||||
|
Other
income (expense)
|
(27,000
|
)
|
(55,000
|
)
|
15,000
|
28,000
|
(70,000
|
)
|
(50.9
|
)%
|
(466.7
|
)%
|
||||||||||
|
Total
|
$
|
482,000
|
$
|
107,000
|
$
|
90,000
|
$
|
375,000
|
$
|
17,000
|
350.5
|
%
|
18.9
|
%
|
||||||||
| · |
Interest
income increased in 2006 as compared to 2005 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 of
2006. Interest income also increased from 2004 to 2005 due to a
larger
balance of funds available for investment as well as higher returns
on
investments.
|
| · |
Interest
expense increased in 2006 as compared to 2005 due to higher principal
balances on our long-term equipment-financed borrowings. In late
2005, we
executed an additional promissory note, with approximately $1,380,000
in
principal. Our newest promissory note, with approximately $600,000
in
principal, was executed in December 2006.
|
| · |
The
changes in other income (expense) in 2006, 2005 and 2004 resulted
primarily from changes in foreign currency exchange rates.
|
The
future.
Interest income earned in 2007 will be dependent on our levels of funds
available for investment as well as general economic conditions. We expect
interest expense to increase slightly in 2007 due to the addition of the
newest
promissory note.
Equity
loss from investment in Joint Venture
The
following table summarizes equity loss from investment in joint venture for
the
years ended December 31, 2006, 2005, and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Equity
loss from investment in joint venture
|
$
|
74,000
|
$
|
4,172,000
|
$
|
—
|
$
|
(4,098,000
|
)
|
$
|
4,172,000
|
(98.2
|
)%
|
—
|
||||||||
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 2005 loss related
to
the payment of a portion of the original capital which Olympus invested in
the
Joint Venture back to Olympus, in exchange for a development services
agreement.
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 modest general and administrative expenses,
offset
by royalty income expected to begin in 2008 when Cytori commercializes its
Celution™ System in Europe. Though we have no obligation to do so, we and
Olympus plan to jointly fund the Joint Venture to cover any costs should
the
Joint Venture deplete its cash balance.
Liquidity
and Capital Resources
Short-term
and long-term liquidity
The
following is a summary of our key liquidity measures at December 31, 2006,
2005,
and 2004:
|
Years
ended
|
$
Differences
|
%
Differences
|
||||||||||||||||||||
|
2006
|
2005
|
2004
|
2006
to 2005
|
2005
to 2004
|
2006
to 2005
|
2005
to 2004
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
8,902,000
|
$
|
8,007,000
|
$
|
2,840,000
|
$
|
895,000
|
$
|
5,167,000
|
11.2
|
181.9
|
%
|
|||||||||
|
Short-term
investments, available for sale
|
3,976,000
|
7,838,000
|
10,579,000
|
(3,862,000
|
)
|
(2,741,000
|
)
|
(49.3
|
)%
|
(25.9
|
)%
|
|||||||||||
|
Total
cash and cash equivalents and short-term investments, available
for
sale
|
$
|
12,878,000
|
$
|
15,845,000
|
$
|
13,419,000
|
$
|
(2,967,000
|
)
|
$
|
2,426,000
|
(18.7
|
)%
|
18.1
|
%
|
|||||||
|
|
||||||||||||||||||||||
|
Current
assets
|
$
|
13,978,000
|
$
|
17,540,000
|
$
|
15,645,000
|
$
|
(3,562,000
|
)
|
$
|
1,895,000
|
(20.3
|
)%
|
12.1
|
%
|
|||||||
|
Current
liabilities
|
6,586,000
|
7,081,000
|
3,187,000
|
(495,000
|
)
|
3,894,000
|
(7.0
|
)%
|
122.2
|
%
|
||||||||||||
|
Working
capital
|
$
|
7,392,000
|
$
|
10,459,000
|
$
|
12,458,000
|
$
|
(3,067,000
|
)
|
$
|
(1,999,000
|
)
|
(29.3
|
)%
|
(16.0
|
)%
|
||||||
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 have an ongoing need to raise additional capital (notwithstanding
the
proceeds received from the Olympus collaboration agreements, which were entered
into in November 2005). In the third quarter of 2006, we received net proceeds
of $16,200,000 from the sale of common stock pursuant to a shelf registration
statement, of which Olympus purchased $11,000,000; the remaining shares were
purchased by other institutional investors. Additionally,
in the first quarter of 2007, we received net proceeds of $19,700,000 from
the
sale of units consisting of 3,746,000 shares of common stock and 1,873,000
common stock warrants (with an exercise price of $6.25 per share) under the
shelf registration statement. Also, near the end of the first quarter of
2007, we entered into an agreement to sell 1,000,000 shares of common stock
to
Green Hospital Supply, Inc. in a private placement. We expect this sale to
close early in the second quarter of 2007.
We
also
implemented certain cost containment measures and are actively seeking a
buyer
(or buyers) 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 December 31, 2007.
From
inception to December 31, 2006, we have financed our operations primarily
by:
| · |
Issuing
our stock in pre-IPO transactions, in our 2000 initial public offering
in
Germany, and upon stock option
exercises,
|
| · |
Generating
revenues,
|
| · |
Selling
the bioresorbable implant CMF product line in September
2002,
|
| · |
Selling
the bioresorbable implant 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,
|
| · |
Issuing
1,100,000 shares of common stock to Olympus under a Stock Purchase
Agreement which closed 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
in
February 2006, and
|
| · |
Issuing
$16,800,000 of registered common stock under our shelf registration
statement in August 2006.
|
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 May 2005 Olympus equity investment.
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.
In
August
2006, we sold 2,918,000 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 proceeds of approximately $16,200,000, net of related
offering costs and fees.
In
February 2007, we sold units consisting of 3,746,000 shares of common stock
and
1,873,000 common stock warrants (with an exercise price of $6.25 per share)
to
institutional and accredited investors. We received proceeds of approximately
$19,700,000, net of related offering costs and fees.
We
expect
to receive net proceeds of $6,000,000 from the common stock private
placement to Green Hospital Supply, Inc. in April 2007.
We
don’t
expect significant capital expenditures in 2007; 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
cash
requirements for 2007 and beyond will depend on numerous factors, including
the
resources we devote to developing and supporting our investigational cell
therapy products, market acceptance of any 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. 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.
The
following summarizes our contractual obligations and other commitments at
December 31, 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
|
$
|
2,158,000
|
$
|
999,000
|
$
|
1,159,000
|
$
|
—
|
$
|
—
|
||||||
|
Interest
commitment on long-term obligations
|
277,000
|
172,000
|
105,000
|
—
|
—
|
|||||||||||
|
Operating
lease obligations
|
5,108,000
|
1,677,000
|
3,431,000
|
—
|
—
|
|||||||||||
|
Pre-clinical
research study obligations
|
902,000
|
902,000
|
—
|
—
|
—
|
|||||||||||
|
Clinical
research study obligations
|
6,631,000
|
4,796,000
|
1,835,000
|
—
|
—
|
|||||||||||
|
Total
|
$
|
15,076,000
|
$
|
8,546,000
|
$
|
6,530,000
|
$
|
—
|
$
|
—
|
||||||
Cash
(used in) provided by operating, investing and financing activities for the
years ended December 31, 2006, 2005 and 2004, is summarized as
follows:
|
Years
Ended
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
cash used in operating activities
|
$
|
(16,483,000
|
)
|
$
|
(1,101,000
|
)
|
$
|
(12,574,000
|
)
|
|
|
Net
cash provided by investing activities
|
591,000
|
911,000
|
13,425,000
|
|||||||
|
Net
cash provided by (used in) financing activities
|
16,787,000
|
5,357,000
|
(831,000
|
)
|
||||||
Operating activities
Net
cash
used in operating activities for all periods presented resulted primarily
from
expenditures related to our regenerative cell research and development
efforts.
Research
and development efforts, other operational activities, and a comparatively
small
amount of product sales generated a $25,447,000 net loss for the year ended
December 31, 2006. The cash impact of this loss was $16,483,000, after adjusting
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, the $1,500,000 received
from
Olympus mentioned above, $2,120,000 of non-cash depreciation and amortization
and $4,431,000 non-cash change in the fair value of option liabilities, along
with other changes in working capital due to timing of product shipments
(accounts receivable) and payment of liabilities.
Research
and development efforts, other operational activities, and a comparatively
small
amount of product sales generated a $26,538,000 net loss for the year ended
December 31, 2005. The cash impact of this loss was $1,101,000, after adjusting
for the $17,311,000 we received from Olympus as discussed previously. Other
adjustments include material non-cash activities, such as the gain on sale
of
assets, depreciation and amortization, changes in the fair value of the Olympus
option liabilities, stock based compensation expense, equity loss from
investment in Joint Venture, as well as for changes in working capital due
to
the timing of product shipments (accounts receivable) and payment of
liabilities.
Research
and development efforts, other operational activities, and a comparatively
small
amount of product sales generated a $2,090,000 net loss for the year ended
December 31, 2004. The cash impact of this loss was $12,574,000, after adjusting
for the $13,883,000 gain on sale of assets, related party and changes in
working
capital due to the timing of product shipments and payment of liabilities.
The
net cash used in operations was partially offset by the $1,500,000 upfront
license fee and $1,250,000 development milestone payment received from Senko
in
2004.
Investing
activities
Net
cash
provided by investing activities for the year ended December 31, 2006 resulted
primarily from net proceeds from the purchase and sale of short-term
investments, offset in part by expenditures for leasehold improvements.
Net
cash
provided by investing activities for the year ended December 31, 2005 resulted
primarily from net proceeds from the sale of short-term
investments.
Net
cash
provided by investing activities for the year ended December 31, 2004 resulted
in part from the receipt of a non-recurring payment of $6,500,000 related
to the
2002 sale of the CMF Product Line to Medtronic. In addition, we received
net
proceeds of $6,931,000 from the sale of our Thin Film product line (except
for
the territory of Japan) to MAST.
Capital
spending is essential to our product innovation initiatives and to maintain
our
operational capabilities. For the years ended December 31, 2006, 2005 and
2004,
we used cash to purchase $3,138,000, $1,846,000 and $789,000, 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 year ended December 31, 2006
related mainly to the issuance of 2,918,255 shares of our common stock in
cash
transactions in exchange for approximately $16,200,000 (net). It was also
related to the exercise of employee stock options and offset to some extent
by
the principal payments on long-term obligations.
The
net
cash provided by financing activities for the year ended December 31, 2005
related mainly to the proceeds received from Olympus as noted above. Sale
proceeds were recorded as $3,003,000 for the sale of common stock and $1,686,000
for the issuance of options.
The
net
cash used in financing activities for the year ended December 31, 2004 related
to the repurchase of 290,252 shares of our common stock for $1,052,000 as
well
as the payment of $847,000 on our long term obligations.
Net
cash
used in financing activities in 2004 was offset by proceeds from an Amended
Master Security Agreement we entered in September 2003 to provide financing
for
equipment purchases. In connection with this agreement, we issued promissory
notes with principal amounts totaling approximately $1,039,000 for the year
ended December 31, 2004.
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:
| · |
Fees
for achieving certain defined milestones under research and/or
development
arrangements.
|
| · |
Product
sales, and
|
| · |
Payments
under license or distribution agreements.
|
A
number
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 product 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 contains 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 manufacturing 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.
|
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
|
| o |
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
$361,000 of this amount is classified as deferred revenues. Approximately
$361,000 ($152,000 in 2006, $51,000 in 2005 and $158,000 in 2004)
has been
recognized to date 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 in
2007.
|
| o |
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
have and will continue 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
|
| o |
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.
|
| o |
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, which has since then expired. When we actually delivered
products
under the back-up supply arrangements in 2004, 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 constituted
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 December 31, 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 reasonably 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. Our
two reporting units are, in fact, our two operating segments.
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 2006, 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. 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 2006, 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. The combined value of our goodwill is consistent with the
market’s valuation.
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.
|
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.
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 in 2004. 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 Olympus-Cytori 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, we 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 loss or
shareholders’ equity at December 31, 2006 or for the year 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.
Net
Operating Loss and Tax Credit Carryforwards
We
have
established a valuation allowance against our net deferred tax asset due
to the
uncertainty surrounding the realization of such assets. We periodically evaluate
the recoverability of the deferred tax asset. At such time as it is determined
that it is more likely than not that deferred assets are realizable, the
valuation allowance will be reduced. We have recorded a valuation allowance
of
$38,505,000 as of December 31, 2006 to reflect the estimated amount of deferred
tax assets that may not be realized. We increased our valuation allowance
by
approximately $10,675,000 during the year ended December 31, 2006. The valuation
allowance includes approximately $579,000 related to stock option deductions,
the benefit of which, if realized, will eventually be credited to equity
and not
to income.
At
December 31, 2006, we had federal and state tax loss carryforwards of
approximately $57,515,000 and $50,529,000 respectively. The federal and state
net operating loss carryforwards begin to expire in 2019 and 2007 respectively,
if unused. At December 31, 2006, we had federal and state tax credit
carryforwards of approximately $1,755,000 and $1,445,000 respectively. The
federal credits will begin to expire in 2017, if unused, and $160,000 of
the
state credits will begin to expire in 2009 if unused. The remaining state
credits carry forward indefinitely. In addition, we had a foreign tax loss
carryforward of $1,741,000 and $179,000 in Japan and the United Kingdom,
respectively.
The
Internal Revenue Code limits the future availability of net operating loss
and
tax credit carryforwards that arose prior to certain cumulative changes in
a
corporation’s ownership resulting in a change of control of Cytori. Due to prior
ownership changes as defined in IRC Section 382, a portion of our net operating
loss and tax credit carryforwards are limited in their annual utilization.
In
September 1999, we experienced an ownership change for purposes of the IRC
Section 382 limitation. At December 31, 2006, the remaining 1999 pre-change
federal net operating loss carryforward of $400,000 is subject to an annual
limitation of approximately $400,000. It is estimated that these pre-change
net
operating losses and credits will be fully available by 2007.
Additionally,
in 2002 when we purchased StemSource, we acquired federal and state net
operating loss carryforwards of approximately $2,700,000 and $2,700,000
respectively. This event triggered an ownership change for purposes of IRC
Section 382. As of December 31, 2006, the remaining pre-change federal and
state
net operating loss carryforward of $499,000 is subject to an annual limitation
of approximately $460,000. It is estimated that the pre-change net operating
losses and credits will be fully available by 2008.
We
are in
the process of updating our IRC Section 382 study analysis for the tax year
ended December 31, 2006. The extent of any additional limitation, if any,
on the
availability to use net operating losses and credits, is not known at this
time.
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. The adoption of SFAS 155 has
not had
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. The adoption of FIN 48 is not expected to 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.
The
adoption of EITF 06-3 is not expected to 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.
The adoption of SAB 108 has not had 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.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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 $3,976,000 as of December 31,
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 December 31, 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 year ended December 31, 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 in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
||||||||||||||||
|
Item
1. Financial Statements
|
||||||||||||||||
Report
of Independent Registered Public Accounting
Firm
The
Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We
have
audited the accompanying consolidated balance sheets of Cytori Therapeutics,
Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and
the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2006. In connection with our audits
of the
consolidated financial statements, we have also audited the financial statement
schedule for each of the years in the three-year period ended December 31,
2006.
These consolidated financial statements and financial statement schedule
are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Cytori Therapeutics,
Inc.
and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
for
each of the years in the three-year period ended December 31, 2006, when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly, in all material respects, the information set forth
therein.
As
discussed in note 2 to the consolidated financial statements, the Company
derives a substantial portion of its revenues from related parties,
and effective January 1, 2006, adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment.”
|
/s/
KPMG LLP
|
|
|
San
Diego, California
|
|
|
March
29, 2007
|
CYTORI
THERAPEUTICS, INC.
|
As of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
8,902,000
|
$
|
8,007,000
|
|||
|
Short-term
investments, available-for-sale
|
3,976,000
|
7,838,000
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $2,000 and
$9,000 in
2006 and 2005, respectively
|
225,000
|
816,000
|
|||||
|
Inventories,
net
|
164,000
|
258,000
|
|||||
|
Other
current assets
|
711,000
|
621,000
|
|||||
|
Total
current assets
|
13,978,000
|
17,540,000
|
|||||
|
Property
and equipment held for sale, net
|
457,000
|
—
|
|||||
|
Property
and equipment, net
|
4,242,000
|
4,260,000
|
|||||
|
Investment
in joint venture
|
76,000
|
—
|
|||||
|
Other
assets
|
428,000
|
458,000
|
|||||
|
Intangibles,
net
|
1,300,000
|
1,521,000
|
|||||
|
Goodwill
|
4,387,000
|
4,387,000
|
|||||
|
Total
assets
|
$
|
24,868,000
|
$
|
28,166,000
|
|||
|
Liabilities
and Stockholders’ Deficit
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
5,587,000
|
$
|
6,129,000
|
|||
|
Current
portion of long-term obligations
|
999,000
|
952,000
|
|||||
|
Total
current liabilities
|
6,586,000
|
7,081,000
|
|||||
|
Deferred
revenues, related party
|
23,906,000
|
17,311,000
|
|||||
|
Deferred
revenues
|
2,389,000
|
2,541,000
|
|||||
|
Option
liabilities
|
900,000
|
5,331,000
|
|||||
|
Long-term
deferred rent
|
741,000
|
573,000
|
|||||
|
Long-term
obligations, less current portion
|
1,159,000
|
1,558,000
|
|||||
|
Total
liabilities
|
35,681,000
|
34,395,000
|
|||||
|
Commitments
and contingencies
|
|||||||
|
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; 21,612,243
and
18,194,283 shares issued and 18,739,409 and 15,321,449 shares outstanding
in 2006 and 2005, respectively
|
22,000
|
18,000
|
|||||
|
Additional
paid-in capital
|
103,053,000
|
82,196,000
|
|||||
|
Accumulated
deficit
|
(103,460,000
|
)
|
(78,013,000
|
)
|
|||
|
Treasury
stock, at cost
|
(10,414,000
|
)
|
(10,414,000
|
)
|
|||
|
Accumulated
other comprehensive income (loss)
|
1,000
|
(16,000
|
)
|
||||
|
Amount
due from exercises of stock options
|
(15,000
|
)
|
—
|
||||
|
Total
stockholders’ deficit
|
(10,813,000
|
)
|
(6,229,000
|
)
|
|||
|
Total
liabilities and stockholders’ deficit
|
$
|
24,868,000
|
$
|
28,166,000
|
|||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
CYTORI
THERAPEUTICS, INC.
|
For the Years Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Product
revenues:
|
||||||||||
|
Sales
to related party
|
$
|
1,451,000
|
$
|
5,634,000
|
$
|
4,085,000
|
||||
|
Sales
to third parties
|
—
|
—
|
2,237,000
|
|||||||
|
1,451,000
|
5,634,000
|
6,322,000
|
||||||||
|
Cost
of product revenues
|
1,634,000
|
3,154,000
|
3,384,000
|
|||||||
|
Gross
profit (loss)
|
(183,000
|
)
|
2,480,000
|
2,938,000
|
||||||
|
Development
revenues:
|
||||||||||
|
Development,
related party
|
5,905,000
|
—
|
—
|
|||||||
|
Development
|
152,000
|
51,000
|
158,000
|
|||||||
|
Research
grants and other
|
419,000
|
320,000
|
338,000
|
|||||||
|
6,476,000
|
371,000
|
496,000
|
||||||||
|
Operating
expenses:
|
||||||||||
|
Research
and development
|
21,977,000
|
15,450,000
|
10,384,000
|
|||||||
|
Sales
and marketing
|
2,055,000
|
1,547,000
|
2,413,000
|
|||||||
|
General
and administrative
|
12,547,000
|
10,208,000
|
6,551,000
|
|||||||
|
Change
in fair value of option liabilities
|
(4,431,000
|
)
|
3,645,000
|
—
|
||||||
|
Restructuring
charge
|
—
|
—
|
107,000
|
|||||||
|
Equipment
impairment charge
|
—
|
—
|
42,000
|
|||||||
|
Total
operating expenses
|
32,148,000
|
30,850,000
|
19,497,000
|
|||||||
|
Operating
loss
|
(25,855,000
|
)
|
(27,999,000
|
)
|
(16,063,000
|
)
|
||||
|
Other
income (expense):
|
||||||||||
|
Gain
on sale of assets
|
—
|
5,526,000
|
—
|
|||||||
|
Gain
on sale of assets, related party
|
—
|
—
|
13,883,000
|
|||||||
|
Interest
income
|
708,000
|
299,000
|
252,000
|
|||||||
|
Interest
expense
|
(199,000
|
)
|
(137,000
|
)
|
(177,000
|
)
|
||||
|
Other
income (expense), net
|
(27,000
|
)
|
(55,000
|
)
|
15,000
|
|||||
|
Equity
loss from investment in joint venture
|
(74,000
|
)
|
(4,172,000
|
)
|
—
|
|||||
|
Total
other income, net
|
408,000
|
1,461,000
|
13,973,000
|
|||||||
|
Net
loss
|
(25,447,000
|
)
|
(26,538,000
|
)
|
(2,090,000
|
)
|
||||
|
Other
comprehensive income (loss) - unrealized holding income
(loss)
|
17,000
|
16,000
|
(58,000
|
)
|
||||||
|
Comprehensive
loss
|
$
|
(25,430,000
|
)
|
$
|
(26,522,000
|
)
|
$
|
(2,148,000
|
)
|
|
|
Basic
and diluted net loss per common share
|
$
|
(1.53
|
)
|
$
|
(1.80
|
)
|
$
|
(0.15
|
)
|
|
|
Basic
and diluted weighted average common shares
|
16,603,550
|
14,704,281
|
13,932,390
|
|||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
CYTORI
THERAPEUTICS, INC.
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
Accumulated
|
Amount
due
|
|||||||||||||||||||||||||||||||||
|
Additional
|
Treasury
|
Other
|
From
|
|||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Unearned
|
Accumulated
|
Treasury
Stock
|
Stock
|
Comprehensive
|
Exercises
of
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Deficit
|
Shares
|
Amount
|
Receivable
|
Income
(Loss)
|
Stock
Options
|
Total
|
||||||||||||||||||||||||
|
Balance
at December 31, 2003
|
16,777,644
|
$
17,000
|
$
74,698,000
|
$
(109,000)
|
$
(49,385,000)
|
2,582,582
|
$(9,362,000)
|
$
(976,000)
|
$
26,000
|
—
|
$14,909,000
|
|||||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
42,374
|
—
|
29,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
29,000
|
|||||||||||||||||||||||
|
Compensatory
stock options
|
—
|
—
|
10,000
|
109,000
|
—
|
—
|
—
|
—
|
—
|
119,000
|
||||||||||||||||||||||||
|
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
27,650
|
(76,000)
|
—
|
—
|
—
|
(76,000)
|
|||||||||||||||||||||||
|
Treasury
stock receivable
|
—
|
—
|
—
|
—
|
—
|
262,602
|
(976,000
|
)
|
976,000
|
—
|
—
|
—
|
||||||||||||||||||||||
|
Unrealized
loss on investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(58,000
|
)
|
—
|
(58,000
|
)
|
|||||||||||||||||||||
|
Net
loss for the year ended December 31, 2004
|
—
|
—
|
—
|
—
|
(2,090,000
|
)
|
—
|
—
|
—
|
—
|
—
|
(2,090,000
|
)
|
|||||||||||||||||||||
|
Balance
at December 31, 2004
|
16,820,018
|
17,000
|
74,737,000
|
—
|
(51,475,000
|
)
|
2,872,834
|
(10,414,000
|
)
|
—
|
(32,000
|
)
|
—
|
12,833,000
|
||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
232,042
|
—
|
174,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
174,000
|
|||||||||||||||||||||||
|
Issuance
of common stock under stock warrant agreement
|
22,223
|
—
|
50,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
50,000
|
|||||||||||||||||||||||
|
Compensatory
stock options
|
—
|
—
|
341,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
341,000
|
|||||||||||||||||||||||
|
Compensatory
common stock awards
|
20,000
|
—
|
63,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
63,000
|
|||||||||||||||||||||||
|
Issuance
of common stock to Olympus
|
1,100,000
|
1,000
|
3,002,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,003,000
|
|||||||||||||||||||||||
|
Accretion
of interests in joint venture
|
—
|
—
|
3,829,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,829,000
|
|||||||||||||||||||||||
|
Unrealized
gain on investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
16,000
|
—
|
16,000
|
|||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2005
|
—
|
—
|
—
|
—
|
(26,538,000
|
)
|
—
|
—
|
—
|
—
|
—
|
(26,538,000
|
)
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
18,194,283
|
18,000
|
82,196,000
|
—
|
(78,013,000
|
)
|
2,872,834
|
(10,414,000
|
)
|
—
|
(16,000
|
)
|
—
|
(6,229,000
|
)
|
|||||||||||||||||||
|
Stock-based
compensation expense
|
—
|
—
|
3,202,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3,202,000
|
|||||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
397,205
|
1,000
|
934,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
935,000
|
|||||||||||||||||||||||
|
Compensatory
common stock awards
|
2,500
|
—
|
18,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
18,000
|
|||||||||||||||||||||||
|
Issuance
of common stock
|
2,918,255
|
3,000
|
16,216,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
16,219,000
|
|||||||||||||||||||||||
|
Stock
issued for license amendment
|
100,000
|
—
|
487,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
487,000
|
|||||||||||||||||||||||
|
Amount
due from exercises of stock options
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(15,000
|
)
|
(15,000
|
)
|
|||||||||||||||||||||
|
Unrealized
gain on investments
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
17,000
|
—
|
17,000
|
|||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2006
|
—
|
—
|
—
|
—
|
(25,447,000
|
)
|
—
|
—
|
—
|
—
|
—
|
(25,447,000
|
)
|
|||||||||||||||||||||
|
Balance
at December 31, 2006
|
21,612,243
|
$
|
22,000
|
$
|
103,053,000
|
$
|
—
|
$
|
(103,460,000
|
)
|
2,872,834
|
$
|
(10,414,000
|
)
|
$
|
—
|
$
|
1,000
|
$
|
(15,000
|
)
|
$
|
(10,813,000
|
)
|
||||||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENT
CYTORI
THERAPEUTICS, INC.
|
For the Years Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(25,447,000
|
)
|
$
|
(26,538,000
|
)
|
$
|
(2,090,000
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
2,120,000
|
1,724,000
|
1,752,000
|
|||||||
|
Inventory
provision
|
88,000
|
280,000
|
242,000
|
|||||||
|
Warranty
provision (reversal)
|
(23,000
|
)
|
53,000
|
86,000
|
||||||
|
(Reduction)
increase in allowance for doubtful accounts
|
(7,000
|
)
|
1,000
|
(44,000
|
)
|
|||||
|
Change
in fair value of option liabilities
|
(4,431,000
|
)
|
3,645,000
|
—
|
||||||
|
Loss
on disposal of assets
|
—
|
—
|
3,000
|
|||||||
|
Equipment
impairment charge
|
—
|
—
|
42,000
|
|||||||
|
Restructuring
charge
|
—
|
—
|
—
|
|||||||
|
Amortization
of gain on sale of assets
|
—
|
—
|
(772,000
|
)
|
||||||
|
Amortization
of gain on sale of assets, related party
|
—
|
—
|
(156,000
|
)
|
||||||
|
Gain
on sale of assets
|
—
|
(5,526,000
|
)
|
—
|
||||||
|
Gain
on sale of assets, related party
|
—
|
—
|
(13,883,000
|
)
|
||||||
|
Stock-based
compensation
|
3,220,000
|
404,000
|
119,000
|
|||||||
|
Stock
issued for license amendment
|
487,000
|
—
|
—
|
|||||||
|
Equity
loss from investment in joint venture
|
74,000
|
4,172,000
|
—
|
|||||||
|
Increases
(decreases) in cash caused by changes in operating assets and
liabilities:
|
||||||||||
|
Accounts
receivable
|
598,000
|
46,000
|
472,000
|
|||||||
|
Inventories
|
6,000
|
(159,000
|
)
|
33,000
|
||||||
|
Other
current assets
|
(90,000
|
)
|
363,000
|
(458,000
|
)
|
|||||
|
Other
assets
|
30,000
|
(346,000
|
)
|
8,000
|
||||||
|
Accounts
payable and accrued expenses
|
281,000
|
|
3,027,000
|
(527,000
|
)
|
|||||
|
Deferred
revenues, related party
|
6,595,000
|
17,311,000
|
—
|
|||||||
|
Deferred
revenues
|
(152,000
|
)
|
(51,000
|
)
|
2,592,000
|
|||||
|
Long-term
deferred rent
|
168,000
|
493,000
|
7,000
|
|||||||
|
Net
cash used in operating activities
|
(16,483,000
|
)
|
(1,101,000
|
)
|
(12,574,000
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Proceeds
from the sale and maturity of short-term investments
|
67,137,000
|
56,819,000
|
51,132,000
|
|||||||
|
Purchases
of short-term investments
|
(63,258,000
|
)
|
(54,062,000
|
)
|
(50,321,000
|
)
|
||||
|
Proceeds
from the sale of assets, net
|
—
|
—
|
6,931,000
|
|||||||
|
Proceeds
from sale of assets, related party
|
—
|
—
|
6,500,000
|
|||||||
|
Purchases
of property and equipment
|
(3,138,000
|
)
|
(1,846,000
|
)
|
(789,000
|
)
|
||||
|
Investment
in joint venture
|
(150,000
|
)
|
—
|
—
|
||||||
|
Acquisition
costs
|
—
|
—
|
(28,000
|
)
|
||||||
|
Net
cash provided by investing activities
|
591,000
|
911,000
|
13,425,000
|
|||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Principal
payments on long-term obligations
|
(952,000
|
)
|
(936,000
|
)
|
(847,000
|
)
|
||||
|
Proceeds
from long-term obligations
|
600,000
|
1,380,000
|
1,039,000
|
|||||||
|
Proceeds
from exercise of employee stock options and warrants
|
920,000
|
224,000
|
29,000
|
|||||||
|
Proceeds
from sale of common stock
|
16,219,000
|
3,003,000
|
—
|
|||||||
|
Proceeds
from issuance of options, related party
|
—
|
1,686,000
|
—
|
|||||||
|
Purchase
of treasury stock
|
—
|
—
|
(1,052,000
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
16,787,000
|
5,357,000
|
(831,000
|
)
|
||||||
|
Net
increase in cash and cash equivalents
|
895,000
|
5,167,000
|
20,000
|
|||||||
|
Cash
and cash equivalents at beginning of year
|
8,007,000
|
2,840,000
|
2,820,000
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
8,902,000
|
$
|
8,007,000
|
$
|
2,840,000
|
||||
|
For the Years Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Supplemental
disclosure of cash flows information:
|
||||||||||
|
Cash
paid during period for:
|
||||||||||
|
Interest
|
$
|
201,000
|
$
|
135,000
|
$
|
176,000
|
||||
|
Taxes
|
1,000
|
13,000
|
7,000
|
|||||||
|
Supplemental
schedule of non-cash investing and financing
activities:
|
||||||||||
|
Transfer
of intangible assets to joint venture (note 4)
|
$
|
—
|
$
|
343,000
|
$
|
—
|
||||
|
Accretion
of interest in joint venture (note 4)
|
—
|
3,829,000
|
—
|
|||||||
|
Additions
to leasehold improvements included in accounts payable and accrued
expenses
|
—
|
800,000
|
—
|
|||||||
|
Amount
due from exercise of stock options
|
15,000
|
—
|
—
|
|||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
CYTORI
THERAPEUTICS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
1. Organization
and Operations
The
Company
Cytori
Therapeutics, Inc. is developing and seeks to commercialize stem and
regenerative cell therapies for cardiovascular disease, reconstructive surgery
and many other serious, chronic, and life threatening conditions and disorders.
We plan to commercialize these therapies through the sale of the Celution™
System, a device that quickly removes stem and regenerative cells from a
patient’s own adipose tissue, and its related single-use consumables.
We
also
own manufacturing rights to two product families that are no longer central
to
our business focus. The HYDROSORB™ family of bioresorbable spine and orthopedic
implants is distributed worldwide exclusively by Medtronic, Inc. (“Medtronic”).
Moreover, our Thin Film product line will be marketed exclusively in Japan
by
Senko Medical Trading Co. (“Senko”) following regulatory approval of the product
in Japan, which is expected in 2007.
We
have
subsidiaries located in Japan and the United Kingdom.
Principles
of Consolidation
The
consolidated financial statements include our accounts and those of our
subsidiaries. All significant intercompany transactions and balances have
been
eliminated. Management evaluates its investments on an individual basis for
purposes of determining whether or not consolidation is appropriate. In
instances where we do not demonstrate control through decision-making ability
and/or a greater than 50% ownership interest, we account for the related
investments under the cost or equity method, depending upon management’s
evaluation of our ability to exercise and retain significant influence over
the
investee. Our investment in the Olympus-Cytori, Inc. joint venture has been
accounted for under the equity method of accounting (see note 4 for further
details).
Certain
Risks and Uncertainties
We
have a
limited operating history and our prospects are subject to the risks and
uncertainties frequently encountered by companies in the early stages of
development and commercialization, especially those companies in rapidly
evolving and technologically advanced industries such as the biotech/medical
device field. Our future viability largely depends on the ability to complete
development of new products and receive regulatory approvals for those products.
No assurance can be given that our new products will be successfully developed,
regulatory approvals will be granted, or acceptance of these products will
be
achieved. The development of medical devices for specific therapeutic
applications is subject to a number of risks, including research, regulatory
and
marketing risks. There can be no assurance that our development stage products
will overcome these hurdles and become commercially viable and/or gain
commercial acceptance.
For
the
years ended December 31, 2006, 2005 and 2004, we recorded bioresorbable product
revenue from Medtronic of $1,451,000, $5,634,000 and $4,085,000, respectively,
which represented 18.3%, 93.8% and 59.9% of total product and development
revenues, respectively. Our future revenue generated from our bioresorbable
products will continue to depend to a significant extent on Medtronic’s (our
sole distributor of spine and orthopedics implants) efforts in the bioresorbable
spine and orthopedics arena. Since we have concern about Medtronic’s level of
commitment, we are actively seeking a buyer (or buyers) for our bioresorbable
product line (see note 3 for further details).
Capital
Availability
We
have a
limited operating history and recorded the first sale of our products in
1999.
We incurred losses of $25,447,000, $26,538,000 and $2,090,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, and have an accumulated
deficit of $103,460,000 as of December 31, 2006. Additionally, we have used
net
cash of $16,483,000, $1,101,000 and $12,574,000 to fund our operating activities
for the years ended December 31, 2006, 2005 and 2004, respectively.
Management
recognizes the need to generate positive cash flows in future periods and/or
to
obtain additional capital from various sources. In the continued absence
of
positive cash flows from operations, no assurance can be given that we can
generate sufficient revenue to cover operating costs or that additional
financing will be available to us and, if available, on terms acceptable
to us
in the future. See note 21 for discussion of financing arrangements made
subsequent to December 31, 2006.
2. Summary
of Significant Accounting Policies
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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 for impairment, accounting for product line
dispositions, and assessing how to report our investment in Olympus-Cytori,
Inc.
Presentation
Certain
prior period amounts have been reclassified to conform to current period
presentation, such as the classification of legal expenses.
Concentration
of Credit Risk
Financial
instruments which potentially subject us to concentrations of credit risk
consist of short-term available-for-sale investments and accounts receivable.
Substantially all of our accounts receivable is due from Medtronic (see note
19).
Cash
and Cash Equivalents
We
consider all highly liquid investments with maturities of three months or
less
at the time of purchase to be cash equivalents. Investments with original
maturities of three months or less that were included with and classified
as
cash and cash equivalents totaled $7,500,000 and $6,415,000 as of December
31,
2006 and 2005, respectively.
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 Statement of
Financial Standards (“SFAS”) No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” Based on our intent, our investment policies and
our ability to liquidate 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
December 31, 2006, the excess of carrying cost over the fair value of our
short-term investments is immaterial.
Fair
Value of Financial Instruments
The
carrying amounts of our cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair value due to the short-term
nature of these balances. The carrying amounts of our current portion of
long-term obligations and long-term obligations approximate fair value as
the
terms and rates of interest for these instruments approximate terms and market
rates of interest currently available to us for similar instruments. The
carrying amount for our option liability approximates fair value based on
established option pricing theory and assumptions (note 4). Our short-term
investments are already reported at fair value in the financial
statements.
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.
During
the years ended December 31, 2006 and 2005, we recorded provisions of $88,000
and $280,000, respectively, for excess and slow-moving inventory. The inventory
was produced in anticipation of stocking orders from Medtronic which did
not
materialize. The provisions have been charged to cost of sales.
During
the first quarter of 2004, we recorded a provision of approximately $242,000
for
excess inventory. Such excess inventory was produced in consideration of
our
responsibility to be a back-up supplier for the craniomaxillofacial (“CMF”)
product line. We sold the assets related to this product line to an affiliate
of
Medtronic on September 30, 2002. In April of 2004, Medtronic indicated that
it
would no longer purchase CMF inventory from us under the back-up supply
arrangement, leading to the determination that the remaining CMF inventory
on
hand would not be recoverable.
Property
and Equipment
Property
and equipment is stated at cost, net of accumulated depreciation. Depreciation
expense, which includes the amortization of assets recorded under capital
leases, is provided for on a straight-line basis over the estimated useful
lives
of the assets, or the life of the lease, whichever is shorter, and range
from
three to seven years. When assets are sold or otherwise disposed of, the
cost
and related accumulated depreciation are removed from the accounts and the
resulting gain or loss is included in operations. Leasehold improvements
are
amortized on a straight-line basis over the shorter of the estimated useful
life
of the asset or the lease term. Maintenance and repairs are charged to
operations as incurred.
In
the
second and fourth quarters of 2006, we recorded an additional $118,000 and
$103,000 of depreciation expense to accelerate the estimated remaining lives
for
certain assets determined to be no longer in use. The second quarter charge
related to furniture and fixtures no longer in use due to our headquarters
relocation, as well as outdated computer software and related equipment.
The
assets related to both our regenerative cell technology and MacroPore Biosurgery
operating segments. We recorded the charge as an increase to general and
administrative expenses. The fourth quarter charge related to leasehold
improvements that had a shortened useful life due to the termination of one
of
our leases. The charge was allocated to each department based on square footage
occupied at this terminated location.
Impairment
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 year ended December 31, 2004, we recorded an equipment impairment charge
of
$42,000 related to production assets which were used in multiple product
lines.
Assets
held for sale
In
the
third quarter of 2006, we classified certain assets as held for sale, including
certain tangible assets related to our MacroPore Biosurgery product line
(note
3). We stopped depreciating these assets in September 2006.
Goodwill
and Intangibles
SFAS
No.
142, “Goodwill and Other Intangible Assets,” establishes financial accounting
and reporting standards for acquired goodwill and other intangible assets.
Under
SFAS No. 142, goodwill and indefinite-lived intangible assets are not amortized
but are reviewed at least annually for impairment. Separable intangible assets
that have finite useful lives will continue to be amortized over their
respective useful lives.
SFAS
No.
142 requires that goodwill be tested for impairment on at least an annual
basis
or whenever events or changes in circumstances indicate that the carrying
value
of goodwill may not be recoverable. We last completed this testing as of
November 30, 2006 and concluded that no impairment existed.
Intangibles,
consisting of patents and core technology purchased in the acquisition of
StemSource, Inc. in 2002, are being amortized on a straight-line basis over
their expected lives of ten years.
In
2005,
we licensed a portion of our patents and core technology to a joint venture
which we formed with Olympus Corporation (“Olympus”), named Olympus-Cytori, Inc.
(the “Joint Venture”). Of the $1,735,000 previously allocated to patents and
core technology, $343,000 (net of accumulated amortization of $136,000),
was
transferred to the Joint Venture (see note 4).
The
changes in the carrying amounts of other indefinite and finite-life intangible
assets and goodwill for the years ended December 31, 2006 and 2005 are as
follows:
|
December 31, 2006
|
||||||||||
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Total
|
||||||||
|
Other
intangibles, net:
|
||||||||||
|
Beginning
balance
|
$
|
1,521,000
|
$
|
—
|
$
|
1,521,000
|
||||
|
Amortization
|
(221,000
|
)
|
—
|
(221,000
|
)
|
|||||
|
Ending
balance
|
1,300,000
|
—
|
1,300,000
|
|||||||
|
Goodwill,
net:
|
||||||||||
|
Beginning
balance
|
3,922,000
|
465,000
|
4,387,000
|
|||||||
|
Disposal
of assets
|
—
|
—
|
—
|
|||||||
|
Ending
balance
|
3,922,000
|
465,000
|
4,387,000
|
|||||||
|
Total
goodwill and other intangibles, net
|
$
|
5,222,000
|
$
|
465,000
|
$
|
5,687,000
|
||||
|
Cumulative
amount of amortization charged against intangible assets
|
$
|
916,000
|
$
|
—
|
$
|
916,000
|
||||
|
December 31, 2005
|
||||||||||
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Total
|
||||||||
|
Other
intangibles, net:
|
||||||||||
|
Beginning
balance
|
$
|
2,122,000
|
$
|
—
|
$
|
2,122,000
|
||||
|
Amortization
|
(258,000
|
)
|
—
|
(258,000
|
)
|
|||||
|
Subtotal
|
1,864,000
|
—
|
1,864,000
|
|||||||
|
Patents
and core technology transferred to Joint Venture (note 4)
|
(479,000
|
)
|
—
|
(479,000
|
)
|
|||||
|
Accumulated
amortization related to above
|
136,000
|
—
|
136,000
|
|||||||
|
Patents
and core technology transferred to Joint Venture, net
|
(343,000
|
)
|
—
|
(343,000
|
)
|
|||||
|
Ending
balance
|
1,521,000
|
—
|
1,521,000
|
|||||||
|
Goodwill,
net:
|
||||||||||
|
Beginning
balance
|
3,922,000
|
465,000
|
4,387,000
|
|||||||
|
Disposal
of assets
|
—
|
—
|
—
|
|||||||
|
Ending
balance
|
3,922,000
|
465,000
|
4,387,000
|
|||||||
|
Total
goodwill and other intangibles, net
|
$
|
5,443,000
|
$
|
465,000
|
$
|
5,908,000
|
||||
|
Cumulative
amount of amortization charged against intangible assets
|
$
|
695,000
|
$
|
—
|
$
|
695,000
|
||||
As
of
December 31, 2006, future estimated amortization expense for these other
intangible assets is expected to be as follows:
|
2007
|
221,000
|
|||
|
2008
|
221,000
|
|||
|
2009
|
221,000
|
|||
|
2010
|
221,000
|
|||
|
Thereafter
|
416,000
|
|||
|
$
|
1,300,000
|
Revenue
Recognition
Product
Sales
We
sell
our (non-Thin Film) MacroPore Biosurgery products to Medtronic, Inc., 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. In these
circumstances, 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 below).
In
September 2002, we entered into various agreements with Medtronic and a
subsidiary of Medtronic for the sale of our CMF product line. Moreover, 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 Biosurgery
AG, a
Swiss corporation (“MAST”) and a subsidiary of MAST. In both cases, the net
proceeds received initially were recorded as deferred gain on sale of assets
(see notes 5 and 6).
As
part
of the sale agreements, we agreed to act as a back-up supplier to Medtronic
and
MAST until those respective parties could integrate the acquired assets into
their own manufacturing operations. Specifically, the back-up supply agreements
required us to sell products ordered by Medtronic and MAST at our manufacturing
cost. Accordingly, we recognized a portion of the deferred gains as revenues
upon the sale of products to Medtronic and MAST under the back-up supply
arrangements. The amount of the deferred gain recognized as revenues was
equal
to the excess of (a) the fair value of products sold, based on historical
selling prices of similar products, over (b) our manufacturing cost. In the
case
of Medtronic, we recognized $156,000 of the deferred gain as revenues in
2004.
In the case of MAST, we recognized $772,000 of the deferred gain as revenues
in
2004.
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, a related party (see note 4), 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.
In
the
first quarter of 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 as revenue in the statement
of operations 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.
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 and received a $1,500,000
upfront
license fee from them in return for this right. 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.
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 4). 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 4 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 4). 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 December 31, 2006, we have
recognized $5,905,000 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 $152,000,
$51,000, and $158,000 in the years ended December 31, 2006, 2005 and 2004,
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. 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 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 7 for further details.
Under
our
agreement with the NIH, we were reimbursed for “qualifying expenditures” related
to research on adipose-derived cell therapy for myocardial infarction.
To
receive funds under the grant arrangement, we were 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 could
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 were reimbursed for costs incurred under grant arrangements with
the NIH, we
recognized 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
2006,
we recognized NIH grant revenue of $310,000 and incurred costs of $479,000
($169,000 of which were not qualified). In 2005, we recognized NIH
grant revenue
of $312,000 and incurred costs of $306,000 for the same period. In
2004 we
recognized NIH grant revenue of $328,000 and incurred costs of $339,000
($11,000
of which were not qualified).
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 included
in
accounts payable and accrued expenses, at December 31, 2006 and
2005:
|
As of
January 1,
|
Additions/
(Deductions) to
expenses
|
Claims
|
As of
December 31,
|
||||||||||
|
2006:
|
|||||||||||||
|
Warranty
reserve
|
$
|
155,000
|
$
|
(23,000
|
)
|
$
|
—
|
$
|
132,000
|
||||
|
2005:
|
|||||||||||||
|
Warranty
reserve
|
$
|
102,000
|
$
|
53,000
|
$
|
—
|
$
|
155,000
|
|||||
In
August
2003, as part of our ongoing product monitoring process, we determined that
some
of the products sold to Medtronic did not meet certain expectations, based
on
criteria we previously communicated to Medtronic. We agreed to a “no charge”
replacement of the affected inventory in the possession of Medtronic. In
the
first half of 2004, we incurred claims of $251,000 related to the replacement
of
this product. There were no similar claims made in 2005 or
2006.
Research
and Development
Research
and development expenditures, which are charged to operations in the period
incurred, include costs associated with the design, development, testing
and
enhancement of our products, regulatory fees, the purchase of laboratory
supplies, pre-clinical and clinical studies. Included in these expenditures
are
salaries and benefits related to these efforts, which were approximately
$9,166,000 in 2006.
Also
included in research and development are costs incurred to support research
grant reimbursement and costs incurred in connection with our development
arrangements with Olympus and Senko.
Expenditures
related to the Joint Venture with Olympus include costs that are necessary
to
support the commercialization of future generation devices based on our
Celution™ System. These development activities, which began in November 2005,
include performing pre-clinical and clinical trials, seeking regulatory
approval, and performing product development related to therapeutic applications
for adipose stem and regenerative cells for multiple large markets. For the
years ended December 31, 2006 and 2005, costs associated with the development
of
the device were $7,286,000 and $1,136,000. There were no comparable expenditures
in 2004.
Our
agreement with the NIH entitled us to qualifying expenditures of up to $950,000
for Phase I and Phase II related to research on Adipose-Derived Cell Therapy
for
Myocardial Infarction. We incurred $479,000 ($169,000 of which were not
reimbursed), $306,000 and $339,000 ($11,000 of which were not reimbursed)
of
direct expenses for the years ended December 31, 2006, 2005 and 2004,
respectively.
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. During the years ended December 31, 2006, 2005
and
2004, we incurred $178,000, $129,000 and $170,000, respectively, of expenses
related to this regulatory and registration process.
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, a full valuation allowance was
recognized against deferred tax assets.
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 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.
In
addition, 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 Financial accounting Standards Board Statement No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 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). SFAS 123 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 loss and loss per share that would
have
resulted had we adopted SFAS 123 for measurement purposes.
Fair
value under SFAS 123 is determined using the Black-Scholes option-pricing
model
with the following assumptions:
|
For
the year ended December 31, 2005
|
For
the year ended December 31, 2004
|
||||||
|
Expected
term
|
8
years
|
6
years
|
|||||
|
Risk
free interest rate
|
3.9-4.4
|
%
|
3.3-4.4
|
%
|
|||
|
Volatility
|
80
|
%
|
85
|
%
|
|||
|
Dividends
|
—
|
—
|
|||||
|
Resulting
weighted average grant date fair value
|
$
|
3.25
|
$
|
3.26
|
|||
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 year ended December 31, 2005
|
For
the year ended December 31, 2004
|
||||||
|
Net
loss:
|
|||||||
|
As
reported
|
$
|
(26,538,000
|
)
|
$
|
(2,090,000
|
)
|
|
|
Add:
Employee stock-based compensation expense included in reported
net loss,
net of related tax effects
|
341,000
|
96,000
|
|||||
|
Deduct:
Total employee stock-based compensation expense determined under
the fair
value method for all awards, net of related tax effects
|
(2,675,000
|
)
|
(2,586,000
|
)
|
|||
|
Pro
forma
|
$
|
(28,872,000
|
)
|
$
|
(4,580,000
|
)
|
|
|
Basic
and diluted loss per common share:
|
|||||||
|
As
reported
|
$
|
(1.80
|
)
|
$
|
(0.15
|
)
|
|
|
Pro
forma
|
$
|
(1.96
|
)
|
$
|
(0.33
|
)
|
|
Other
Comprehensive Income (Loss)
Comprehensive
income (loss) is the total of net income (loss) and all other non-owner changes
in equity. Other comprehensive income (loss) refers to these revenues, expenses,
gains, and losses that, under generally accepted accounting principles, are
included in comprehensive income (loss) but excluded from net income
(loss).
During
the years ended December 31, 2006, 2005 and 2004, our only element of other
comprehensive income (loss) resulted from unrealized gains (losses) on
available-for-sale investments, which are reflected in the statements of
changes
in stockholders’ equity as accumulated other comprehensive income
(loss).
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 developing and seeks to commercialize
stem and regenerative cell therapies for cardiovascular disease, reconstructive
surgery and many other serious, chronic, and life threatening conditions
and
disorders. We plan to commercialize these therapies through the sale of the
Celution™ System, a device that quickly removes stem and regenerative cells from
a patient’s own adipose (fat) tissue, and its related single-use consumables.
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 profits
and
losses 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, restructuring charges 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 amounts. 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:
|
Year ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Revenues:
|
||||||||||
|
Regenerative
cell technology
|
$
|
6,324,000
|
$
|
320,000
|
$
|
338,000
|
||||
|
MacroPore
Biosurgery
|
1,603,000
|
5,685,000
|
6,480,000
|
|||||||
|
Total
revenues
|
$
|
7,927,000
|
$
|
6,005,000
|
$
|
6,818,000
|
||||
|
Segment
losses:
|
||||||||||
|
Regenerative
cell technology
|
$
|
(16,211,000
|
)
|
$
|
(13,170,000
|
)
|
$
|
(6,911,000
|
)
|
|
|
MacroPore
Biosurgery
|
(1,528,000
|
)
|
(976,000
|
)
|
(2,452,000
|
|||||
|
General
and administrative expenses
|
(12,547,000
|
)
|
(10,208,000
|
)
|
(6,551,000
|
)
|
||||
|
Changes
in fair value of option liabilities
|
4,431,000
|
(3,645,000
|
)
|
—
|
||||||
|
Restructuring
charge
|
—
|
—
|
(107,000
|
)
|
||||||
|
Equipment
impairment charge
|
—
|
—
|
(42,000
|
)
|
||||||
|
Total
operating loss
|
$
|
(25,855,000
|
)
|
$
|
(27,999,000
|
)
|
$
|
(16,063,000
|
)
|
|
|
As of December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Assets:
|
|||||||
|
Regenerative
cell technology
|
$
|
9,792,000
|
$
|
9,152,000
|
|||
|
MacroPore
Biosurgery
|
1,758,000
|
2,206,000
|
|||||
|
Corporate
assets
|
13,318,000
|
16,808,000
|
|||||
|
Total
assets
|
$
|
24,868,000
|
$
|
28,166,000
|
|||
We
derived our revenues from the following products, research grants, development
and service activities:
|
Years ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Regenerative
cell technology:
|
||||||||||
|
Development
revenues:
|
||||||||||
|
Milestone
revenue (Olympus)
|
$
|
5,905,000
|
$
|
—
|
$
|
—
|
||||
|
Research
grant (NIH)
|
310,000
|
312,000
|
328,000
|
|||||||
|
Regenerative
cell storage services
|
7,000
|
8,000
|
10,000
|
|||||||
|
Other
|
102,000
|
—
|
—
|
|||||||
|
Total
regenerative cell technology
|
6,324,000
|
320,000
|
338,000
|
|||||||
|
MacroPore
Biosurgery:
|
||||||||||
|
Product
revenues:
|
||||||||||
|
Spine
& orthopedics products
|
1,451,000
|
5,634,000
|
3,803,000
|
|||||||
|
Thin
Film products:
|
||||||||||
|
Product
sales (non-MAST-related)
|
—
|
—
|
559,000
|
|||||||
|
Product
sales to MAST
|
—
|
—
|
906,000
|
|||||||
|
Amortization
of gain on sale (MAST)
|
—
|
—
|
772,000
|
|||||||
|
—
|
—
|
2,237,000
|
||||||||
|
Craniomaxillofacial
(CMF) products:
|
||||||||||
|
Product
sales
|
—
|
—
|
126,000
|
|||||||
|
Amortization
of gain on sale
|
—
|
—
|
156,000
|
|||||||
|
—
|
—
|
282,000
|
||||||||
|
Development
revenues
|
152,000
|
51,000
|
158,000
|
|||||||
|
Total
MacroPore Biosurgery
|
1,603,000
|
5,685,000
|
6,480,000
|
|||||||
|
Total
revenues
|
$
|
7,927,000
|
$
|
6,005,000
|
$
|
6,818,000
|
||||
The
following table provides geographical information regarding our sales to
external customers:
|
For the Years Ended
December 31,
|
U.S. Revenues
|
Non-U.S. Revenues
|
Total Revenues
|
|||||||
|
2006
|
$
|
7,827,000
|
$
|
100,000
|
$
|
7,927,000
|
||||
|
2005
|
$
|
6,005,000
|
$
|
—
|
$
|
6,005,000
|
||||
|
2004
|
$
|
6,602,000
|
$
|
216,000
|
$
|
6,818,000
|
||||
At
December 31, 2006 and 2005, our long-lived assets, excluding goodwill and
intangibles (all of which are domiciled in the U.S.), are located in the
following jurisdictions:
|
As of
December 31,
|
U.S. Domiciled
|
Non-U.S. Domiciled
|
Total
|
|||||||
|
2006
|
$
|
4,995,000
|
$
|
208,000
|
$
|
5,203,000
|
||||
|
2005
|
$
|
4,539,000
|
$
|
179,000
|
$
|
4,718,000
|
||||
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 net 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 years ended December
31, 2006, 2005 and 2004, as their inclusion would be antidilutive. Potentially
dilutive common shares excluded from the calculations of diluted loss per
share
were 5,934,029, 7,984,741, and 5,023,796 for the years ended December 31,
2006,
2005 and 2004, respectively.
Potential
common shares in 2005 include a now-expired option to purchase 2,200,000
shares
related to the Olympus equity agreement (see note 4).
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. The adoption of SFAS 155 did
not
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 expect the adoption of EITF 06-3 to 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.
The adoption of SAB 108 has not had 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.
3. Assets
Held for Sale
We
have
begun to focus our efforts exclusively on the regenerative cell therapy segment
of our business. As a result, in 2006, the Board of Directors 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 our regenerative
cell therapy 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 December 31, 2006, the remaining assets
were
comprised of machinery and equipment used for manufacturing, with a net book
value of $457,000.
4. 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 at $10 per share, which expired on December
31, 2006. Before its expiration, we 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 would have been 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
December 31, 2006 and December 31, 2005, we re-estimated the fair value
of the
option liability to be $0 and $3,731,000, respectively, based on the following
assumptions:
| · |
Contractual
term of 0 years and 1 year,
|
| · |
Risk-free
interest rate of 0% and 4.38%, and
|
| · |
Estimated
share-price volatility of 0% and 65.1%,
respectively.
|
The
decrease in the fair value by $3,731,000 for the year ended December 31,
2006
and the increase in the fair value by $3,545,000 for the year ended December
31,
2005 were recorded in the statements of operations as a component of change
in
fair value of option liabilities. The decrease in 2006 was attributable
to the
expiration of the option.
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 under
the
shelf registration statement filed in May 2006. The purchase price was
determined by our closing price on August 9, 2006.
As
of
December 31, 2006, Olympus holds approximately 16.08% of our issued and
outstanding shares. 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
December 31, 2006, the carrying value of our investment in the Joint Venture
is
$76,000.
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, 2006 and 2005, the fair value of the Put was $900,000 and
$1,600,000, respectively. Fluctuations in the Put value are 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
as a
long-term liability in the caption 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 interest
rate.
The
following assumptions were employed in estimating the value of the
Put:
|
December
31, 2006
|
December
31, 2005
|
November
4, 2005
|
||||||||
|
Expected
volatility of Cytori
|
66.00
|
%
|
63.20
|
%
|
63.20
|
%
|
||||
|
Expected
volatility of the Joint Venture
|
56.60
|
%
|
69.10
|
%
|
69.10
|
%
|
||||
|
Bankruptcy
recovery rate for Cytori
|
21.00
|
%
|
21.00
|
%
|
21.00
|
%
|
||||
|
Bankruptcy
threshold for Cytori
|
$
|
10,110,000
|
$
|
10,780,000
|
$
|
10,780,000
|
||||
|
Probability
of a change of control event for Cytori
|
1.94
|
%
|
3.04
|
%
|
3.04
|
%
|
||||
|
Expected
correlation between fair values of Cytori and the Joint Venture
in the
future
|
99.00
|
%
|
99.00
|
%
|
99.00
|
%
|
||||
|
Risk
free interest rate
|
4.71
|
%
|
4.39
|
%
|
4.66
|
%
|
||||
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 December
31, 2006.
Deferred
revenues, related party
As
of
December 31, 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 pre-clinical 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 2 for a full
description of our revenue recognition policy.
Other
Related Party Transactions
As
part
of the formation of the Joint Venture and as discussed above, the Joint Venture
agreed to purchase development services from Olympus. In December 2005, the
Joint Venture paid to Olympus $8,000,000 as a payment for those services.
The
payment has been recognized in its entirety as an expense on the books and
records of the Joint Venture as the expenditure represents a payment for
research and development services that have no alternative future uses. Our
share of this expense has been reflected within the account, Equity loss
from
investment in joint venture, within the consolidated statement of operations
for
the year ended December 31, 2005.
Condensed
financial information for the Joint Venture
A
summary
of the unaudited condensed financial information for the Joint Venture as
of
December 31, 2006 and 2005 and for the period from January 1, 2006 to December
31, 2006 and November 4, 2005 (inception) to December 31, 2005 is as
follows:
|
As
of December 31, 2006
|
As
of December 31, 2005
|
||||||
|
Balance
Sheet
|
|||||||
|
Assets:
|
|||||||
|
Cash
|
$
|
173,000
|
$
|
11,000,000
|
|||
|
Prepaid
insurance
|
15,000
|
—
|
|||||
|
Total
assets
|
$
|
188,000
|
$
|
11,000,000
|
|||
|
Liabilities
and Stockholders’ Equity:
|
|||||||
|
Accrued
expenses
|
$
|
62,000
|
$
|
—
|
|||
|
Stockholders’
equity
|
126,000
|
11,000,000
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
188,000
|
$
|
11,000,000
|
|||
|
Period
from January 1, 2006 to December 31, 2006
|
Period
from November 4, 2005 (inception) to December 31,
2005
|
||||||
|
Statement
of Operation
|
|||||||
|
Research
and development expense
|
$
|
11,000,000
|
$
|
19,343,000
|
|||
|
General
and administrative expense
|
174,000
|
—
|
|||||
|
Net
loss
|
$
|
(11,174,000
|
)
|
$
|
(19,343,000
|
)
|
|
5. Gain
on Sale of Assets, Related Party
In
January 2004, we received a $5,000,000 milestone payment from Medtronic relating
to the 2002 disposition of our CMF product line. As part of the disposition
arrangement, we had agreed to complete clinical research regarding Faster
Resorbable Polymers, an area that directly relates to the CMF product line
transferred to Medtronic. We became entitled to the $5,000,000 payment after
fulfilling the research requirements set out in the CMF sale agreement. The
$5,000,000 payment was recognized during the first half of 2004 as gain on
sale
of assets, related party in the accompanying statement of
operations.
During
the third quarter of 2004, we completed all remaining performance obligations
related to the 2002 sale of the CMF product line to Medtronic. Accordingly,
we
recorded $7,383,000 as a component of gain on sale of assets, related party,
representing the remaining balance that had theretofore been reported as
deferred gain on sale of assets, related party.
Pursuant
to the sale of the CMF product line, we were obliged to transfer certain
“know-how,” including manufacturing processes, patents, and other intellectual
property, to Medtronic. If such know-how was transferred within a certain
time
frame defined in the CMF Asset Purchase Agreement dated September 30, 2002
(the
“APA”), we would become entitled to a $2,000,000 milestone payment.
In
the
second quarter of 2004, we provided notice to Medtronic that the requisite
know-how associated with the transferred CMF product line had been transferred,
pursuant to the terms of, and within the timeframe specified by, the APA.
Medtronic did not agree that know-how transfer had been completed and asserted
that, in any case, that the maximum payment due to us was $1,000,000 rather
than
$2,000,000.
To
avoid
the risk and expense of arbitration, in the third quarter of 2004 we agreed
to
accept a negotiated settlement with Medtronic in the amount of $1,500,000
related to the know-how transfer. The $1,500,000 payment was recognized as
gain
on sale of assets, related party in 2004.
Accordingly,
the total gain on sale of assets, related party, recognized in 2004 was
$13,883,000.
6. 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
7). 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 7) 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.
7. 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 2 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 6), 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.
8. Short-term
Investments
As
of
December 31, 2006 and 2005, all short-term investments were classified as
available-for-sale, which consisted of the following:
|
December 31, 2006
|
||||||||||||||||||||||
|
Less than 12 months
temporary impairment
|
Greater than 12 months
temporary impairment
|
Total
|
||||||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||||||
|
Corporate
notes and bonds
|
$
|
599,000
|
$
|
—
|
$
|
599,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
599,000
|
||||||||
|
Agency
securities
|
3,377,000
|
—
|
3,377,000
|
—
|
—
|
—
|
3,377,000
|
|||||||||||||||
|
Total
|
$
|
3,976,000
|
$
|
—
|
$
|
3,976,000
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
3,976,000
|
||||||||
|
December 31, 2005
|
||||||||||||||||||||||
|
Less than 12 months
temporary impairment
|
Greater than 12 months
temporary impairment
|
Total
|
||||||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||||||
|
Corporate
notes and bonds
|
$
|
1,984,000
|
$
|
(2,000
|
)
|
$
|
1,882,000
|
$
|
—
|
$
|
100,000
|
$
|
(2,000
|
)
|
$
|
1,982,000
|
||||||
|
Agency
securities
|
5,870,000
|
(14,000
|
)
|
5,456,000
|
—
|
400,000
|
(14,000
|
)
|
5,856,000
|
|||||||||||||
|
Total
|
$
|
7,854,000
|
$
|
(16,000
|
)
|
$
|
7,338,000
|
$
|
—
|
$
|
500,000
|
$
|
(16,000
|
)
|
$
|
7,838,000
|
||||||
As
of
December 31, 2006 and 2005, investments available-for-sale had the following
maturities:
|
December 31, 2006
|
December 31, 2005
|
||||||||||||
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
||||||||||
|
Corporate
notes and bonds:
|
|||||||||||||
|
with
maturity of less than 1 year
|
$
|
599,000
|
$ |
599,000
|
$
|
1,984,000
|
$
|
1,982,000
|
|||||
|
with
maturity of 1 to 2 years
|
—
|
—
|
—
|
—
|
|||||||||
|
Agency
securities:
|
|||||||||||||
|
with
maturity of less than 1 year
|
3,377,000
|
3,377,000
|
5,870,000
|
5,856,000
|
|||||||||
|
with
maturity of 1 to 2 years
|
—
|
—
|
—
|
—
|
|||||||||
|
$
|
3,976,000
|
$
|
3,976,000
|
$
|
7,854,000
|
$
|
7,838,000
|
||||||
Proceeds
from sales and maturity of short term investments for the year ended December
31, 2006, 2005 and 2004 were $67,137,000, $56,819,000, and $51,132,000,
respectively. Gross realized losses for such sales in 2006 were approximately
$1,000. Gross realized losses for such sales in 2005 were approximately $12,000.
Gross realized gains on such sales in 2004 were approximately
$4,000.
Based
on
our ability and intent to hold the investments for a reasonable period of
time
sufficient for a forecasted recovery of fair value and the low severity of
impairment, we do not consider these investments to be other-than-temporarily
impaired as of December 31, 2006.
9. Composition
of Certain Financial Statement Captions
Inventories,
net
As
of
December 31, 2006 and 2005, inventories, net, were comprised of the
following:
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Raw
materials
|
$
|
136,000
|
$
|
232,000
|
|||
|
Finished
goods
|
28,000
|
26,000
|
|||||
|
$
|
164,000
|
$
|
258,000
|
||||
Other
Current Assets
As
of
December 31, 2006 and 2005, other current assets were comprised of the
following:
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Prepaid
expenses
|
$
|
648,000
|
$
|
506,000
|
|||
|
Accrued
interest receivable
|
19,000
|
77,000
|
|||||
|
Other
receivables
|
44,000
|
38,000
|
|||||
|
$
|
711,000
|
$
|
621,000
|
||||
Property
and Equipment, net
As
of
December 31, 2006 and 2005, property and equipment, net, were comprised of
the
following:
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Manufacturing
and development equipment
|
$
|
2,980,000
|
$
|
4,681,000
|
|||
|
Office
and computer equipment
|
2,653,000
|
2,682,000
|
|||||
|
Leasehold
improvements
|
3,085,000
|
3,359,000
|
|||||
|
8,718,000
|
10,722,000
|
||||||
|
Less
accumulated depreciation and amortization
|
(4,476,000
|
)
|
(6,462,000
|
)
|
|||
|
$
|
4,242,000
|
$
|
4,260,000
|
||||
Accounts
Payable and Accrued Expenses
As
of
December 31, 2006 and 2005, accounts payable and accrued expenses were comprised
of the following:
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
|
|||||||
|
Accrued
legal fees
|
$
|
1,630,000
|
$
|
975,000
|
|||
|
Accrued
studies
|
1,064,000
|
712,000
|
|||||
|
Accounts
payable
|
729,000
|
933,000
|
|||||
|
Accrued
vacation
|
628,000
|
680,000
|
|||||
|
Accrued
bonus
|
661,000
|
1,018,000
|
|||||
|
Accrued
expenses
|
371,000
|
467,000
|
|||||
|
Deferred
rent
|
239,000
|
138,000
|
|||||
|
Warranty
reserve (note 2)
|
132,000
|
155,000
|
|||||
|
Accrued
accounting fees
|
115,000
|
199,000
|
|||||
|
Accrued
payroll
|
18,000
|
52,000
|
|||||
|
Accrued
leasehold improvements
|
—
|
800,000
|
|||||
|
$
|
5,587,000
|
$
|
6,129,000
|
||||
10. 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
|
|||
|
2007
|
$
|
1,677,000
|
||
|
2008
|
1,342,000
|
|||
|
2009
|
1,382,000
|
|||
|
2010
|
707,000
|
|||
|
Total
|
$
|
5,108,000
|
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 monthly 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.
The
lease
contains a provision whereby we could be required to remove some or all
of the
leasehold improvements we have constructed at the end of the lease term.
We believe the costs that could be incurred pursuant to this provision
would be
immaterial, and therefore we have not recorded a liability for them as
of
December 31, 2006.
We
also
have a facility located at 6740 Top Gun Street, San Diego, California.
Until it
was amended and terminated on December 31, 2006, we leased approximately
27,000
square feet of space at this location of which approximately 6,000 square
feet
was laboratory space, 12,000 square feet was office space and 9,000 square
feet
was manufacturing space. We will continue to occupy a portion of the building
and pay rent to the new lessee until June 30, 2007. We also lease:
| · |
16,000
additional square feet for research and development activities
located at
6749 Top Gun Street, San Diego, California that has been amended
to
terminate on April 30, 2007.
|
| · |
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.
|
Rent
expense, which includes common area maintenance, for the years ended December
31, 2006, 2005 and 2004 was $2,397,000, $1,632,000 and $801,000, respectively.
We have entered into agreements with various clinical research organizations for pre-clinical and clinical development studies, which have provisions for cancellation. Under the terms of these agreements, the vendors provide a variety of services including conducting pre-clinical development research, enrolling patients, recruiting patients, monitoring studies and data analysis. Payments under these agreements typically include fees for services and reimbursement of expenses. The timing of payments due under these agreements was estimated based on current schedules of pre-clinical and clinical studies in progress. As of December 31, 2006, we have pre-clinical research study obligations of $902,000 (all of which are expected to be complete within a year) and clinical research study obligations of $6,631,000 ($4,796,000 of which are expected to be complete within a year).
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 11 for a discussion of our commitments and contingencies related to
our
interactions with the University of California.
Refer
to
note 4 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 7 for a discussion of our commitments and contingencies related to our
arrangements with MAST and Senko.
11. 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, 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 addition, there are certain due diligence
milestones that are required to be reached as a result of the agreement.
Failure
to fulfill these milestones may result in a reduction of or loss of the specific
rights to which the effected milestone relates.
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. The expense was charged to 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 agreement. 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 the University of Pittsburgh. 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 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. Accordingly, it could have a negative effect on us if the University
of Pittsburgh 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
years ended December 31, 2006, 2005 and 2004, we expensed $2,189,000, $1,303,000
and $190,000, respectively, for legal fees related to this license. These
expenses have been classified as general and administrative expense in the
accompanying consolidated financial statements. We believe that the amount
accrued as of December 31, 2006 is a reasonable estimate of our liability
for
the expenses incurred to date. We reimbursed UC for $240,000 in the second
quarter of 2006 for legal fees incurred related to this patent
prosecution.
12. Restructuring
Event
In
September 2003, we closed an administrative office in Königstein, Germany in an
effort to reduce costs and consolidate operations in the United
States.
The
Königstein, Germany office was rented under an operating lease. As of September
30, 2003, we ceased using the office space, but continued to remain liable
for
monthly rent payments of approximately $12,500 per month under a lease agreement
that would have expired in February 2006. We sought to sublease the entire
facility for the remaining term of the lease agreement. However, due to the
unique nature of the office building and the depressed rental market in and
around Frankfurt, Germany, we originally expected that a sublease of the
entire
facility in 2003 would yield approximately 65% of our monthly rental obligation
if successfully negotiated.
In
the
second quarter of 2004, we re-assessed the expected range of probable sublease
rates and determined that we could potentially sublease the entire facility
(if
one was successfully negotiated) for only 45% of our current monthly rental
obligation and recorded additional restructuring expense of $70,000. In the
third quarter of 2004, we negotiated a settlement of the remaining lease
payments with the lessor and as a result, recorded additional restructuring
expense of $37,000.
The
following outlines the restructuring activity recorded to the liability account
during the year ended December 31, 2004:
|
As
of January 1,
|
Charged to
Expense*
|
Costs Paid
|
Adjustments
to
Liability**
|
As of
December 31,
|
||||||||||||
|
2004:
|
||||||||||||||||
|
Lease
termination
|
$
|
153,000
|
$
|
107,000
|
$
|
(255,000
|
)
|
$
|
(5,000
|
)
|
$
|
—
|
||||
________________________________________
* All
amounts recorded as Restructuring charge in the accompanying statements of
operations.
** Revaluation
of monetary liability denominated in a foreign currency, which was charged
to
other income (expense) during the period.
13. Long-term
Obligations
In
2003,
we entered into an Amended Master Security Agreement to provide financing
for
new equipment purchases. In connection with the agreement, we issued three
promissory notes to our lender in an aggregate principal amount of approximately
$1,120,000. In 2004, we issued three additional promissory notes in an aggregate
principal amount of approximately $1,039,000 and in 2005, we issued one
additional promissory note for an amount of approximately $1,380,000. Our
newest
promissory note, with approximately $600,000 in principal, was executed in
December 2006. All notes are secured by equipment with an aggregate cost
of
approximately $4,139,000.
Additional
details relating to the above promissory notes are presented in the following
table:
|
Origination Date
|
Interest Rate
|
Current
Monthly
Payment*
|
Term
|
Remaining
Principal
|
|||||||||
|
October
2003
|
8.6
|
%
|
6,000
|
48
Months
|
$
|
54,000
|
|||||||
|
October
2003
|
8.8
|
%
|
12,000
|
48
Months
|
122,000
|
||||||||
|
March
2004
|
8.2
|
%
|
16,000
|
48
Months
|
166,000
|
||||||||
|
April
2004
|
9.0
|
%
|
3,000
|
48
Months
|
44,000
|
||||||||
|
September
2004
|
9.0
|
%
|
9,000
|
48
Months
|
130,000
|
||||||||
|
December
2005
|
10.75
|
%
|
42,000
|
35
Months
|
1,042,000
|
||||||||
|
December
2006
|
11.05
|
%
|
20,000
|
36
Months
|
600,000
|
||||||||
|
$
|
2,158,000
|
||||||||||||
________________________________________
* Includes
principal and interest
As
of
December 31, 2006, the future contractual principal payments on all of our
promissory notes are as follows:
|
Years Ending December 31,
|
||||
|
2007
|
$
|
999,000
|
||
|
2008
|
741,000
|
|||
|
2009
|
399,000
|
|||
|
2010
|
19,000
|
|||
|
Total
|
$
|
2,158,000
|
||
Our
interest expense for the years ended December 31, 2006, 2005 and 2004 (all
of
which related to these promissory notes) was $199,000, $137,000 and $177,000,
respectively.
14. Income
Taxes
Due
to
our net loss position for the years ended December 31, 2006, 2005 and 2004,
and
since we have recorded a full valuation allowance against deferred tax assets,
there was no provision or benefit for income taxes recorded. There were no
components of current or deferred federal or state income tax provisions
for the
years ended December 31, 2006, 2005, and 2004.
A
reconciliation of the total income tax provision tax rate to the statutory
federal income tax rate of 34% for the years ended December 31, 2006, 2005
and
2004 is as follows:
|
2006
|
2005
|
2004
|
||||||||
|
Income
tax expense (benefit) at federal statutory rate
|
(34.00
|
)%
|
(34.00
|
)%
|
(34.00
|
)%
|
||||
|
Stock
based compensation
|
0.99
|
%
|
0.05
|
%
|
1.54
|
%
|
||||
|
Credits
|
(2.72
|
)%
|
(0.59
|
)%
|
(3.58
|
)%
|
||||
|
Change
in federal valuation allowance
|
34.52
|
%
|
23.46
|
%
|
31.05
|
%
|
||||
|
Equity
loss on investment in Joint Venture
|
0.12
|
%
|
5.35
|
—
|
||||||
|
Gain
on intangible property
|
—
|
%
|
4.74
|
—
|
||||||
|
Other,
net
|
1.09
|
%
|
0.99
|
%
|
4.99
|
%
|
||||
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|||||
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred tax liabilities as of December 31, 2006
and
2005 are as follows:
|
2006
|
2005
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Allowances
and reserves
|
$
|
163,000
|
$
|
190,000
|
|||
|
Accrued
expenses
|
625,000
|
275,000
|
|||||
|
Deferred
revenue and gain on sale of assets
|
7,971,000
|
5,784,000
|
|||||
|
Stock
based compensation
|
1,933,000
|
1,604,000
|
|||||
|
Net
operating loss carryforwards
|
24,410,000
|
17,917,000
|
|||||
|
Income
tax credit carryforwards
|
3,201,000
|
2,195,000
|
|||||
|
Capitalized
assets and other
|
720,000
|
435,000
|
|||||
|
39,023,000
|
28,400,000
|
||||||
|
Valuation
allowance
|
(38,505,000
|
)
|
(27,830,000
|
)
|
|||
|
Total
deferred tax assets, net of allowance
|
518,000
|
570,000
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Property
and equipment, principally due to differences in
depreciation
|
—
|
174,000
|
|||||
|
Intangibles
|
(518,000
|
)
|
(738,000
|
)
|
|||
|
Other
|
—
|
(6,000
|
)
|
||||
|
Total
deferred tax liability
|
(518,000
|
)
|
(570,000
|
)
|
|||
|
Net
deferred tax assets (liability)
|
$
|
—
|
$
|
—
|
|||
We
have
established a valuation allowance against our net deferred tax asset due
to the
uncertainty surrounding the realization of such assets. Management periodically
evaluates the recoverability of the deferred tax asset. At such time as it
is
determined that it is more likely than not that deferred assets are realizable,
the valuation allowance will be reduced. We have recorded a valuation allowance
of $38,505,000 as of December 31, 2006 to reflect the estimated amount of
deferred tax assets that may not be realized. We increased our valuation
allowance by approximately $10,675,000 for the year ended December 31, 2006.
The
valuation allowance includes approximately $579,000 related to stock option
deductions, the benefit of which will be credited to equity if ever
utilized.
At
December 31, 2006, we had federal and state tax net operating loss carryforwards
of approximately $57,515,000 and $50,529,000, respectively. The federal and
state net operating loss carryforwards begin to expire in 2019 and 2007,
respectively, if unused. At December 31, 2006, we had federal and state tax
credit carryforwards of approximately $1,755,000 and $1,445,000, respectively.
The federal credits will begin to expire in 2017, if unused, and $160,000
of the
state credits will begin to expire in 2009 if unused. The remaining state
credits carry forward indefinitely. In addition, we had a foreign tax loss
carryforward of $1,741,000 and $179,000 in Japan and the United Kingdom,
respectively.
The
Internal Revenue Code limits the future availability of net operating loss
and
tax credit carryforwards that arose prior to certain cumulative changes in
a
corporation’s ownership resulting in a change of our control. Due to prior
ownership changes as defined in IRC Section 382, a portion of the net operating
loss and tax credit carryforwards are limited in their annual utilization.
In
September 1999, we experienced an ownership change for purposes of the IRC
Section 382 limitation. As of December 31, 2006, the remaining 1999 pre-change
federal net operating loss carryforward of $400,000 is subject to an annual
limitation of approximately $400,000. It is estimated that the pre-change
net
operating losses and credits will be fully available by 2007.
Additionally,
in 2002 when we purchased StemSource, we acquired federal and state net
operating loss carryforwards of approximately $2,700,000 and $2,700,000,
respectively. This event triggered an ownership change for purposes of IRC
Section 382. As of December 31, 2006, this remaining pre-change federal and
state net operating loss carryforward of $499,000 is subject to an annual
limitation of approximately $460,000. It is estimated that the pre-change
net
operating losses and credits will be fully available by 2008.
We
have
not updated our IRC Section 382 study analysis for the tax year ended December
31, 2006. The extent of any additional limitation, if any, on the availability
to use net operating losses and credits, is not known at this time.
As
a
result of the adoption of SFAS 123R, we recognize windfall tax benefits
associated with the exercise of stock options directly to stockholders’ equity
only when realized. Accordingly, deferred tax assets are not recognized for
net
operating loss carryforwards resulting from windfall tax benefits occurring
from
January 1, 2006 onward. At December 31, 2006, deferred tax assets do not
include
$845,000 of excess tax benefits from stock-based compensation.
15. Employee
Benefit Plan
We
implemented a 401(k) retirement savings and profit sharing plan (the “Plan”)
effective January 1, 1999. We may make discretionary annual contributions
to the
Plan, which is allocated to the profit sharing accounts based on the number
of
years of employee service and compensation. At the sole discretion of the
Board
of Directors, we may also match the participants’ contributions to the Plan. We
made no discretionary or matching contributions to the Plan in 2006, 2005
and
2004.
16. Stockholders’
Equity
Preferred
Stock
We
have
authorized 5,000,000 shares of $.001 par value preferred stock, with no shares
outstanding as of December 31, 2006 and 2005. Our Board of Directors is
authorized to designate the terms and conditions of any preferred stock we
issue
without further action by the common stockholders.
Treasury
Stock
On
August
11, 2003, the Board of Directors amended the April 3, 2001 authorization
to
purchase treasury stock and authorized the repurchase of up to 3,000,000
shares
of our common stock in the open market, from time to time until August 10,
2004
at a purchase price per share not to exceed €15.00, based on the exchange rate
in effect on August 11, 2003. During 2003, we repurchased 614,099 shares
of our
Common Stock at an average cost of $3.69 per share for a total of
$2,266,000.
In
2003,
we sold 150,500 shares of treasury stock for $542,000 at an average price
of
$3.60 per share. The basis of the treasury stock sold was the weighted average
purchase price or $3.67 per share with the difference of $10,000 accounted
for
as a reduction to additional paid-in capital.
On
December 6, 2003, we exchanged 1,447,755 shares of common stock (all listed
on
the Frankfurt Stock Exchange) held in our treasury for 1,447,755 of our unlisted
outstanding common stock issued to former StemSource shareholders. $104,000
was
accounted for as a charge against additional paid-in capital relating to
the
difference between the weighted average purchase price and fair market value
of
the listed shares held in treasury at the time of the exchange.
In
2004,
we repurchased 27,650 shares of our common stock for $76,000 on the open
market
at a price of $2.75 per share. Additionally in 2004, we repurchased 262,602
shares of our common stock for $976,000 from a former director and officer
of
StemSource at a price of $3.72 per share.
Our
repurchase program expired on August 10, 2004. We have no plans to initiate
a
new repurchase program at this time.
17. Stockholders
Rights Plan
On
May
28, 2003, the Board of Directors declared a dividend distribution of one
preferred share purchase right (a “Right”) for each outstanding share of our
Common Stock. The dividend is payable to the stockholders of record on June
10,
2003, and with respect to shares of Common Stock issued thereafter until
the
Distribution Date (as defined below) and, in certain circumstances, with
respect
to shares of Common Stock issued after the Distribution Date. Except as set
forth below, each Right, when it becomes exercisable, entitles the registered
holder to purchase from us one one-thousandth (1/1000th) of a share of our
Series RP Preferred Stock, $0.001 par value per share (the “Preferred Stock”),
at a price of $25.00 per one one-thousandth (1/1000th) of a share of Preferred
Stock, subject to adjustment. Each share of the Preferred Stock would entitle
the holder to Common Stock with a value of twice that paid for the Preferred
Stock. The description and terms of the Rights are set forth in a Rights
Agreement (the “Rights Agreement”) between us and Computershare Trust Company,
Inc., as Rights Agent, dated as of May 29, 2003, and as amended on May 12,
2005.
The
Rights attach to all certificates representing shares of our Common Stock
outstanding, and are evidenced by a legend on each share certificate,
incorporating the Rights Agreement by reference. The Rights trade with and
only
with the associated shares of the Company’s Common Stock and have no impact on
the way in which holders can trade the Company’s shares. Unless the Rights
Agreement were to be triggered, it would have no effect on the Company’s balance
sheet or income statement and should have no tax effect on the Company or
its
stockholders. The Rights Agreement is triggered upon the earlier to occur
of (i)
a person or group of affiliated or associated persons having acquired, without
the prior approval of the Board, beneficial ownership of 15% or more of the
outstanding shares of Common Stock or (ii) 10 days, or such later date as
the
Board may determine, following the commencement of or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in a person or group of affiliated or associated persons becoming
an Acquiring Person (as defined in the Rights Agreement) except in certain
circumstances (the “Distribution Date”). The Rights are not exercisable until
the Distribution Date and will expire at the close of business on May 29,
2013,
unless we redeem them earlier.
18.
Stock-based Compensation
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 2004 and 1997 Plans for the year
ended
December 31, 2006 is as follows:
|
Options
|
Weighted
Average Exercise Price
|
||||||
|
Balance
as of January 1, 2006
|
5,784,741
|
$
|
4.12
|
||||
|
Granted
|
904,850
|
$
|
7.16
|
||||
|
Exercised
|
(397,205
|
)
|
$
|
2.36
|
|||
|
Expired
|
(46,572
|
)
|
$
|
6.53
|
|||
|
Cancelled/forfeited
|
(311,785
|
)
|
$
|
5.31
|
|||
|
Balance
as of December 31, 2006
|
5,934,029
|
$
|
4.62
|
||||
|
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
||||||||||
|
Balance
as of December 31, 2006
|
5,934,029
|
$
|
4.62
|
5.6
|
$
|
13,079,826
|
|||||||
|
Vested
and unvested expected to vest at December 31, 2006
|
5,845,484
|
$
|
4.47
|
5.6
|
$
|
12,982,379
|
|||||||
|
Vested
and exercisable at December 31, 2006
|
4,381,603
|
$
|
4.27
|
4.5
|
$
|
10,991,014
|
|||||||
The
following table summarizes information about options outstanding under the
2004
and 1997 Plans as of December 31, 2006:
|
Range of Exercise Price
|
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
in Years
|
Options
Vested
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
Less
than $2.00
|
291,408
|
$
|
0.29
|
1.9
|
291,408
|
$
|
0.29
|
|||||||||
|
$
2.00 - 3.99
|
2,036,539
|
$
|
3.07
|
4.9
|
1,676,139
|
$
|
3.07
|
|||||||||
|
$
4.00 - 5.99
|
1,819,386
|
$
|
4.32
|
5.9
|
1,466,498
|
$
|
4.29
|
|||||||||
|
$
6.00 - 7.99
|
1,450,196
|
$
|
6.87
|
6.3
|
814,080
|
$
|
6.97
|
|||||||||
|
$
8.00 - 9.99
|
259,500
|
$
|
8.68
|
8.9
|
56,478
|
$
|
8.65
|
|||||||||
|
More
than $10.00
|
77,000
|
$
|
13.18
|
3.7
|
77,000
|
$
|
13.18
|
|||||||||
|
5,934,029
|
4,381,603
|
|||||||||||||||
The
total
intrinsic value of stock options exercised was $1,913,000, $1,049,000 and
$122,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
The
fair
value of each option awarded during the year ended December 31, 2006 was
estimated on the date of grant using the Black-Scholes-Merton option valuation
model based on the following weighted-average assumptions:
|
Expected
term
|
6
years
|
|||
|
Risk-free
interest rate
|
4.50
|
%
|
||
|
Volatility
|
78.61
|
%
|
||
|
Dividends
|
—
|
|||
|
Resulting
weighted average grant date fair value
|
$
|
5.26
|
||
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 is 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 compensation cost recognized in the accompanying
financial statements:
|
For
the years ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Total
compensation cost for share-based payment arrangements recognized
in the
statement of operations (net of tax of $0)
|
$
|
3,220,000
|
$
|
404,000
|
$
|
128,000
|
||||
|
Total
compensation cost capitalized as part of the cost of an asset
|
—
|
—
|
—
|
|||||||
As
of
December 31, 2006, the total compensation cost related to non-vested stock
options not yet recognized for all of our plans is approximately $4,123,000.
These costs are expected to be recognized over a weighted average period
of 1.86
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 were exercised in the third quarter of 2005, resulting in cash proceeds
to us of approximately $50,000.
Cash
received from stock option and warrant exercises for the years ended December
31, 2006, 2005 and 2004 was approximately $920,000, $224,000, and $29,000,
respectively. SFAS 123R
requires that cash flows resulting from tax deductions in excess of the
cumulative compensation cost recognized for options exercised (excess tax
benefits) be classified as cash inflows provided by financing activities
and
cash outflows used in operating activities. 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 2007, we are not able to benefit
from
the deduction for exercised stock options in the current reporting
period.
In
November 2005, the FASB issued Staff Position (FSP) No. FAS 123(R)-3,
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards” (FSP 123R-3). We have elected to adopt the alternative
transition method provided in the FSP 123R-3 for calculating the tax effects
of
stock-based compensation pursuant to SFAS 123R. The alternative transition
method includes simplified methods to establish the beginning balance of
the
APIC pool related to the tax effects of employee stock-based compensation,
and
to determine the subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123R.
To
settle
stock option awards that have been exercised, we will issue new shares of
our
common stock. At December 31, 2006, we have an aggregate of 76,260,591 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, resulting
in the cancellation of 75,003 non-vested stock options on May 31, 2006.
In
connection with a broader 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 these positions.
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 non-vested stock options held by this individual
on
July 31, 2006.
In
connection with the above modifications and in accordance with SFAS 123R,
we
recorded additional expense of $567,000 in the year ended December 31, 2006,
respectively, as components of research and development, general and
administrative and sales and marketing expense. This charge constitutes the
entire expense related to these options, and no future period charges will
be
required.
In
August
2005, our Chief Operating Officer (“COO”), ceased employment with us. We paid
the former COO a lump sum cash severance payment of $155,164 and extended
the
post-separation exercise period for two years on 253,743 vested stock options.
In addition to the cash severance payment, we recorded stock based compensation
expense of $337,000 in the third quarter of 2005, which represents the intrinsic
value of the options held by the COO at the date of the
modification.
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 development 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.
We
issued
10,000 stock options to a non-employee for consulting services for the year
ended December 31, 2004. The fair value per share of these stock options
was
$3.17. As a result, we recorded stock based compensation expense of $32,000
for
the year ended December 31, 2004. The expense recorded constitutes the entire
expense related to these options, and no future period charges will be required.
The fair value of the grant was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions for the year ended
December 31, 2004: expected dividend yield of 0.0%, risk-free interest rate
of
4.3%, expected volatility factor of 87% and life of 7 years.
19. Related
Party Transactions
Refer
to
note 4 for a discussion of related party transactions with Olympus.
As
of
December 31, 2006, Medtronic holds 1,000,000 shares of our common stock,
which
constitutes approximately 5.34% of our outstanding common stock at December
31,
2006. For the years ended December 31, 2006, 2005 and 2004, we had sales
to
Medtronic of $1,451,000, $5,634,000 and $4,085,000, respectively, which
represented 18.3%, 93.8% and 59.9% of total product and development revenues,
respectively. At December 31, 2006, 2005, and 2004, we had gross amounts
due
from Medtronic of $224,000, $721,000, and $767,000, respectively.
20.
Quarterly Information (unaudited)
The
following unaudited quarterly financial information includes, in management’s
opinion, all the normal and recurring adjustments necessary to fairly state
the
results of operations and related information for the periods
presented.
|
For the three months ended
|
|||||||||||||
|
March 31,
2006
|
June 30,
2006
|
September 30,
2006
|
December 31,
2006
|
||||||||||
|
Product
revenues
|
$
|
502,000
|
$
|
453,000
|
$
|
133,000
|
$
|
363,000
|
|||||
|
Gross
profit (loss)
|
48,000
|
(51,000
|
)
|
(250,000
|
)
|
70,000
|
|||||||
|
Development
revenues
|
830,000
|
63,000
|
351,000
|
5,232,000
|
|||||||||
|
Operating
expenses
|
8,418,000
|
7,437,000
|
8,969,000
|
7,324,000
|
|||||||||
|
Other
income
|
84,000
|
112,000
|
101,000
|
111,000
|
|||||||||
|
Net
loss
|
$
|
(7,456,000
|
)
|
$
|
(7,313,000
|
)
|
$
|
(8,767,000
|
)
|
$
|
(1,911,000
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(0.48
|
)
|
$
|
(0.47
|
)
|
$
|
(0.53
|
)
|
$
|
(0.10
|
)
|
|
|
For the three months ended
|
|||||||||||||
|
March 31,
2005
|
June 30,
2005
|
September 30,
2005
|
December 31,
2005
|
||||||||||
|
Product
revenues
|
$
|
1,755,000
|
$
|
1,477,000
|
$
|
1,544,000
|
$
|
858,000
|
|||||
|
Gross
profit
|
1,010,000
|
739,000
|
616,000
|
115,000
|
|||||||||
|
Development
revenues
|
34,000
|
64,000
|
38,000
|
235,000
|
|||||||||
|
Operating
expenses
|
5,573,000
|
6,154,000
|
8,523,000
|
10,600,000
|
|||||||||
|
Other
income (loss)
|
2,000
|
(8,000
|
)
|
5,581,000
|
(4,114,000
|
)
|
|||||||
|
Net
loss
|
$
|
(4,527,000
|
)
|
$
|
(5,359,000
|
)
|
$
|
(2,288,000
|
)
|
$
|
(14,364,000
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(0.32
|
)
|
$
|
(0.37
|
)
|
$
|
(0.15
|
)
|
$
|
(0.96
|
)
|
|
| 21. |
Subsequent
Events
|
In
February 2007, we entered into a Placement Agency Agreement with Piper Jaffray
& Co. (“Piper Jaffray”) pursuant to which Piper Jaffray agreed to act as our
placement agent for the offering and sale of shares to certain
institutional and accredited investors of units consisting of 3,745,645
shares of common stock and 1,872,823 common stock warrants (with an exercise
price of $6.25 per share) for proceeds of approximately $19,700,000, net
of
agency placement and financial advisor fees and other expenses totaling
approximately $1,800,000. The offering was made pursuant to a Form S-3
shelf registration statement and was successfully completed on February 28,
2007.
Also
in
March 2007, we entered into a Common Stock Purchase Agreement to sell 1,000,000
shares of unregistered common stock to Green Hospital Supply, Inc. for
$6,000,000 cash. In the Common Stock Purchase Agreement we agreed to seek
SEC
registration of the shares for resale if so requested. The closing of the
sale of shares is expected to occur early in the second quarter of
2007.
Not
applicable.
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 December 31, 2006, our disclosure controls and procedures
are effective.
None
PART
III
The
information called for by Item 10 is incorporated herein by reference to
the
material under the captions “Election of Directors” and “Directors, Executive
Officers and Corporate Governance” in our proxy statement for our 2007 annual
stockholders’ meeting, which will be filed with the SEC on or before April 30,
2007.
The
information called for by Item 11 is incorporated herein by reference to
the
material under the caption “Executive Compensation” in our proxy statement for
our 2007 annual stockholders’ meeting, which will be filed with the SEC on or
before April 30, 2007.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information called for by Item 12 is incorporated herein by reference to
the
material under the caption “Security Ownership of Certain Beneficial Owners and
Management” in our proxy statement for our 2007 annual stockholders’ meeting,
which will be filed with the SEC on or before April 30, 2007.
Item
13. Certain Relationships and Related Transactions, and
Director Independence
The
information called for by Item 13 is incorporated herein by reference to
the
material under the caption “Information Concerning Directors and Executive
Officers- Certain Relationships and Related Transactions” in our proxy statement
for our 2007 annual stockholders’ meeting, which will be filed with the SEC on
or before April 30, 2007.
Item
14. Principal Accountant Fees and
Services
The
information called for by Item 14 is incorporated herein by reference to
the
material under the caption “Principal Accountant Fees and Services” in our proxy
statement for our 2007 annual stockholders meeting, which will be filed with
the
SEC on or before April 30, 2007.
PART
IV
Item
15. Exhibits and Financial Statement
Schedules
|
(a)
(1)
|
Financial
Statements
|
||
|
|
|||
|
|
|||
|
|
|||
|
|
|||
|
|
|||
|
|
|||
(a)
(2) Financial
Statement Schedules
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
For
the
years ended December 31, 2006, 2005 and 2004
(in
thousands of dollars)
|
Balance at
beginning of
year
|
Additions/(Reductions)
((charges)/ credits to
expense)
|
Charged to
Other
Accounts
|
Deductions
|
Balance at
end of year
|
||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||
|
Year
ended December 31, 2006
|
$
|
9
|
$
|
—
|
$
|
—
|
$
|
(7
|
)
|
$
|
2
|
|||||
|
Year
ended December 31, 2005
|
$
|
8
|
$
|
1
|
$
|
—
|
$
|
—
|
$
|
9
|
||||||
|
Year
ended December 31, 2004
|
$
|
62
|
$
|
(44
|
)
|
$
|
—
|
$
|
(10
|
)
|
$
|
8
|
||||
Table
of Contents
(a)(3) Exhibits
|
Exhibit
Number
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
(filed as Exhibit 3.1 to our Form 10-Q Quarterly Report as
filed on August 13, 2002 and incorporated by reference herein)
|
|
|
3.2
|
Amended
and Restated Bylaws of Cytori Therapeutics, Inc. (filed
as Exhibit 3.2 to our Form 10-Q Quarterly Report, as filed on
August 14, 2003 and incorporated by reference herein)
|
|
|
3.3
|
Certificate
of Ownership and Merger (effecting name change to
Cytori Therapeutics, Inc.) (filed as Exhibit 3.1.1 to our Form
10-Q, as
filed on November 14, 2005 and incorporated by reference
herein)
|
|
|
4.1
|
Rights
Agreement, dated as of May 19, 2003, between Cytori
Therapeutics, Inc. and Computershare Trust Company, Inc. as Rights
Agent,
which includes: as Exhibit A thereto, the Form of Certificate of
Designation, Preferences and Rights of Series RP Preferred Stock
of Cytori
Therapeutics, Inc.; as Exhibit B thereto, the Form of Right Certificate;
and, as Exhibit C thereto, the Summary of Rights to Purchase Series
RP
Preferred Stock (filed as Exhibit 4.1 to our Form 8-A which was
filed on
May 30, 2003 and incorporated by reference herein)
|
|
|
4.2
|
Amendment
No. 1 to Rights Agreement dated as of May 12, 2005,
between Cytori Therapeutics, Inc. and Computershare Trust Company,
Inc. as
Rights Agent (filed as Exhibit 4.1.1 to our Form 8-K, which was
filed on
May 18, 2005 and incorporated by reference herein).
|
|
|
10.1#
|
Amended
and Restated 1997 Stock Option and Stock Purchase Plan
(filed as Exhibit 10.1 to our Form 10 registration statement, as
amended, as filed on March 30, 2001 and incorporated by reference
herein)
|
|
|
10.1.1#
|
Board
of Directors resolution adopted November 9, 2006
regarding determination of fair market value for stock option grant
purposes (incorporated by reference to Exhibit 10.10.1 filed
herewith)
|
|
|
10.2+
|
Development
and Supply Agreement, made and entered into as of
January 5, 2000, by and between the Company and Medtronic (filed as
Exhibit 10.4 to our Form 10 registration statement, as amended,
as filed on June 1, 2001 and incorporated by reference
herein)
|
|
|
10.3+
|
Amendment
No. 1 to Development and Supply Agreement,
effective as of December 22, 2000, by and between the Company and
Medtronic (filed as Exhibit 10.5 to our Form 10 registration
statement, as amended, as filed on June 1, 2001 and incorporated by
reference herein)
|
|
|
10.4+
|
License
Agreement, effective as of October 8, 2002, by and
between the Company and Medtronic PS Medical, Inc. (filed as
Exhibit 2.2 to our Current Report on Form 8-K which was filed on
October 23, 2002 and incorporated by reference herein)
|
|
|
10.5+
|
Amendment
No. 2 to Development and Supply Agreement,
effective as of September 30, 2002, by and between the Company
and
Medtronic, Inc. (filed as Exhibit 2.4 to our Current Report on
Form 8-K which was filed on October 23, 2002 and incorporated by
reference herein)
|
|
|
10.7
|
Amended
Master Security Agreement between the Company and
General Electric Corporation, September, 2003 (filed as Exhibit 10.1
to our Form 10-Q Quarterly Report, as filed on November 12, 2003 and
incorporated by reference herein)
|
|
|
10.8#
|
Asset
Purchase Agreement dated May 7, 2004 between Cytori
Therapeutics, Inc. and MAST Biosurgery AG (filed as Exhibit 2.1
to our
Form 8-K Current Report, as filed on May 28, 2004 and incorporated
by
reference herein.)
|
|
|
10.8.1
|
Settlement
Agreement dated August 9, 2005, between MAST
Biosurgery AG, MAST Biosurgery, Inc. and the Company (filed as
Exhibit
10.26 to our Form 10-Q, which was filed on November 14, 2005 and
incorporated by reference herein)
|
|
|
10.9#
|
Offer
Letter for the Position of Chief Financial Officer dated
June 2, 2004 between the Company and Mark Saad (filed as
Exhibit 10.18 to our Form 10-Q Quarterly Report, as filed on
August 16, 2004 and incorporated by reference herein)
|
|
|
10.10#
|
2004
Equity Incentive Plan of Cytori Therapeutics, Inc. (filed
as Exhibit 10.1 to our Form 8-K Current Report, as filed on
August 27, 2004 and incorporated by reference herein)
|
|
|
10.10.1#
|
Board
of Directors resolution adopted November 9, 2006
regarding determination of fair market value for stock option grant
purposes (filed herewith)
|
|
|
10.11
|
Exclusive
Distribution Agreement, effective July 16, 2004 by
and between the Company and Senko Medical Trading Co. (filed as
Exhibit 10.25 to our Form 10-Q Quarterly Report, as filed on
November 15, 2004 and incorporated by reference herein)
|
|
|
10.12#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori
Therapeutics, Inc. 1997 Stock Option and Stock Purchase Plan;
(Nonstatutory) (filed as Exhibit 10.19 to our Form 10-Q
Quarterly Report, as filed on November 15, 2004 and incorporated
by
reference herein)
|
|
|
10.13#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori
Therapeutics, Inc. 1997 Stock Option and Stock Purchase Plan;
(Nonstatutory) with Cliff (filed as Exhibit 10.20 to our
Form 10-Q Quarterly Report, as filed on November 15, 2004 and
incorporated by reference herein)
|
|
|
10.14#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori
Therapeutics, Inc. 1997 Stock Option and Stock Purchase Plan; (Incentive)
(filed as Exhibit 10.21 to our Form 10-Q Quarterly Report, as
filed on November 15, 2004 and incorporated by reference
herein)
|
|
|
10.15#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori
Therapeutics, Inc. 1997 Stock Option and Stock Purchase Plan; (Incentive)
with Cliff (filed as Exhibit 10.22 to our Form 10-Q Quarterly
Report, as filed on November 15, 2004 and incorporated by reference
herein)
|
|
|
10.16#
|
Form
of Options Exercise and Stock Purchase Agreement Relating
to the 2004 Equity Incentive Plan (filed as Exhibit 10.23 to our
Form 10-Q Quarterly Report, as filed on November 15, 2004 and
incorporated by reference herein)
|
|
|
10.17#
|
Form
of Notice of Stock Options Grant Relating to the 2004
Equity Incentive Plan (filed as Exhibit 10.24 to our Form 10-Q
Quarterly Report, as filed on November 15, 2004 and incorporated
by
reference herein)
|
|
|
10.18#
|
Separation
Agreement and General Release dated July 15, 2005,
between John K. Fraser and the Company (filed as Exhibit 10.25
to our Form
10-Q Quarterly Report as filed on November 14, 2005 and incorporated
by
reference herein)
|
|
|
10.19#
|
Consulting
Agreement dated July 15, 2005, between John K.
Fraser and the Company (filed as Exhibit 10.28 to our Form 10-Q
Quarterly
Report as filed on November 14, 2005 and incorporated by reference
herein)
|
|
|
10.20
|
Agreement
Between Owner and Contractor dated October 10, 2005,
between Rudolph and Sletten, Inc. and the Company (filed as Exhibit
10.20
to our Form 10-K Annual Report as filed on March 30, 2006 and incorporated
by reference herein)
|
|
|
10.21#
|
Severance
Agreement and General Release dated August 10, 2005,
between Sharon V. Schulzki and the Company (filed as Exhibit 10.27
to our
Form 10-Q Quarterly report as filed on November 14, 2005 and incorporated
by reference herein)
|
|
|
10.22
|
Common
Stock Purchase Agreement dated April 28, 2005, between
Olympus Corporation and the Company (filed as Exhibit 10.21 to
our Form
10-Q Quarterly Report as filed on August 15, 2005 and incorporated
by
reference herein)
|
|
|
10.23
|
Sublease
Agreement dated May 24, 2005, between Biogen Idec,
Inc. and the Company (filed as Exhibit 10.21 to our Form 10-Q Quarterly
Report as filed on August 15, 2005 and incorporated by reference
herein)
|
|
|
10.24#
|
Employment
Offer Letter to Doug Arm, Vice President of
Development—Biologics, dated February 1, 2005 (filed as Exhibit 10.21 to
our Form 10-Q Quarterly Report as filed on August 15, 2005 and
incorporated by reference herein)
|
|
|
10.25#
|
Employment
Offer Letter to Alex Milstein, Vice-President of
Clinical Research, dated May 1, 2005 (filed as Exhibit 10.21 to
our Form
10-Q Quarterly Report as filed on August 15, 2005 and incorporated
by
reference herein)
|
|
|
10.26#
|
Employment
Offer Letter to John Ransom, Vice-President of
Research, dated November 15, 2005 (filed as Exhibit 10.26 to our
Form 10-K
Annual Report as filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.27+
|
Joint
Venture Agreement dated November 4, 2005, between Olympus
Corporation and the Company (filed as Exhibit 10.27 to our Form
10-K
Annual Report as filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.28+
|
License/
Commercial Agreement dated November 4, 2005, between
Olympus-Cytori, Inc. and the Company (filed as Exhibit 10.28 to
our Form
10-K Annual Report as filed on March 30, 2006 and incorporated
by
reference herein)
|
|
|
10.29+
|
License/
Joint Development Agreement dated November 4, 2005,
between Olympus Corporation, Olympus-Cytori, Inc. and the Company
(filed
as Exhibit 10.29 to our Form 10-K Annual Report as filed on March
30, 2006
and incorporated by reference herein)
|
|
|
10.30+
|
Shareholders
Agreement dated November 4, 2005, between Olympus
Corporation and the Company (filed as Exhibit 10.30 to our Form
10-K
Annual Report as filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.31+
|
Exclusive
Negotiation Agreement with Olympus Corporation, dated
February 22, 2006 (filed as Exhibit 10.31 to our Form 10-Q Quarterly
Report as filed on May 15, 2006 and incorporated by reference
herein)
|
|
|
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 (filed as Exhibit
10.35
to our Form 10-Q Quarterly Report as filed on November 145, 2006
and
incorporated by reference herein)
|
|
|
10.36#
|
Stock
Option Extension Agreement between Elizabeth A.
Scarbrough and Cytori Therapeutics, Inc. effective July 25, 2006
(filed as
Exhibit 10.36 to our Form 10-Q Quarterly Report as filed on November
14,
2006 and incorporated by reference herein)
|
|
|
10.37#
|
Employment
Agreement between Bruce A. Reuter and Cytori
Therapeutics, Inc. effective July 25, 2006 (filed as Exhibit 10.37
to our
Form 10-Q Quarterly Report as filed on November 14, 2006 and incorporated
by reference herein)
|
|
|
10.38#
|
Employment
Agreement between Elizabeth A. Scarbrough and Cytori
Therapeutics, Inc. effective July 25, 2006 (filed as Exhibit 10.38
to our
Form 10-Q Quarterly Report as filed on November 14, 2006 and incorporated
by reference herein)
|
|
|
10.39+
|
Exclusive
License Agreement between us and the Regents of the
University of California dated October 16, 2001 (filed as Exhibit
10.10 to
our Form 10-K Annual Report as filed on March 31, 2003 and incorporated
by
reference herein)
|
|
|
10.39.1
+
|
Amended
and Restated Exclusive License Agreement, effective
September 26, 2006, by and between The Regents of the University
of
California and Cytori Therapeutics, Inc. (filed as Exhibit 10.39
to our
Form 10-Q Quarterly Report as filed on November 14, 2006 and incorporated
by reference herein)
|
|
|
10.40#
|
Stock
Option Extension Agreement between Charles Galetto and
Cytori Therapeutics, Inc. signed on May 24, 2006 and effective
as of June
1, 2006 (filed as Exhibit 10.20 to our Form 10-Q Quarterly Report
as filed
on August 14, 2006 and incorporated by reference herein)
|
|
|
10.41#
|
Part-time
Employment Agreement between Charles Galetto and
Cytori Therapeutics, Inc. signed on May 24, 2006 and effective
as of June
1, 2006 (filed as Exhibit 10.21 to our Form 10-Q Quarterly Report
as filed
on August 14, 2006 and incorporated by reference herein)
|
|
| 10.42 | Placement Agency Agreement, dated February 23, 2007, between Cytori Therapeutics, Inc. and Piper Jaffray & Co. (filed as Exhibit 10.1 to our Form 8-K Current Report as filed on February 26, 2007 and incorporated by reference herein). | |
|
14.1
|
Code
of Ethics (filed as Exhibit 14.1 to our Annual Report
on Form 10-K which was filed on March 30, 2004 and incorporated by
reference herein)
|
|
|
23.1
|
Consent
of KPMG LLP, Independent Registered Public Accounting
Firm (filed herewith).
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to
Securities Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to
Securities Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
32.1
|
Certifications
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 (filed
herewith).
|
_______________________________________
+ 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 Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this registration statement to be signed
on
its behalf by the undersigned, thereunto duly authorized.
|
CYTORI
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Christopher
J. Calhoun
|
||
|
Chief
Executive Officer
|
||
|
March
30, 2007
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this annual report
has been signed below by the following persons on behalf of the registrant
and
in the capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Marshall G. Cox
|
Chairman
of the Board of Directors
|
March
30, 2007
|
||
|
Marshall
G. Cox
|
||||
|
/s/
Christopher J. Calhoun
|
Chief
Executive Officer, Director (Principal Executive
Officer)
|
March
30, 2007
|
||
|
Christopher
J. Calhoun
|
||||
|
/s/
Marc H. Hedrick, MD
|
President,
Director
|
March
30, 2007
|
||
|
Marc
H. Hedrick, MD
|
||||
|
/s/
Mark E. Saad
|
Chief
Financial Officer (Principal Financial Officer)
|
March
30, 2007
|
||
|
Mark
E. Saad
|
||||
|
/s/
John W. Townsend
|
Chief
Accounting Officer
|
March
30, 2007
|
||
|
John
W. Townsend
|
||||
|
/s/
David M. Rickey
|
Director
|
March
30, 2007
|
||
|
David
M. Rickey
|
||||
|
/s/
Ronald D. Henriksen
|
Director
|
March
30, 2007
|
||
|
Ronald
D. Henriksen
|
||||
|
/s/
E. Carmack Holmes, MD
|
Director
|
March
30, 2007
|
||
|
E.
Carmack Holmes, MD
|
||||
|
/s/
Paul W. Hawran
|
Director
|
March
30, 2007
|
||
|
Paul
W. Hawran
|
EXHIBIT
10.10.1
As
of
January 1, 2007, the Board of Directors adopted the policy that the fair market
value of the Company’s common stock for the purposes of granting stock options
under the Company’s 1997 Stock Option and Purchase Plan and the 2004 Equity
Incentive Plan shall be the closing price of the Company’s common stock as
quoted on the NASDAQ Stock Market on the day of such grant.
EXHIBIT
23.1
Consent
of Independent Registered Public Accounting Firm
The
Board
of Directors
Cytori
Therapeutics, Inc.:
We
consent to the incorporation by reference in Registration Statement Nos.
(333-82074 and 333-122691) on Form S-8 and in the registration statements
Nos. (333-140875 and 333-134129) on Form S-3 of Cytori Therapeutics, Inc.,
of our report dated March 29, 2007, with respect to the consolidated balance
sheets of Cytori Therapeutics, Inc. and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity (deficit), and cash flows for each of
the years in the three-year period ended December 31, 2006, and the related
financial statement schedule, which report appears in the December 31, 2006
annual report on Form 10-K of Cytori Therapeutics, Inc. Our report on the
consolidated financial statements refers to the Company deriving a substantial
portion of its revenues from related parties and the Company’s
adoption of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment,” effective January 1, 2006.
|
/s/
KPMG
|
|
|
San
Diego, California
|
|
|
March
30, 2007
|
|
EXHIBIT
23.1
Consent
of Independent Registered Public Accounting Firm
The
Board
of Directors
Cytori
Therapeutics, Inc.:
We
consent to the incorporation by reference in Registration Statement Nos.
(333-82074 and 333-122691) on Form S-8 and in the registration statements
Nos. (333-140875 and 333-134129) on Form S-3 of Cytori Therapeutics, Inc.,
of our report dated March 28, 2007, with respect to the consolidated balance
sheets of Cytori Therapeutics, Inc. and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of operations and
comprehensive loss, stockholders’ equity (deficit), and cash flows for each of
the years in the three-year period ended December 31, 2006, and the related
financial statement schedule, which report appears in the December 31, 2006
annual report on Form 10-K of Cytori Therapeutics, Inc. Our report on the
consolidated financial statements refers to the Company deriving a substantial
portion of its revenues from related parties and the Company’s
adoption of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment,” effective January 1, 2006.
|
/s/
KPMG LLP
|
|
|
San
Diego, California
|
|
|
March
30, 2007
|
|
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 annual report on Form 10-K 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.
|
Date:
March 30, 2007
|
|
|
/s/
Mark E. Saad
|
|
|
Mark
E. Saad,
|
|
|
Chief
Financial Officer
|
|
EXHIBIT
32.1
CERTIFICATIONS
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 Annual Report on Form 10-K of Cytori Therapeutics, Inc.
for
the year ended December 31, 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-K 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-K 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.
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
March 30, 2007
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
March 30, 2007
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|