UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________________
FORM
10-Q
|
(Mark
One)
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||
|
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
For
the quarterly period ended June 30, 2007
|
||
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OR
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||
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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|
|
For
the transition period
from to
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||
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Commission
file number 0-32501
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||
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CYTORI
THERAPEUTICS, INC.
|
|
(Exact
name of Registrant as Specified in Its
Charter)
|
|
DELAWARE
|
33-0827593
|
|
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
3020
CALLAN ROAD, SAN DIEGO, CALIFORNIA
|
92121
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant’s
telephone number, including area code:
(858) 458-0900
|
||
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 (“the
Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days. Yes ý
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act. Large Accelerated
Filer o Accelerated
Filer o
Non-Accelerated Filer ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
As
of
July 31, 2007, there were 23,918,257 shares of the registrant’s common stock
outstanding.
CYTORI
THERAPEUTICS, INC.
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
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Item
1.
|
Financial
Statements
|
||
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|||
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|||
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|||
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Item
2.
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Item
3.
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Item
4.
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PART
II
|
OTHER
INFORMATION
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||
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Item
1.
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|||
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Item
1A.
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|||
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Item
2.
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|||
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Item
3.
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||
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Item
4.
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|||
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Item
5.
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|||
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Item
6.
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|||
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PART
I. FINANCIAL INFORMATION
|
||||||||||||||||
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Item
1. Financial Statements
|
||||||||||||||||
The
Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We
have
reviewed the accompanying consolidated condensed balance sheet of Cytori
Therapeutics, Inc. and subsidiaries (the Company) as of June 30, 2007, the
related consolidated condensed statements of operations and comprehensive loss
for the three-month and six-month periods ended June 30, 2007 and 2006, and
the
consolidated condensed statements of cash flows for the six-month periods ended
June 30, 2007 and 2006. These consolidated condensed financial statements are
the responsibility of the Company’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). A review of interim
financial information consists principally of applying analytical procedures
and
making inquiries of persons responsible for financial and accounting matters.
It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based
on
our reviews, we are not aware of any material modifications that should be
made
to the consolidated condensed financial statements referred to above for them
to
be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
Cytori Therapeutics, Inc. and subsidiaries as of December 31, 2006, and the
related consolidated statements of operations and comprehensive loss,
stockholders’ deficit, and cash flows for the year then ended (not presented
herein); and in our report dated March 29, 2007, we expressed an unqualified
opinion on those consolidated financial statements. In
our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 2006, is fairly stated in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
|
/s/
KPMG LLP
|
|
|
San
Diego, California
|
|
|
August
8, 2007
|
|
CYTORI
THERAPEUTICS, INC.
|
As
of
June
30, 2007
|
As
of
December
31, 2006
|
||||||
|
(unaudited)
|
|||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
22,808,000
|
$
|
8,902,000
|
|||
|
Short-term
investments, available-for-sale
|
3,795,000
|
3,976,000
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts
of
$3,000 and $2,000 in 2007 and 2006, respectively
|
45,000
|
225,000
|
|||||
|
Inventories,
net
|
92,000
|
164,000
|
|||||
|
Other
current assets
|
564,000
|
711,000
|
|||||
|
Total
current assets
|
27,304,000
|
13,978,000
|
|||||
|
Property
and equipment held for sale, net
|
—
|
457,000
|
|||||
|
Property
and equipment, net
|
3,897,000
|
4,242,000
|
|||||
|
Investment
in joint venture
|
82,000
|
76,000
|
|||||
|
Other
assets
|
417,000
|
428,000
|
|||||
|
Intangibles,
net
|
1,189,000
|
1,300,000
|
|||||
|
Goodwill
|
3,922,000
|
4,387,000
|
|||||
|
Total
assets
|
$
|
36,811,000
|
$
|
24,868,000
|
|||
|
Liabilities
and Stockholders’ Equity (Deficit)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
4,827,000
|
$
|
5,587,000
|
|||
|
Current
portion of long-term obligations
|
771,000
|
999,000
|
|||||
|
Total
current liabilities
|
5,598,000
|
6,586,000
|
|||||
|
Deferred
revenues, related party
|
22,110,000
|
23,906,000
|
|||||
|
Deferred
revenues
|
2,379,000
|
2,389,000
|
|||||
|
Option
liability
|
1,000,000
|
900,000
|
|||||
|
Long-term
deferred rent
|
611,000
|
741,000
|
|||||
|
Long-term
obligations, less current portion
|
613,000
|
1,159,000
|
|||||
|
Total
liabilities
|
32,311,000
|
35,681,000
|
|||||
|
Commitments
and contingencies
|
—
|
—
|
|||||
|
Stockholders’
equity (deficit):
|
|||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; (-0-) shares
issued
and outstanding in 2007 and 2006
|
—
|
—
|
|||||
|
Common
stock, $0.001 par value; 95,000,000 shares authorized; 25,428,778
and
21,612,243 shares issued and 22,555,944 and 18,739,409 shares outstanding
in 2007 and 2006, respectively
|
26,000
|
22,000
|
|||||
|
Additional
paid-in capital
|
127,393,000
|
103,053,000
|
|||||
|
Accumulated
deficit
|
(116,125,000
|
)
|
(103,460,000
|
)
|
|||
|
Treasury
stock, at cost
|
(6,794,000
|
)
|
(10,414,000
|
)
|
|||
|
Accumulated
other comprehensive income
|
—
|
1,000
|
|||||
|
Amount
due from exercises of stock options
|
—
|
(15,000
|
)
|
||||
|
Total
stockholders’ equity (deficit)
|
4,500,000
|
(10,813,000
|
)
|
||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$
|
36,811,000
|
$
|
24,868,000
|
|||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(UNAUDITED)
|
For
the Three Months Ended
June 30,
|
For
the Six Months Ended
June 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Product
revenues
|
$
|
512,000
|
$
|
453,000
|
$
|
792,000
|
$
|
955,000
|
|||||
|
Cost
of product revenues
|
197,000
|
504,000
|
422,000
|
958,000
|
|||||||||
|
Gross
profit (loss)
|
315,000
|
(51,000
|
)
|
370,000
|
(3,000
|
)
|
|||||||
|
Development
revenues:
|
|||||||||||||
|
Development,
related party
|
1,796,000
|
—
|
1,796,000
|
683,000
|
|||||||||
|
Development
|
10,000
|
6,000
|
10,000
|
148,000
|
|||||||||
|
Research
grant and other
|
8,000
|
57,000
|
53,000
|
63,000
|
|||||||||
|
1,814,000
|
63,000
|
1,859,000
|
894,000
|
||||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development
|
4,393,000
|
6,021,000
|
9,390,000
|
11,197,000
|
|||||||||
|
Sales
and marketing
|
519,000
|
473,000
|
1,065,000
|
974,000
|
|||||||||
|
General
and administrative
|
3,433,000
|
3,608,000
|
6,599,000
|
6,824,000
|
|||||||||
|
Change
in fair value of option liabilities
|
(100,000
|
)
|
(2,665,000
|
)
|
100,000
|
(3,140,000
|
)
|
||||||
|
Total
operating expenses
|
8,245,000
|
7,437,000
|
17,154,000
|
15,855,000
|
|||||||||
|
Operating
loss
|
(6,116,000
|
)
|
(7,425,000
|
)
|
(14,925,000
|
)
|
(14,964,000
|
)
|
|||||
|
Other
income (expense):
|
|||||||||||||
|
Gain
on sale of assets
|
1,858,000
|
—
|
1,858,000
|
—
|
|||||||||
|
Interest
income
|
348,000
|
183,000
|
545,000
|
379,000
|
|||||||||
|
Interest
expense
|
(43,000
|
)
|
(53,000
|
)
|
(95,000
|
)
|
(111,000
|
)
|
|||||
|
Other
expense, net
|
(52,000
|
)
|
(1,000
|
)
|
(54,000
|
)
|
(6,000
|
)
|
|||||
|
Equity
gain (loss) from investment in joint venture
|
9,000
|
(17,000
|
)
|
6,000
|
(66,000
|
)
|
|||||||
|
Total
other income (expense)
|
2,120,000
|
112,000
|
2,260,000
|
196,000
|
|||||||||
|
Net
loss
|
(3,996,000
|
)
|
(7,313,000
|
)
|
(12,665,000
|
)
|
(14,768,000
|
)
|
|||||
|
Other
comprehensive loss- unrealized holding loss
|
—
|
(10,000
|
)
|
(1,000
|
)
|
(24,000
|
)
|
||||||
|
Comprehensive
loss
|
$
|
(3,996,000
|
)
|
$
|
(7,323,000
|
)
|
$
|
(12,666,000
|
)
|
$
|
(14,792,000
|
)
|
|
|
Basic
and diluted net loss per common share
|
$
|
(0.17
|
)
|
$
|
(0.47
|
)
|
$
|
(0.58
|
)
|
$
|
(0.95
|
)
|
|
|
Basic
and diluted weighted average common shares
|
23,497,375
|
15,592,293
|
21,790,048
|
15,510,586
|
|||||||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
(UNAUDITED)
|
For
the Six Months Ended June 30,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(12,665,000
|
)
|
$
|
(14,768,000
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
843,000
|
1,124,000
|
|||||
|
Inventory
provision
|
—
|
70,000
|
|||||
|
Warranty
provision
|
(43,000
|
)
|
—
|
||||
|
Increase
(reduction) in allowance for doubtful accounts
|
1,000
|
(5,000
|
)
|
||||
|
Change
in fair value of option liabilities
|
100,000
|
(3,140,000
|
)
|
||||
|
Stock-based
compensation expense
|
1,155,000
|
1,873,000
|
|||||
|
Gain
on sale of assets
|
(1,858,000
|
)
|
—
|
||||
|
Equity
(gain) loss from investment in joint venture
|
(6,000
|
)
|
66,000
|
||||
|
Increases
(decreases) in cash caused by changes in operating assets and
liabilities:
|
|||||||
|
Accounts
receivable
|
179,000
|
477,000
|
|||||
|
Inventories
|
(22,000
|
)
|
(14,000
|
)
|
|||
|
Other
current assets
|
145,000
|
(170,000
|
)
|
||||
|
Other
assets
|
11,000
|
(63,000
|
)
|
||||
|
Accounts
payable and accrued expenses
|
(913,000
|
)
|
(1,631,000
|
)
|
|||
|
Deferred
revenues, related party
|
(1,796,000
|
)
|
11,817,000
|
||||
|
Deferred
revenues
|
(10,000
|
)
|
(148,000
|
)
|
|||
|
Long-term
deferred rent
|
(130,000
|
)
|
324,000
|
||||
|
Net
cash used in operating activities
|
(15,009,000
|
)
|
(4,188,000
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Proceeds
from sale and maturity of short-term investments
|
18,459,000
|
33,222,000
|
|||||
|
Purchases
of short-term investments
|
(18,280,000
|
)
|
(32,372,000
|
)
|
|||
|
Proceeds
from sale of assets
|
3,175,000
|
—
|
|||||
| Costs from sale of assets | (109,000 | ) | — | ||||
|
Purchases
of property and equipment
|
(365,000
|
)
|
(2,331,000
|
)
|
|||
|
Investment
in joint venture
|
—
|
(150,000
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
2,880,000
|
(1,631,000
|
)
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Principal
payments on long-term obligations
|
(774,000
|
)
|
(460,000
|
)
|
|||
|
Proceeds
from exercise of employee stock options
|
908,000
|
651,000
|
|||||
|
Proceeds
from sale of common stock and warrants
|
21,500,000
|
—
|
|||||
| Costs from sale of common stock and warrants | (1,599,000 | ) |
—
|
||||
|
Proceeds
from sale of treasury stock
|
6,000,000
|
—
|
|||||
|
Net
cash provided by financing activities
|
26,035,000
|
191,000
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
13,906,000
|
(5,628,000
|
)
|
||||
|
Cash
and cash equivalents at beginning of period
|
8,902,000
|
8,007,000
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
22,808,000
|
$
|
2,379,000
|
|||
|
Supplemental
disclosure of cash flows information:
|
|||||||
|
Cash
paid during period for:
|
|||||||
|
Interest
|
$
|
96,000
|
$
|
111,000
|
|||
|
Taxes
|
2,000
|
1,000
|
|||||
|
Supplemental
schedule of non-cash investing and financing
activities:
|
|||||||
|
Additions
to leasehold improvements included in accounts payable and accrued
expenses
|
$
|
—
|
$
|
287,000
|
|||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CYTORI
THERAPEUTICS, INC.
JUNE
30, 2007
(UNAUDITED)
|
1.
|
Basis
of Presentation
|
Our
accompanying unaudited consolidated condensed financial statements as of June
30, 2007 and for the six months ended June 30, 2007 and 2006 have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for annual financial statements. Our
consolidated condensed balance sheet at December 31, 2006 has been derived
from
the audited financial statements at that date, but does not include all of
the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the financial
position and results of operations of Cytori Therapeutics, Inc., and our
subsidiaries, have been included. Operating results for the three and six months
ended June 30, 2007 are not necessarily indicative of the results that may
be
expected for the year ending December 31, 2007. For further information, refer
to our consolidated financial statements for the year ended December 31, 2006
and footnotes thereto which were included in our Annual Report on Form 10-K,
dated April 2, 2007.
|
2.
|
Use
of Estimates
|
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America of America
requires management to make estimates and assumptions affecting the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. Estimates and assumptions are reviewed periodically,
and
the effects of revisions are reflected in the consolidated financial statements
in the periods they are determined to be necessary.
Our
most
significant estimates and critical accounting policies involve recognizing
revenue, evaluating goodwill for impairment, accounting for product line
dispositions, valuing the Put option (see note 12), determining the assumptions
used in measuring share-based compensation expense, valuing our deferred tax
assets, and assessing how to report our investment in Olympus-Cytori, Inc.
|
3.
|
Segment
Information
|
We
operate as 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 evaluate and report our financial results in two
segments.
Our
regenerative cell technology segment is developing and seeks to commercialize
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 regenerative cells from a patient’s own
adipose tissue, and its related single-use consumables.
Our
MacroPore Biosurgery unit manufactured and distributed the HYDROSORB™ family of
bioresorbable spine and orthopedic implants, which have been cleared by the
Food
& Drug Administration (“FDA”); 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 sold
the
bioresorbable spine and orthopedic implant product line in May 2007 to Kensey
Nash Corporation (“Kensey Nash”) (see note 14).
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 and changes in fair value of our option
liabilities.
The
following tables provide information regarding the performance and assets of
our
operating segments:
|
For
the three months ended
June 30,
|
For
the six months ended
June 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Regenerative
cell technology
|
$
|
1,804,000
|
$
|
57,000
|
$
|
1,849,000
|
$
|
746,000
|
|||||
|
MacroPore
Biosurgery
|
522,000
|
459,000
|
802,000
|
1,103,000
|
|||||||||
|
Total
Revenues
|
$
|
2,326,000
|
$
|
516,000
|
$
|
2,651,000
|
$
|
1,849,000
|
|||||
|
Segment
gains (losses):
|
|||||||||||||
|
Regenerative
cell technology
|
$
|
(3,014,000
|
)
|
$
|
(6,046,000
|
)
|
$
|
(8,364,000
|
)
|
$
|
(10,515,000
|
)
|
|
|
MacroPore
Biosurgery
|
231,000
|
(436,000
|
)
|
138,000
|
(765,000
|
)
|
|||||||
|
General
and administrative expenses
|
(3,433,000
|
)
|
(3,608,000
|
)
|
(6,599,000
|
)
|
(6,824,000
|
)
|
|||||
|
Change
in fair value of option liabilities
|
100,000
|
2,665,000
|
(100,000
|
)
|
3,140,000
|
||||||||
|
Total
operating loss
|
$
|
(6,116,000
|
)
|
$
|
(7,425,000
|
)
|
$
|
(14,925,000
|
)
|
$
|
(14,964,000
|
)
|
|
|
As
of
June
30,
|
As
of
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
Assets:
|
|||||||
|
Regenerative
cell technology
|
$
|
28,757,000
|
$
|
9,792,000
|
|||
|
MacroPore
Biosurgery
|
92,000
|
1,758,000
|
|||||
|
Corporate
assets
|
7,962,000
|
13,318,000
|
|||||
|
Total
assets
|
$
|
36,811,000
|
$
|
24,868,000
|
|||
-7-
|
4.
|
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 of America
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 trade date.
At
June
30, 2007, the excess of carrying cost over the fair value of our short-term
investments is immaterial.
|
5.
|
Summary
of Significant Accounting
Policies
|
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 excess or obsolete. We expense excess manufacturing costs,
that
is, costs resulting from lower than “normal” production levels.
During
the second quarter of 2006, we recorded a provision of $70,000 for excess raw
materials that we determined were unlikely to be converted into finished goods
and ultimately sold. No inventory provisions were recorded during the first
six
months of 2007.
See
note
14 for a description of the sale of our bioresorbable spine and orthopedic
implant product line.
Property
and Equipment
Property
and equipment is stated at cost, net of accumulated depreciation. Depreciation
expense is provided for on a straight-line basis over the estimated useful
lives
of the assets, or the life of the lease (as applicable), 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. Maintenance and
repairs are charged to operations as incurred.
Revenue
Recognition
Product
Sales
Before
the disposal of our bioresorbable spine and orthopedic product line in May
2007,
we sold our (non-Thin Film) MacroPore Biosurgery products to Medtronic, Inc.
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 product revenues in our statements of
operations.
We
recognized 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.
In
the
past, we would offer Medtronic extended payment terms. In these circumstances,
we did not recognize revenues under these arrangements until the payment became
due or was received, if that occurred earlier. Moreover, we warranted that
our
products were 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 for products previously sold.
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, 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 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.
-8-
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 12). Approximately
$4,689,000 of this amount related to common stock that we issued, as well
as options we granted, to Olympus. 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 12). 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 June 30, 2007, we have recognized $7,701,000
of
the deferred revenues, related party as development revenues of which $1,796,000
was recognized in the three and six months ended June 30, 2007. 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 non-refundable 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 $10,000
and
$148,000 in the six months ended June 30, 2007 and 2006, respectively,
representing the fair value of the completed milestones relative to the fair
value of the total efforts expected to be necessary to achieve regulatory
approval by the MHLW. 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.
Accordingly, we expect to recognize approximately $1,129,000 (consisting of
the
remaining $879,000 in deferred revenues plus a non-refundable payment of
$250,000 to be received upon commercialization) in revenues associated with
this
milestone arrangement once commercialization is achieved. We will not recognize
the potentially refundable portion of the fees until the right of refund
expires.
|
6.
|
Long-Lived
Assets
|
In
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” we assess certain 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 six months ended
June 30, 2007 and 2006, we had no impairment losses associated with our
long-lived assets.
|
7.
|
Share-Based
Compensation
|
During
the first quarter of 2007, we issued to our officers and directors stock options
to purchase up to 410,000 shares of our common stock, with a four-year vesting
for our officers and 24-month vesting for our directors. The grant date fair
value of option awards granted to our officers and directors was $3.82 and
$3.70
per share, respectively. The resulting share-based compensation expense of
$1,480,000, net of estimated forfeitures, will be recognized as expense over
the
respective vesting periods.
During
the second quarter of 2007, we made a company-wide option grant to our
non-executive employees to purchase up to 213,778 shares of our common stock,
subject to a four-year vesting schedule. The grant date fair value for the
awards was $3.66. The resulting share-based compensation expense of $739,000,
net of estimated forfeitures, will be recognized as expense over the respective
vesting periods.
|
8.
|
Income
Taxes
|
On
July
13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes -
An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
in accordance with SFAS No. 109 (“SFAS 109”), “Accounting for Income Taxes,” and
prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
We
adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized
tax benefits as of the date of adoption. There are no unrecognized tax benefits
included in the balance sheet that would, if recognized, affect the effective
tax rate.
Our
practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. We had $0 accrued for interest and penalties on our
balance sheet as of June 30, 2007 and December 31, 2006, and have recognized
$0
in interest and/or penalties in our statement of operations for the three and
six months ended June 30, 2007.
With
limited exception, we are subject to taxation in the U.S. and California
jurisdictions. Our tax years for 1997 and forward are subject to examination
by
the U.S. and California tax authorities due to the carryforward of unutilized
net operating losses and research and development credits.
The
adoption of FIN No. 48 did not impact our financial condition, results of
operations, or cash flows. At January 1, 2007, we had net deferred tax assets
of
$38,505,000. The deferred tax assets are primarily composed of federal and
state
tax net operating loss carryforwards and federal and state research and
development (“R&D”) credit carryforwards. Due to uncertainties surrounding
our ability to generate future taxable income to realize these assets, a full
valuation allowance has been established to offset our deferred tax assets.
Additionally, the future utilization of our net operating loss and R&D
credit carryforwards to offset future taxable income may be subject to a
substantial annual limitation as a result of ownership changes that may have
occurred previously or that could occur in the future. We are in the process
of
updating our Section 382/383 analysis through the period ending December 31,
2006. We have not yet determined whether such an ownership change has occurred,
however, the Company is currently working to complete a Section 382/383 analysis
regarding the limitation of the net operating losses and research and
development credits. Similarly, we plan to complete an R&D credit analysis
regarding the calculation of the R&D credit. When these analyses are
completed, we may need to update the amount of unrecognized tax benefits we
have
reported under FIN No. 48. Therefore, we expect that the unrecognized tax
benefits may change within 12 months of this reporting date. At this time,
we
cannot estimate how much the unrecognized tax benefits may change.
Due to the existence of the valuation allowance, future changes in our
unrecognized tax benefits will not impact our effective tax
rate.
-9-
|
9.
|
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 options and warrants for all periods presented.
We
have
excluded all potentially dilutive securities from the calculation of diluted
loss per share attributable to common stockholders for the three and six months
ended June 30, 2007 and 2006, as their inclusion would be antidilutive.
Potentially dilutive common shares excluded from the calculations of diluted
loss per share were 8,161,043 and 8,344,536 for the three and six months ended
June 30, 2007 and 2006, respectively.
|
10.
|
Commitments
and Contingencies
|
We
have
entered into agreements, which have provisions for cancellation, with various
clinical research organizations for pre-clinical and clinical development
studies. 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 is estimated based
on current schedules of pre-clinical and clinical studies in progress. As of
June 30, 2007, we have pre-clinical research study obligations of $267,000
(all
of which are expected to be completed within a year) and clinical research
study
obligations of $6,314,000 ($5,458,000 of which are expected to be completed
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 12 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.
|
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 2015. 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.
We
are
not named as a party to the lawsuit, but our president, Marc Hedrick, is one
of
the inventors identified on the patent and therefore is a named individual
defendant. We are providing substantial financial and other assistance to the
defense of the lawsuit.
In
the
three and six months ended June 30, 2007, we expensed $518,000 and $602,000,
respectively, for legal fees related to this license. For the same periods
in
2006, we expensed $861,000 and $1,366,000, respectively. These expenses have
been classified as general and administrative expense in the accompanying
financial statements. We believe that the amount accrued as of June 30, 2007
is
a reasonable estimate of our liability for the expenses incurred to date.
|
12.
|
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 under 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. 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.
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
June 30, 2007, Olympus holds approximately 12.7% 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.
-10-
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 regenerative cells residing in adipose 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.
|
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 June
30, 2007, the carrying value of our investment in the Joint Venture is $82,000.
We
are
under no obligation to provide additional funding to the Joint Venture, but
may
choose to do so. In the first quarter of 2006, we contributed $150,000 to the
Joint Venture.
Put/Calls
and Guarantees
The
Shareholders’ Agreement between Cytori and Olympus provides that in certain
specified circumstances of insolvency or if we experience a change in control,
Olympus will have the rights to (i) purchase 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
June 30, 2007 and December 31, 2006, the fair value of the Put was $1,000,000
and $900,000, 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 itself, which is perpetual, has been recorded as a
long-term liability in the caption Option liability 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:
|
June
30,
2007
|
December
31,
2006
|
November
4,
2005
|
||||||||
|
Expected
volatility of Cytori
|
61.00
|
%
|
66.00
|
%
|
63.20
|
%
|
||||
|
Expected
volatility of the Joint Venture
|
61.00
|
%
|
56.60
|
%
|
69.10
|
%
|
||||
|
Bankruptcy
recovery rate for Cytori
|
21.00
|
%
|
21.00
|
%
|
21.00
|
%
|
||||
|
Bankruptcy
threshold for Cytori
|
$
|
10,460,000
|
$
|
10,110,000
|
$
|
10,780,000
|
||||
|
Probability
of a change of control event for Cytori
|
2.22
|
%
|
1.94
|
%
|
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
|
5.03
|
%
|
4.71
|
%
|
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.
Olympus-Cytori
Joint Venture
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 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 June
30,
2007.
Deferred
revenues, related party
As
of
June 30, 2007, 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 regenerative cells residing in adipose tissue.
These
services also include maintaining the 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 5 for a full
description of our revenue recognition policy.
-11-
|
13.
|
Common
Stock
|
In
February 2007, we completed a registered direct public offering of units
consisting of common stock and warrants. We received net proceeds of $19,901,000
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
and a
five-year exercisability period) under our shelf registration
statement.
In
April
2007, we sold 1,000,000 shares of unregistered common stock out of our treasury
stock to Green Hospital Supply, Inc. for $6,000,000 cash. We agreed to seek
Securities and Exchange Commission registration of the shares for resale if
so
requested. The sale agreement contains no registration payment arrangements
within the scope of FASB Staff Position EITF 00-19-2.
|
14.
|
Gain
on Sale of Assets, Spine and Orthopedics Product
Line
|
In
May
2007, we sold to Kensey Nash our intellectual property rights and tangible
assets related to our spine and orthopedic product line, a part of our MacroPore
Biosurgery business. Excluded from the sale was our Japan Thin Film product
line.
We
received $3,175,000 in cash proceeds related to the disposition. The assets
comprising the spine and orthopedic product line transferred to Kensey Nash
were
as follows:
|
Carrying
Value Prior to Disposition
|
||||
|
Inventory
|
$
|
94,000
|
||
|
Other
current assets
|
17,000
|
|||
|
Assets
held for sale
|
436,000
|
|||
|
Goodwill
|
465,000
|
|||
|
$
|
1,012,000
|
|||
We
incurred expenses of $109,000 in connection with the sale. We recognized
approximately $1,858,000 as gain on sale in the statement of operations during
the second quarter of 2007.
The
revenues and expenses related to the spine and orthopedic product line
transferred to Kensey Nash for the three and six months ended June 30, 2007
and
2006 were as follows:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Revenues
|
$
|
512,000
|
$
|
453,000
|
$
|
792,000
|
$
|
955,000
|
|||||
|
Cost
of product revenues
|
(197,000
|
)
|
(504,000
|
)
|
(422,000
|
)
|
(958,000
|
)
|
|||||
|
Research
& development
|
(31,000
|
)
|
(279,000
|
)
|
(113,000
|
)
|
(609,000
|
)
|
|||||
|
Sales
& marketing
|
(8,000
|
)
|
(50,000
|
)
|
(21,000
|
)
|
(138,000
|
)
|
|||||
As
part
of the disposition agreement, we are required to provide training to Kensey
Nash
representatives in all aspects of the manufacturing process related to the
transferred spine and orthopedic product line, and to act in the capacity of
a
product manufacturer from the point of sale through August 2007. Because of
these additional manufacturing requirements, we deferred $196,000 of the
gain related to the outstanding manufacturing requirements to be completed
by
August 31, 2007.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
report contains certain statements that may be deemed “forward-looking
statements” within the meaning of United States of America securities laws. All
statements, other than statements of historical fact, that address activities,
events or developments that we intend, expect, project, believe or anticipate
will or may occur in the future are forward-looking statements. Such statements
are based upon certain assumptions and assessments made by our management in
light of their experience and their perception of historical trends, current
conditions, expected future developments and other factors they believe to
be
appropriate. The forward-looking statements included in this report are also
subject to a number of material risks and uncertainties, including but not
limited to the risks described under the “Risk Factors” section in Part II
below.
We
encourage you to read those descriptions carefully. We caution you not to place
undue reliance on the forward-looking statements contained in this report.
These
statements, like all statements in this report, speak only as of the date of
this report (unless an earlier date is indicated) and we undertake no obligation
to update or revise the statements except as required by law. Such
forward-looking statements are not guarantees of future performance and actual
results will likely differ, perhaps materially, from those suggested by such
forward-looking statements.
Overview
Regenerative
Cell Technology
Cytori
is
developing the Celution™ System, an innovative medical device that removes
patients’ regenerative cells from their own 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, cardiovascular
disease and cell banking. Our success is dependent upon our ability to conduct
well-designed clinical trials that demonstrate patient benefit and support
reimbursement and physician adoption. We will also need to seek regulatory
clearances for the Celution™ System around the world, and build out our
commercialization and manufacturing infrastructure.
The
following are our major initiatives over the next six to 18 months:
| · |
To
initiate a limited market introduction of the Celution™ System in Europe
for reconstructive surgery;
|
| · |
To
launch our Celution™ System -based cell preservation product in Japan;
|
| · |
To
advance and expand our clinical development product pipeline; and
|
| · |
To
make continued progress in our corporate partnering efforts.
|
The
major
milestones, which will measure our success over this time, are the
following:
| · |
Initiation
of the APOLLO heart attack safety and feasibility
trial;
|
| · |
Announcement
of the outcome of the investigator-initiated breast reconstruction
safety
study in Japan;
|
| · |
Initiation
of a multi-center breast reconstruction claims expansion and reimbursement
trial in Europe;
|
| · |
Expansion
of the Celution™ System distribution network for reconstructive surgery;
|
| · |
Completion
of the internal manufacture build-out for the Celution™ System to meet
anticipated product demand in 2008 and early 2009;
|
| · |
The
achievement of commercialization partners for the Celution™ System in
select therapeutic areas; and
|
| · |
The
signing of a commercialization agreement for adipose-derived regenerative
cell banking in Japan.
|
Breast
Reconstruction
During
the first half of 2007, we continued to make progress toward our commercial
launch of the Celution™ System. Our goal is to make the Celution™ System
available on a targeted basis in Europe in early 2008 for reconstructive
surgery. This will be followed by a broader launch in 2009, when we achieve
reimbursement for reconstruction of breast tissue following a partial mastectomy
(lumpectomy) in breast cancer patients.
To
date
we have entered distribution agreements for Belgium, Greece, Italy, Luxembourg,
Portugal, Spain, and The Netherlands to prepare for the launch of our Celution™
System. We expect to continue to expand our international distribution network
for additional countries throughout Europe later this year. In parallel, we
are
building out our internal manufacturing capabilities so that we will be in
a
position to meet anticipated demand in 2008 and 2009 until the Olympus-Cytori
Joint Venture, described below, is expected to fulfill device manufacturing.
We
have
made progress toward initiating a clinical trial later this year for the
Celution™ System for restoring volume and contour defects resulting from breast
conservation therapy in breast cancer patients. The goal of this study is to
achieve expanded marketing claims and to support reimbursement for use of
adipose-derived regenerative cells, processed via the Celution™ System, in
breast reconstruction post-partial mastectomy.
Breast
reconstruction in partial mastectomy patients represents an important market
for
which there are few, if any, available treatment options. In Europe alone,
there
are an estimated 300,000 patients diagnosed with breast cancer each year of
which an estimated 60% are considered eligible for a partial mastectomy.
Approximately 3,000,000 women in Europe are already diagnosed with breast
cancer. This figure includes women who are newly diagnosed, in active treatment,
have completed active treatment, and those living with progressive symptoms
of
their disease.
-13-
Cardiovascular
Disease
In
January 2007, we initiated a clinical trial of adipose-derived regenerative
cells, processed via the Celution™ System, for chronic myocardial ischemia, a
severe form of coronary artery disease. It is designed as a 36-patient,
double-blind,
placebo-controlled, dose-escalation safety and feasibility study. The
patients’ cells are extracted from their adipose tissue using the Celution™
System, and 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 results are
expected to be reported in the second half of 2008.
We
expect
to start a clinical trial of adipose-derived regenerative cells, processed
via
the Celution™ System, in heart attack patients later in 2007. This trial
is designed as a 48-patient double-blind, placebo-controlled, dose-escalation
safety and feasibility study. The patients’ cells will be extracted from
their adipose tissue using the Celution™ System and injected into their coronary
artery. Once started, the enrollment duration is expected to be 18 months
and initial results are to be reported in approximately 27
months.
The
American Heart Association estimates that in the United States of America 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 favorable 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 regenerative cells residing in adipose 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.
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.
Olympus-Cytori
Joint Venture
The
Joint
Venture currently 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 regenerative cells.
We
have
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 the remainder of
2007,
the Joint Venture will continue its efforts with the goal of scale-up
manufacturing available in late 2008 or early 2009.
We
account for our investment in the Joint Venture under the equity method of
accounting.
Other
Related-Party Transactions
In
a
separate agreement entered into on February 23, 2006, we granted Olympus an
exclusive right to negotiate a commercialization collaboration for the use
of
adipose 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.
In
the
third quarter of 2006, we received net proceeds of $16,219,000 from the sale
of
common stock pursuant to a shelf registration statement, of which $11,000,000
of
common stock was purchased by Olympus.
-14-
MacroPore
Biosurgery
Spine
and orthopedic products
We
have
completed our transition away from the bioresorbable spine and orthopedic
surgical implants business for which we were originally founded. We sold our
product line to Kensey Nash Corporation (“Kensey Nash”) in the second quarter of
2007.
Thin
Film Japan Distribution Agreement
In
2004,
we sold the majority of our Thin Film business to MAST Biosurgery, AG (“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,
which expired in May 2007), 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.
|
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”). We are currently in the process of seeking approval from
the MHLW but commercialization has not yet occurred.
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. We recognized $10,000 during the three and
six
months ended June 30, 2007. We recognized $6,000 and $148,000 in development
revenues during the same periods in 2006, respectively.
Liquidity
As
our
regenerative cell technology business is still in the development stage and
requires large amounts of cash, it is important that we maintain sufficient
liquidity to support our future cash needs. As of June 30, 2007, we had cash,
cash equivalents, and short-term investments on hand of $26,603,000, which
included approximately $19,901,000 that was raised from an equity offering
in
February 2007, net of fees and expenses. In the second quarter of 2007, we
received $6,000,000 from the sale of 1,000,000 shares to Green Hospital Supply,
Inc. During the second quarter of 2007, we also received $3,175,000 from the
sale of our spine and orthopedic product line to Kensey Nash.
Results
of Operations
Our
overall net loss for the three and six months ended June 30, 2007 was $3,996,000
and $12,665,000, which was driven by $4,393,000 and $9,390,000 in research
and
development expenses and $3,433,000 and $6,599,000 in general and administrative
expenses, respectively. This compares to a net loss of $7,313,000 and
$14,768,000 during the three and six months ended June 30, 2006, respectively.
The net loss for the second quarter and six months ended June 30, 2007
reflects expenses related to preparations for regenerative cell technology
commercialization, including build-out of our manufacturing capability, as
well
as costs associated with clinical trials. The losses for these periods were
offset in part by the recognition of a gain on the sale of our bioresorbable
spine and orthopedic implant product line as well as the recognition of
development revenue in the second quarter of 2007. We expect our net operating
loss for 2007 will be approximately $25,000,000.
-15-
Product
revenues
Product
revenues in 2007 and 2006 relate to our MacroPore Biosurgery segment and
consisted of revenues from our spine and orthopedic products. The following
table summarizes the components for the three and six months ended June 30,
2007
and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Spine
and orthopedics products
|
$
|
512,000
|
$
|
453,000
|
$
|
59,000
|
13.0
|
%
|
$
|
792,000
|
$
|
955,000
|
$
|
(163,000
|
)
|
(17.1
|
)%
|
||||||||
|
%
attributable to Medtronic
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||||||||||||||
Spine
and
orthopedic product revenues represent sales of bioresorbable implants used
in
spine and orthopedic surgical procedures. We sold this line of business to
Kensey Nash in May 2007.
The
future.
We
expect to have product revenues related to our MacroPore Biosurgery segment
again when commercialization of the Thin Film products in Japan occurs and
we
begin Thin Film shipments to Senko.
We
also
expect to generate product revenues during 2008 related to our regnerative
cell
therapy segment from the sale of our Celution™ devices and single-use
consumables related to breast reconstructive surgery as well as from our newly
formed commercialization agreement with Green Hospital Supply, Inc. for
regenerative cell banking in Japan signed in August 2007. Refer to Part
II, Item 5 for further information.
Cost
of product revenues
Cost
of
product revenues relates to spine and orthopedic products in our MacroPore
Biosurgery segment and includes material, manufacturing labor, overhead costs,
and an inventory provision, if applicable. The following table summarizes the
components of our cost of revenues for the three and six months ended June
30,
2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Cost
of product revenues
|
$
|
188,000
|
$
|
412,000
|
$
|
(224,000
|
)
|
(54.4
|
)%
|
$
|
403,000
|
$
|
840,000
|
$
|
(437,000
|
)
|
(52.0
|
)%
|
|||||||
|
Inventory
provision
|
—
|
70,000
|
(70,000
|
)
|
—
|
—
|
70,000
|
(70,000
|
)
|
—
|
|||||||||||||||
|
Share-based
compensation
|
9,000
|
22,000
|
(13,000
|
)
|
(59.1
|
)%
|
19,000
|
48,000
|
(29,000
|
)
|
(60.4
|
)%
|
|||||||||||||
|
Total
cost of product revenues
|
$
|
197,000
|
$
|
504,000
|
$
|
(307,000
|
)
|
(60.9
|
)%
|
$
|
422,000
|
$
|
958,000
|
$
|
(536,000
|
)
|
(55.9
|
)%
|
|||||||
|
Total
cost of product revenues as % of product revenues
|
38.5
|
%
|
111.3
|
%
|
53.3
|
%
|
100.3
|
%
|
|||||||||||||||||
MacroPore
Biosurgery:
|
·
|
The
decrease in cost of product revenues for the three and six months
ended
June 30, 2007 as compared to the same periods in 2006 was due largely
to a
decrease in production of MacroPore Biosurgery spine and orthopedic
products, in part due to our sale of the product line in May 2007.
|
|
·
|
Cost
of product revenues includes approximately $9,000 and $19,000 of
share-based compensation expense for the three and six months ended
June
30, 2007, respectively. Share-based compensation expense for the
three and
six months ended June 30, 2006 was $22,000 and $48,000, respectively.
For
further details, see share-based compensation discussion below.
|
|
·
|
During
the second quarter of 2006, we recorded a provision of $70,000 related
to
excess inventory. No such provision was recorded in the first or
second
quarters of 2007.
|
The
future.
We do
not expect to incur costs related to our products until commercialization is
achieved for our Japan Thin Film product line or until we begin to manufacture
the Celution™ device for sale.
-16-
Development
revenues
The
following table summarizes the components of our development revenues for the
three and six months ended June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Regenerative
cell technology:
|
|||||||||||||||||||||||||
|
Development
(Olympus)
|
$
|
1,796,000
|
$
|
—
|
$
|
1,796,000
|
—
|
$
|
1,796,000
|
$
|
683,000
|
$
|
1,113,000
|
163.0
|
%
|
||||||||||
|
Research
grant (NIH)
|
—
|
3,000
|
(3,000
|
)
|
—
|
—
|
7,000
|
(7,000
|
)
|
—
|
|||||||||||||||
|
Regenerative
cell storage services and other
|
8,000
|
54,000
|
(46,000
|
)
|
(85.2
|
)%
|
53,000
|
56,000
|
(3,000
|
)
|
(5.4
|
)%
|
|||||||||||||
|
Total
regenerative cell technology
|
1,804,000
|
57,000
|
1,747,000
|
3,064.9
|
%
|
1,849,000
|
746,000
|
1,103,000
|
147.9
|
%
|
|||||||||||||||
|
MacroPore
Biosurgery:
|
|||||||||||||||||||||||||
|
Development
(Senko)
|
10,000
|
6,000
|
4,000
|
66.7
|
%
|
10,000
|
148,000
|
(138,000
|
)
|
(93.2
|
)%
|
||||||||||||||
|
Total
development revenues
|
$
|
1,814,000
|
$
|
63,000
|
$
|
1,751,000
|
2,779.4
|
%
|
$
|
1,859,000
|
$
|
894,000
|
$
|
965,000
|
107.9
|
%
|
|||||||||
Regenerative
cell technology:
|
·
|
We
recognize deferred revenues, related party, as development revenue
when
certain performance obligations are met (i.e., using a proportional
performance approach). During the three and six months ended June
30,
2007, we recognized $1,796,000 of revenue associated with our arrangements
with Olympus. The revenue recognized in the second quarter of 2007
was a
result of completion of a preclinical study. During the three and
six
months ended June 30, 2006, we recognized $0 and $683,000, respectively,
of revenue associated with our arrangements with Olympus. The revenue
recognized in the first quarter of 2006 was a result of completion
of a
pre-clinical study and a milestone payment upon receipt of a CE Mark
for
the first generation Celution™ System.
|
|
·
|
The
research grant revenue related to a now-completed agreement with
NIH.
Under this arrangement, the NIH reimbursed us for “qualifying
expenditures” related to research on Adipose-Derived Cell Therapy for
Myocardial Infarction. Our policy is to recognize revenues under
the NIH
grant arrangement as the lesser of (i) qualifying costs incurred
(and not
previously recognized), plus our allowable grant fees for which we
are
entitled to funding or (ii) the amount determined by comparing the
outputs
generated to date versus the total outputs expected to be achieved
under
the research arrangement.
|
During
the three and six months ended June 30, 2006, we incurred $17,000 and $86,000
in
expenditures, of which $3,000 and $7,000 were qualified. We recorded a total
of
$3,000 and $7,000 in revenues for the three and six months ended June 30, 2006,
respectively, which include allowable grant fees as well as cost reimbursements.
Our work under this NIH agreement was completed in 2006; as a result, there
were
no comparable revenues or costs in 2007.
MacroPore
Biosurgery:
Under
a
Distribution Agreement with Senko we are entitled to earn payments based on
achieving the following defined milestones:
|
·
|
Upon
notifying Senko of completion of the initial regulatory application
to the
MHLW for the Thin Film product, we were entitled to a nonrefundable
payment of $1,250,000. We so notified Senko on September 28, 2004,
received payment in October 2004, and recorded deferred revenues
of
$1,250,000. As of June 30, 2007, of the amount deferred, we have
recognized development revenues of $371,000 ($10,000 in 2007, $152,000
in
2006, $51,000 in 2005, and $158,000 in 2004).
|
|
·
|
Under
this agreement, we also received a $1,500,000 license fee that was
recorded as a component of deferred revenues in the accompanying
balance
sheet. We are also entitled to a nonrefundable payment of $250,000
once we
achieve commercialization. Because the $1,500,000 in license fees
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 $2,749,000 in revenues during the remainder of 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 from the MHLW. We are still awaiting regulatory clearance
from the MHLW in order for initial commercialization to occur. Accordingly,
we
may recognize approximately $1,129,000 (consisting of $879,000 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, if achieved. 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.
-17-
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 clinical studies. The following
table summarizes the components of our research and development expenses for
the
three and six months ended June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Regenerative
cell technology:
|
|||||||||||||||||||||||||
|
Regenerative
cell technology
|
$
|
2,837,000
|
$
|
3,914,000
|
$
|
(1,077,000
|
)
|
(27.5
|
)%
|
$
|
6,073,000
|
$
|
6,980,000
|
$
|
(907,000
|
)
|
(13.0
|
)%
|
|||||||
|
Development
milestone (Joint Venture)
|
1,329,000
|
1,513,000
|
(184,000
|
)
|
(12.2
|
)%
|
2,834,000
|
2,866,000
|
(32,000
|
)
|
(1.1
|
)%
|
|||||||||||||
|
Research
grants (NIH)
|
—
|
17,000
|
(17,000
|
)
|
—
|
—
|
86,000
|
(86,000
|
)
|
—
|
|||||||||||||||
|
Share-based
compensation
|
175,000
|
261,000
|
(86,000
|
)
|
(33.0
|
)%
|
327,000
|
541,000
|
(214,000
|
)
|
(39.6
|
)%
|
|||||||||||||
|
Total
regenerative cell technology
|
4,341,000
|
5,705,000
|
(1,364,000
|
)
|
(23.9
|
)%
|
9,234,000
|
10,473,000
|
(1,239,000
|
)
|
(11.8
|
)%
|
|||||||||||||
|
MacroPore
Biosurgery:
|
|||||||||||||||||||||||||
|
Bioresorbable
polymer implants
|
30,000
|
271,000
|
(241,000
|
)
|
(88.9
|
)%
|
111,000
|
588,000
|
(477,000
|
)
|
(81.1
|
)%
|
|||||||||||||
|
Development
milestone (Senko)
|
21,000
|
37,000
|
(16,000
|
)
|
(43.2
|
)%
|
43,000
|
115,000
|
(72,000
|
)
|
(62.6
|
)%
|
|||||||||||||
|
Share-based
compensation
|
1,000
|
8,000
|
(7,000
|
)
|
(87.5
|
)%
|
2,000
|
21,000
|
(19,000
|
)
|
(90.5
|
)%
|
|||||||||||||
|
Total
MacroPore Biosurgery
|
52,000
|
316,000
|
(264,000
|
)
|
(83.5
|
)%
|
156,000
|
724,000
|
(568,000
|
)
|
(78.5
|
)%
|
|||||||||||||
|
Total
research and development expenses
|
$
|
4,393,000
|
$
|
6,021,000
|
$
|
(1,628,000
|
)
|
(27.0
|
)%
|
$
|
9,390,000
|
$
|
11,197,000
|
$
|
(1,807,000
|
)
|
(16.1
|
)%
|
|||||||
Regenerative
cell technology:
| · |
Regenerative
cell technology expenses relate to the development of a technology
platform that involves using adipose 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 and from other investors in 2006 and 2007.
Labor-related expenses, not including share-based compensation, decreased
by $230,000 for the six months ended June 30, 2007 as compared to
the same
period in 2006. Professional services expense, which includes pre-clinical
study costs, decreased by $1,152,000 for the six months ended June
30,
2007 as compared to the same period in 2006. This was due to decreases
in
temporary labor, the use of consultants, and a change in focus from
pre-clinical studies to clinical studies. Clinical study costs increased
by $300,000 for the six months ended June 30, 2007 as compared to
the same
period in 2006. Rent and utilities expense decreased by $159,000
in the
six months ended June 30, 2007 as compared to 2006 due to the new
lease
terms at our Top Gun location in San Diego, CA. Other supplies decreased
by $108,000 during the six months ended June 30, 2007 as compared
to 2006.
Repairs and maintenance increased by $195,000 for the six months
ended
June 30, 2007, as compared to the same period in 2006.
|
| · |
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 regenerative cells for multiple large markets.
For the six months ended June 30, 2007 and 2006, costs associated
with the
development of the device were $2,834,000 and $2,866,000, respectively.
These expenses were composed of $1,719,000 and $1,505,000 in labor
and
related benefits, $530,000 and $739,000 in consulting and other
professional services, $341,000 and $439,000 in supplies and $244,000
and
$183,000, respectively, in other miscellaneous expense.
|
| · |
In
2004, we entered into an agreement with the NIH to reimburse us for
up to
$950,000 (Phase I $100,000 and Phase II $850,000) in “qualifying
expenditures” related to research on Adipose-Derived Cell Therapy for
Myocardial Infarction. For the three and six months ended June 30,
2006,
we incurred $17,000 and $86,000 of direct expenses relating entirely
to
Phase II ($14,000 and $79,000 of which were not reimbursed, respectively).
Our work under this NIH agreement was completed during 2006; as a
result,
there were no comparable costs in
2007.
|
| · |
Share-based
compensation for the regenerative cell technology segment of research
and
development was $175,000 and $327,000 for the three and six months
ended
June 30, 2007, respectively. Share-based compensation was $262,000
and
$541,000 for the three and six months ended June 30, 2006, respectively.
See share-based compensation discussion below for more
details.
|
MacroPore
Biosurgery:
| · |
Labor
and related benefits expense, not including share-based compensation,
decreased by $177,000 for the six months ended June 30, 2007 as compared
to the same period in 2006. This was due to a redistribution of labor
resources from one business segment to the other, as well as to
termination of spine and orthopedics product research upon sale of
that
product line in May 2007.
|
| · |
Under
a Distribution Agreement with Senko, we are responsible for the completion
of the initial regulatory application to the MHLW and commercialization
of
the Thin Film product line in Japan. Commercialization occurs when
one or
more Thin Film product registrations are completed with the MHLW.
During
the three and six months ended June 30, 2007, we incurred $28,000
of
expenses related to this regulatory and registration process. We
incurred
$37,000 and $115,000 of expenses for the same periods in 2006.
|
| · |
Share-based
compensation for the MacroPore Biosurgery segment of research and
development for the three and six months ended June 30, 2007 was
$1,000
and $2,000, respectively. Share-based compensation was $8,000 and
$21,000,
respectively, for the three and six months ended June 30, 2006. See
share-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 working
to develop therapies for cardiovascular disease as well as new approaches
for aesthetic and reconstructive surgery, gastrointestinal disorders and spine
and orthopedic conditions. We are also developing a regenerative cell banking
platform for use in hospitals and clinics that will preserve harvested
regenerative cells for potential future use. The expenditures have and will
continue to primarily relate to developing therapeutic applications and
conducting pre-clinical and clinical studies on adipose-derived regenerative
cells.
-18-
Sales
and marketing expenses
Sales
and
marketing expenses include costs of marketing personnel, tradeshows, physician
training, and promotional activities and materials. Before the sale of our
spine
and orthopedic implant product line in May 2007, Medtronic was responsible
for
the distribution, marketing, and sales support of our spine and orthopedic
devices. The following table summarizes the components of our sales and
marketing expenses for the three and six months ended June 30, 2007 and
2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Regenerative
cell technology:
|
|||||||||||||||||||||||||
|
International
sales and marketing
|
$
|
412,000
|
$
|
313,000
|
$
|
99,000
|
31.6
|
%
|
$
|
846,000
|
$
|
600,000
|
$
|
246,000
|
41.0
|
%
|
|||||||||
|
Share-based
compensation
|
65,000
|
87,000
|
(22,000
|
)
|
(25.3
|
)%
|
135,000
|
188,000
|
(53,000
|
)
|
(28.2
|
)%
|
|||||||||||||
|
Total
regenerative cell technology
|
477,000
|
400,000
|
77,000
|
19.3
|
%
|
981,000
|
788,000
|
193,000
|
24.5
|
%
|
|||||||||||||||
|
MacroPore
Biosurgery:
|
|||||||||||||||||||||||||
|
General
corporate marketing
|
8,000
|
47,000
|
(39,000
|
)
|
(83.0
|
)%
|
21,000
|
130,000
|
(109,000
|
)
|
(83.8
|
)%
|
|||||||||||||
|
International
sales and marketing
|
34,000
|
24,000
|
10,000
|
41.7
|
%
|
63,000
|
47,000
|
16,000
|
34.0
|
%
|
|||||||||||||||
|
Share-based
compensation
|
—
|
2,000
|
(2,000
|
)
|
—
|
—
|
9,000
|
(9,000
|
)
|
—
|
|||||||||||||||
|
Total
MacroPore Biosurgery
|
42,000
|
73,000
|
(31,000
|
)
|
(42.5
|
)%
|
84,000
|
186,000
|
(102,000
|
)
|
(54.8
|
)%
|
|||||||||||||
|
Total
sales and marketing expenses
|
$
|
519,000
|
$
|
473,000
|
$
|
46,000
|
9.7
|
%
|
$
|
1,065,000
|
$
|
974,000
|
$
|
91,000
|
9.3
|
%
|
|||||||||
Regenerative
Cell Technology:
| · |
International
sales and marketing expenditures for the three and six months ended
June
30, 2007 and 2006 relate primarily to salary expenses 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.
|
| · |
Share-based
compensation for the regenerative cell segment of sales and marketing
for
the three and six months ended June 30, 2007 was $65,000 and $135,000,
respectively. Share-based compensation for the regenerative cell
segment
of sales and marketing for the three and six months ended June 30,
2006
was $87,000 and $188,000, respectively. See share-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 relevant to bioresorbable implants. Expenditures in this
area
continued to decrease as we focused more on our regenerative cell
technology business and prepared to exit from our spine and orthopedic
implant business.
|
| · |
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.
|
| · |
Share-based
compensation for the MacroPore Biosurgery segment of sales and marketing
for the three and six months ended June 30, 2007 was $0. Share-based
compensation for the MacroPore Biosurgery segment of sales and marketing
for the three and six months ended June 30, 2006 was $2,000 and $9,000,
respectively. See share-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,
which is expected to be commercialized in 2008.
-19-
General
and administrative expenses
General
and administrative expenses include costs for administrative personnel, legal
and other professional expenses, and general corporate expenses. The following
table summarizes the general and administrative expenses for the three and
six
months ended June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
General
and administrative
|
$
|
3,076,000
|
$
|
2,919,000
|
$
|
157,000
|
5.4
|
%
|
$
|
5,927,000
|
$
|
5,758,000
|
$
|
169,000
|
2.9
|
%
|
|||||||||
|
Share-based
compensation
|
357,000
|
689,000
|
(332,000
|
)
|
(48.2
|
)%
|
672,000
|
1,066,000
|
(394,000
|
)
|
(37.0
|
)%
|
|||||||||||||
|
Total
general and administrative expenses
|
$
|
3,433,000
|
$
|
3,608,000
|
$
|
(175,000
|
)
|
(4.9
|
)%
|
$
|
6,599,000
|
$
|
6,824,000
|
$
|
(225,000
|
)
|
(3.3
|
)%
|
|||||||
| · |
Professional
services costs increased by $310,000 during the six month ended June
30,
2007 as compared to the same period in 2006 due to the increased
use of
financial and business advisory services. This was offset by a decrease
of
$122,000 in depreciation and amortization for the six months ended
June
30, 2007, compared to the same period in
2006.
|
| · |
We
have incurred 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. The amended license agreement
signed with the Regents of the University of California
(“UC”) in the third quarter of 2006 clarified that we are
responsible for all patent prosecution and litigation costs related
to
this lawsuit. In the three and six months ended June 30, 2007, we
expensed
$518,000 and $602,000, respectively, for legal fees related to this
license. For the same periods in 2006, we expensed $861,000 and
$1,366,000, respectively. Our legal expenses related to this lawsuit
will
fluctuate depending upon the activity incurred during each
period.
|
| · |
Share-based
compensation related to general and administrative expense for the
three
and six months ended June 30, 2007 was $357,000 and $672,000,
respectively. Share-based compensation related to general and
administrative expense for the same periods in 2006 was $689,000
and
$1,066,000, respectively. See share-based compensation discussion
below
for more details.
|
The
future.
We
expect general and administrative expenses of approximately $11,000,000 in
2007.
We will seek ways to minimize the ratio of these expenses to research and
development expenses.
We
expect
to continue to incur substantial legal expenses in connection with the
University of Pittsburgh’s 2004 lawsuit and for the forseeable
future.
Share-based
compensation expenses
We
adopted SFAS 123R on January 1, 2006. The following table summarizes the
components of our share-based compensation for the three and six months ended
June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Regenerative
cell technology:
|
|||||||||||||||||||||||||
|
Research
and development-related
|
$
|
175,000
|
$
|
261,000
|
$
|
(86,000
|
)
|
(33.0
|
)%
|
$
|
327,000
|
$
|
541,000
|
$
|
(214,000
|
)
|
(39.6
|
)%
|
|||||||
|
Sales
and marketing-related
|
65,000
|
87,000
|
(22,000
|
)
|
(25.3
|
)%
|
135,000
|
188,000
|
(53,000
|
)
|
(28.2
|
)%
|
|||||||||||||
|
Total
regenerative cell technology
|
240,000
|
348,000
|
(108,000
|
)
|
(31.0
|
)%
|
462,000
|
729,000
|
(267,000
|
)
|
(36.6
|
)%
|
|||||||||||||
|
MacroPore
Biosurgery:
|
|||||||||||||||||||||||||
|
Cost
of product revenues
|
9,000
|
22,000
|
(13,000
|
)
|
(59.1
|
)%
|
19,000
|
48,000
|
(29,000
|
)
|
(60.4
|
)%
|
|||||||||||||
|
Research
and development-related
|
1,000
|
8,000
|
(7,000
|
)
|
(87.5
|
)%
|
2,000
|
21,000
|
(19,000
|
)
|
(90.5
|
)%
|
|||||||||||||
|
Sales
and marketing-related
|
—
|
2,000
|
(2,000
|
)
|
—
|
—
|
9,000
|
(9,000
|
)
|
—
|
|||||||||||||||
|
Total
MacroPore Biosurgery
|
10,000
|
32,000
|
(22,000
|
)
|
(68.8
|
)%
|
21,000
|
78,000
|
(57,000
|
)
|
(73.1
|
)%
|
|||||||||||||
|
General
and administrative-related
|
357,000
|
689,000
|
(332,000
|
)
|
(48.2
|
)%
|
672,000
|
1,066,000
|
(394,000
|
)
|
(37.0
|
)%
|
|||||||||||||
|
Total
share-based compensation
|
$
|
607,000
|
$
|
1,069,000
|
$
|
(462,000
|
)
|
(43.2
|
)%
|
$
|
1,155,000
|
$
|
1,873,000
|
$
|
(718,000
|
)
|
(38.3
|
)%
|
|||||||
During
the first quarter of 2007, we issued to our officers and directors stock options
to purchase up to 410,000 shares of our common stock, with a four-year vesting
for our officers and 24-month vesting for our directors. The grant date fair
value of option awards granted to our officers and directors was $3.82 and
$3.70
per share, respectively. The resulting share-based compensation expense of
$1,480,000, net of estimated forfeitures, will be recognized as expense over
the
respective vesting periods.
During
the second quarter of 2007, we made a company-wide option grant to our
non-executive employees to purchase up to 213,778 shares of our common stock,
subject to a four-year vesting schedule. The grant date fair value for the
awards was $3.66 per share. The resulting share-based compensation expense
of
$739,000, net of estimated forfeitures, will be recognized as expense over
the
respective vesting periods.
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 June 30, 2007, the total compensation cost
related to non-vested stock options not yet recognized for all our plans is
approximately $5,269,000. These costs are expected to be recognized over a
weighted average period of 1.87 years.
-20-
Gain
on sale of assets
The
following is a table summarizing the gain on sale of assets from the disposal
of
our spine and orthopedic product line for the three and six months ended June
30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Gain
on sale of assets
|
$
|
1,858,000
|
$
|
—
|
$
|
1,858,000
|
—
|
$
|
1,858,000
|
$
|
—
|
$
|
1,858,000
|
—
|
|||||||||||
|
Total
gain on sale of assets
|
$
|
1,858,000
|
$
|
—
|
$
|
1,858,000
|
—
|
$
|
1,858,000
|
$
|
—
|
$
|
1,858,000
|
—
|
|||||||||||
| · |
In
May 2007, we sold to Kensey Nash our intellectual property rights
and
tangible assets related to our spine and orthopedic bioresorbable
implant
product line, a part of our MacroPore Biosurgery business. Excluded
from
the sale was our Japan Thin Film product line. We received $3,175,000
in
cash related to the disposition. The assets comprising the spine
and
orthopedic product line transferred to Kensey Nash were as
follows:
|
|
Carrying
Value Prior to Disposition
|
||||
|
Inventory
|
$
|
94,000
|
||
|
Other
current assets
|
17,000
|
|||
|
Assets
held for sale
|
436,000
|
|||
|
Goodwill
|
465,000
|
|||
|
$
|
1,012,000
|
|||
| · |
We
incurred expenses of $109,000 in connection with the sale. We recognized
approximately $1,858,000 as gain on sale in the statement of operations
during the second quarter of 2007. The revenues and expenses related
to
the spine and orthopedic product line transferred to Kensey Nash
for the
three and six months ended June 30, 2007 and 2006 were as
follows:
|
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Revenues
|
$
|
512,000
|
$
|
453,000
|
$
|
792,000
|
$
|
955,000
|
|||||
|
Cost
of product revenues
|
(197,000
|
)
|
(504,000
|
)
|
(422,000
|
)
|
(958,000
|
)
|
|||||
|
Research
& development
|
(31,000
|
)
|
(279,000
|
)
|
(113,000
|
)
|
(609,000
|
)
|
|||||
|
Sales
& marketing
|
(8,000
|
)
|
(50,000
|
)
|
(21,000
|
)
|
(138,000
|
)
|
|||||
| · |
As
part of the disposition agreement, we are required to provide training
to
Kensey Nash representatives in all aspects of the manufacturing process
related to the transferred spine and orthopedic product line, and
to act
in the capacity of a product manufacturer from the point of sale
through
August 2007. Because of these additional manufacturing requirements,
we
deferred $196,000 of the gain related to the outstanding manufacturing
requirements to be completed by August 31, 2007.
|
-21-
Change
in fair value of option liabilities
The
following is a table summarizing the change in fair value of option liabilities
for the three and six months ended June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Change
in fair value of option liability
|
$
|
—
|
$
|
(2,765,000
|
)
|
$
|
2,765,000
|
—
|
$
|
—
|
$
|
(3,140,000
|
)
|
$
|
3,140,000
|
—
|
|||||||||
|
Change
in fair value of put option liability
|
(100,000
|
)
|
100,000
|
(200,000
|
)
|
(200.0
|
)%
|
100,000
|
—
|
100,000
|
—
|
||||||||||||||
|
Total
change in fair value of option liabilities
|
$
|
(100,000
|
)
|
$
|
(2,665,000
|
)
|
$
|
2,565,000
|
(96.2
|
)%
|
$
|
100,000
|
$
|
(3,140,000
|
)
|
$
|
3,240,000
|
(103.2
|
)%
|
||||||
| · |
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, 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:
|
June
30,
2007
|
December
31,
2006
|
November
4,
2005
|
||||||||
|
Expected
volatility of Cytori
|
61.00
|
%
|
66.00
|
%
|
63.20
|
%
|
||||
|
Expected
volatility of the Joint Venture
|
61.00
|
%
|
56.60
|
%
|
69.10
|
%
|
||||
|
Bankruptcy
recovery rate for Cytori
|
21.00
|
%
|
21.00
|
%
|
21.00
|
%
|
||||
|
Bankruptcy
threshold for Cytori
|
$
|
10,460,000
|
$
|
10,110,000
|
$
|
10,780,000
|
||||
|
Probability
of a change of control event for Cytori
|
2.22
|
%
|
1.94
|
%
|
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
|
5.03
|
%
|
4.71
|
%
|
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.
-22-
Income
taxes
On
July
13, 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty
in income taxes recognized in an entity’s financial statements in accordance
with SFAS 109, and prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount
that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
We
adopted the provisions of FIN 48 on January 1, 2007. There were no unrecognized
tax benefits as of the date of adoption. There are no unrecognized tax benefits
included in the balance sheet that would, if recognized, affect the effective
tax rate.
Our
practice is to recognize interest and/or penalties related to income tax matters
in income tax expense. We had $0 accrued for interest and penalties on our
balance sheet as of June 30, 2007 and December 31, 2006, and have recognized
$0
in interest and/or penalties in our statement of operations for the three and
six months ended June 30, 2007.
With
limited exception, we are subject to taxation in the U.S. and California
jurisdictions. Our tax years for 1997 and forward are subject to examination
by
the U.S. and California tax authorities due to the carryforward of unutilized
net operating losses and research and development credits.
The
adoption of FIN No. 48 did not impact our financial condition, results of
operations or cash flows. At January 1, 2007, we had net deferred tax assets
of
$38,505,000 million. The deferred tax assets are primarily composed of federal
and state tax net operating loss carryforwards and federal and state R&D
credit carryforwards. Due to uncertainties surrounding our ability to generate
future taxable income to realize these assets, a full valuation allowance has
been established to offset our deferred tax asset. Additionally, the future
utilization of our net operating loss and R&D credit carryforwards to offset
future taxable income may be subject to a substantial annual limitation as
a
result of ownership changes that may have occurred previously or that could
occur in the future. We are in the process of updating our Section 382/383
analysis through the period ending December 31, 2006. We have not yet determined
whether such an ownership change has occurred, however, the Company is currently
working to complete a Section 382/383 analysis regarding the limitation of
the
net operating losses and research and development credits. Similarly, we plan
to
complete an R&D credit analysis regarding the calculation of the R&D
credit. When these analyses are completed, we may need to update the amount
of
unrecognized tax benefits we have reported under FIN No. 48. Therefore, we
expect that the unrecognized tax benefits may change within 12 months of this
reporting date. At this time, we cannot estimate how much the unrecognized
tax
benefits may change. Due to the existence of the valuation allowance,
future changes in our unrecognized tax benefits will not impact
our effective tax rate.
Financing
items
The
following table summarizes interest income, interest expense, and other income
and expense for the three and six months ended June 30, 2007 and
2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Interest
income
|
$
|
348,000
|
$
|
183,000
|
$
|
165,000
|
90.2
|
%
|
$
|
545,000
|
$
|
379,000
|
$
|
166,000
|
43.8
|
%
|
|||||||||
|
Interest
expense
|
(43,000
|
)
|
(53,000
|
)
|
10,000
|
(18.9
|
)%
|
(95,000
|
)
|
(111,000
|
)
|
16,000
|
(14.4
|
)%
|
|||||||||||
|
Other
income (expense)
|
(52,000
|
)
|
(1,000
|
)
|
(51,000
|
)
|
5,100.0
|
%
|
(54,000
|
)
|
(6,000
|
)
|
(48,000
|
)
|
800.0
|
%
|
|||||||||
|
Total
|
$
|
253,000
|
$
|
129,000
|
$
|
124,000
|
96.1
|
%
|
$
|
396,000
|
$
|
262,000
|
$
|
134,000
|
51.1
|
%
|
|||||||||
| · |
Interest
income increased for the three and six months ended June 30, 2007
due to
an increased cash balance available for investment.
|
| · |
Interest
expense decreased in 2007 as compared to 2006 due to lower principal
balances on our long-term equipment-financed borrowings offset by
an
additional promissory note of approximately $600,000 executed in
December
2006.
|
| · |
The
changes in other income (expense) in the first quarter of 2007 as
compared
to the same period in 2006 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 remain relatively consistent during the remainder of
2007.
Equity
gain (loss) from investment in Joint Venture
The
following table summarizes our equity loss from investment in joint venture
for
the three and six months ended June 30, 2007 and 2006:
|
For
the three months ended June 30,
|
For
the six months ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
||||||||||||||||||
|
Equity
gain (loss) in investment
|
$
|
9,000
|
$
|
(17,000
|
)
|
$
|
26,000
|
(152.9
|
)%
|
$
|
6,000
|
$
|
(66,000
|
)
|
$
|
72,000
|
(109.1
|
)%
|
|||||||
The
losses in 2006 relate entirely to our 50% equity interest in the Joint Venture,
which we account for using the equity method of accounting. We experienced
a
small gain with relation to this investment during the three and six months
ended June 30, 2007. This was due to an adjustment to an estimated
expense.
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 general and administrative expenses. 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.
-23-
Liquidity
and Capital Resources
Short-term
and long-term liquidity
The
following is a summary of our key liquidity measures at June 30, 2007 and
December 31, 2006:
|
June
30, 2007
|
December
31, 2006
|
$
Differences
|
%
Differences
|
||||||||||
|
Cash
and cash equivalents
|
$
|
22,808,000
|
$
|
8,902,000
|
$
|
13,906,000
|
156.2
|
%
|
|||||
|
Short-term
investments, available for sale
|
3,795,000
|
3,976,000
|
(181,000
|
)
|
(4.6
|
)%
|
|||||||
|
Total
cash and cash equivalents and short-term investments, available for
sale
|
$
|
26,603,000
|
$
|
12,878,000
|
13,725,000
|
106.6
|
%
|
||||||
|
Current
assets
|
$
|
27,304,000
|
$
|
13,978,000
|
$
|
13,326,000
|
95.3
|
%
|
|||||
|
Current
liabilities
|
5,598,000
|
6,586,000
|
(988,000
|
)
|
(15.0
|
)%
|
|||||||
|
Working
capital
|
$
|
21,706,000
|
$
|
7,392,000
|
$
|
14,314,000
|
193.6
|
%
|
|||||
In
order
to provide greater financial flexibility and liquidity, and in view of the
substantial cash needs of our regenerative cell business, we have an ongoing
need to raise additional capital. In the third quarter of 2006, we received
net
proceeds of $16,219,000 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 $19,901,000 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.
In the
second quarter of 2007, we received net proceeds of $6,000,000 from the sale
of
1,000,000 shares of common stock to Green Hospital Supply, Inc. in a private
placement. Also
in
the second quarter of 2007, we successfully divested our spine and orthopedic
product line to Kensey Nash for gross proceeds of $3,175,000.
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 June 30, 2008.
From
inception to June 30, 2007, 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,
|
| · |
Receiving
net proceeds of $16,219,000 from the sale of common stock under our
shelf
registration statement in August 2006,
|
| · |
Receiving
net proceeds of $19,901,000 from the sale of common stock and common
stock
warrants under the shelf registration statement in February
2007.
|
| · |
Receiving
net proceeds of $6,000,000 from the common stock private placement
to
Green Hospital Supply, Inc., in April 2007.
|
| · |
Receiving
gross proceeds of $3,175,000 from the sale of our spine and orthopedic
product line to Kensey Nash in May
2007.
|
We
don’t
expect significant capital expenditures during the remainder of 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.
-24-
The
following summarizes our contractual obligations and other commitments at June
30, 2007, and the effect such obligations could have on our liquidity and cash
flow in future periods:
|
Payments
due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1
year
|
1
- 3 years
|
3
- 5 years
|
More
than
5
years
|
|||||||||||
|
Long-term
obligations
|
$
|
1,384,000
|
$
|
771,000
|
$
|
613,000
|
$
|
—
|
$
|
—
|
||||||
|
Interest
commitment on long-term obligations
|
147,000
|
108,000
|
39,000
|
—
|
—
|
|||||||||||
|
Operating
lease obligations
|
4,233,000
|
1,468,000
|
2,765,000
|
—
|
—
|
|||||||||||
|
Pre-clinical
research study obligations
|
267,000
|
267,000
|
—
|
—
|
—
|
|||||||||||
|
Clinical
research study obligations
|
6,314,000
|
5,458,000
|
856,000
|
—
|
—
|
|||||||||||
|
Total
|
$
|
12,345,000
|
$
|
8,072,000
|
$
|
4,273,000
|
$
|
—
|
$
|
—
|
||||||
Cash
(used in) provided by operating, investing, and financing activities for the
six
months ended June 30, 2007 and 2006 is summarized as follows:
|
For
the six months ended June 30,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
cash used in operating activities
|
$
|
(15,009,000
|
)
|
$
|
(4,188,000
|
)
|
|
|
Net
cash provided by (used in) investing activities
|
2,880,000
|
(1,631,000
|
)
|
||||
|
Net
cash provided by financing activities
|
26,035,000
|
191,000
|
|||||
Operating
activities
Net
cash
(used in) provided by operating activities for both 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 $12,665,000 net loss for the six months
ended June 30, 2007. The operating cash impact of this loss was $15,009,000,
after adjusting for the gain on sale of our spine and orthopedic product line
(considered an investing activity), the recognition of non-cash development
revenue, share-based compensation of $1,155,000, other adjustments including
material non-cash activities, such as depreciation and amortization, and 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 $14,768,000 net loss for the six months
ended June 30, 2006. The cash impact of this loss was $4,188,000, after
adjusting for the $11,817,000 we received from Olympus in the first half of
the
year. Other adjustments include material non-cash activities, such as
depreciation and amortization, changes in the fair value of the Olympus option
liabilities, share-based compensation expense, and equity loss from investment
in Joint Venture, as well as changes in working capital due to the timing of
product shipments (accounts receivable) and payment of liabilities.
Investing
activities
Net
cash
provided by investing activities for the six months ended June 30, 2007 resulted
primarily from proceeds from the sale of our spine and orthopedics bioresorbable
implant product line to Kensey Nash.
Net
cash
used in investing activities for the six months ended June 30, 2006 resulted
primarily from expenditures for leasehold improvements, offset in part by the
net proceeds from the sale of short-term investments.
Capital
spending is essential to our product innovation initiatives and to maintain
our
operational capabilities. For the six months ended June 30, 2007 and 2006,
we
used cash to purchase $365,000 and $2,331,000, respectively, of property and
equipment, primarily, to support the research and development of the
regenerative cell technology platform. The high level of 2006 capital spending
was caused primarily by expenditures for leasehold improvements made to our
new
Callan Road facilities.
Financing
Activities
The
net
cash provided by financing activities for the six months ended June 30, 2007
related mainly to the issuance of 3,746,000 shares of our common stock and
1,873,000 common stock warrants in exchange for approximately $21,500,000
($19,901,000 net of direct offering costs) as well as the sale of 1,000,000
shares of treasury stock for $6,000,000.
The
net
cash provided by financing activities for the year ended June 30, 2006 related
mainly to the exercise of employee stock options offset by the principal
payments on long-term obligations.
Critical
Accounting Policies and Significant Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of our assets, liabilities,
revenues, and expenses, and that affects 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 policies that require us to make our most significant
judgments and, as a result, could have the greatest impact on our future
financial results.
-25-
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 and Senko. 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 contain a number of distinct revenue
streams, known as “elements.” For example, our Distribution Agreement with Senko
contains direct or indirect future revenue streams related to:
| · |
A
distribution license fee (which was paid at the outset of the
arrangement),
|
| · |
Milestone
payments for achieving commercialization of the Thin Film product
line in
Japan,
|
| · |
Training
for representatives of Senko,
|
| · |
Sales
of Thin Film products to Senko, and
|
| · |
Payments
in the nature of royalties on future product sales made by Senko
to its
end customers.
|
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, and 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 milestone
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.
-26-
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 assistance, 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 the recognition issue with regard
to
upfront license fees and milestones that we have considered during the reporting
period:
| · |
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
initially classified this amount as deferred revenues. Approximately
$371,000 ($10,000 in 2007, $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, as we have
yet to
receive definitive notification from the
MHLW.
|
| · |
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 have recognized revenues
from the license/development accounting unit using a “proportional
performance” methodology, resulting in the derecognition of amounts
recorded in the deferred revenues, related party account as we complete
various milestones underlying the development services. For instance,
we
have recognized 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.
|
-27-
Goodwill
Impairment Testing
In
late
2002, we purchased StemSource, Inc. and recognized over $4,600,000 in goodwill
associated with the acquisition, of which $3,922,000 remains on our balance
sheet as of June 30, 2007. 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.
The $465,000 of goodwill determined to be related to our MacroPore
Biosurgery reporting unit was transferred to Kensey Nash upon the
sale of
our spine and orthopedic product line in 2007. Therefore, as of June
30,
2007, all of our goodwill relates to our regenerative cell
business.
|
| · |
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.
-28-
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),
and
|
| · |
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
the 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.
-29-
Recent
Accounting Pronouncements
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 consolidated financial statements.
In
March
2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
on Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities” (“EITF
07-3”). EITF 07-3 states that nonrefundable advance payments for future research
and development activities should be deferred and capitalized. Such amounts
should be recognized as an expense as the goods are delivered or the related
services are performed. The guidance is effective for all periods beginning
after December 15, 2007. We are currently in the process of evaluating whether
the adoption of EITF 07-3 will have a significant effect on our consolidated
financial statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities- including an amendment of FASB Statement
No. 115” (“SFAS 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. The provisions
of
SFAS 159 are effective for financial statements issued for fiscal years
beginning after November 15, 2007. We do not believe that the adoption of SFAS
159 will have a significant effect on our consolidated financial statements.
We
are
exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates.
Interest
Rate Exposure
We
are
not subject to market risk due to fluctuations in interest rates on our
long-term obligations as they bear a fixed rate of interest. Our exposure
relates primarily to short-term investments. These short-term investments,
reported at an aggregate fair market value of $3,795,000 as of June 30, 2007,
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 June 30, 2007, 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 of America for the quarter ended June 30, 2007,
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 prospective 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 to begin in 2007.
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 June 30, 2007, our disclosure controls and procedures
are
effective. There has been no change in our internal control over financial
reporting during the quarter and six months ended June 30, 2007, that has
materially affected, or is likely to materially affect, our internal control
over financial reporting.
-30-
From
time
to time, we have been involved in routine litigation incidental to the conduct
of our business. As of June 30, 2007, we were not a party to any material legal
proceeding. We are not formally a party to the University of Pittsburgh patent
litigation. However, we are responsible for reimbursing certain related
litigation costs.
In
analyzing our company, you should consider carefully the following risk factors
together with all of the other information included in this quarterly report
on
Form 10-Q. Factors that could adversely affect our business, operating results,
and financial condition, as well as adversely affect the value of an investment
in our common stock, include those discussed below, as well as those discussed
above in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere throughout this quarterly report on Form
10-Q.
We
are
subject to the following significant risks, among others:
We
will need to raise more cash in the future
We
have
almost 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. 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 our results of
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.
As
our focus on our regenerative cell technology has increased, 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 regenerative cell technology 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 and on a different scale than we have operated in the past
(operational risk), that we will be able to achieve the desired therapeutic
results using regenerative cells (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.
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 potentially 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.
-31-
We
have a limited operating history; our operating results and stock price, like
those of all emerging life science companies, 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 of future performance.
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. All of
our
recent product revenues have come from our spine and orthopedics bioresorbable
implants product line, which we sold in May 2007.
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.
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 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 products. It is
possible that certain of these competitors may obtain patent protection,
approval, or clearance from the FDA or achieve commercialization earlier than
we, any of which could have a substantial negative effect on our business.
Finally, Olympus 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.
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 useful procedure-specific consumables, and to establish the safety and
efficacy of our therapies through clinical trials and studies. We are presently
pursuing therapies for cardiovascular disease as well as new approaches for
aesthetic and reconstructive surgery, gastrointestinal disorders and spine
and
orthopedic conditions. 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
intend to commercialize aesthetic and reconstructive surgery and our
regenerative cell banking platform in 2008, additional market opportunities
for
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, and competition from copycat 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 our results of
operations and financial condition.
The
timing and amount of Thin Film revenues from Senko are
uncertain
The
sole
remaining product line in our MacroPore Biosurgery segment is our Japan Thin
Film business. Our right to receive royalties from Senko, and to recognize
certain deferred revenues, depends on the timing of MHLW approval for
commercialization of the product in Japan. We currently expect this to occur
in
2007, but we have no control over this timing and our expectations have fallen
short before. Also, even after commercialization, we will be dependent on Senko,
our exclusive distributor, to increase product sales in Japan.
There
is
a risk that we could experience with Senko some of the same problems we
experienced in our previous relationship with Medtronic, which was the exclusive
distributor for our former bioresorbable spine and orthopedic implant product
line.
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 the future.
-32-
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.
On
August
3, 2007, the United States Patent and Trademark Office issued a “Revised
Decision (Correction of Inventorship)” specifying that the correct inventorship
of Patent 6,777,231 is only UC’s assignees. On August 9, 2007, the United States
District Court, without the benefit of the Patent Office Inventorship Decision,
granted the University of Pittsburgh’s motion for Summary Judgment in part,
determining that the University of Pittsburgh’s assignees were properly named as
inventors on Patent 6,777,231, and that all other inventorship issues shall
be
determined according to the facts presented at trial.
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 of America, 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 business, we also rely on unpatented trade secrets and
proprietary technological expertise. Our intended future cell-related
therapeutic products, such as consumables, are likely to fall largely into
this
category. 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 our results of 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 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 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 of America 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.
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 of America 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
our results of operations and financial condition.
-33-
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 our results of operations
and financial condition.
We
and/or the Joint Venture have to maintain quality assurance certification and
manufacturing approvals
The
manufacture of our 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 our results of 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 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 our results of 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.
None
None
-34-
Other
Information
Material
Agreements
None
Properties
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 August 31, 2007.
We
also lease 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 $149,000 in rent
per month.
Staff
As
of
June 30, 2007, we had 140 full-time equivalent employees, comprised of 5
employees in manufacturing, 88 employees in research and development, 7
employees in sales and marketing, and 40 employees in management and finance
and
administration. From time to time, we also employ independent contractors to
support our administrative organizations. Our employees are not represented
by
any collective bargaining unit and we have never experienced a work stoppage.
A
breakout by segment is as follows:
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Corporate
|
Total
|
||||||||||
|
Manufacturing
|
—
|
5
|
—
|
5
|
|||||||||
|
Research
& Development
|
87
|
1
|
—
|
88
|
|||||||||
|
Sales
and Marketing
|
7
|
—
|
—
|
7
|
|||||||||
|
General
& Administrative
|
—
|
—
|
40
|
40
|
|||||||||
|
Total
|
94
|
6
|
40
|
140
|
|||||||||
Voluntary
Disclosure
On
August
13, 2007, we entered into an exclusive distribution and supply agreement with
Green Hospital Supply, Inc.to commercialize our StemSource™ cell bank in Japan.
The StemSource™ cell bank is an automated platform that incorporates the use of
our Celution™ System and disposables to enable hospitals and clinics in Japan to
harvest, process and store regenerative cells from a patient’s adipose tissue
for potential later use. This enterprise is subject to all of the
risks associated with any new business venture, including risks relating to
market acceptance.
|
2.5
|
Asset
Purchase Agreement, dated May 30, 2007, between Cytori Therapeutics,
Inc.
and MacroPore Acquisition Sub, Inc.
|
|
10.47
|
Consulting
Agreement, dated May 3, 2007, between Cytori Therapeutics, Inc.
and
Marshall G. Cox
|
|
15.1
|
Letter
re unaudited interim financial information.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Securities Exchange Act
Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Securities Exchange Act
Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule
13a-14(b), as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, in San Diego, California, on August 14, 2007.
|
CYTORI
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
August 14, 2007
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
August 14, 2007
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|
||
Exhibit
2.5
ASSET
PURCHASE AGREEMENT
THIS
ASSET PURCHASE AGREEMENT
(this
“Agreement”)
is
made on this 30th day of May 2007, by and between Cytori Therapeutics, Inc.,
a
Delaware corporation (the “Company”),
and
MacroPore Acquisition Sub, Inc., a Delaware corporation (“Buyer”).
WHEREAS,
the
Company is engaged in the business of developing, manufacturing, commercializing
and marketing technology and products in connection with bioresorbable implants
in its conduct of the Business (as defined in Section
7.10);
WHEREAS,
the
Company desires to sell to Buyer, and Buyer desires to purchase from the
Company, certain assets used in the Business, subject to the terms and
conditions set forth below; and
WHEREAS,
certain
capitalized terms have the meanings respectively indicated in Section
7.10
herein.
NOW
THEREFORE,
in
consideration of the mutual covenants of the parties set forth in this Agreement
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE
I
PURCHASE
AND SALE OF ASSETS
1.1 Assets.
(a) On
the
terms and subject to the conditions set forth in this Agreement, at the Closing,
the Company shall sell, transfer and deliver to Buyer, free and clear of all
liens, hypothecations, mortgages, charges, security interests, pledges or other
encumbrances or adverse claims or interests of any nature (“Liens”),
and
Buyer shall purchase from the Company, all of the Company’s right, title and
interest as of the Closing Date in and to the following assets that are
primarily used in, relate to or arise out of the conduct of the Business
(collectively, the “Assets”):
(i) Equipment.
All
machinery, equipment, furniture, supplies, tools, dies, molds, fixtures and
all
other tangible or movable personal property included under the “Equipment”
heading on the Specified
Assets Schedule 1.1(a)(i),
including, but not limited to, the Deposit Assets (collectively, the
“Equipment”);
(ii) Inventory
and Supplies.
All
inventory of the Company used in connection with the Business and included
under
“Inventory” on the Specified
Assets Schedule 1.1(a)(ii),
including, without limitation, raw materials, work-in-process, finished goods,
merchandise for resale, spare parts, packaging and shipping materials and other
Business manufacturing supplies, whether or not located at the Company’s
principal place of business (collectively, the “Inventory”);
(iii) Contracts.
All
rights, benefits, duties and obligations that the Company may have under the
Contracts or portions thereof listed on Schedule
1.1(a)(iii)
hereto
(the “Assumed
Contracts”);
(iv) Proprietary
Rights.
All
intellectual property, confidential information, and proprietary information
in
the world owned or used by the Company primarily in connection with the Business
including, specifically as follows (collectively, “Proprietary
Rights”):
(a) all
patents, patent applications, patent disclosures and inventions (whether or
not
patentable and whether or not reduced to practice) as listed on Schedule
1.1(a)(iv)(a)
hereto;
(b) any
trademarks, service marks, trade dress, trade names and corporate names
specifically listed on Schedule
1.1(a)(iv)(b)
hereto;
(c) all
registered and unregistered statutory and common law copyrights used primarily
in the conduct of the Business;
(d) all
registrations, applications, extensions and renewals for any of the foregoing;
(e) all
trade
secrets, confidential information, ideas, formulae, compositions, know-how,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, improvements, proposals,
technical and computer data, databases, documentation and software, financial,
business and marketing plans, and customer and supplier lists and related
information used in the conduct of the Business;
(f) all
agreements, commitments, contracts, understandings, licenses, assignments or
indemnities relating or pertaining to an asset, property or right of the
character described in the preceding clauses to which the Company is a party;
(g) all
licenses or agreements pertaining to mailing lists, know-how, trade secrets,
inventions, disclosures or uses of ideas used in or relating to the Business
to
which the Company is a party;
(h) all
correspondence and memoranda between the Company and its intellectual property
counsel relating to Proprietary Rights, including without limitation all
documentation related to the protection or analysis thereof; and
(i) all
other
intellectual property, confidential information and proprietary rights used
primarily in connection with the Business;
(v) Licenses,
Permits and Approvals.
All
rights of the Company in and to the Permits identified on Schedule
1.1(a)(v),
including, without limitation, specified FDA approvals, to the extent
assignable; provided however, that all rights to regulatory approvals for the
Company’s thin film (SurgiWrap/Hydrosorb Shield) shall be subject to the
limitations and obligations mentioned in the side letters attached as Exhibit
A
to Schedule
1.1(a)(v);
(vi) Claims.
All
warranties, guarantees, refunds (other than tax refunds), covenants, indemnities
and the like, with respect to the Inventory and other Assets transferred
hereunder;
(vii) Books
and Records.
The
books and records relating primarily to the operation of the Business, including
all records, documentation of research and development, files, papers, sales
and
purchase and other correspondence, but excluding all general corporate records
and personnel files of the Company;
(viii) Customer
Information.
All
customer information, distributor information, sales representative information,
sales contact management information (from both employees and contract agents),
sales ledgers and records, in each case as specifically related to the Business
and in whatever form; and
(ix) Domain
Names.
The
websites and internet domain names relating to the Business as listed on
Schedule
1.1(a)(ix),
and the
exclusive right to display, prepare, reproduce, create derivative works based
on, and operate (as applicable) the same.
(b) Notwithstanding
the foregoing, the following assets of the Company and all assets described
on
the Excluded
Assets Schedule 1.1(b)
shall be
retained by the Company and are expressly excluded from the purchase and sale
contemplated by this Agreement (collectively, the “Excluded
Assets”):
(i) Cash.
All
cash and cash equivalents of the Company;
(ii) This
Agreement.
The
Company’s rights pursuant to this Agreement and the Transaction
Documents;
(iii) Nonassignable
Permits.
Any
Permits that may not be transferred without the consent, novation, waiver or
approval of another Person and for which such consent, novation, waiver or
approval has not been obtained;
(iv) Employee
Benefit Plans.
All
monies, rights and other assets (including any insurance policy, annuity
contract or trust) maintained under, pursuant to or in direct connection with
any Employee Benefit Plan;
(v) Excluded
Contracts.
All
rights and benefits that the Company may have under any Contracts that are
not
Assumed Contracts;
(vi) Insurance.
All
insurance policies of the Company and (except as otherwise set forth in
Section
1.1(a)(vi)),
all
claims, rights and proceeds thereunder; and
(vii) Accounts
Receivable.
All
accounts receivable, notes or other indebtedness of any Person held by the
Company.
(c) It
is
understood that all specifications, drawings, samples, designs, software, and
other items and information furnished by Medtronic to the Company remain
Medtronic’s property to the same extent that such items were owned by Medtronic
(rather than the Company) immediately prior to the Closing, and such Assets
shall be delivered to Buyer hereunder, subject to any rights of Medtronic
therein (whether or not specifically disclosed by the Company to Buyer),
notwithstanding anything in this Agreement to the contrary.
1.2 Assumption
of Liabilities»
.
Notwithstanding anything to the contrary contained in this Agreement or any
Transaction Document, and regardless of whether such Liability is disclosed
in
this Agreement, in any of the Transaction Documents, on any Schedule hereto
or
thereto or otherwise, and regardless of Buyer’s or any of its directors’,
officers’, employees’ or agents’ knowledge or awareness of any Liability,
whether learned in connection with Buyer’s due diligence investigation of the
Business or otherwise, Buyer will not assume, agree to pay, perform or discharge
or in any way be responsible for any Liabilities (the “Excluded
Liabilities”),
except that Buyer will assume following the Closing the obligations arising
under the Assumed Contracts, including any royalties that are due there under
after the Closing (the “Assumed
Liabilities”);
provided,
however,
that
any Liability relating to or arising from any breach, or event, circumstance
or
condition that with notice, lapse of time or both would constitute or result
in
a breach, by the Company, on or before the Closing Date, of any of its
obligations thereunder shall be an Excluded Liability. Without limiting the
generality of the foregoing, Buyer is not assuming or agreeing to pay, perform
or discharge or in any way be responsible for, any Excluded Liabilities, which
shall include, but not be limited to: (i) all Indebtedness, (ii) all Company
Taxes, (iii) all Liabilities related to employee compensation and employee
benefit plans or obligations of the Company (including severance, non-compete
payments, benefits, deferred compensation, continuation coverage required under
COBRA for each individual who is or becomes an “M & A Qualified Beneficiary”
(as such term is defined in the Treas. Reg. §54.4980B-9 and workers’
compensation claims) as a result of the consummation of the transactions
contemplated this Agreement), (iv) all Liabilities related to litigation and
environmental matters with respect to the Assets for any period (or portion
thereof) ending on or before the Closing Date, (v) all Liabilities relating
to
or arising out of any transaction contemplated by this Agreement or the
Transaction Documents, (vi) any Liabilities with respect to any Products, or
(vii) any other liabilities or obligations associated with the ownership of
the
Assets on or prior to Closing or the stockholders of the Company at any
time.
1.3 Conveyance»
.
At the
Closing, the Company and Buyer shall execute and deliver a Bill of Sale,
Assignment and Assumption Agreement (the “Bill
of Sale”),
pursuant to which the Company shall convey to the Buyer the Assets and the
Buyer
shall assume the Assumed Liabilities.
ARTICLE
II
CONSIDERATION
AND MANNER OF PAYMENT
2.1 Purchase
Price»
.
The
purchase price (the “Purchase
Price”)
to be
paid by Buyer for the Assets, and the rights and benefits conferred hereunder,
shall be Three Million One Hundred Seventy Five Thousand Dollars ($3,175,000),
which amount shall be payable by Buyer to the Company at Closing, by wire
transfer of immediately available funds to an account or accounts specified
by
the Company in writing, in an amount equal to the Purchase Price minus the
Deposit Amount (the “Cash
Payment”).
2.2 Purchase
Price Allocation»
.
Buyer
shall prepare an allocation of the Purchase Price (along with the Assumed
Liabilities and any other items constituting consideration for purposes of
Section 1060 of the Code), taking into account any adjustments made thereto
pursuant to this Agreement, among the Assets and the covenants and agreements
set forth in Section
6.5
in
accordance with Section 1060 of the Code and the Treasury Regulations thereunder
(and any similar provision of state, local or foreign law, as appropriate).
Buyer shall deliver a proposal regarding such allocation to the Company within
sixty (60) days after the Closing (the “Proposed
Allocation”).
Upon
receipt of the Proposed Allocation, the Company shall deliver to Buyer within
fifteen (15) days a written notice (the “Company
Response”)
which
shall specify either that the Company agrees with the Proposed Allocation as
final or else which portion(s) of the Proposed Allocation the Company does
not
agree with in its good faith determination; provided
that if
the Company shall not respond within such fifteen (15) day period, it will
be
deemed to have consented to the Proposed Allocation as final. Upon receipt
of
the Company Response, if any, Buyer and the Company shall in good faith attempt
to come to an agreement over any disputes within fifteen (15) days following
Buyer’s receipt of the Company Response. If Buyer and the Company cannot come to
an agreement within such period, the matter shall be referred to Deloitte &
Touche LLP, which firm shall make a final determination as to the proper
allocation within fifteen (15) days of submission of the matter to such firm.
The final allocation to be delivered pursuant to the terms of this Section
2.2
shall be
binding upon the Company and Buyer for all purposes. In the event an adjustment
to the Purchase Price (or any item constituting consideration for purposes
of
Section 1060 of the Code) is made pursuant to this Agreement, the final
allocation of the Purchase Price shall be revised accordingly by Buyer and
delivered to the Company as soon as reasonably practicable. Buyer, the Company
and each of their respective Affiliates shall take all actions and properly
and
timely file all Tax Returns (including, but not limited to IRS Form 8594 (Asset
Acquisition Statement)) consistent with such allocation and shall not take
any
action inconsistent therewith. The Company and its Affiliates shall timely
and
properly prepare, execute, file and deliver all such documents, forms and other
information as Buyer may reasonably request to prepare such
allocation.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
As
a
material inducement to Buyer to enter into this Agreement, the Company makes
to
Buyer the representations and warranties set forth in this Article
III,
which
representations and warranties are made and shall be true and correct with
respect to the Business as of the date hereof.
3.1 Authority»
.
The
Company has full power, right and authority to enter into and perform its
obligations under this Agreement and each of the Company Transaction Documents.
The execution, delivery and performance of this Agreement and each of the
Company Transaction Documents and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all requisite
action in accordance with applicable Rules, and no other proceedings are
necessary to authorize the execution, delivery and performance of this Agreement
and each of the Company Transaction Documents. This Agreement and each of the
Company Transaction Documents have been duly executed and delivered by the
Company and constitute the valid and binding obligations of the Company and
are
enforceable against the Company in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws of general application relating to
the
enforcement of creditors’ rights and general equitable principles (whether
considered in a proceeding in equity or at law).
3.2 Organization
and Qualification of the Company»
.
The
Company is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware. The Company has full power and
authority to own or hold under lease the properties and assets it now owns
or
holds under lease in connection with the Business.
3.3 Transaction
Not a Breach»
.
Neither
the execution and delivery of this Agreement or any Company Transaction Document
by the Company nor the performance by the Company of the transactions
contemplated hereby or thereby will:
(a) violate
or conflict with or result in a breach of any provision of any law, statute,
rule, regulation, requirement, approval, order, permit, judgment, injunction,
decree or other decision (collectively, “Rules”)
of any
court or other tribunal or any Governmental Authority binding on the Company
or
its properties, or conflict with or result in the breach of any of the terms,
conditions or provisions thereof;
(b) violate
or conflict with or constitute (with or without notice or lapse of time or
both)
a default under the organizational or governing documents of the Company or
any
Permit or Contract;
(c) constitute
an event which would permit any party to terminate, modify, or accelerate the
maturity of any Indebtedness or other obligation under any
Contract;
(d) result
in
the creation or imposition of any Lien upon the Assets; or
(e) require
any Permit, authorization, consent, approval, exemption, or other action by
or
notice to any Person, court or administrative or Governmental Authority pursuant
to any Rules.
3.4 No
Consent Required»
.
Except
as set forth on Schedule
3.4,
no
consent, approval, order or authorization of, or declaration, filing or
registration with, any Person or Governmental Authority is required to be made
or obtained by the Company in connection with the authorization, execution,
delivery, performance or lawful completion of this Agreement, the other Company
Transaction Documents or the transactions contemplated hereby.
3.5 Financial
Information.
(a) Schedule
3.5
sets
forth the amount of Net Revenue by product line for each completed fiscal
quarter during the years 2004 through 2007. “Net
Revenue”
means
the gross revenue received by the Company or any Affiliate thereof in connection
with the Business, minus (i) any refunds, credits or allowances actually given
or credited to any party due to rejections, defects or returns of product,
(ii)
any discounts or rebates actually given or credited by the Company or any
Affiliate thereof, (iii) any Taxes, duties or other governmental charges imposed
on, and paid by the Company and its Affiliates, in connection with the
importation, exportation, use or sale of product, and (iv) any freight, postage
or insurance charges incurred by the Company or its Affiliates in connection
with product.
(b) Except
for the potential effects of the transaction contemplated by this Agreement
which has been known to Company’s sole customer, and the recent termination of
certain real property leases by Company connected to the operations of the
Business, there has not been any material change to the value of the Assets
from
that set forth in the financial information provided by the Company to Buyer
in
the course of Buyer’s due diligence investigation of the Business.
3.6 Absence
of Undisclosed Liabilities»
.
The
Company has no Liabilities in connection with the Assets arising out of
transactions entered into on or prior to the date hereof, or any transaction,
series of transactions, action or inaction occurring on or prior to the date
hereof, or any state of facts or condition existing on or prior to the date
hereof (regardless of when such Liability is asserted), including, but not
limited to, Liabilities on account of Taxes or governmental charges or
penalties, interest or fines thereon or in respect thereof, except for the
Assumed Liabilities.
3.7 Assets.
(a) Title.
The
Company has the exclusive right to possess and convey, and upon the consummation
of the transactions contemplated by this Agreement, the Company will have
conveyed and Buyer will be vested with, good and marketable title and interest
in and to the Assets, free and clear of all Liens (other than Permitted Liens).
Assuming the Buyer enters into arrangements with Medtronic that are materially
equivalent to the Medtronic Supply Agreement, and assuming the Buyer has its
own
facilities and personnel that are materially equivalent to those with which
the
Company operates the Business, and assuming Buyer does not need any of those
patents included on the Excluded
Assets Schedule 1.1(b),
the
Assets are sufficient to enable Buyer to conduct the Business immediately after
the Closing in materially the same manner as conducted by the Company. Other
than as set forth on Schedule
3.7(a),
no
Person (other than the Company) including, without limitation, any Subsidiary
or
Affiliate of the Company, owns or has any right to the use or possession of
any
tangible personal property included in the Assets, other than lessors and
licensors of such tangible personal property constituting leasehold interests
or
licenses.
(b) Inventories.
The
Inventory: (i) consists of items of a quality and quantity useable or saleable
in the ordinary course of business, (ii) is the property of the Company free
and
clear of any Lien and (iii) is located at the real property leased by the
Company. None of the Inventory is held by the Company on consignment. The
Company has no liability to any consignor with respect to the prior sale of
any
inventory held at any time under consignment or similar
arrangement.
(c) Condition
and Location.
Schedule
3.7(c)
lists
all maintenance records of the Company relating to the tangible assets that
are
part of the Assets as described therein, true and correct copies of which have
been or will be delivered to Buyer, and to the knowledge of the Company, such
Assets are otherwise generally useable in the ordinary course of business.
The
tangible assets of the Company that are part of the Assets are in good operating
condition and repair, ordinary wear and tear excepted; provided however that
this sentence shall not be deemed to apply to any of the Deposit Assets. Except
for the Deposit Assets, none of the personal or movable property owned or leased
by the Company is located other than at the real property leased by the
Company.
(d) Equipment.
All
Equipment is free and clear of Liens (other than Permitted Liens).
3.8 Compliance
with Laws; Permits»
.
Except
for violations which would not reasonably be expected to result in a material
adverse effect on the Assets or the business, financial condition, results
of
operations or prospects of the Business, the Company is not, nor has it been
in
the past five (5) years, in violation of any Rules applicable to it in
connection with the Assets or the operation of the Business, and the Company
has
received no written notice of any such violation or alleged or potential
violation; provided, that to the extent the representations contained in other
sections of this Agreement address compliance with specific Rules (including
without limitation, representations contained in Sections
3.9,
3.14
and
3.23),
any
representations contained in this Section
3.8
are
qualified to the extent set forth in such other sections of this Agreement.
Without limiting the generality of the foregoing, the Company is and has been
in
material compliance with all applicable Rules affecting the use, possession,
distribution, labeling, advertising and all forms of promotion in connection
with the sale and distribution of the Company’s products, including, without
limitation, that it and its representatives have not used or made any deceptive,
misleading, manipulative or intentionally or inaccurate marketing or advertising
materials, statements or practices. The Company holds and at all times has
held
all of the material Permits necessary for the use, occupancy or operation of
the
Business or ownership of the Assets, all of which are set forth on Schedule
3.8.
The
Company is and at all times has been in full compliance with each of such
Permits, all of which are in full force and effect.
3.9 Real
Property; Environmental and Safety Requirements.
(a) The
Company does not own any real property.
(b) To
the
knowledge of the Company, the Company (with regard to the Business) has complied
and is in compliance with all applicable Environmental and Safety Requirements,
and the Company possesses all required Permits and has filed all notices or
applications, required thereby.
(c) With
regard to the Business (i) the Company has never (other than safely and fully
in
accordance with all applicable guidelines and laws) generated, transported,
treated, stored, disposed of, arranged for the disposal of or otherwise handled
any Hazardous Materials at any site, location or facility owned or operated
or
used by the Company in the Business or at any offsite location and (ii) no
Hazardous Materials are present on, in, under or emanating from the real
property leased by the Company, and such property contains no Hazardous
Materials except as, in the case of either clause (i) or (ii) above, would
not
result in a condition in violation of, or any liability under, any applicable
Environmental and Safety Requirements. To the knowledge of the Company, there
are no underground storage tanks on the property leased by the
Company.
(d) With
regard to the Business, the Company has not been subject to, nor has the Company
received any notice (written or oral) of, any private, administrative or
judicial action, order, or investigation or any notice (written or oral) of
any
intended private, administrative, or judicial action, order or investigation
relating to any violation of Environmental and Safety Requirements or the
presence or alleged presence of Hazardous Materials in, under, upon, or
emanating from any real or immovable property now or previously owned or used
by
the Company in the Business or any offsite location, and, to the knowledge
of
the Company, there is no reasonable basis in fact or law for any such notice
or
action; and there are no pending or threatened actions, investigations or,
to
the knowledge of the Company, orders or proceedings (or notices of potential
actions or proceedings) from any Governmental Authority or any Person regarding
any matter relating to Environmental and Safety Requirements.
3.10 Personal
Property Leases»
.
The
Company is not a party to any lease of personal or movable property with respect
to the Assets.
3.11 Contracts»
.
Schedule
3.11
is a
correct and complete list of every Contract, correct and complete copies of
which previously have been furnished to Buyer (except for oral contracts,
written descriptions in detail of which have been previously furnished to
Buyer). Each of the Assumed Contracts, along with the remainder of the MAST
License that is not an Assumed Contract (collectively, the “R&W
Contracts”),
is
enforceable against the Company and against any third parties in accordance
with
its terms. The Company is not in default, and no event has occurred which with
the giving of notice or the passage of time or both would constitute a default
by the Company, under any R&W Contract. The Company has performed all
obligations required to be performed by it under the R&W Contracts and, to
the knowledge of the Company, no other party to the R&W Contracts is in
default, and no event has occurred which with the giving of notice or the
passage of time or both could constitute a default by any other party to any
such R&W Contract under any of such R&W Contracts. Each of the R&W
Contracts is in full force and effect, is valid and enforceable in accordance
with its terms, and, to the knowledge of the Company, is not subject to any
claims, charges, set-offs or defenses. No R&W Contract is required to be
treated as a capital lease by GAAP. Except as set forth on Schedule
3.11,
all of
the R&W Contracts will continue, without change or modification, in full
force and effect after the consummation of the transactions contemplated by
this
Agreement, without the necessity of obtaining any consent, approval, novation
or
waiver of any third party.
3.12 Brokers’
or Finders’ Fees»
.
No
agent, broker, investment banker, Person or firm acting on behalf of the Company
or any stockholder thereof, or under the authority thereof, is or will be
entitled to any brokers’ or finders’ fee or any other commission or similar fee
directly or indirectly from any of the parties hereto in connection with any
of
the transactions contemplated hereby.
3.13 Proprietary
Rights.
(a) Except
as
set forth on Schedule
3.13(a),
the
Company owns, or is licensed, or otherwise possesses legally enforceable rights,
to use, sell or license, as applicable, all Proprietary Rights used, sold or
licensed in connection with the Business. Schedule
1.1(a)(iv)(a),
Schedule
1.1(a)(iv)(b),
Schedule
1.1(a)(ix)
and
Schedule
1.1(b) Excluded Assets together
contain a complete and correct list of all of the Company’s patents and patent
applications; trademark and service mark registrations and applications for
registration thereof; domain names; copyright registrations and applications
for
registration thereof; and material computer software, in each case owned or
used
by the Company and primarily related to the Business (excluding Commercial
Software in each case (as defined below)). The Company has delivered or shall
deliver to Buyer correct and complete copies of all such patents, registrations
and applications and has made available to Buyer correct and complete copies
of
all written documentation evidencing ownership and prosecution (if applicable)
of each such item. All renewal and maintenance fees in respect of the items
listed in Schedule
1.1(a)(iv)(a),
Schedule
1.1(a)(iv)(b)
and
Schedule
1.1(a)(ix)
(if
applicable) have been duly paid.
(b) Schedule
3.13(b)
sets
forth a compete list of all (excluding Commercial Software) licenses,
sublicenses and other agreements as to which the Company is a party (as
licensor, licensee or otherwise) and pursuant to which the Company or any other
Person is authorized to use, sell, distribute or license any Proprietary Rights
in connection with the Business. The Company has delivered to Buyer correct
and
complete copies of all such licenses, sublicenses and agreements (as amended
to
date). The Company is not in violation, in any material respect, of any such
license, sublicense or agreement and such license, sublicense and agreement
will
continue to be legal, valid, binding, enforceable and in full force and effect
following the Closing.
(c) Except
as
disclosed on Schedule
1.1(a)(iv)(a)
and
Schedule
1.1(a)(iv)(b),
the
Company is the sole and exclusive owner of the Proprietary Rights (free and
clear of any Liens) identified on such Schedules. The Company is not
contractually obligated to pay compensation to any third party with respect
to
any Proprietary Rights, except pursuant to the agreements disclosed on
Schedule
3.13(b).
Each
item of Proprietary Rights identified on Schedules
1.1(a)(iv)(a),
1.1(a)(iv)(b)
and
1.1(a)(ix)
will,
immediately subsequent to the Closing hereunder, be owned or available for
use
by Buyer on such terms as are substantially identical to those pursuant to
which
the Company, immediately prior to the Closing, owns or has the right to use
such
item. Immediately following the Closing, the Company shall make available to
Buyer all correspondence and memoranda between the Company and its intellectual
property counsel relating to Proprietary Rights.
(d) To
the
knowledge of the Company, it has not infringed on, misappropriated or violated
any proprietary rights of any third Persons in connection with the
Business.
(e) No
claims
with respect to the Proprietary Rights used, sold or licensed in connection
with
the Business are pending or, to the knowledge of the Company, threatened by
any
Person, (i) alleging that the manufacture, sale, licensing or use of any such
Proprietary Rights as now manufactured, sold, licensed or used by the Company
in
the Business infringes on any intellectual property rights of any third party,
(ii) against the use by the Company of any technology, know-how or computer
software used in the Business as currently conducted or (iii) challenging the
ownership by the Company or the validity of any Proprietary Rights identified
on
Schedule
1.1(a)(iv)(a)
and
Schedule
1.1(a)(iv)(b).
(f) The
Company has taken all reasonable measures to safeguard and maintain its property
rights in all Proprietary Rights owned by the Company in connection with the
Business. The Company is not aware of any grounds to assert a claim to, or
any
ownership interest in, any Proprietary Right as a result of having been involved
in the development of such property while employed by or consulting to the
Company. All of the computer software products within the Proprietary Rights
owned by the Company in connection with the Business that have been developed
by
employees of the Company within the scope of their employment as a “work made
for hire”, which employees were directed by the Company to work on the software
for which Proprietary Rights are owned by the Company, or by consultants who
have assigned all rights to such products to the Company.
(g) The
Company has licenses for all Commercial Software used in the Business and the
use of such Commercial Software has been in accordance with such licenses.
“Commercial
Software”
means
packaged commercially available software programs generally available to the
public.
3.14 Employee
Benefit Plans.
(a) No
Employee Benefit Plan is (i) subject to Section 302 or Title IV of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”)
or
Section 412 of the Code, (ii) a “multi-employer plan” (as such term is defined
in Section 3(37) of ERISA), or (iii) a “multiple employer welfare arrangement”
(as defined in Section 3(40) of ERISA).
(b) Each
Employee Benefit Plan and all related trusts, insurance contracts and funds
have
been maintained, funded and administered in compliance with their terms and
the
terms of any applicable collective bargaining agreement, and in compliance
with
the applicable provisions of ERISA, the Code, and any other applicable legal
requirement. With respect to each Employee Benefit Plan, all required payments,
premiums, contributions, distributions or reimbursements for all periods ending
prior to or as of the date hereof have been made or properly accrued on the
Company’s relevant balance sheets and financial statements.
(c) The
Company does not have any liability (or potential liability) with respect to
any
“employee benefit plan” (as defined in Section 3(3) of ERISA) by reason of being
treated as a single employer under Section 414 of the Code or Section 4001(b)
of
ERISA with any trade, business or entity other than the Company. The
transactions contemplated by this Agreement are not transactions to evade or
avoid liability (as described in Section 4069(a) or 4212(c) of
ERISA).
(d) Each
Employee Benefit Plan that is subject to the health care continuation
requirements of Part 6 of Subtitle B of Title I of ERISA and Section 4980B
of
the Code (collectively, “COBRA”)
has
been administered in compliance with such requirements.
3.15 Labor
and Employment Matters»
.
The
Company is not party to or bound by any collective bargaining agreement in
connection with the Business; (ii) no labor organization or group of employees
has filed any representation petition or made any written demand for recognition
in connection with the Business; (iii) no organizing or decertification efforts
are underway or, to the knowledge of the Company, threatened in connection
with
the Business; (iv) since January 1, 2000, no labor strike, work stoppage,
slowdown, or other material labor dispute has occurred in connection with the
Business, and none is underway or, to the knowledge of the Company, threatened;
and (v) there is no employment-related charge (including, but not limited to,
an
unfair labor practice charge), complaint, grievance, investigation, inquiry
or
obligation of any kind in connection with the Business, pending or, to the
knowledge of the Company, threatened, in any forum, relating to an alleged
violation or breach by the Company (or its officers or directors) of any law,
regulation or contract.
3.16 Suppliers»
.
Schedule
3.16
is a
complete and correct list by dollar volume of the ten (10) largest suppliers
to
the Company (in terms of the Company’s purchases from such suppliers during the
relevant periods) of key materials and services and commodities, exclusive
of
utility services, with respect to the Business for each of the three most recent
calendar years (each, a “Supplier”).
Except as set forth on Schedule
3.16,
(i) all
Suppliers continue to be suppliers of the Business, and (ii) the Company is
not
involved in any material claim, dispute or controversy with any Supplier. To
the
Company’s knowledge, since December 31, 2006, there has been no material adverse
change in the relationship between the Company and any Supplier.
3.17 Customers»
.
Schedule
3.17
is a
complete list by dollar volume of sales made or services provided by the Company
to the customers of the Business (the “Customers”)
for
each of the three most recent calendar years, along with the aggregate revenue
received by the Company from each Customer during each such period. Except
as
set forth on Schedule
3.17
and as
contemplated by the Medtronic Assignment and the Transaction Documents, (i)
all
Customers continue to be customers of the Business, (ii) since December 31,
2006, no Customer has modified or, to the Company’s knowledge, indicated that it
intends to modify its relationship with the Business in a manner that is
materially less favorable to the Business than the terms and conditions provided
to the Business on such date, and (iii) the Company is not involved in any
material claim, dispute or controversy with any Customer. Except as contemplated
by the Medtronic Assignment and the Transaction Documents, no Customer has
threatened to take any of the actions described in this Section
3.17
as a
result of the transactions contemplated by this Agreement. To the Company’s
knowledge, since December 31, 2006, there has been no other material adverse
change in the relationship between the Company and any Customer.
3.18 Distributors
and Representatives»
.
Schedule
3.18
is a
complete list of all distributors, representatives and agents for the sale
of
the products of the Business made during the most recent calendar year and
all
distributors, representatives and agents to whom the Company has given any
exclusive rights with respect to territories or products in connection with
the
Business, indicating in each case the existing contractual arrangements, if
any,
with such distributor, representative or agent.
3.19 Affiliate
Transactions»
.
Schedule
3.19
sets
forth the parties to and the date, nature and amount of each transaction (other
than the provision of service as an employee or director, and compensation
therefore) involving the transfer of any cash, property or rights to or from
the
Company from, to or for the direct or indirect benefit of any Affiliate or
former Affiliate of the Company (“Affiliate
Transactions”)
with
respect to the Business since January 1, 2005. Except as set forth on
Schedule
3.19,
no
officer, director, employee, or Affiliate or any entity in which any such Person
or individual is an officer, director or the owner of fifteen percent (15%)
or
more of the beneficial ownership interests, is a party to any agreement,
contract, commitment or transaction with the Company in connection with the
Business (other than the provision of service as an employee or director, and
compensation therefore) or has any interests in any property used by the Company
in connection with the Business. Each Affiliate Transaction was effected on
terms equivalent to those which would have been established in an arms-length
negotiation, except as disclosed on Schedule
3.19.
Except
as set forth in Schedule
3.19,
neither
the Company nor any of its Affiliates has any direct or indirect interest in
any
competitor of the Business.
3.20 Insurance
Policies»
.
Schedule
3.20
contains
a correct and complete list and description (including policy numbers, carriers,
risks insured, amounts of coverage, deductibles and expiration dates) of all
insurance policies currently owned by the Company pertaining to the Business
or
the Assets, which policies are in full force and effect, and the Company is
not
in default under any of them. The Company has received no written notice of
cancellation or intent to cancel or increase premiums with respect to such
policies nor, to the knowledge of the Company, is there any basis for any such
action. None of such policies will terminate, lapse or be modified (with or
without the giving of notice or lapse of time) by reason of the transactions
contemplated by this Agreement. Schedule
3.20
also
contains a list of all pending claims filed by the Company with any insurance
company and any instances within the previous three (3) years of a denial of
coverage of the Company by any insurance company, in each case in connection
with the Business.
3.21 Taxes.
(a) The
Company has filed all Tax Returns that it is required to have filed prior to
the
date hereof, including any extension of time for the filing thereof, and such
returns are true and correct in all material respects and have been prepared
in
a manner consistent with prior periods.
(b) There
are
no security interests on any of the Assets that arose in connection with any
failure (or alleged failure) to pay any Tax.
(c) There
are
no agreements, waivers or other arrangements providing for extension of filing
with respect to any Tax Return. There are no unexpired waivers of any statute
of
limitations with respect to any Taxes.
(d) No
claim
has ever been made by an authority in a jurisdiction where the Company does
not
file Tax Returns that it is or may be subject to taxation by that jurisdiction
in connection with the Business.
(e) The
Company has timely withheld and paid all Taxes required to have been withheld
and paid in connection with any amounts paid or owing to any employee,
independent contractor, stockholder, or other third party in connection with
the
Business, and all Forms W-2 and 1099 required with respect thereto have been
properly completed and timely filed.
(f) The
Company is not a party to any action or proceedings by any Governmental
Authority for the collection or assessment of Taxes.
(g) There
is
no dispute or claim concerning any Tax liability of the Company either (i)
claimed or raised by any authority in writing or (ii) as to which any of the
directors and officers (and employees responsible for Tax matters) of the
Company has knowledge based upon personal contact with any agent of such
authority.
(h) The
Company has not made any payments, is not obligated to make any payments, nor
is
a party to any agreement that under certain circumstances could obligate it
to
make any payments that will not be deductible under Code §280G. The Company is
not a party to any Tax allocation or sharing agreement (other than this
Agreement, if applicable). The Company has no liability for the Taxes of any
Person under Regulation §1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise. The
Company has not been a United States real property holding corporation within
the meaning of Code §897(c)(2) during the applicable period specified in Code
§897(c)(1)(A)(ii).
(i) The
Company has not made any change in any method of accounting which could give
rise to the recognition of income or to Tax liability to Buyer following the
date hereof. The Company has not made any closing adjustment in connection
with
an audit which could give rise to the recognition of income or to Tax liability
to Buyer following the date hereof. The Company has not entered into any
installment sale transaction (aside from this Agreement, if applicable) which
could give rise to the recognition of income or to Tax liability to Buyer
following the date hereof.
3.22 Litigation»
.
Except
as set forth on Schedule
3.22,
there
are no claims, counter-claims, actions, suits, grievances, arbitrations, orders,
proceedings or, to the knowledge of the Company, investigations pending or,
to
the knowledge of the Company, threatened, against or involving the Company
with
respect to the Business (or pending or, to the knowledge of the Company,
threatened against any of the officers, directors or key employees of the
Company with respect to their business activities on behalf of the Company
with
respect to the Business), the Assets, or relating to the transactions
contemplated hereby, before any court, agency, arbitrator or other Governmental
Authority; nor, to the knowledge of the Company, is there any reasonable basis
for any such claim, action, suit, proceeding or governmental investigation.
Except as set forth in Schedule
3.22,
the
Company is not directly subject to or affected by any order, judgment, decree
or
ruling of, or settlement enforceable in, any court or Governmental Authority
in
connection with the Business. Except as set forth on Schedule
3.22,
the
Company is not engaged in any legal action to recover monies due it or for
damages sustained by it in connection with the Business.
3.23 Product
Warranties»
.
To the
knowledge of the Company, all commercialized Products have been in conformance
with all applicable contractual commitments and all express or implied
warranties of the Company, and no Liability exists for replacement thereof,
recall or other damages in connection with such sales or deliveries at any
time
prior to the date hereof. The Company has not been notified in writing of any
claims for and, to the knowledge of the Company, there are no threatened claims
for any product returns, recalls, warranty obligations or product services
relating to any of its Products (including, without limitation, information
products) or services in connection with the Business.
3.24 Defects
in Products or Designs; Product Safety.
(a) To
the
knowledge of the Company, there have been no pattern of defects in the design,
construction or manufacturing of any Product commercialized by the Company
or
its employees or agents in connection with the Business that would adversely
affect the specified performance or quality of such Product. Each commercialized
Product has been designed, manufactured, packaged and labeled in compliance
with
all regulatory, engineering, industrial and other codes applicable thereto
and
the Company has received no written notice of any alleged noncompliance with
any
such code. Each Product advertised or represented as being rated or approved
by
a rating organization, such as Underwriters’ Laboratories or other similar
organizations, complies with all conditions of such rating or
approval.
(b) Other
than standard information and reports provided with respect to medical device
products to the FDA and any local authorities, and standard international
reporting to notified bodies, and vigilance reporting, the Company has not
been
required to file, nor has it filed, a notification or other report with the
United States Consumer Product Safety Commission or any other Governmental
Authority concerning actual or potential hazards with respect to any
Product.
3.25 Absence
of Certain Payments»
.
Neither
the Company nor, to the knowledge of the Company, any manager, officer, agent,
employee or other Person acting on behalf of the Company has, with respect
to
the Business (a) used any corporate or other funds for unlawful contributions,
payments, gifts or entertainment, or made any unlawful expenditures relating
to
political activity to government officials or others or established or
maintained any unlawful or unrecorded funds in violation of Section 104 of
the
Foreign Corrupt Practices Act of 1977 (15 U.S.C. §79dd-2), as amended, or any
other applicable provincial, foreign, federal or state law; or (b) accepted
or
received any unlawful contributions, payments, expenditures or gifts or (c)
established or maintained any fund or asset that has not been recorded in the
books and records of the Company.
3.26 Government
Contracts and Funding»
.
The
Company is not, with respect to the Business, party to, or bound by the
provisions of, any contract (including purchase orders, blanket purchase orders
and agreements and delivery orders) with the United States government or any
department, agency, or instrumentality thereof or any other Governmental
Authority. The Company has not, with respect to the Business received any grant
or other funding from any Governmental Authority, including without limitation
any such grant or funding arising from a contract which contains a grant-back
provision or other encumbrance based on non-use thereof.
3.27 Regulatory
Approvals and Proceedings»
.
The
Company has made all filings and filed all reports required to be made and
filed
in connection with its manufacturing of Products in the U.S. and under European
Community Regulations. All such applications and submissions by the Company
to
Governmental Authorities, including but not limited to submissions of 510(K)
notification packages and Design Dossiers under European Community Regulations,
and all data collection, testing and analysis in connection therewith, have
been
collected in a controlled manner using methods and techniques generally accepted
by the industry, and all such applications and submissions have been true,
complete and accurate in all material respects.
3.28 Disclosure»
.
To the
Company’s knowledge, this Agreement, the Company Transaction Documents, the
schedules and exhibits hereto, and the financial information and other materials
referred to herein as having been delivered to Buyer, do not contain any untrue
statement of a material fact that has not been corrected by the Company prior
to
the date hereof, and do not omit to state a material fact necessary in order
to
make the statements contained therein or herein not misleading in light of
the
circumstances under which they were made. There is no fact known to the Company
relating to the Business, its affairs, assets, prospects, operations, employee
relations or condition, financial or otherwise, that may materially adversely
affect the same which has not been disclosed in writing to Buyer by the
Company.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF BUYER
Buyer
hereby represents and warrants to the Company as follows:
4.1 Organization
and Good Standing»
.
Buyer
is a corporation duly organized, validly existing and in good standing under
the
laws of the State of Delaware.
4.2 Authorization»
.
Buyer
has full power, right and authority to enter into and perform its obligations
under this Agreement and each of the Buyer Transaction Documents. The execution,
delivery and performance of this Agreement and each of the Buyer Transaction
Documents and the consummation of the transactions contemplated hereby have
been
duly and validly authorized by all requisite action in accordance with
applicable Rules, and no other proceedings are necessary to authorize the
execution, delivery and performance of this Agreement and each of the Buyer
Transaction Documents. This Agreement and each of the Buyer Transaction
Documents have been duly executed and delivered by the Buyer and constitute
the
valid and binding obligations of the Buyer and are enforceable against the
Buyer
in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other laws of general application relating to the enforcement of creditors’
rights and general equitable principles (whether considered in a proceeding
in
equity or at law).
4.3 No
Violation»
.
The
execution, delivery and performance by Buyer of this Agreement and the other
Buyer Transaction Documents and the consummation of the transactions
contemplated herein and therein will not:
(a) result
in
the breach of any of the terms or conditions of, or constitute a default under,
or in any manner release any party thereto from any obligation under, any
mortgage, note, bond, contract, indenture, agreement, license or other
instrument or obligation of any kind or nature to which Buyer is now a party
or
by which any of its properties or assets may be bound;
(b) violate
any order, writ, injunction, regulation, statute or decree of any court,
administrative agency or Governmental Authority specifically applicable to
Buyer; or
(c) violate
any provision of the governing documents of Buyer.
ARTICLE
V
CLOSING
5.1 Closing»
.
The
transactions that are the subject of this Agreement shall be consummated at
a
closing (the “Closing”)
which
shall be held at the offices of Katten Muchin Rosenman LLP, 525 West Monroe
Street, Chicago, Illinois 60661 (or at such other place as the parties may
mutually agree) on the date hereof (the “Closing
Date”).
The
Closing shall be deemed effective at the close of business on the Closing Date
(the “Effective
Time”).
5.2 Deliveries
by the Company»
.
At the
Closing, the Company shall execute and deliver to Buyer:
(a) Instruments
of Conveyance.
The
Bill of Sale, a Patent Assignment to be filed with the United States Patent
and
Trademark Office immediately following the Closing, an Assignment of Domain
Name
Registrations and any other required assignments of Proprietary Rights in form
and substance satisfactory to Buyer.
(b) Opinion
of Counsel.
An
opinion of counsel of the Company, dated as of the Closing Date, in the form
reasonably requested by Buyer.
(c) Secretary’s
Certificate.
A
certificate of the Secretary of the Company certifying as to (i) resolutions
of
the Board of Directors of the Company authorizing the execution and delivery
of
this Agreement and the Company Transaction Documents and the performance of
the
transactions contemplated hereby and thereby; and (ii) a certificate of good
standing of the Company, dated as of a date not more than fifteen (15) days
prior to the Closing Date, issued by the applicable Secretary of
State.
(d) Third
Party Consents.
Third
party consents for those contracts identified on Schedule
3.4.
(e) Assignment
of Medtronic Supply Agreement.
An
Assignment by the Company to Buyer of the Medtronic Supply Agreement (the
“Medtronic
Assignment”).
(f) Transition
Agreement.
A
Transition Services Agreement between the Company and Buyer (the “Transition
Agreement”).
5.3 Deliveries
by Buyer»
.
At the
Closing, Buyer shall deliver to the Company:
(a) Instruments
of Assumption.
The
Bill of Sale, executed by Buyer.
(b) Opinion
of Counsel.
An
opinion of counsel of Buyer, dated as of the Closing Date, in the form
reasonably requested by the Company.
(c) Cash
Payment.
The
Cash Payment wired to the bank account(s) designated by the
Company.
(d) Resolutions.
Resolutions of Buyer authorizing the execution and delivery of this Agreement
and the Buyer Transaction Documents and the performance of the transactions
contemplated hereby and thereby certified by the Secretary of
Buyer.
(e) Transition
Agreement.
The
Transition Agreement executed by Buyer.
(f) Assignment
of Medtronic Supply Agreement.
The
Medtronic Assignment executed by Buyer and Medtronic.
ARTICLE
VI
COVENANTS
AFTER CLOSING
6.1 Non-Assignable
Contracts»
.
To the
extent that the assignment hereunder by the Company to Buyer of any Assumed
Contract is not permitted or is not permitted without the consent of any other
party to the Assumed Contract, this Agreement shall not be deemed to constitute
an assignment of any such Assumed Contract if such consent is not given or
if
such assignment otherwise would constitute a breach of, or cause a loss of
contractual benefits under, any such Assumed Contract, and Buyer shall not
assume any obligations or liabilities thereunder. With respect to any such
Assumed Contract, the Company shall continue to use reasonable efforts to obtain
such consents and shall cooperate with Buyer in any arrangement designed to
provide Buyer with the rights and benefits (subject to the obligations) under
any such Assumed Contracts.
6.2 Payment of
Excluded Liabilities»
.
After
the Closing, the Company shall pay in full and discharge all of the Excluded
Liabilities in accordance with their stated terms, as applicable, and in a
manner that is not detrimental to any relationships of Buyer or the Business
with customers, suppliers or others.
6.3 Agreements
Regarding Tax Matters»
.
After
the Closing, the Company on one hand and Buyer on the other hand will (i)
promptly inform the other party in writing of any notice that it receives of
any
audit, investigation, request for documents or information related to Taxes
that
could affect the Tax liability of the other party, (ii) each provide the other
party with such assistance as may reasonably be requested in connection with
the
preparation of any Tax Return, audit or other examination by any taxing
authority or judicial or administrative proceeding relating to liability for
taxes, (iii) each retain and provide to the other party all records and other
information that may be relevant to any such Tax Return, audit or examination,
proceeding or determination and (iv) each provide the other party with any
final
determination of any such audit or examination, proceeding or determination
that
affects any amount required to be shown on any Tax Return of the other party
for
any period. Without limiting the generality of the foregoing, each of the
Company and Buyer will retain, until the expiration of the applicable statutes
of limitation (including any extensions thereof), copies of all Tax Returns,
supporting work schedules and other records relating to tax periods or portions
thereof ending on or prior to the Closing Date.
6.4 Indemnification.
(a) Indemnification
by the Company.
From
and after the Closing, the Company agrees to indemnify, defend and save Buyer,
its stockholder and their respective Affiliates and Plan Affiliates, and each
of
their respective officers, directors, employees, attorneys, agents, Employee
Benefit Plans and fiduciaries, plan administrators or other parties dealing
with
such plans (each, a “Buyer
Indemnified Party”),
forever harmless from and against, and to promptly pay to a Buyer Indemnified
Party or reimburse a Buyer Indemnified Party for, any and all liabilities,
obligations, deficiencies, demands, claims, suits, actions, or causes of action,
assessments, losses, costs, expenses, interest, fines, penalties, actual or
punitive damages or costs or expense of any and all investigations, proceedings,
judgments, environmental analysis, remediations, settlements and compromises
(including reasonable fees and expenses of attorneys, accountants and other
experts) (individually and collectively, the “Losses”)
sustained or incurred by any Buyer Indemnified Party relating to, resulting
from, arising out of or otherwise by virtue of any of the
following:
(i) any
inaccuracy in or misrepresentation or breach of a representation or warranty
made by the Company herein or in the Company Transaction Documents;
(ii) any
non-compliance with or breach by the Company of any of the covenants or
agreements contained in this Agreement or the Company Transaction Documents
to
be performed by the Company;
(iii) any
Patent Infringement Claim or any action, demand, proceeding, investigation
or
claim by any third party (including Governmental Agencies) against or affecting
any Buyer Indemnified Party which, if successful, would result from a matter
constituting an inaccuracy in, misrepresentation or breach of any of the
representations, warranties or covenants of the Company in this Agreement or
any
Company Transaction Documents;
(iv) any
matter set forth on Schedule
3.13(e)
or
Schedule
3.22;
(v) any
liability or obligation of the Company or any assertion against a Buyer
Indemnified Party, arising out of or relating, directly or indirectly, to any
of
the Excluded Liabilities, including but not limited to any claim made in
connection with the Products (whether or not such claims are described in
Section
6.8);
(vi) any
claim
for payment of fees and/or expenses as a broker or finder in connection with
the
origin, negotiation, execution or consummation of this Agreement based upon
an
alleged agreement between claimant and the Company or any of its Affiliates;
and
(vii) any
non-compliance with or breach by the Company of any of the covenants or
agreements contained in the MAST License to be performed by the
Company.
(b) Indemnification
by Buyer.
From
and after the Closing, Buyer agrees to indemnify, defend and save the Company,
its stockholders and their respective Affiliates, and each of their respective
officers, directors, employees, attorneys, agents, Employee Benefit Plans and
fiduciaries, plan administrators or other parties dealing with such plans (each,
a “Company
Indemnified Party”)
forever harmless from and against, and to promptly pay to a Company Indemnified
Party or reimburse a Company Indemnified Party for, any and all Losses sustained
or incurred by any Company Indemnified Party relating to, resulting from,
arising out of or otherwise by virtue of any of the following:
(i) any
inaccuracy in or misrepresentation or breach of a representation or warranty
made by Buyer herein or in the Buyer Transaction Documents;
(ii) non-compliance
with or breach by Buyer of any of the covenants or agreements contained in
this
Agreement or the Buyer Transaction Documents to be performed by
Buyer;
(iii) any
action, demand, proceeding, investigation or claim by any third party (including
Governmental Agencies) against or affecting any Company Indemnified Party which,
if successful, would result from a matter constituting an inaccuracy in,
misrepresentation or breach of any of the representations, warranties or
covenants of Buyer in this Agreement or any Buyer Transaction Documents;
(iv) any
liability or obligation of Buyer or any assertion against a Company Indemnified
Party, arising out of or relating, directly or indirectly, to any of the Assumed
Liabilities and/or the Buyer’s operation of the Business or usage of the Assets
after the Closing Date, except to the extent such Loss arises out of the
operation of the Business or ownership of the Assets prior to the Closing or
is
otherwise an indemnifiable Loss pursuant to Section
6.4(a);
and
(v) any
non-compliance with or breach by Buyer of any of the covenants or agreements
contained in Buyer’s Assumed MAST License to be performed by Buyer.
(c) Indemnification
Procedure for Third Party Claims.
In the
event that subsequent to the Closing any Person entitled to indemnification
under this Agreement (an “Indemnified
Party”)
receives notice of the assertion of any claim or of the commencement of any
action or proceeding by any Person who is not a party to this Agreement or
an
Affiliate of a party to this Agreement, including without limitation, a Patent
Infringement Claim, (a “Third
Party Claim”)
against such Indemnified Party, against which a party to this Agreement is
required to provide indemnification under this Agreement (an “Indemnifying
Party”),
the
Indemnified Party shall give written notice together with a statement of any
available information regarding such claim (and attaching a copy of all papers
served with respect to such claim) to the Indemnifying Party within fifteen
(15)
days after learning of such claim (or within such shorter time as may be
necessary to give the Indemnifying Party a reasonable opportunity to respond
to
such claim) (the “Claim
Notice”).
The
Indemnifying Party will have the right to defend the Indemnified Party against
the Third Party Claim with counsel of the Indemnifying Party’s choice,
satisfactory to Indemnified Party, so long as (A) the Indemnifying Party
notifies the Indemnified Party in writing within thirty (30) calendar days
after
receipt of a Claim Notice (the “Control
Notice”)
that
the Indemnifying Party will undertake to assume the defense of such Third Party
Claim and will indemnify the Indemnified Party against such Third Party Claim,
(B) the Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying Party
has
and will at all times continue to have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations hereunder
with
respect thereto, (C) the Indemnifying Party conducts the defense of the Third
Party Claim actively and diligently at its own cost and expense and (D) the
Third Party Claim has not been initiated by any Governmental Authority. So
long
as such conditions are and remain satisfied, then the Indemnifying Party may
conduct the defense of the Third Party Claim and the Indemnified Party may
participate through counsel chosen by such Indemnified Party and paid at its
own
expense (which expense shall not constitute part of any Loss that is the subject
of indemnity under this Section
6.4
unless
the Indemnified Party has reasonably concluded that counsel chosen by the
Indemnifying Party has actual or potential conflicts of interest and has so
notified the Indemnifying Party in writing). If the Indemnifying Party does
not
deliver a Control Notice within the thirty (30) day period provided above or
any
of the conditions set forth in clauses (A) through (D) above are or become
unsatisfied, the Indemnified Party shall have the right to undertake the
settlement or defense of the claim, but shall not thereby waive any right to
indemnity from the Indemnifying Party therefor. The Person handling such defense
or settlement shall pursue such defense or settlement with the customary care
that a reasonably prudent person would exercise under the circumstances. If
the
Indemnifying Party decides not to undertake the conduct and control of the
settlement or defense of a claim, the Indemnified Party may undertake control
of
the settlement or defense of the Third Party Claim to the entire exclusion
of
the Indemnifying Party. The Indemnifying Party will not pay or enter into any
settlement of any Third Party Claim or consent to the entry of any judgment
with
respect to any Third Party Claim without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld or delayed.
Furthermore, the Indemnifying Party will not consent to the entry of any
judgment with respect to the matter, or enter into any settlement which either
imposes an injunction or other equitable relief upon the Indemnified Party
or
does not include a provision whereby the plaintiff or claimant in the matter
releases the Indemnified Party from all liability with respect thereto. Any
final judgment entered or settlement agreed upon in the manner provided herein
shall be binding upon the Indemnifying Party, and shall conclusively be deemed
to be an obligation with respect to which the Indemnified Party is entitled
to
prompt indemnification hereunder.
(d) Direct
Claims.
It is
the intent of the parties hereto that all direct claims by an Indemnified Party
against a party hereto not arising out of Third Party Claims or related to
Patent Infringement Claims shall be subject to and benefit from the terms of
this Section
6.4.
Any
claim under this Section
6.4
by an
Indemnified Party for indemnification other than indemnification against a
Third
Party Claim or in connection with a Patent Infringement Claim
(a “Direct
Claim”)
will
be asserted by giving the Indemnifying Party reasonably prompt written notice
thereof, and the Indemnifying Party will have a period of thirty (30) calendar
days within which to satisfy such Direct Claims. If the Indemnifying Party
disputes the Direct Claim asserted by the Indemnified Party or fails to respond
within such thirty (30) calendar day period, such dispute shall be resolved
in
accordance with the provisions of Section
7.8(b)
hereof
and the Indemnified Party may if it so chooses proceed directly to the mediation
stage.
(e) Failure
to Give Timely Notice.
A
failure by an Indemnified Party to give timely, complete or accurate notice
as
provided in Section
6.4(c)
will not
affect the rights or obligations of any party hereunder except and only to
the
extent that, as a result of such failure, any party entitled to receive such
notice was deprived of its right to recover any payment under its applicable
insurance coverage or was otherwise damaged as a result of such failure to
give
timely notice.
(f) Survival
of Representations and Warranties: Time Limits on Indemnification
Obligations.
All of
the representations and warranties set forth in this Agreement or in any of
the
other Transaction Documents shall survive the execution and delivery of this
Agreement and the consummation of the transactions until they expire and
terminate on the second anniversary of this Agreement, and, for the avoidance
of
doubt, neither the Company nor Buyer shall be entitled to recovery under such
representations and warranties other than pursuant to this Section
6.4.
If
written notice of a claim has been given prior to the end of such applicable
period, the termination date with regard to such claim shall be extended until
such claim is fully resolved and the appropriate indemnification has been
tendered.
(g) Adjustment
to Purchase Price.
Any
indemnification received under this Section 6.4
shall be
treated by Buyer, the Company and their respective Affiliates, to the extent
permitted by applicable Rules, as an adjustment to the Purchase Price unless
a
Final Determination causes any such amount not to constitute an adjustment
to
the Purchase Price for Federal tax purposes. The term “Final
Determination”
shall
mean (i) any final determination of liability in respect of a Tax that, under
applicable Rules, is not subject to further appeal, review or modification
through proceedings or otherwise (including the expiration of a statute of
limitations or a period for the filing of claims for refunds, amended returns
or
appeals from adverse determinations) or (ii) the payment of Tax by Buyer or
the
Company, whichever is responsible for payment of such Tax under applicable
Rules, with respect to any item disallowed or adjusted by a taxing authority,
provided
that
such responsible party or parties determine(s) that no action should be taken
to
recoup such payment and the other party agrees in writing.
(h) Indemnification
Limits.
The
foregoing provisions of this Section
6.4
notwithstanding:
(i) the
Company shall not be liable under the indemnification obligations set forth
in
Section
6.4(a)(i)
of this
Agreement until, and then only to the extent that, the aggregate amount of
such
indemnification obligation of the Company exceeds $50,000 (the “Basket
Amount”);
(ii) the
aggregate indemnification obligation of the Company pursuant to Section
6.4(a)(i)
shall
not be greater than $3,000,000 (the “Indemnification
Cap”);
and
(iii) the
aggregate indemnification obligations of Buyer pursuant to Section 6.4(b)(i)
of this
Agreement shall not be greater than the Indemnification Cap.
(i) Special
Rule for Fraud.
Notwithstanding anything in Section
6.4(h)
to the
contrary, in the event of any breach of a representation or warranty by any
party hereto that is intentional or constitutes fraud, (a) the representation
or
warranty that has been breached will survive the execution and delivery of
this
Agreement and the consummation of the transactions contemplated hereby and
will
continue in full force and effect for the period of the applicable statute
of
limitations, and (b) the limitations set forth in Section
6.4(h)
shall
not apply to any Losses that any Buyer Indemnified Party or Company Indemnified
Party, respectively, may suffer, sustain or become subject to, as a result
of,
arising out of, relating to, or in connection with, any such
breach.
(j) Investigation.
The
representations and warranties of the Company shall not be affected or deemed
waived by reason of any investigation made by or on behalf of Buyer or by reason
of the fact that Buyer should have known (as opposed to “actually knew”) any
such representation or warranty might be inaccurate.
(k) Right
of Set-off.
To the
extent that any Indemnifying Party fails to satisfy an indemnification
obligation pursuant to this Section
6.4
when due
in accordance with the terms hereof, the Indemnified Party may in its sole
discretion set off the amount of such indemnification obligation against any
amounts due and payable by the Indemnified Party to the Indemnifying
Party.
6.5 Restrictive
Covenants.
(a) Company’s
Acknowledgment.
The
Company agrees and acknowledges that it is necessary that the Company undertake
not to utilize its special knowledge of the Business and its relationships
with
customers and suppliers of the Company to compete with Buyer and the
Business.
(b) Non-Compete.
The
Company hereby agrees that for a period commencing on the Closing Date and
ending five (5) years from the Closing Date (the “Restricted
Period”),
the
Company will not, directly or indirectly, as agent, consultant, manager, partner
or in any other capacity, operate, manage, control, engage in, participate
in ,
or act as a consultant or advisor to, or render services (alone or in
association with any Person), that provide specific Business assistance to
any
Person that engages in or owns, invests in, operates, manages or controls any
venture or enterprise that directly or indirectly engages or proposes to engage
in the Business anywhere in the world (excluding Japan) (the “Territory”).
Notwithstanding this or any other provision of Section
6.5,
the
covenants contained herein shall not restrict the Company from developing,
partnering with and/or selling regenerative cell technology to any
party
irrespective of whether such other party is involved with the Business, or
whether or not such other party might utilize regenerative cell products in
connection with the Business, or restrict the Company from any activities in
so
far as they relate to the SurgiWrap thin film biomaterials products of the
Company.
(c) Non-Solicitation.
Without
limiting the generality of the provisions of Section 6.5(b)
above,
the Company hereby agrees that during the Restricted Period it will not,
directly or indirectly, solicit, or participate as agent, consultant,
stockholder, manager, partner or in any other capacity in any business which
solicits, business from any Person which is or was a customer or supplier of
the
Business during the three (3)-year period preceding the date of such
solicitation, or from any successor in interest to any such Person for the
purpose of securing business or contracts related to the Business other than
in
connection with the Company’s regenerative cell technology.
(d) Confidential
Information.
During
the term of this Agreement and thereafter, the Company shall keep secret and
retain in strictest confidence, and shall not, without the prior written consent
of Buyer, furnish, make available or disclose to any third party or use for
the
benefit of the Company or any third party, any Confidential Information. As
used
in this Section 6.5(d),
“Confidential
Information”
shall
mean any information relating to the business or affairs of Buyer or that is
exclusively used by Company in connection with the Business immediately prior
to
the Closing Date, and information relating to the Business financial statements,
customer identities, potential customers, employees, suppliers, servicing
methods, equipment, programs, strategies and information, analyses, profit
margins or other proprietary information used by the Company or the Buyer in
connection with the Business; provided,
however,
that
Confidential Information shall not include any information which is in the
public domain or enters the public domain through no wrongful act on the part
of
the Company, and Company may make any disclosures of such Confidential
Information as required by law provided reasonable advance notice is provided
to
Buyer to seek protective orders with respect to such disclosures.
(e) Blue-Pencil.
If any
court of competent jurisdiction shall at any time deem the term of any
particular restrictive covenant contained in this Section
6.5
too
lengthy or the Territory too extensive, the other provisions of this
Section
6.5
shall
nevertheless stand, the Restricted Period shall be deemed to be the longest
period permissible by law under the circumstances and the Territory shall be
deemed to comprise the largest territory permissible by law under the
circumstances. The court in each case shall reduce the Restricted Period and/or
Territory to permissible duration or size.
(f) Property
of the Business.
All
memoranda, notes, lists, records and other documentation or papers (and all
copies thereof), including such items stored in computer memories, or microfiche
or by any other means, which will become Buyer’s exclusive property (after the
consummation of transactions contemplated by this Agreement), shall become
Buyer’s property and shall be delivered to Buyer promptly on the request of
Buyer. Notwithstanding the foregoing, Company shall be allowed to retain such
copies as necessary for legal, financial and regulatory files as necessary
for
the Company’s ongoing general corporate and compliance
responsibilities.
(g) Remedies.
The
Company acknowledges and agrees that the covenants set forth in this
Section
6.5
are
reasonable and necessary for the protection of Buyer’s business interests, that
irreparable injury will result to Buyer if the Company breaches any of the
terms
of this Section
6.5,
and
that in the event of the Company’s actual or threatened breach of any of the
provisions contained in this Section
6.5,
Buyer
will have no adequate remedy at law. The Company accordingly agrees that in
the
event of any actual or threatened breach by it of any of the provisions
contained in this
Section 6.5,
Buyer
shall be entitled to such injunctive and other equitable relief, without the
necessity of showing actual monetary damages or posting of a bond, as may be
deemed necessary or appropriate by a court of competent jurisdiction. Nothing
contained herein shall be construed as prohibiting Buyer from pursuing any
other
remedies available to it for such breach or threatened breach, including the
recovery of any damages which it is able to prove.
6.6 Further
Assurances»
.
Each of
the parties hereto agrees that subsequent to the Closing Date, upon the
reasonable request of the other party hereto from time to time, it shall execute
and deliver, or cause to be executed and delivered, such further reasonable
instruments and take such other commercially reasonable actions as may be
necessary to carry out the transactions contemplated by this Agreement and
the
Transaction Documents or to vest, perfect or confirm ownership of the Assets
in
Buyer. Without limiting the generality of the foregoing, following the Closing,
the Company shall cause fully executed copies of the documents required to
record the transfer of the Proprietary Rights in jurisdictions located outside
of the United States to be delivered to Buyer within seven (7) days of the
Company’s receipt thereof.
6.7 Post-Closing
Access to Books and Records»
.
From
and after the Closing, except in connection with any Direct Claim, the Company
and its accountants and other representatives will be given reasonable access
upon reasonable notice to the books and records included in the Assets relating
to the period prior to the Closing Date.
6.8 Reimbursement
for Recalls»
.
To the
extent that Buyer is required to conduct a recall with respect to any Product,
Buyer shall be entitled to indemnification under Section 6.4(a)(v)
in an
amount equal to Buyer’s reasonable expense with respect to such recall; provided
however, that such amounts shall be subject to the indemnification limitations
set forth in Section
6.4(h)
hereof.
6.9 Regulatory
Consulting Services»
.
From
and after the Closing, the Company shall prepare for filing by Buyer a 510(k)
submission to the U.S. FDA for the SurgiWrap product and provide assistance
with
the Buyer’s preparation of an Assumption Application for its notified body
through the transfer of Design Dossiers to Buyer and Buyer’s notified body and
other inputs to Buyer as may reasonably be requested. In addition, the Company
shall cause Mr. Ken Kleinhenz to make himself available on reasonable notice
during normal business hours and devote no more than 25 hours of consulting
services to the performance of related regulatory consulting services as is
reasonably requested by Buyer in relation to the Business, provided that Mr.
Kleinhenz shall not be required to travel in connection with such services.
The
services provided pursuant to this section shall be provided at no cost to
Buyer.
6.10 Receipt
of Certain Notice»
.
Following the Closing, the Company shall provide all necessary reports
to the Buyer of all adverse events and complaints of which the
Company has or gains knowledge, including any follow-up information
necessary to evaluate such occurrences, related to any application which
incorporates the Products or any products manufactured or sold by or on behalf
of the Buyer. Any initial reports of such events referred to in
this section should be forwarded to the Buyer as soon
as reasonably practical and in no event later than twenty-four (24) hours
following the notification to the Company of the event if the event
involves patient death or serious patient injury, or within three (3) business
days otherwise.
6.11 MAST
Licensed Business Materials»
.
(a) In
the
event that, following the Closing, Buyer enters into a new agreement between
Buyer and MAST (or an Affiliate thereof) whereby MAST grants to Buyer a license
with respect to the MAST Licensed Business Materials in form and substance
satisfactory to Buyer in its sole discretion (“Buyer’s
Direct MAST License”),
then
the parties shall attempt to cause that portion of the MAST License included
in
the Assets (“Buyer’s
Assumed MAST License”)
to be
terminated simultaneously with the execution and delivery of Buyer’s Direct MAST
License.
(b) Except
as
otherwise contemplated by Section
6.11(a),
(i) the
Company agrees to use its reasonable best efforts to keep the entire MAST
License in full force and effect following the date hereof and (ii) the Company
shall not cause or allow all or any portion of the MAST License to be amended,
revoked, altered or waived in any way without the prior written consent of
Buyer.
(c) Except
as
otherwise contemplated by Section
6.11(a),
(i)
Buyer agrees to use its reasonable best efforts to keep Buyer’s Assumed MAST
License in full force and effect following the date hereof and (ii) Buyer shall
not cause or allow all or any portion of Buyer’s Assumed MAST License to be
amended, revoked, altered or waived in any way without the prior written consent
of the Company.
6.12 License
from the Company»
.
From
and after the Effective Time, the Company hereby grants to Buyer a worldwide
(except Japan), fully paid-up, royalty-free license to: (a) sell or dispose
of
any Asset that is marked or identified with the trade or corporate name
“MacroPore” or “MacroPore Biosurgery” or any derivation thereof and (b) use the
trademark “MacroPore” in connection with the products of the Business, which use
shall include but not be limited to, the distribution, marking and
identification of products manufactured, packaged or labeled (whether before,
on
or following the date hereof) with such trademark, provided that such use is
not
in the Craniofacial Field. The licenses hereby granted shall be irrevocable
and
shall survive for so long as the Medtronic Supply Agreement (as amended and
restated on the date hereof, and as may be further amended or modified in the
future) shall remain in effect. Prior to abandoning the trademark, Company
shall
first offer the trademark to the end seller under the Medtronic Supply Agreement
identified above, and if they decline to accept, then to the Buyer.
ARTICLE
VII
MISCELLANEOUS
7.1 Notices,
Consents, etc»
.
Any
notices, consents or other communication required to be sent or given hereunder
by any of the parties shall in every case be in writing and shall be deemed
properly served if (a) delivered personally, (b) sent by registered or certified
mail, in all such cases with first class postage prepaid, return receipt
requested, (c) delivered by a recognized overnight courier service, or (d)
sent
by facsimile transmission with a confirmation copy sent by overnight courier,
in
each case, to the parties at the addresses as set forth below or at such other
addresses as may be furnished in writing.
If
to
Buyer:
MacroPore
Acquisition Sub, Inc.
c/o
Kensey Nash Corporation
735
Pennsylvania Drive
Exton,
Pennsylvania 19341
Fax
No.: (484)
713-2901
Attention: Joseph
W.
Kaufmann
with
a
copy (which shall not constitute notice) to:
Katten
Muchin Rosenman LLP
525
West
Monroe Street
Chicago,
Illinois 60661-3693
Fax
No.: (312)
902-1061
Attention: David
R.
Shevitz, Esq.
Kimberly
T. Smith, Esq.
If
to the
Company:
Cytori
Therapeutics, Inc.
3020
Callan Road
San
Diego, California 92121
Fax
No.: (858)
458-0994
Attention: Christopher
J. Calhoun
with
a
copy (which shall not constitute notice) to:
Cytori
Therapeutics, Inc.
3020
Callan Road
San
Diego, California 92121
Fax
No.: (858)
450-4335
Attention: Jonathan
Soneff
Richa
Nand
Date
of
service of such notice shall be (w) the date such notice is personally
delivered, (x) three (3) days after the date of mailing if sent by certified
or
registered mail, (y) one (1) day after date of delivery to the overnight courier
if sent by overnight courier or (z) the next succeeding business day after
transmission by facsimile.
7.2 Public
Announcements»
.
Neither
Party shall make any public announcement or filing with respect to the
transactions provided for herein without the prior consent of the other Party
(not to be unreasonably withheld or delayed), except as required by law in
the
opinion of its counsel. Any press release or other announcement or notice
regarding the transactions contemplated by this Agreement made by Buyer or
the
Company shall be subject to prior review by and the consent of the other Party,
not to be unreasonably withheld or delayed.
7.3 Severability»
.
The
unenforceability or invalidity of any provision of this Agreement shall not
affect the enforceability or validity of any other provision.
7.4 Amendment
and Waiver»
.
This
Agreement may be amended, or any provision of this Agreement may be waived,
provided,
that,
any such amendment or waiver will be binding on Buyer only if such amendment
or
waiver is set forth in a writing executed by Buyer, and provided,
that,
any such amendment or waiver will be binding upon the Company only if such
amendment or waiver is set forth in a writing executed by the Company. The
waiver by any party hereto of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any other breach.
7.5 Counterparts»
.
This
Agreement may be executed simultaneously in two or more counterparts, each
of
which shall be deemed an original but all of which together shall constitute
one
and the same agreement and shall become effective when one or more counterparts
have been signed by each of the parties hereto and delivered to the other.
This
Agreement, the Transaction Documents and each other agreement or instrument
entered into in connection herewith or therewith or contemplated hereby or
thereby, and any amendments hereto or thereto, to the extent signed and
delivered by means of a facsimile machine or other electronic transmission,
shall be treated in all manner and respects and for all purposes as an original
agreement or instrument and shall be considered to have the same binding legal
effect as if it were the original signed version thereof delivered in person.
At
the request of any party hereto or to any such agreement or instrument, each
other party hereto or thereto shall re-execute original forms thereof and
deliver them to all other parties, except that the failure of any party to
comply with such a request shall not render this Agreement invalid or
unenforceable. No party hereto or to any such agreement or instrument shall
raise the use of a facsimile machine or other electronic transmission to deliver
a signature or the fact that any signature or agreement or instrument was
transmitted or communicated through the use of a facsimile machine or other
electronic transmission as a defense to the formation or enforceability of
a
contract and each such party forever waives any such defense.
7.6 Expenses»
.
Each of
the parties shall pay all costs and expenses incurred or to be incurred by
it in
negotiating and preparing this Agreement and in closing and carrying out the
transactions contemplated by this Agreement. Any Transfer Taxes incurred shall
be split evenly between the Company and Buyer, provided that Company’s
obligation for such taxes shall not exceed Thirty Five Thousand Seven Hundred
Dollars ($35,700).
7.7 Headings»
.
The
subject headings of Articles and Sections of this Agreement are included for
purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
7.8 Governing
Law; Arbitration.
(a) This
Agreement shall be construed and governed in accordance with the internal laws
of the State of Delaware without regard to the principles of conflicting
laws.
(b) The
parties shall negotiate in good faith to resolve any controversy, dispute or
disagreement arising out of or relating to this Agreement or the breach of
any
provision of this Agreement. Except as otherwise set forth in Section
2.2,
any
matter not resolved by negotiation shall be settled (a) first, by the parties
trying in good faith to settle the dispute by mediation under the Commercial
Mediation Rules of the American Arbitration Association (“AAA”)
(such
mediation session to be held in Chicago, Illinois and to commence within thirty
(30) days of the appointment of the mediator by the AAA), and (b) if the
controversy, claim or dispute cannot be settled by mediation, then by
arbitration administered by the AAA under its Commercial Arbitration Rules
(such
arbitration to be held in Chicago, Illinois before a single neutral arbitrator
selected by AAA and to commence within thirty (30) days of the appointment
of
the arbitrator by the AAA or such later date as is reasonable under the
circumstances), and judgment on the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Nothing in this Section
7.8(b)
shall be
construed to prevent either party from seeking interim equitable relief through
a court of law for violations of this Agreement.
7.9 Assignment»
.
This
Agreement will be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, but will not be
assignable or delegable by any party without the prior written consent of the
other party, provided,
however,
that
(1) Buyer shall be allowed to assign its rights and benefits hereto (a) to
an
Affiliate so long as the Affiliate assumes Buyer’s obligations hereunder, (b) in
connection with a sale of all or substantially all of Buyer’s assets so long as
the assignee assumes Buyer’s obligations hereunder and (c) to Buyer’s lenders as
collateral for security purposes, and (2) the Company shall be allowed to assign
its rights and benefits hereto to (a) in connection with a sale of all or
substantially all of the Company’s assets so long as the assignee assumes
Company’s obligations hereunder and the Company remains fully liable therefor
and (b) to the Company’s lenders as collateral for security
purposes.
7.10 Definitions»
.
For
purposes of this Agreement, the following terms have the meaning set forth
below:
“Affiliate”
means,
with respect to any Person, any other Person directly or indirectly controlling,
controlled by, or under common control with such Person, and any officer,
director or executive employee of such Person, and includes any past or present
Affiliate of any such Person. The term “control” (including, with correlative
meanings, the terms “controlling,” “controlled by” and “under common control
with”), as applied to any Person, includes the possession, directly or
indirectly, of five percent (5%) or more of the total number of votes which
may
be cast by the holders of the total number of outstanding shares of stock of
any
class or classes of such Person in any election of directors of such Person
(or
in the case of a Person which is not a corporation, five percent (5%) or more
of
the ownership interest, beneficial or otherwise) of such Person or the power
otherwise to direct or cause the direction of the management and policies of
that Person, whether through voting, by contract or otherwise.
“Affiliated
Group”
means
an affiliated group as defined in Section 1504 of the Code (or analogous
combined, consolidated or unitary group defined under state, local or foreign
income Tax law).
“Business”
means
the biomaterials polymer business (developing, manufacturing, commercializing
and marketing technology and products in connection with bioresorbable polymer
implants) as conducted by the Company. This term specifically excludes any
and
all rights to Company’s thin film (SurgiWrap) polymer technology and business
for the territory of Japan, and all other rights to the thin film technology
owned by the Company for all other markets/applications other than for
applications in the Spinal Field, and also excludes all rights to the
craniomaxillofacial bioresorbable implants business which the Company sold
to
Medtronic in 2002.
“Buyer
Transaction Documents”
means
the Bill of Sale and any other agreement, document, certificate or instrument
to
which the Buyer is a party and which is being delivered pursuant to this
Agreement.
“Code”
means
the Internal Revenue Code of 1986, as amended.
“Company
Taxes”
means
collectively (a) any Taxes imposed on the Company for any period, (b) any Taxes
imposed with respect to the Assets for any period (or portion of any period)
ending on or before the Effective Time and (c) Transfer Taxes in accordance
with
Section
7.6.
“Company
Transaction Documents”
means
the Bill of Sale and any other agreement, document, certificate or instrument
to
which the Company is a party and which is being delivered pursuant to this
Agreement.
“Contracts”
means
any contracts, commitments, purchase orders, sales orders, licenses, leases
and
other agreements, whether written or oral, to which the Company is a party
or by
which Company is bound as are necessary in connection with the conduct of the
Business.
“Craniofacial
Field”
means
any skeletal fixation and/or reconstruction application in each case and only
to
the extent that the application pertains to neurosurgery (cranial and skull
base
only), craniomaxillofacial, oral maxillofacial, reconstructive (head/face only),
otolaryngology, orthognathic, mandibular, plastic surgery (head/face only),
and/or iliac crest.
“Deposit
Agreement”
means
that certain Deposit Agreement dated as of April 19, 2007 by and between the
Company and Buyer.
“Deposit
Amount”
means
$250,000, which amount represents the aggregate amount of the Purchase Price
that has been prepaid by Buyer to the Company pursuant to the terms and
conditions set forth in the Deposit Agreement.
“Deposit
Assets”
means
the Assets as such term is defined in the Deposit Agreement.
“Employee
Benefit Plan”
means
any “Employee Pension Benefit Plan” (as defined in Section 3(2) of ERISA),
“Employee Welfare Benefit Plan” (as defined in Section 3(1) of ERISA),
“Multi-Employer Plan” (as defined in Sections 3(37) or 4001(a)(3) of ERISA),
pension plan, plan of deferred compensation, medical plan, life insurance plan,
long-term disability plan, dental plan, “multiple employer welfare arrangement”
(as defined in Section 3(40) of ERISA) or other plan or trust providing for
or
funding of the welfare of any of the employees or former employees or
beneficiaries thereof of the Company, personnel policy (including, but not
limited to, vacation time, holiday pay, bonus programs, moving expense
reimbursement programs and sick leave), excess benefit plan, bonus or incentive
plan (including, but not limited to, stock options, restricted stock, stock
bonus and deferred bonus plans), severance, salary reduction agreement,
change-of-control agreement, employment agreement, consulting agreement or
any
other benefit, program or contract, whether or not written or pursuant to a
collective bargaining agreement, in each case of the Company.
“Environmental
and Safety Requirements”
means
all federal, state and local or municipal laws, rules, regulations, ordinances,
orders, statutes and requirements, and all common law, relating to public health
and safety, worker health and safety, pollution or protection of the
environment, all as amended or hereafter amended.
“GAAP”
means
generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute
of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or any successor authority) that are applicable
as
the date of determination, consistently applied.
“Governmental
Authority”
means
any multi-national, national, state, provincial, local, governmental, judicial,
public, quasi-public, administrative or self-regulatory authority, agency,
commission, board, organization or instrumentality.
“Guarantees”
means
any obligation, contingent or otherwise, of the Company directly or indirectly
guaranteeing any indebtedness or other obligation of any other Person. The
term
“guarantee” used as a verb has a corresponding meaning.
“Hazardous
Materials”
means
(A) hazardous materials, hazardous substances, extremely hazardous substances
or
hazardous wastes, as those terms are defined by the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. §9601 et
seq.,
the
Resource Conservation and Recovery Act, 42 U.S.C. §6901 et
seq.,
and any
other Environmental and Safety Requirements; (B) petroleum, including, without
limitation, crude oil or any fraction thereof which is liquid at standard
conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds
per square inch absolute); (C) any radioactive material, including, without
limitation, any source, special nuclear, or by-product material as defined
in 42
U.S.C. §2011 et
seq.;
(D)
asbestos in any form or condition; and (E) any other material, substance or
waste to which liability or standards of conduct may be imposed under any
Environmental and Safety Requirements.
“Indebtedness”
means
without duplication, all: (a) indebtedness for borrowed money or funded debt
owed by the Company, (b) Guarantees, (c) liabilities of the Company evidenced
by
notes, bonds or debentures, (d) liabilities of the Company secured by any Liens,
(e) liabilities or obligations evidenced by a note, bond or other debt
instrument, (f) the capitalized portion of lease liabilities of the Company
under any capitalized lease, (g) liabilities arising from installment purchases
of property or representing the deferred purchase price of property or services
in respect of which the Company is liable, contingently or otherwise, as obligor
or otherwise (other than trade payables and other current liabilities incurred
in the ordinary course), (h) liabilities or obligations with respect to
Severance Obligations, (i) all liabilities and obligations of the Company with
respect to outstanding letters of credit and (j) any interest, principal,
prepayment penalty, fees, or expenses, to the extent due or owing in respect
of
those items listed in clauses (a) through (i) above.
“knowledge
of the Company”
and
each phrase having equivalent meaning (e.g., “known to the Company” or “to the
Company’s knowledge”) means the facts or other information known by Chris
Calhoun, Kevin Thomas, Tim Zander, Mark Saad, Jon Soneff, John Risley, Peter
Amis, Ken Kleinhenz, Richa Nand and Eric Daniels or that would have been known
by any such Person if they had made reasonable inquiry.
“Liabilities”
means
any indebtedness (including, but not limited to, any Indebtedness), obligations
or liabilities of the Company of any kind or nature whatsoever, whether fixed
or
unfixed, absolute or contingent, accrued or unaccrued, known or unknown,
liquidated or unliquidated, choate or inchoate, secured or unsecured, and
whether due or to become due and regardless of when or by whom asserted,
including, but not limited to, any obligations arising out of facts,
circumstances or events that have occurred prior to the Closing but are not
known as of the Closing but that if known would be contingent
liabilities.
“MAST”
means
MAST Biosurgery AG, a Swiss corporation.
“MAST
License”
means
collectively that certain (i) License Agreement dated May 13, 2004 between
the
Company and MAST and (ii) License Agreement dated May 23, 2006 between the
Company and MAST.
“MAST
Licensed Business Materials”
means
those certain items licensed by MAST pursuant to the MAST License that are
necessary for the conduct of the Business, including without limitation, such
items for use in the Spinal Field.
“Medtronic”
means
Medtronic, Inc., a Minnesota corporation.
“Medtronic
Supply Agreement”
means
that certain Development and Supply Agreement dated as of January 5, 2000
between the Company and Medtronic, as amended by Amendment No. 1 thereto dated
December 22, 2000 and Amendment No. 2 thereto dated September 30,
2002.
“Patent
Infringement Claim”
means
a
claim or assertion by the third party that Buyer’s conduct of the Business
infringes any patent owned by or licensed to such third party for which Buyer
may reasonably be entitled to indemnification pursuant to Section
6.4(a)(i), (iii)
or
(iv).
“Permits”
means
all permits, licenses, approvals and authorizations by or of Governmental
Authorities or third parties issued or granted or otherwise received primarily
in connection with the Business.
“Permitted
Liens”
means:
(A) statutory liens for Taxes that are not yet due and payable; (B) statutory
liens to secure obligations to landlords, lessors or renters under leases or
rental agreements; and (C) deposits or pledges made in connection with, or
to
secure payment of, workers’ compensation, unemployment insurance or similar
programs mandated by applicable law.
“Person”
means
any individual, partnership, limited partnership, sole proprietorship, company
or corporation with or without share capital, public or private association,
public utility, legal personal representative, regulatory or Governmental
Agency, or other legal entity however designated or constituted.
“Product”
means
any product of the Business manufactured or sold by the Company prior to the
Effective Time.
“Severance
Obligation”
means
all severance, stay bonus or change of control payment obligations of the
Company and other accelerations or increases in rights or benefits of the
Company’s current or former employees (whether payable or occurring prior to, on
or after the Closing Date), including without limitation any such obligations
arising in whole or in part as a result of the consummation of the transactions
contemplated by this Agreement.
“Specified
Assets”
means
all Equipment and Inventory used in connection with the operation of the
Business as described on Specified
Assets Schedules 1.1(a) and 1.1(b).
“Spinal
Field”
means
all applications (including but not limited to: anti-adhesion, anti-scarring,
minimizing the attachment of soft tissues, or soft tissue support) related
to
the anatomy of the spine including, but not limited to, applications in the
following: spinal fixation, stabilization and/or fusion, spinal cord coverings,
exiting nerve root coverings, cauda equina coverings, lamina coverings and
vertebral column-cervical, thoracic, lumbar and sacral. The Spinal Field does
not include distal peripheral nerve and other structures extrinsic and distal
to
the spine.
“Subsidiary”
means
any corporation, partnership, limited liability company, association or other
entity of which securities or other ownership interests representing more than
fifty percent (50%) of the ordinary voting power are owned or controlled by
(i)
the Company, (ii) one or more Subsidiaries of the Company or (iii) the Company
and one or more Subsidiaries of the Company.
“Tax”
means
any multi-national, Federal, state, local or foreign income, gross receipts,
franchise, estimated, alternative minimum, add on minimum, sales, use, transfer,
registration, value added, excise, natural resources, entertainment, amusement,
severance, stamp, occupation, premium, windfall profit, environmental, customs,
duties, real property, personal property, ad valorem, capital stock, social
security, unemployment, disability, payroll, license, employee or other
withholding, or other tax, of any kind whatsoever, including any interest,
penalties or additions to Tax or additional amounts in respect of the foregoing;
the foregoing shall include any transferee or secondary liability for a Tax
and
any liability assumed by agreement or arising as a result of being (or ceasing
to be) a member of any Affiliated Group (or being included (or required to
be
included) in any Tax Return relating thereto).
“Tax
Returns”
means
returns, declarations, reports, claims for refund, information returns or other
documents (including any related or supporting schedules, statements or
information and any amendment thereof) filed or required to be filed in
connection with the determination, assessment or collection of any Taxes of
any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
“Transaction
Documents”
means
the Buyer Transaction Documents and the Company Transaction
Documents.
“Transfer
Taxes”
means
all sales, transfer, documentary, stamp, recording, conveyance and similar
taxes
and fees (including any penalties and interest) due with regard to the
transactions contemplated by this Agreement.
7.11 Entire
Agreement»
.
This
Agreement, the Preamble and all the Schedules and Exhibits attached to this
Agreement (all of which shall be deemed incorporated in the Agreement and made
a
part hereof) and the Transaction Documents set forth the entire understanding
of
the parties, and supersede and preempt all prior oral or written understandings
and agreements with respect to the subject matter hereof, and shall not be
modified or affected by any offer, proposal, statement or representation, oral
or written, made by or for any party in connection with the negotiation of
the
terms hereof, and may be modified only by instruments signed by all of the
parties hereto; provided
that the
Deposit Agreement and any Nondisclosure/Confidentiality agreements in place
between the parties are not superseded or preempted hereby.
7.12 Third
Parties»
.
Except
as otherwise set forth in Section
6.4,
nothing
herein expressed or implied is intended or shall be construed to confer upon
or
give to any Person, other than the parties to this Agreement and their
respective permitted successors and assigns, any rights or remedies under or
by
reason of this Agreement.
7.13 Interpretative
Matters»
.
Unless
the context otherwise requires, (a) all references to Articles, Sections or
Schedules are to Articles, Sections or Schedules in this Agreement, (b) each
accounting term not otherwise defined in this Agreement has the meaning assigned
to it in accordance with GAAP, (c) words in the singular or plural include
the
singular and plural, pronouns stated in either the masculine, the feminine
or
neuter gender shall include the masculine, feminine and neuter and (d) the
term
“including” shall mean by way of example and not by way of limitation. The
parties hereto have participated jointly in the negotiation and drafting of
this
Agreement. If an ambiguity or questions of intent or interpretation arises,
this
Agreement shall be construed as if drafted jointly by the parties, and no
presumption or burden of proof shall arise favoring any party by virtue of
the
authorship of any of the provisions of this Agreement.
7.14 Waiver
of Bulk Sales Laws»
.
Buyer
and the Company hereby waive compliance in connection with the transactions
contemplated by this Agreement or the Transaction Documents with the provisions
of Article 6 of the Uniform Commercial Code as adopted in states where any
of
the Assets are located, and any other applicable bulk sales laws, in effect
as
of the date of the Closing; provided,
however,
that
the Company shall fully indemnify, reimburse and hold harmless Buyer and its
Affiliates against all liability, damages or expenses which Buyer may suffer
due
to the Company’s failure to so comply.
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the date first
above written.
|
THE
COMPANY:
Cytori
Therapeutics, Inc.,
a
Delaware corporation
By:
/s/
Christopher J. Calhoun
Name: Christopher
J. Calhoun
Its: CEO
|
|
|
BUYER:
MacroPore
Acquisition Sub, Inc.,
a
Delaware corporation
By: /s/
Joseph W. Kaufmann
Name: Joseph
W. Kaufmann
Its: President
|
Exhibit
10.47
CONSULTING
AGREEMENT
This
Consulting Agreement (this “Agreement”)
is
entered into by and between Cytori Therapeutics, Inc., a Delaware corporation
(the “Company”),
and
Marshall G. Cox (“Consultant”),
effective as of May 3, 2007 (the “Retirement Date”).
WHEREAS,
Consultant is retiring and resigning from his positions as a Company director
and employee, and
WHEREAS,
the Company wishes to honor Consultant with recognition as Chairman Emeritus
and
to retain access to his advice and counsel during a transition
period.
NOW,
THEREFORE, in consideration of the foregoing and the mutual agreements set
forth
herein, the parties agree as follows.
1. Consulting
Relationship.
During
the term of this Agreement, Consultant will provide consulting
services
(the “Services”) on an as-needed basis to the Company as may be specified from
time to time by the Company’s Chief Executive Officer (the “CEO”) as to scope,
subject matter, timing, format and location, all in the CEO’s reasonable
discretion. Notwithstanding the foregoing, Consultant will not be required
to
travel or to perform services in the Company’s offices, nor shall he be required
to provide more than ten hours of service per month. Consultant generally
will
perform services in his own facility. When Consultant deems it necessary
or
appropriate to spend time in the Company’s facility, the Company will provide
Consultant with space to work, but Consultant will not have a regularly assigned
workspace.
2. Compensation.
As
consideration for the Services to be provided by Consultant, the Company
shall
pay to Consultant $5,000 per month, payable in arrears, during the term of
this
Agreement. Consultant shall be responsible for all taxes on such amount.
The
Company shall promptly reimburse Consultant for all reasonable out-of-pocket
incurred in carrying out the Services requested pursuant to this Agreement,
subject to documentation in accordance with the Company’s business expense
reimbursement policy, as in effect from time to time.
It is
also understood and acknowledged that, during the term of this Agreement,
and in
accordance with the existing terms of the applicable stock option plans and
agreements, Consultant’s outstanding stock options shall continue to vest and be
exercisable.
3 Term
of Agreement.
The
term of this Agreement shall begin on the Retirement Date and end on March
1,
2009. The Company may terminate this Agreement prior to the expiration of
such
term only in the event that Consultant commits fraud in the commission of
his
Services on behalf of the Company hereunder, and has failed to cure such
acts or
failures to act which are alleged to constitute fraud within sixty days after
receipt of written notice from the Company stating in detail the particular
acts
or failures to act that constitute the grounds on which the proposed termination
is based.
4. Retirement.
This
Agreement constitutes Consultant’s retirement and resignation as a Company
director and employee as of the Retirement Date. This
Agreement also constitutes the Company’s appointment of Consultant as Chairman
Emeritus for life effective upon the Retirement Date. The parties confirm
that
the position of Chairman Emeritus is an honorary, unpaid position and does
not
itself constitute Consultant an employee or consultant of the
Company.
5. Independent
Contractor.
Consultant’s relationship with the Company during the term of this Agreement
will be that of an independent contractor and not that of a director, officer,
employee or agent. During the term of this Agreement:
(a) No
Authority to Bind Company.
Consultant has no authority to enter into contracts that bind the Company
or
create obligations on the part of the Company, and he agrees not to purport
to
do so.
(b) No
Benefits.
Consultant acknowledges and agrees that Consultant will not, by virtue of
this
consultancy, be eligible for any Company employee benefits, except as provided
under Sections 2, 6 and 10.
6. Other
Agreements.
Except
as otherwise specified in this Agreement, all agreements between the Company
and
Consultant pertaining to his service and compensation as an employee and/or
director are hereby terminated by mutual agreement and without any further
obligation of either party, with the exception of Consultant’s stock option
agreements, any indemnification and/or insurance rights Consultant may have
pursuant to the Company’s certificate of incorporation, bylaws or insurance
policies for officers and directors liability (provided, that the Company
shall
have no obligation to purchase future directors and officers liability
insurance, nor renew any directors and officers liability insurance, for
the
purpose of covering Consultant for periods after the Retirement Date or for
maintaining the benefit of coverage under past or current policies), and
any
employee benefit plans or agreements the provisions of which will continue
to
govern the Consultant’s and the Company’s rights and obligations with respect to
benefits accrued through the Retirement Date.
7. Consulting
or Other Services for Competitors.
Consultant represents and warrants that Consultant does not presently perform
or
intend to perform, during the term of this Agreement, consulting or director
or
other services for, or engage in or intend to engage in an employment
relationship with, companies whose businesses or proposed businesses in any
way
involve products or services which would be competitive with the Company’s
regenerative-cell products or services. If, however, Consultant decides to
do
so, Consultant agrees that, in advance of accepting such work, Consultant
will
promptly notify the Company in writing, specifying the organization with
which
Consultant proposes to consult, provide services, or become employed
by.
8. The
Employment, Confidentiality and Assignment Agreement.
Consultant represents that, immediately before signing this Agreement, he
has
signed and delivered to the Company an Employment, Confidentiality and
Assignment Agreement on the Company’s standard form of such agreement, and has
dated it “May 3, 2007, as of July 31, 2000” (the “Confidentiality
Agreement”). The Confidentiality Agreement remains in full force and effect, and
will continue to persist during the term of and after the termination or
expiration of this Consulting Agreement. In addition, Consultant and the
Company
mutually understand and agree that the terms of the Confidentiality Agreement
shall also apply to and during the term of this Consulting Agreement, with
all
applicable changes to reflect and cover the fact that his service will be
as a
consultant rather than as an employee; provided, that this Consulting Agreement
shall control in the event of any inconsistency between the provisions of
the
Confidentiality Agreement and this Consulting Agreement. (For example, Section
3
and the first paragraph of Section 4 of the Confidentiality Agreement shall
be
inapplicable during the term of consultancy.) Moreover, the Company further
agrees that its remedies for any breach of the Confidentiality Agreement
shall
not include the right to terminate this Consulting Agreement due to such
breach.
Consultant confirms that his fiduciary duty as a director with regard to
confidentiality of all confidential or proprietary information he learned
in his
capacity as a Company director persists even after his retirement and
resignation from the Board of Directors and will continue to persist during
the
term of and after the termination or expiration of this Consulting
Agreement.
9. Works
Made for Hire.
All
works of authorship created by Consultant in connection with the Services
shall
be deemed “works made for hire,” and shall be owned by the Company.
10. Post-Employment
Matters.
(a) Salary
and Vacation Time.
The
Company confirms its obligation to pay forthwith to Consultant all of his
accrued base salary and his accrued and unused vacation/holiday/paid-time-off
time through the date of this Agreement.
(b) COBRA.
The
Company and Consultant acknowledge that the Company has provided Consultant
with
forms pursuant to which he may maintain his and his eligible dependents’
participation in the Company’s group health insurance plan pursuant to the terms
of the Consolidated Omnibus Budget Reconciliation Act and corresponding
provisions of state law (“COBRA”). If Consultant elects such coverage, he
understands and agrees that he shall be fully responsible for making the
necessary premium payments in order to continue such coverage. Nothing herein
shall limit the right of the Company to change the provider and/or the terms
of
its group health insurance plans or other benefit plans at any time hereafter,
nor its right to terminate any or all plans at any time hereafter.
11. Dribble-Out.
(a) Limitation.
Consultant
agrees that in each of the five successive three-month periods beginning
immediately after the end of the (90-day) Lock-Up Period contemplated by
his
Lock-Up Agreement dated February 23, 2007 given to Piper Jaffray & Co. in
connection with the Company’s February 2007 registered-direct offering (the
“Lock-Up
Agreement”),
he
will sell no more than 160,000 shares of Company common stock in the three-month
period. These 160,000 share amounts are not cumulative, e.g., it is not the
case
that if he sells no shares in the first three-month period he could sell
up to
320,000 shares in the second three-month period.
(b) Definition.
This
agreement not to “sell” means that Consultant agrees not to (and
will
cause the spouse and any immediate family member of Consultant
or his spouse
living in Consultant’s
household not to) directly or indirectly, sell (including without limitation
any
short sale and also including without limitation any
sale
pursuant to a Rule 10b5-1 stock selling plan),
offer,
pledge, transfer, contract or grant any option to sell, establish an open
“put
equivalent position” within the meaning of Rule 16a-1(h) under the Securities
Exchange Act, or otherwise dispose of any shares of Common Stock, options
or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially by Consultant
(or
such
spouse or family member), or publicly announce an intention to do any of
the
foregoing, except as expressly allowed by this Section 11, during the
(90-day) Lock-Up Period and also for
the
period commencing immediately
after the end of the (90-day) Lock-Up Period contemplated by the Lock-Up
Agreement and
ending 15 months thereafter (the “Dribble-Out
Period”).
The
foregoing sentence shall not apply to (i) any
exercise of outstanding stock options; (ii)
any
transfer to the immediate family (for the purposes of this Agreement, “immediate
family” shall mean any relationship by blood, marriage or adoption, no more
remote than first cousin) of Consultant or to a trust the beneficiaries of
which
are exclusively Consultant and/or a member or members of his immediate family;
or (iii) any transfer upon Consultant’s death; provided, however, that in any
such case of item (ii) above it shall be a condition to such transfer that
the
transferee executes and delivers to the Company an agreement stating that
the
transferee is receiving and holding the Common Stock subject to the provisions
of this Section 11, and there shall be no further transfer of such Common
Stock
during the Dribble-Out Period except in accordance with this Agreement (with
all
sales by Consultant and such item (ii) transferees within the same three-month
period being combined).
(c) Stop
Transfer.
Consultant agrees
and
consents to the entry of stop transfer instructions with the Company’s transfer
agent and registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by
Consultant
except
in
compliance with the foregoing restrictions.
(d) Securities
Law Compliance.
Consultant acknowledges his responsibility to ensure that any and all sales
by
him comply not only with this Section 11 but also with all applicable securities
laws and regulations.
12. Miscellaneous.
(a) Amendments
and Waiver.
Any
term of this Agreement maybe amended or waived only with the written consent
of
the parties.
(b) Sole
Agreement.
This
Agreement constitutes the sole agreement of the parties, and (except to the
extent specific other agreements are expressly provided for herein for
preservation) supersedes all prior and contemporaneous negotiations, commitments
and agreements, with respect to the subject matter hereof. For avoidance
of
doubt: the stock option and other agreements specified in Section 6, the
Lock-Up
Agreement dated February 23, 2007 given to Piper Jaffray & Co. in connection
with the Company’s February 2007 registered-direct offering and, except as
specifically provided herein, the Confidentiality Agreement, are not
superseded.
(c) Choice
of Law.
The
validity, interpretation, construction and performance of this Agreement
shall
be governed by the laws of the State of California, without giving effect
to the
principles of conflict of laws.
(d) Arbitration.
Any
dispute or claim arising out of or in connection with any provision of this
Agreement will be finally settled by binding arbitration in Orange County,
California, in accordance with the commercial arbitration rules of the American
Arbitration Association by one arbitrator appointed in accordance with said
rules. The arbitrator shall apply California law, without reference to rules
of
conflicts of law or rules of statutory arbitration, to the substantive
resolution of any dispute. Judgment on the award rendered by the arbitrator
may
be entered in any court having jurisdiction thereof. Notwithstanding the
foregoing, the parties may apply to any court of competent jurisdiction for
preliminary or interim equitable relief, or to compel arbitration in accordance
with this paragraph, without breach of this arbitration provision. This
Section 12(d) shall not apply to the Confidentiality
Agreement.
(e) Advice
of Counsel.
Each
party acknowledges that, in negotiating and executing this Agreement,
(i) such party has had the right and the opportunity to seek the advice of
independent legal counsel of his or its own choosing, (ii) such party has
read and understood all of the terms and provisions of this Agreement, and
(iii) Heller Ehrman LLP and Hayden Trubitt, and Jonathan Soneff, represent
only the Company and did not represent and are not representing
Consultant. The
Company will reimburse Consultant for up to $5,000 in reasonable attorneys’ fees
incurred by Consultant in connection with the negotiation and preparation
of
this Agreement and any related agreements contemplated hereunder.
(f) Construction.
This
Agreement shall not be construed against either party by reason of who drafted
or prepared it.
(g) Notices.
Every notice or other communication relating to this Agreement shall
be in writing, and shall be mailed to or delivered to the party for whom
it is
intended at such address as may from time to time be designated by it in
a
notice mailed or delivered to the other party as herein provided, provided
that,
unless and until some other address be so designated, all notices or
communications by Consultant to the Company shall be mailed or delivered
to the
Company at its principal executive office, and all notices or communications
by
the Company to Consultant may be given to Consultant personally or may
be mailed
to Consultant at the following address:
Marshall
G. Cox
[address]
[address]
with
a copy to:
Jorge
del Calvo and Cindy V. Schlaefer
Pillsbury
Winthrop Shaw Pittman LLP
2475
Hanover Street
Palo
Alto, CA 94304
Any
notice so addressed shall be deemed
to be given: (i) if delivered by hand, or by courier or overnight mail,
on the
date of such delivery; and (ii) if mailed by registered or certified mail,
on
the third business day after the date of such mailing.
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CYTORI
THERAPEUTICS, INC.
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By:
/s/ Marc Hedrick
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Title:
President
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MARSHALL G.
COX
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/s/
Marshall G. Cox
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EXHIBIT
15.1
Letter
Re Unaudited Interim Financial Information
August
14, 2007
Cytori
Therapeutics, Inc.
3020
Callan Rd
San
Diego, California 92121
Re:
Registration Statement Nos. 333-82074, 333-122691, 333-134129, and
333-140875
With
respect to the subject registration statements, we acknowledge our awareness
of
the use therein of our report dated August 8, 2007 related to our review of
interim financial information.
Pursuant
to Rule 436 under the Securities Act of 1933 (the Act), such report is not
considered part of a registration statement prepared or certified by an
independent registered public accounting firm, or a report prepared or certified
by an independent registered public accounting firm within the meaning of
Sections 7 and 11 of the Act.
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/s/
KPMG LLP
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San
Diego, California
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EXHIBIT
31.1
Certification
of Chief Executive Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a),
as
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Christopher J. Calhoun, the Chief Executive Officer of Cytori Therapeutics,
Inc., certify that:
1. I
have
reviewed this quarterly report on Form 10-Q of Cytori Therapeutics,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements and other financial information included
in this report fairly present in all material respects the financial condition,
results of operations, and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Exchange
Act
Rules 13a-15(e) and 15d-15(e)) for
the
registrant and have:
(a) designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this
report-based on such evaluation; and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
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Date:
August 14, 2007
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/s/
Christopher J. Calhoun
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Christopher
J. Calhoun,
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Chief
Executive Officer
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EXHIBIT
31.2
Certification
of Chief Financial Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a),
as
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Mark
E. Saad, the Chief Financial Officer of Cytori Therapeutics, Inc., certify
that:
1. I
have
reviewed this quarterly report on Form 10-Q of Cytori Therapeutics,
Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge the financial statements, and other financial information included
in this report fairly present in all material respects the financial condition,
results of operations, and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Exchange
Act
Rules 13a-15(e) and 15d-15(e)) for
the
registrant and have:
(a) designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this
report-based on such evaluation; and
(c) disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) all
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
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Date:
August 14, 2007
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/s/
Mark E. Saad
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Mark
E. Saad
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Chief
Financial Officer
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EXHIBIT
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350/ SECURITIES EXCHANGE ACT RULE 13a-14(b),
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Quarterly Report on Form 10-Q of Cytori Therapeutics, Inc.
for the quarterly period ended June 30, 2007 as filed with the Securities and
Exchange Commission on the date hereof, Christopher J. Calhoun, as Chief
Executive Officer of Cytori Therapeutics, Inc., and Mark E. Saad, as Chief
Financial Officer of Cytori Therapeutics, Inc., each hereby certifies,
respectively, that:
1. The
Form
10-Q report of Cytori Therapeutics, Inc. that this certification accompanies
fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934.
2. The
information contained in the Form 10-Q report of Cytori Therapeutics, Inc.
that
this certification accompanies fairly presents, in all material respects, the
financial condition and results of operations of Cytori Therapeutics,
Inc.
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By:
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/s/
Christopher J. Calhoun
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Dated:
August 14, 2007
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Christopher
J. Calhoun
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Chief
Executive Officer
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By:
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/s/
Mark E. Saad
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Dated:
August 14, 2007
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Mark
E. Saad
|
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Chief
Financial Officer
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