UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
(Mark
One)
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||
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ý
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
For
the quarterly period ended September 30, 2007
|
||
|
OR
|
||
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
|
For
the transition period
from to
|
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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
October 31, 2007, there were 24,039,259 shares of the registrant’s common stock
outstanding.
CYTORI
THERAPEUTICS, INC.
INDEX
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Page
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3
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4
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5
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6
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7
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17
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37
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37
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37
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38
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43
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43
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43
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44
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45
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Report
of
Independent Registered Public Accounting
Firm
The
Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We
have
reviewed the accompanying consolidated condensed balance sheet of Cytori
Therapeutics, Inc. and subsidiaries (the Company) as of September 30, 2007,
the
related consolidated condensed statements of operations and comprehensive loss
for the three-month and nine-month periods ended September 30, 2007 and 2006,
and the consolidated condensed statements of cash flows for the nine-month
periods ended September 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). 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
|
|
|
November
9, 2007
|
|
3
CYTORI
THERAPEUTICS,
INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
|
As
of
September
30, 2007
|
As
of
December
31, 2006
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
17,939,000
|
$ |
8,902,000
|
||||
|
Short-term
investments, available-for-sale
|
994,000
|
3,976,000
|
||||||
|
Accounts
receivable, net of allowance for doubtful accounts
of
$1,000 and $2,000 in 2007 and 2006, respectively
|
31,000
|
225,000
|
||||||
|
Inventories,
net
|
—
|
164,000
|
||||||
|
Other
current assets
|
788,000
|
711,000
|
||||||
|
Total
current assets
|
19,752,000
|
13,978,000
|
||||||
|
Property
and equipment held for sale, net
|
—
|
457,000
|
||||||
|
Property
and equipment, net
|
3,639,000
|
4,242,000
|
||||||
|
Investment
in joint venture
|
77,000
|
76,000
|
||||||
|
Other
assets
|
425,000
|
428,000
|
||||||
|
Intangibles,
net
|
1,134,000
|
1,300,000
|
||||||
|
Goodwill
|
3,922,000
|
4,387,000
|
||||||
|
Total
assets
|
$ |
28,949,000
|
$ |
24,868,000
|
||||
|
Liabilities
and Stockholders’ Equity (Deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ |
4,901,000
|
$ |
5,587,000
|
||||
|
Current
portion of long-term obligations
|
692,000
|
999,000
|
||||||
|
Total
current liabilities
|
5,593,000
|
6,586,000
|
||||||
|
Deferred
revenues, related party
|
18,748,000
|
23,906,000
|
||||||
|
Deferred
revenues
|
2,379,000
|
2,389,000
|
||||||
|
Option
liability
|
1,000,000
|
900,000
|
||||||
|
Long-term
deferred rent
|
547,000
|
741,000
|
||||||
|
Long-term
obligations, less current portion
|
444,000
|
1,159,000
|
||||||
|
Total
liabilities
|
28,711,000
|
35,681,000
|
||||||
|
Commitments
and contingencies
|
—
|
—
|
||||||
|
Stockholders’
equity (deficit):
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and
outstanding in 2007 and 2006
|
—
|
—
|
||||||
|
Common
stock, $0.001 par value; 95,000,000 shares authorized; 25,801,091
and
21,612,243 shares issued and 23,928,257 and 18,739,409 shares outstanding
in 2007 and 2006, respectively
|
26,000
|
22,000
|
||||||
|
Additional
paid-in capital
|
128,458,000
|
103,053,000
|
||||||
|
Accumulated
deficit
|
(121,452,000 | ) | (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)
|
238,000
|
(10,813,000 | ) | |||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ |
28,949,000
|
$ |
24,868,000
|
||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
CYTORI
THERAPEUTICS,
INC.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
|
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Product
revenues
|
$ |
—
|
$ |
133,000
|
$ |
792,000
|
$ |
1,087,000
|
||||||||
|
Cost
of product revenues
|
—
|
383,000
|
422,000
|
1,341,000
|
||||||||||||
|
Gross
profit (loss)
|
—
|
(250,000 | ) |
370,000
|
(254,000 | ) | ||||||||||
|
Development
revenues:
|
||||||||||||||||
|
Development,
related party
|
3,362,000
|
—
|
5,158,000
|
683,000
|
||||||||||||
|
Development
|
—
|
1,000
|
10,000
|
149,000
|
||||||||||||
|
Research
grant and other
|
11,000
|
350,000
|
65,000
|
413,000
|
||||||||||||
|
3,373,000
|
351,000
|
5,233,000
|
1,245,000
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
5,193,000
|
5,552,000
|
14,583,000
|
16,749,000
|
||||||||||||
|
Sales
and marketing
|
613,000
|
610,000
|
1,678,000
|
1,584,000
|
||||||||||||
|
General
and administrative
|
3,177,000
|
3,181,000
|
9,777,000
|
10,005,000
|
||||||||||||
|
Change
in fair value of option liabilities
|
—
|
(374,000 | ) |
100,000
|
(3,514,000 | ) | ||||||||||
|
Total
operating expenses
|
8,983,000
|
8,969,000
|
26,138,000
|
24,824,000
|
||||||||||||
|
Operating
loss
|
(5,610,000 | ) | (8,868,000 | ) | (20,535,000 | ) | (23,833,000 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Gain
on sale of assets
|
—
|
—
|
1,858,000
|
—
|
||||||||||||
|
Interest
income
|
302,000
|
158,000
|
849,000
|
537,000
|
||||||||||||
|
Interest
expense
|
(33,000 | ) | (47,000 | ) | (128,000 | ) | (158,000 | ) | ||||||||
|
Other
expense, net
|
18,000
|
(7,000 | ) | (37,000 | ) | (13,000 | ) | |||||||||
|
Equity
gain (loss) from investment in joint venture
|
(5,000 | ) | (3,000 | ) |
1,000
|
(68,000 | ) | |||||||||
|
Total
other income
|
282,000
|
101,000
|
2,543,000
|
298,000
|
||||||||||||
|
Net
loss
|
(5,328,000 | ) | (8,767,000 | ) | (17,992,000 | ) | (23,535,000 | ) | ||||||||
|
Other
comprehensive gain (loss) – unrealized holding gain (loss)
|
—
|
6,000
|
(1,000 | ) | (18,000 | ) | ||||||||||
|
Comprehensive
loss
|
$ | (5,328,000 | ) | $ | (8,761,000 | ) | $ | (17,993,000 | ) | $ | (23,553,000 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (0.22 | ) | $ | (0.53 | ) | $ | (0.80 | ) | $ | (1.48 | ) | ||||
|
Basic
and diluted weighted average common shares
|
23,903,082
|
16,641,423
|
22,502,133
|
15,891,674
|
||||||||||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
CYTORI
THERAPEUTICS,
INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
For
the Nine Months Ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (17,992,000 | ) | $ | (23,535,000 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
1,227,000
|
1,605,000
|
||||||
|
Inventory
provision
|
70,000
|
70,000
|
||||||
|
Reversal
of warranty provision
|
(54,000 | ) |
—
|
|||||
|
Increase
(reduction) in allowance for doubtful accounts
|
1,000
|
(5,000 | ) | |||||
|
Change
in fair value of option liabilities
|
100,000
|
(3,514,000 | ) | |||||
|
Stock-based
compensation expense
|
1,762,000
|
2,652,000
|
||||||
|
Gain
on sale of assets
|
(1,858,000 | ) |
—
|
|||||
|
Equity
(gain) loss from investment in joint venture
|
(1,000 | ) |
68,000
|
|||||
|
Non-cash
charge related to stock issued for license amendment, related
party
|
—
|
487,000
|
||||||
|
Increases
(decreases) in cash caused by changes in operating assets and
liabilities:
|
||||||||
|
Accounts
receivable
|
193,000
|
718,000
|
||||||
|
Inventories
|
—
|
(22,000 | ) | |||||
|
Other
current assets
|
(94,000 | ) | (160,000 | ) | ||||
|
Other
assets
|
3,000
|
5,000
|
||||||
|
Accounts
payable and accrued expenses
|
(632,000 | ) | (966,000 | ) | ||||
|
Deferred
revenues, related party
|
(5,158,000 | ) |
11,817,000
|
|||||
|
Deferred
revenues
|
(10,000 | ) | (149,000 | ) | ||||
|
Long-term
deferred rent
|
(194,000 | ) |
258,000
|
|||||
|
Net
cash used in operating activities
|
(22,637,000 | ) | (10,671,000 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Proceeds
from sale and maturity of short-term investments
|
25,479,000
|
53,264,000
|
||||||
|
Purchases
of short-term investments
|
(22,498,000 | ) | (50,278,000 | ) | ||||
|
Proceeds
from sale of assets
|
3,175,000
|
—
|
||||||
|
Costs
from sale of assets
|
(305,000 | ) |
—
|
|||||
|
Purchases
of property and equipment
|
(437,000 | ) | (3,014,000 | ) | ||||
|
Investment
in joint venture
|
—
|
(150,000 | ) | |||||
|
Net
cash provided by (used in) investing activities
|
5,414,000
|
(178,000 | ) | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Principal
payments on long-term obligations
|
(1,022,000 | ) | (714,000 | ) | ||||
|
Proceeds
from exercise of employee stock options and warrants
|
1,381,000
|
819,000
|
||||||
|
Proceeds
from sale of common stock and warrants
|
21,500,000
|
16,352,000
|
||||||
|
Costs
from sale of common stock
|
(1,599,000 | ) |
—
|
|||||
|
Proceeds
from sale of treasury stock
|
6,000,000
|
—
|
||||||
|
Net
cash provided by financing activities
|
26,260,000
|
16,457,000
|
||||||
|
Net
increase in cash and cash equivalents
|
9,037,000
|
5,608,000
|
||||||
|
Cash
and cash equivalents at beginning of period
|
8,902,000
|
8,007,000
|
||||||
|
Cash
and cash equivalents at end of period
|
$ |
17,939,000
|
$ |
13,615,000
|
||||
|
Supplemental
disclosure of cash flows information:
|
||||||||
|
Cash
paid during period for:
|
||||||||
|
Interest
|
$ |
131,000
|
$ |
160,000
|
||||
|
Taxes
|
2,000
|
1,000
|
||||||
SEE
NOTES
TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6
CYTORI THERAPEUTICS, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
|
1.
|
Basis
of Presentation
|
Our
accompanying unaudited consolidated condensed financial statements as of
September 30, 2007 and for the three and nine months ended September 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 (the
Company), have been included. Operating results for the three and
nine months ended September 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 condensed 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 condensed 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. 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, aesthetic and
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. We have also developed a regenerative cell
banking platform for use in hospitals and clinics that will preserve
regenerative cells harvested using our CelutionTM System
for
potential future use.
Our
MacroPore Biosurgery unit manufactured and distributed the HYDROSORB™ family of
bioresorbable spine and orthopedic implants, which we sold to the Kensey Nash
Corporation (“Kensey Nash”) in May 2007 (see note 14); it also develops Thin
Film bioresorbable implants for sale in Japan through Senko Medical Trading
Company (“Senko”), which has exclusive distribution rights to these products in
Japan.
We
measure the success of each operating segment based on operating profits and
losses and, additionally, in the case of the regenerative cell technology
segment, the achievement of key research objectives. In arriving at
our operating results for each segment, we use the same accounting policies
as
those used for our consolidated company and as described throughout this
note. However, segment operating results exclude allocations of
company-wide general and administrative costs and changes in fair value of
our
option liabilities.
7
The
following tables provide information regarding the performance and assets of
our
operating segments:
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Regenerative
cell technology
|
$ |
3,373,000
|
$ |
350,000
|
$ |
5,223,000
|
$ |
1,096,000
|
||||||||
|
MacroPore
Biosurgery
|
—
|
134,000
|
802,000
|
1,236,000
|
||||||||||||
|
Total
revenues
|
$ |
3,373,000
|
$ |
484,000
|
$ |
6,025,000
|
$ |
2,332,000
|
||||||||
|
Segment
gains (losses):
|
||||||||||||||||
|
Regenerative
cell technology
|
$ | (2,313,000 | ) | $ | (5,491,000 | ) | $ | (10,677,000 | ) | $ | (16,006,000 | ) | ||||
|
MacroPore
Biosurgery
|
(120,000 | ) | (570,000 | ) |
19,000
|
(1,336,000 | ) | |||||||||
|
General
and administrative expenses
|
(3,177,000 | ) | (3,181,000 | ) | (9,777,000 | ) | (10,005,000 | ) | ||||||||
|
Change
in fair value of option liabilities
|
—
|
374,000
|
(100,000 | ) |
3,514,000
|
|||||||||||
|
Total
operating loss
|
$ | (5,610,000 | ) | $ | (8,868,000 | ) | $ | (20,535,000 | ) | $ | (23,833,000 | ) | ||||
|
As
of September
30,
|
As
of December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Assets:
|
||||||||
|
Regenerative
cell technology
|
$ |
24,370,000
|
$ |
9,792,000
|
||||
|
MacroPore
Biosurgery
|
—
|
1,758,000
|
||||||
|
Corporate
assets
|
4,579,000
|
13,318,000
|
||||||
|
Total
assets
|
$ |
28,949,000
|
$ |
24,868,000
|
||||
|
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
September 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.
The
majority of our inventory was included with the sale in the second quarter
of
our spine and orthopedic implant product line to Kensey Nash (see note 14 for
a
description of this sale). Our remaining inventory at September 30,
2007 consists only of raw materials related to our Thin Film
products. During the third quarter of 2007, we recorded a provision
of $70,000 for this inventory, as we determined it unlikely to be converted
into
finished goods and ultimately sold. This provision is reflected as a
component of research and development expense rather than as cost of product
revenues due to the inventory’s relationship to Thin Film products, for
which
we have not yet achieved commercialization. During the second quarter
of 2006, we also recorded a provision of $70,000 for excess raw materials
related to our spine and orthopedic products.
8
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 occasionally 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 recorded
reserves 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 (EITF) No. 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 statements 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.
No
license/distribution fees have been recognized in the three and nine month
periods ended September 30, 2007 and 2006.
9
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. Revenues derived from reimbursement of direct
out-of-pocket expenses for research costs associated with grants are recorded
in
compliance with EITF Issue No. 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent”, and EITF Issue No. 01-14, “Income
Statement Characterization of Reimbursements Received for “Out-of-Pocket”
Expenses Incurred”. In accordance with the criteria established by these
EITF Issues, we record grant revenue for the gross amount of the
reimbursement. The costs associated with these reimbursements are
reflected as a component of research and development expense in the consolidated
condensed statements of operations.
Additionally,
research arrangements we have with commercial enterprises such as Olympus and
Senko are considered a key component of our central and ongoing
operations. Accordingly, the inflows from such arrangements are
presented as revenues in the consolidated condensed statements of
operations.
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) provide future development contributions related
to commercializing the Celution™ System (see note 12). As noted
above, the license and development contributions are not separable under EITF
00-21. Accordingly, we will recognize the $28,311,000 allocated to
deferred revenues, related party, using a proportional performance methodology-
that is, as we complete substantive milestones related to the development
component of the combined accounting unit. As of September 30, 2007,
we have recognized $11,063,000 of the deferred revenues, related party as
development revenues of which $3,362,000 and $5,158,000 was recognized in the
three and nine months ended September 30, 2007,
respectively. All related development costs are expensed as
incurred and are included in research and development expense in the
consolidated condensed statements 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 $0 and
$10,000 in the three and nine month periods ended September 30, 2007, and $1,000
and $149,000 in the three and nine month periods ended September 30, 2006,
respectively, representing the fair value of the completed milestones relative
to the fair value of the total efforts expected to be necessary to achieve
regulatory approval by the MHLW. 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.
10
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 three and nine months ended September 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 four-year graded
vesting for our officers and 24-month graded 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 company-wide stock option grants to our
non-executive employees to purchase up to 213,778 shares of our common stock,
subject to a four-year graded 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.
Of
the
$1,762,000 charge to stock-based compensation for the nine months ended
September 30, 2007, $64,000 related to award modifications for the termination
of the full-time employment of our Vice President of Research, Regenerative
Cell
Technology, and two less senior employees. The charge reflects the incremental
fair value of (a) the accelerated unvested stock options and (b) the extended
vested stock options (over the fair value of the original awards at the
modification date). There will be no further charges related to these
modifications.
|
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 as of September 2007 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 September 30, 2007 and December 31, 2006, and have
recognized $0 in interest and/or penalties in our statements of operations
for
the three and nine months ended September 30, 2007.
With
limited exception, we are subject to taxation only 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 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 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 potential
limitations as to the use 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 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 in the foreseeable future.
11
|
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
applicable 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 applicable 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 shares that would have
been outstanding as calculated 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 nine months
ended September 30, 2007 and 2006, as their inclusion would be antidilutive.
Potentially dilutive common shares excluded from the calculations of diluted
loss per share were 7,859,325 for the three and nine month periods ended
September 30, 2007 and 8,082,846 for the three and nine months ended September
30, 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 September 30, 2007, we have pre-clinical research
study obligations of $135,000 (which are expected to be fully completed within
a
year) and clinical research study obligations of $5,670,000 ($3,781,000 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.
12
On
August
9, 2007, the United States District Court 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.
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.
During
the three and nine months ended September 30, 2007, we expensed $353,000 and
$954,000, respectively, for legal fees related to this license. For
the same periods in 2006, we expensed $335,000 and $1,701,000,
respectively. These expenses have been classified as general and
administrative expense in the accompanying financial statements. We
believe that the amount accrued as of September 30, 2007 of $1,137,000 is a
reasonable estimate of our liability for the expenses incurred through September
30, 2007.
|
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 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 Issue No. 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. This difference was recorded as deferred revenue, since
conceptually, the excess proceeds represent a prepayment for future
contributions and obligations of Cytori for the benefit of the Joint Venture
(see below), rather than an additional equity investment in
Cytori. The recognition of this deferred amount will require the
achievement of service related milestones, under a proportional performance
methodology. If and as such revenues are recognized, deferred revenue
will be decreased.
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
September 30, 2007, Olympus holds approximately 12.6% of our issued and
outstanding shares. Additionally, Olympus has a right, which it has
not yet exercised, to designate a director to serve on our Board of
Directors.
Formation
of the Olympus-Cytori Joint Venture
On
November 4, 2005, we entered into a joint venture and other related agreements
(the “Joint Venture Agreements”) with Olympus. The Joint Venture is
owned equally by Olympus and us.
Under
the
Joint Venture Agreements:
|
·
|
Olympus
paid $30,000,000 for its 50% interest in the Joint
Venture. Moreover, Olympus simultaneously entered into a
License/Joint Development Agreement with the Joint Venture and us
to
develop a second generation commercial system and manufacturing
capabilities.
|
|
·
|
We
licensed our device technology, including the Celution™ System and certain
related intellectual property, to the Joint Venture for use in future
generation devices. These devices will process and purify
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.
|
13
We
have
determined that the Joint Venture is a variable interest entity (“VIE”) pursuant
to FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51” (“FIN 46R”), but that
Cytori is not the VIE’s primary beneficiary. Accordingly, we have
accounted for our interests in the Joint Venture using the equity method of
accounting, since we can exert significant influence over the Joint Venture’s
operations. At September 30, 2007, the carrying value of our
investment in the Joint Venture is $77,000.
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 September 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 consolidated
condensed balance sheet.
The
valuations of the Put were completed 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:
|
September
30, 2007
|
December
31, 2006
|
November
4, 2005
|
||||||||||
|
Expected
volatility of
Cytori
|
60.00 | % | 66.00 | % | 63.20 | % | ||||||
|
Expected
volatility of the Joint Venture
|
60.00 | % | 56.60 | % | 69.10 | % | ||||||
|
Bankruptcy
recovery rate for
Cytori
|
21.00 | % | 21.00 | % | 21.00 | % | ||||||
|
Bankruptcy
threshold for
Cytori
|
$ |
9,680,000
|
$ |
10,110,000
|
$ |
10,780,000
|
||||||
|
Probability
of a change of control event for Cytori
|
2.38 | % | 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
|
4.59 | % | 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 and all subsequent 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 September 30, 2007.
14
In
August
2007 we entered into a License and Royalty Agreement (“Royalty Agreement”) with
the Joint Venture which provides us the ability to commercially launch Cytori’s
CelutionTM
System earlier than we could have otherwise done so under the terms of the
Joint
Venture Agreements. The Royalty Agreement allows for the sale of the
Cytori system until such time as the Joint Venture’s products are commercially
available, subject to a reasonable royalty that will be payable to the Joint
Venture for all such sales.
Deferred
revenues, related party
As
of
September 30, 2007, the deferred revenues, related party account primarily
consists of the consideration we have received in exchange for contributions
and
obligations that we have agreed to on behalf of Olympus and the Joint Venture
(less any amounts that we have recognized as revenues in accordance with our
policies set out in note 5). These contributions include completing
pre-clinical and clinical studies, product development and seeking certain
regulatory approvals and/or clearances toward commercialization of the
CelutionTM
System. Our obligations 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.
|
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, “Accounting
for Registration Payment Arrangements.”
|
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 bioresorbable spine and orthopedic surgical implant
product line, a part of our MacroPore Biosurgery business. Excluded
from the sale were any rights to 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 during the second
quarter of 2007. As part of the disposition agreement, we were
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, and we recognized $1,858,000 as a gain
on sale in the statement of operations during the second quarter of
2007. These manufacturing requirements were completed in August as
planned, and the associated costs were classified against the deferred balance,
reducing it to zero. As of September 30, 2007, no further costs or
adjustments relating to this product line sale are anticipated.
15
The
revenues and expenses related to the spine and orthopedic product line
transferred to Kensey Nash for the three and nine months ended September 30,
2007 and 2006 were as follows:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Revenues
|
$ |
—
|
$ |
133,000
|
$ |
792,000
|
$ |
1,087,000
|
||||||||
|
Cost
of product revenues
|
—
|
(383,000 | ) | (422,000 | ) | (1,341,000 | ) | |||||||||
|
Research
& development
|
—
|
(239,000 | ) | (113,000 | ) | (848,000 | ) | |||||||||
|
Sales
& marketing
|
—
|
(10,000 | ) | (21,000 | ) | (148,000 | ) | |||||||||
16
Item
2. Management’s
Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
report contains certain statements that may be deemed “forward-looking
statements” within the meaning of United States 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 18 months:
|
·
|
Launch
our Celution™ System-based cell preservation (“cell banking”) product in
Japan;
|
|
·
|
Initiate
a limited market introduction of the Celution™ System in Europe for
reconstructive surgery;
|
|
·
|
Advance
and expand our clinical development product pipeline;
and
|
|
·
|
Make
continued progress in our corporate partnering
efforts.
|
The
major
milestones, on which to measure our success over this time, are the
following:
|
·
|
Completion
of enrollment for the APOLLO and PRECISE safety and feasibility
trials for heart attack and chronic myocardial ischemia,
respectively;
|
|
·
|
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;
and
|
|
·
|
Pursuance
of commercialization partners for the Celution™ System in select
therapeutic areas.
|
17
StemSource™
Cell Bank
In
the
third quarter of 2007, Cytori entered into a partnership to commercialize our
StemSource™ Cell Bank, which includes Cytori's Celution™ System, to hospitals
throughout Japan. Cytori recently received regulatory approval in Japan on
the
Celution™ System
for use in medical laboratories for stem cell collection and preservation
procedures. This was a critical milestone required for Green Hospital Supply
to
begin commercialization. The first cell banks are expected to be installed
by
the first quarter of 2008.
Under
the
agreement, Green Hospital Supply will be the exclusive Japanese provider of
both
the StemSource™ banking platform and the Celution™ System for stem and
regenerative cell banking. Cytori retains exclusive rights for both products
in
other countries.
Breast
Reconstruction
During
the first nine months 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, when we achieve
reimbursement for reconstruction of breast tissue following a partial mastectomy
(lumpectomy) in breast cancer patients based on results from two-planned
post-marketing studies.
This
year, we have entered distribution agreements for Belgium, China, Greece,
Israel, Italy, Korea, Luxembourg, Portugal, Spain, Taiwan, and The Netherlands
to prepare for the launch of our Celution™ System. In parallel, we
are building out our internal manufacturing capabilities so that we will
be able to meet anticipated demand in 2008 and 2009 until the
Olympus-Cytori Joint Venture, described below, is expected to fulfill device
manufacturing.
Based
on
preliminary results and other data, we are planning two post-marketing studies,
designated as the RESTORE II and VENUS studies, which will further evaluate
the
use of adipose-derived stem and regenerative cells processed via
Celution™ System for reconstruction of breast tissue
following a partial mastectomy. RESTORE II will evaluate up to 70 patients
at
multiple European trial sites. VENUS will be a 20 patient single center adjunct
to RESTORE II in patients with more severe damage and contour defects resulting
from a partial mastectomy.
Breast
reconstruction in partial mastectomy patients represents an important market
for
which there are few, if any, available treatment options. In Europe, 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.
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. 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 will be evaluated six months
after treatment.
The
American Heart Association estimates that in the United States of America,
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.
|
18
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 and all subsequent 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.
In
August
2007 we entered into a License and Royalty Agreement (“Royalty Agreement”) with
the Joint Venture which provides us the ability to commercially launch Cytori’s
CelutionTM
System earlier than we could have otherwise done so under the terms of the
Joint
Venture Agreements. The Royalty Agreement allows for the sale of the
Cytori system until such time as the Joint Venture’s products are commercially
available, subject to a reasonable royalty that will be payable to the Joint
Venture for all such sales.
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
$1,500,000 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.
MacroPore
Biosurgery
Spine
and orthopedic products
We
have
completed our transition away from the bioresorbable spine and orthopedic
surgical implant 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”).
19
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, meaning that 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 consolidated condensed 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 $0 and
$10,000 in development revenues during the three and nine months ended September
30, 2007, respectively. We recognized $1,000 and $149,000 in
development revenues during the three and nine months ended September 30, 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 September 30, 2007,
we had cash and cash equivalents and short-term investments on hand of
$18,933,000, which was primarily derived from:
|
·
|
Approximately
$19,901,000 that was raised from an equity offering of common stock
and
warrants in February 2007, net of fees and expenses,
and
|
|
·
|
$6,000,000
we received in the second quarter of 2007 from the sale of 1,000,000
shares of common stock to Green Hospital Supply,
Inc.
|
Moreover,
during the second quarter of 2007, we 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 nine months ended September 30, 2007 was
$5,328,000 and $17,992,000, which was driven by $5,193,000 and $14,583,000
in
research and development expenses and $3,177,000 and $9,777,000 in general
and
administrative expenses, respectively. This compares to a net loss of $8,767,000
and $23,535,000 during the three and nine months ended September 30, 2006,
respectively. The net loss for the third quarter and for the nine
months ended September 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 development revenue in the second and third quarters of 2007,
as
well as by the recognition of a gain on the sale of our bioresorbable spine
and
orthopedic implant product line in the second quarter of 2007. We
expect our net operating loss for 2007 will be approximately
$25,000,000.
20
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 nine months ended
September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$ Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Spine
and orthopedics products
|
$ |
—
|
$ |
133,000
|
$ | (133,000 | ) |
—
|
$ |
792,000
|
$ |
1,087,000
|
$ | (295,000 | ) | (27.1 | %) | |||||||||||||||
|
%
attributable to Medtronic
|
—
|
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
expect
to generate product revenues during 2008 related to our regenerative cell
therapy segment from the sale of our Celution™ devices and single-use
consumables related to breast reconstructive surgery as well as from our August
2007 commercialization agreement with Green Hospital Supply, Inc. for
regenerative cell banking in Japan.
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 nine months
ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Cost
of product revenues
|
$ |
—
|
$ |
368,000
|
$ | (368,000 | ) |
—
|
$ |
403,000
|
$ |
1,208,000
|
$ | (805,000 | ) | (66.6 | )% | |||||||||||||||
|
Inventory
provision
|
—
|
—
|
—
|
—
|
—
|
70,000
|
(70,000 | ) |
—
|
|||||||||||||||||||||||
|
Share-based
compensation
|
—
|
15,000
|
(15,000 | ) |
—
|
19,000
|
63,000
|
(44,000 | ) | (69.8 | )% | |||||||||||||||||||||
|
Total
cost of product revenues
|
$ |
—
|
$ |
383,000
|
$ | (383,000 | ) |
—
|
$ |
422,000
|
$ |
1,341,000
|
$ | (919,000 | ) | (68.5 | )% | |||||||||||||||
|
Total
cost of product revenues as % of product revenues
|
—
|
288.0 | % | 53.3 | % | 123.4 | % | |||||||||||||||||||||||||
MacroPore
Biosurgery:
|
|
·
|
The
decrease in cost of product revenues for the three and nine months
ended
September 30, 2007 as compared to the same periods in 2006 was due
to a
decrease in production of MacroPore Biosurgery spine and orthopedic
products, followed by our sale of the product line in May
2007.
|
|
|
·
|
Cost
of product revenues includes approximately $0 and $19,000 of share-based
compensation expense for the three and nine months ended September
30,
2007, respectively. Share-based compensation expense for the
three and nine months ended September 30, 2006 was $15,000 and $63,000,
respectively. For further details, see share-based compensation
discussion below.
|
|
|
·
|
During
the third quarter of 2007, we recorded a provision of $70,000 for
Thin
Film raw materials inventory, as we determined it was unlikely to
be
ultimately sold. This provision is reflected as a component of
research and development expense rather than as cost of product revenues
due to the inventory’s relationship to Thin Film products, for which we
have not yet achieved commercialization. During the second
quarter of 2006, we recorded a provision of $70,000 for excess raw
materials related to spine and orthopedic
products.
|
The
future. We expect to incur costs related to our products once
commercialization is achieved for our Japan Thin Film product line, and once
manufacturing of our Celution™ device begins. Such manufacturing
activities may begin on a limited scale as early as the fourth quarter of
2007.
21
Development
revenues
The
following table summarizes the components of our development revenues for the
three and nine months ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||||||||
|
Development
(Olympus)
|
$ |
3,362,000
|
$ |
—
|
$ |
3,362,000
|
—
|
$ |
5,158,000
|
$ |
683,000
|
$ |
4,475,000
|
655.2 | % | |||||||||||||||||
|
Research
grant
(NIH)
|
—
|
303,000
|
(303,000 | ) |
—
|
—
|
310,000
|
(310,000 | ) |
—
|
||||||||||||||||||||||
|
Regenerative
cell storage services and other
|
11,000
|
47,000
|
(36,000 | ) | (76.6 | )% |
65,000
|
103,000
|
(38,000 | ) | (36.9 | )% | ||||||||||||||||||||
|
Total
regenerative cell technology
|
3,373,000
|
350,000
|
3,023,000
|
863.7 | % |
5,223,000
|
1,096,000
|
4,127,000
|
376.6 | % | ||||||||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||||||||
|
Development
(Senko)
|
—
|
1,000
|
(1,000 | ) |
—
|
10,000
|
149,000
|
(139,000 | ) | (93.3 | )% | |||||||||||||||||||||
|
Total
development revenues
|
$ |
3,373,000
|
$ |
351,000
|
$ |
3,022,000
|
861.0 | % | $ |
5,233,000
|
$ |
1,245,000
|
$ |
3,988,000
|
320.3 | % | ||||||||||||||||
Regenerative
cell technology:
|
|
·
|
We
recognize deferred revenues, related party, as development revenue
when
certain performance obligations are met (i.e., using a proportional
performance approach). During the three and nine months ended
September 30, 2007, we recognized $3,362,000 and $5,158,000 of revenue
associated with our arrangements with Olympus,
respectively. The revenue recognized in the second quarter of
2007 was a result of completion of a preclinical study. Revenue
was recognized in the third quarter of 2007 due to the completion
of a
development milestone. During the three and nine months ended
September 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 development milestone upon receipt
of a CE
Mark for the first generation Celution™
System.
|
|
|
·
|
The
research grant revenue in 2006 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 nine months ended September 30, 2006, we incurred $393,000 and
$479,000 in expenditures, of which $303,000 and $310,000 were
qualified. We recorded a total of $303,000 and $310,000 in revenues
for the three and nine months ended September 30, 2006, respectively, which
include allowable grant fees as well as cost reimbursements. 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 September 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.
|
22
The
future. We expect to continue to recognize revenues from our
regenerative cell technology segment during 2007 as we complete certain phases
of our Joint Venture and other Olympus product development performance
obligations. If we are successful in achieving certain milestone
points related to these activities, we could recognize approximately $686,000
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 certain contributions and obligations that
we
have agreed to perform) as well as external considerations, including obtaining
certain regulatory clearances and/or approvals related to the Celution™
System. The cash for these contributions and 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 Thin Film 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 when regulatory approval is 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.
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 nine months ended September 30, 2007 and
2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||||||||
|
Regenerative
cell technology
|
$ |
3,224,000
|
$ |
2,805,000
|
$ |
419,000
|
14.9 | % | $ |
9,298,000
|
$ |
9,785,000
|
$ | (487,000 | ) | (5.0 | )% | |||||||||||||||
|
Development
milestone (Joint Venture)
|
1,727,000
|
1,866,000
|
(139,000 | ) | (7.4 | )% |
4,560,000
|
4,732,000
|
(172,000 | ) | (3.6 | )% | ||||||||||||||||||||
|
Research
grants
(NIH)
|
—
|
302,000
|
(302,000 | ) |
—
|
—
|
388,000
|
(388,000 | ) |
—
|
||||||||||||||||||||||
|
Share-based
compensation
|
165,000
|
296,000
|
(131,000 | ) | (44.3 | )% |
492,000
|
837,000
|
(345,000 | ) | (41.2 | )% | ||||||||||||||||||||
|
Total
regenerative cell technology
|
5,116,000
|
5,269,000
|
(153,000 | ) | (2.9 | )% |
14,350,000
|
15,742,000
|
(1,392,000 | ) | (8.8 | )% | ||||||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||||||||
|
Bioresorbable
polymer implants
|
—
|
235,000
|
(235,000 | ) |
—
|
111,000
|
824,000
|
(713,000 | ) | (86.5 | )% | |||||||||||||||||||||
|
Development
milestone (Senko)
|
77,000
|
45,000
|
32,000
|
71.1 | % |
120,000
|
159,000
|
(39,000 | ) | (24.5 | )% | |||||||||||||||||||||
|
Share-based
compensation
|
—
|
3,000
|
(3,000 | ) |
—
|
2,000
|
24,000
|
(22,000 | ) | (91.7 | )% | |||||||||||||||||||||
|
Total
MacroPore Biosurgery
|
77,000
|
283,000
|
(206,000 | ) | (72.8 | )% |
233,000
|
1,007,000
|
(774,000 | ) | (76.9 | )% | ||||||||||||||||||||
|
Total
research and development expenses
|
$ |
5,193,000
|
$ |
5,552,000
|
$ | (359,000 | ) | (6.5 | )% | $ |
14,583,000
|
$ |
16,749,000
|
$ | (2,166,000 | ) | (12.9 | )% | ||||||||||||||
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, increased by $73,000 for the three months and decreased
by
$157,000 for the nine months ended September 30, 2007, respectively
as
compared to the same periods in 2006. Professional services
expense decreased by $461,000 and $823,000 for the three and
nine months ended September 30, 2007 as compared to the same periods
in
2006. This was due to decreased use of consultants and
temporary labor during these periods. Pre-clinical and clinical
study expense increased by $101,000 for the three months and decreased
$388,000 for the nine months ended September 30, 2007 as compared
to the
same periods in 2006. Both fluctuations were due primarily to a
transition in focus from pre-clinical studies to clinical
studies. Rent and utilities expense decreased by $100,000 and
$259,000 in the three and nine months ended September 30, 2007 as
compared
to same periods in 2006 primarily due to the termination of leases
at our
Top Gun location in San Diego, CA. However, expenses for
repairs and maintenance increased by $122,000 and $316,000 for the
three
and nine months ended September 30, 2007, as compared to the same
periods
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 three and nine months ended September 30,
2007, costs associated with the development of the device were $1,727,000
and $4,560,000, respectively. For the three and nine months
ended September 30, 2006 costs associated with the development of
the
device were $1,866,000 and $4,732,000, respectively. The three
and nine months ended September 30, 2007 expenses were composed of
$758,000 and $2,477,000 in labor and related benefits, $665,000 and
$1,195,000 in consulting and other professional services, $158,000
and
$499,000 in supplies and $146,000 and $390,000, respectively, in
other
miscellaneous expense. The comparable expenses for the three
and nine months ended September 30, 2006 were composed of $712,000
and
$2,217,000 in labor and related benefits, $714,000 and $1,452,000
in
consulting and other professional services, $335,000 and $774,000
in
supplies and $105,000 and $289,000, respectively, in other miscellaneous
expense.
|
23
|
·
|
In
2004, we entered into an agreement with the NIH to reimburse us for
up to
$950,000 (Phase I $100,000 and Phase II $850,000) in “qualifying
expenditures” related to research on Adipose-Derived Cell Therapy for
Myocardial Infarction. For the three and nine months ended September
30,
2006, we incurred $393,000 and $479,000 of direct expenses relating
entirely to Phase II ($90,000 and $169,000 of which were not reimbursed,
respectively). 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 $165,000 and $492,000 for the three and nine months
ended
September 30, 2007, respectively. Share-based compensation was
$296,000 and $837,000 for the three and nine months ended September
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 $86,000 and $263,000 for the three and nine months ended
September 30, 2007 as compared to the same periods 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 nine months ended September 30,
2007, we incurred $7,000 and $120,000, respectively, of expenses
related
to this regulatory and registration process. We incurred $45,000
and
$159,000, respectively, of expenses for the same periods in 2006.
Additionally, during the third quarter of 2007, we recorded a provision
of
$70,000 for Thin Film raw material inventory, as we determined it
was
unlikely to be ultimately sold. This provision is reflected as
a component of research and development expense rather than as cost
of
product revenues due to the inventory’s relationship to Thin Film
products, for which we have not yet achieved
commercialization.
|
|
·
|
Share-based
compensation for the MacroPore Biosurgery segment of research and
development for the three and nine months ended September 30, 2007
was $0
and $2,000, respectively. Share-based compensation was $3,000
and $24,000, respectively, for the three and nine months ended September
30, 2006. See share-based compensation discussion below for
more details.
|
The
future. Our strategy is to continue our research and development
efforts in the regenerative cell field and we anticipate expenditures in this
area of research to total approximately $20,000,000 to $22,000,000 in
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 related and will continue to primarily
relate to developing therapeutic applications and conducting pre-clinical and
clinical studies on adipose-derived regenerative cells.
24
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 nine months ended September
30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||||||||
|
International
sales and marketing
|
$ |
508,000
|
$ |
310,000
|
$ |
198,000
|
63.9 | % | $ |
1,355,000
|
$ |
910,000
|
$ |
445,000
|
48.9 | % | ||||||||||||||||
|
Share-based
compensation
|
62,000
|
263,000
|
(201,000 | ) | (76.4 | )% |
196,000
|
451,000
|
(255,000 | ) | (56.5 | )% | ||||||||||||||||||||
|
Total
regenerative cell technology
|
570,000
|
573,000
|
(3,000 | ) | (0.5 | )% |
1,551,000
|
1,361,000
|
190,000
|
14.0 | % | |||||||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||||||||
|
General
corporate marketing
|
—
|
10,000
|
(10,000 | ) |
—
|
21,000
|
140,000
|
(119,000 | ) | (85.0 | )% | |||||||||||||||||||||
|
International
sales and marketing
|
43,000
|
27,000
|
16,000
|
59.3 | % |
106,000
|
74,000
|
32,000
|
43.2 | % | ||||||||||||||||||||||
|
Share-based
compensation
|
—
|
—
|
—
|
—
|
—
|
9,000
|
(9,000 | ) |
—
|
|||||||||||||||||||||||
|
Total
MacroPore Biosurgery
|
43,000
|
37,000
|
6,000
|
16.2 | % |
127,000
|
223,000
|
(96,000 | ) | (43.0 | )% | |||||||||||||||||||||
|
Total
sales and marketing expenses
|
$ |
613,000
|
$ |
610,000
|
$ |
3,000
|
0.5 | % | $ |
1,678,000
|
$ |
1,584,000
|
$ |
94,000
|
5.9 | % | ||||||||||||||||
Regenerative
Cell Technology:
|
·
|
International
sales and marketing expenditures for the three and nine months ended
September 30, 2007 and 2006 relate primarily to salary expenses for
employees involved in sales and marketing activities relating to
our
Celution™ System. 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 nine months ended September 30, 2007 was $62,000 and
$196,000, respectively. Share-based compensation for the
regenerative cell segment of sales and marketing for the three and
nine
months ended September 30, 2006 was $263,000 and $451,000,
respectively. 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 declined to $0 in
2007 as we focused more on our regenerative cell technology business
and
exited 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 nine months ended September 30, 2007 was
$0. Share-based compensation for the MacroPore Biosurgery
segment of sales and marketing for the three and nine months ended
September 30, 2006 was $0 and $9,000, respectively. 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.
25
General
and administrative expenses
General
and administrative expenses include costs for administrative personnel, legal
and other professional expenses, and general corporate expenses. The
following table summarizes the general and administrative expenses for the
three
and nine months ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
General
and administrative
|
$ |
2,797,000
|
$ |
2,979,000
|
$ | (182,000 | ) | (6.1 | )% | $ |
8,724,000
|
$ |
8,737,000
|
(13,000 | ) | (0.1 | )% | |||||||||||||||
|
Share-based
compensation
|
380,000
|
202,000
|
178,000
|
88.1 | % |
1,053,000
|
1,268,000
|
(215,000 | ) | (17.0 | )% | |||||||||||||||||||||
|
Total
general and administrative expenses
|
$ |
3,177,000
|
$ |
3,181,000
|
$ | (4,000 | ) | (0.1 | )% | $ |
9,777,000
|
$ |
10,005,000
|
$ | (228,000 | ) | (2.3 | )% | ||||||||||||||
|
·
|
An
overall decrease (excluding stock-based compensation) occurred during
the
third quarter and first nine months of 2007 as compared to the same
periods in 2006. This resulted primarily from a decrease in
legal costs related to the University of Pittsburg patent lawsuit
for the
three and nine month periods ended September 30, 2007 as compared
to the
same periods ended September 30,
2006.
|
|
·
|
We
have incurred substantial legal expenses in connection with the University
of Pittsburgh’s 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 we signed with UC in the third quarter of 2006 clarified
that we
are responsible for patent prosecution and litigation costs related
to
this lawsuit. In the three and nine months ended September 30,
2007, we expensed $353,000 and $954,000, respectively, for legal
fees
related to this license. For the same periods in 2006, we
expensed $335,000 and $1,701,000, 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 nine months ended September 30, 2007 was $380,000 and $1,053,000,
respectively. Share-based compensation related to general and
administrative expense for the same periods in 2006 was $202,000
and
$1,268,000, respectively. See share-based compensation
discussion below for more details.
|
The
future. We expect general and administrative expenses of
approximately $12,000,000 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 lawsuit at least through December 2007.
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 nine months
ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Regenerative
cell technology:
|
||||||||||||||||||||||||||||||||
|
Research
and development-related
|
$ |
165,000
|
$ |
296,000
|
(131,000 | ) | (44.3 | )% | $ |
492,000
|
$ |
837,000
|
$ | (345,000 | ) | (41.2 | )% | |||||||||||||||
|
Sales
and marketing-related
|
62,000
|
263,000
|
(201,000 | ) | (76.4 | )% |
196,000
|
451,000
|
(255,000 | ) | (56.5 | )% | ||||||||||||||||||||
|
Total
regenerative cell technology
|
227,000
|
559,000
|
(332,000 | ) | (59.4 | )% |
688,000
|
1,288,000
|
(600,000 | ) | (46.6 | )% | ||||||||||||||||||||
|
MacroPore
Biosurgery:
|
||||||||||||||||||||||||||||||||
|
Cost
of product revenues
|
—
|
15,000
|
(15,000 | ) |
—
|
19,000
|
63,000
|
(44,000 | ) | (69.8 | )% | |||||||||||||||||||||
|
Research
and development – related
|
—
|
3,000
|
(3,000 | ) |
—
|
2,000
|
24,000
|
(22,000 | ) | (91.7 | )% | |||||||||||||||||||||
|
Sales
and marketing - related
|
—
|
—
|
—
|
—
|
—
|
9,000
|
(9,000 | ) |
—
|
|||||||||||||||||||||||
|
Total
MacroPore Biosurgery
|
—
|
18,000
|
(18,000 | ) |
—
|
21,000
|
96,000
|
(75,000 | ) | (78.1 | )% | |||||||||||||||||||||
|
General
and administrative-related
|
380,000
|
202,000
|
178,000
|
88.1
|
1,053,000
|
1,268,000
|
(215,000 | ) | (17.0 | )% | ||||||||||||||||||||||
|
Total
share-based compensation
|
$ |
607,000
|
$ |
779,000
|
$ | (172,000 | ) | (22.1 | )% | $ |
1,762,000
|
$ |
2,652,000
|
$ | (890,000 | ) | (33.6 | )% | ||||||||||||||
26
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
schedule for our officers and 24-month graded 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 company-wide stock option grants to our
non-executive employees to purchase up to 213,778 shares of our common stock,
subject to a four-year graded 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.
Of
the
$1,762,000 charge to stock-based compensation for the nine months ended
September 30, 2007, $64,000 related to award modifications for the termination
of the full-time employment of our Vice President of Research, Regenerative
Cell
Technology, and two less senior employees. The charge reflects the incremental
fair value of (a) the accelerated unvested stock options and (b) the extended
vested stock options (over the fair value of the original awards at the
modification date). There will be no further charges related these
modifications.
The
future. We expect to 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 September 30, 2007, the
total compensation cost related to non-vested stock options not yet recognized
for all our plans is approximately $4,555,000. These costs are expected to
be
recognized over a weighted average period of 1.58 years.
Gain
on sale of assets
The
following is a table summarizing the gain on sale of assets from the disposal
of
our bioresorbable spine and orthopedic surgical implant product line for the
three and nine months ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Gain
on sale of assets
|
$ |
—
|
$ |
—
|
$ |
—
|
—
|
$ |
1,858,000
|
$ |
—
|
$ |
1,858,000
|
—
|
||||||||||||||||||
|
Total
gain on sale of assets
|
$ |
—
|
$ |
—
|
$ |
—
|
—
|
$ |
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 during
the
second quarter of 2007. As part of the disposition agreement,
we were 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, and we recognized $1,858,000 as a gain on sale in the
statement of operations during the second quarter of
2007. These manufacturing requirements were completed in August
as planned, and the associated costs were classified against the
deferred
balance, reducing it to zero. As of September 30, 2007, no
further costs or adjustments relating to this product line sale are
anticipated.
|
27
|
·
|
The
revenues and expenses related to the spine and orthopedic product
line
transferred to Kensey Nash for the three and nine months ended September
30, 2007 and 2006 were as follows:
|
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Revenues
|
$ |
—
|
$ |
133,000
|
$ |
792,000
|
$ |
1,087,000
|
||||||||
|
Cost
of product revenues
|
—
|
(383,000 | ) | (422,000 | ) | (1,341,000 | ) | |||||||||
|
Research
& development
|
—
|
(239,000 | ) | (113,000 | ) | (848,000 | ) | |||||||||
|
Sales
& marketing
|
—
|
(10,000 | ) | (21,000 | ) | (148,000 | ) | |||||||||
Change
in fair value of option liabilities
The
following is a table summarizing the change in fair value of option liabilities
for the three and nine months ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Change
in fair value of option liability
|
$ |
—
|
$ | (574,000 | ) | $ |
574,000
|
—
|
$ |
—
|
$ | (3,714,000 | ) | $ |
3,714,000
|
—
|
||||||||||||||||
|
Change
in fair value of put option liability
|
—
|
200,000
|
(200,000 | ) |
—
|
100,000
|
200,000
|
(100,000 | ) | (50.0 | )% | |||||||||||||||||||||
|
Total
change in fair value of option liabilities
|
$ |
—
|
$ | (374,000 | ) | $ |
374,000
|
—
|
$ |
100,000
|
$ | (3,514,000 | ) | $ |
3,614,000
|
102.8 | % | |||||||||||||||
|
·
|
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 statements 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 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:
|
September
30, 2007
|
December
31, 2006
|
November
4, 2005
|
||||||||||
|
Expected
volatility of
Cytori
|
60.00 | % | 66.00 | % | 63.20 | % | ||||||
|
Expected
volatility of the Joint Venture
|
60.00 | % | 56.60 | % | 69.10 | % | ||||||
|
Bankruptcy
recovery rate for
Cytori
|
21.00 | % | 21.00 | % | 21.00 | % | ||||||
|
Bankruptcy
threshold for
Cytori
|
$ |
9,680,000
|
$ |
10,110,000
|
$ |
10,780,000
|
||||||
|
Probability
of a change of control event for Cytori
|
2.38 | % | 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
|
4.59 | % | 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.
28
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 September 30, 2007 and December 31, 2006, and have
recognized $0 in interest and/or penalties in our statements of operations
for
the three and nine months ended September 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 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
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 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
potential limitations as to the use 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 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 in the foreseeable future.
Financing
items
The
following table summarizes interest income, interest expense, and other income
and expense for the three and nine months ended September 30, 2007 and
2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Interest
income
|
$ |
302,000
|
$ |
158,000
|
$ |
144,000
|
91.1 | % | $ |
849,000
|
$ |
537,000
|
$ |
312,000
|
58.1 | % | ||||||||||||||||
|
Interest
expense
|
(33,000 | ) | (47,000 | ) |
14,000
|
(29.8 | )% | (128,000 | ) | (158,000 | ) |
30,000
|
(19.0 | )% | ||||||||||||||||||
|
Other
income (expense)
|
18,000
|
(7,000 | ) |
25,000
|
(357.1 | )% | (37,000 | ) | (13,000 | ) | (24,000 | ) | 184.6 | % | ||||||||||||||||||
|
Total
|
$ |
287,000
|
$ |
104,000
|
$ |
183,000
|
176.0 | % | $ |
684,000
|
$ |
366,000
|
318,000
|
86.9 | % | |||||||||||||||||
|
·
|
Interest
income increased for the three and nine months ended September 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 partially
offset
by an additional promissory note of approximately $600,000 executed
in
December 2006.
|
|
·
|
The
changes in other income (expense) in the three and nine months ended
September 30, 2007 as compared to the same periods 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.
29
|
|
Equity
gain (loss) from investment in Joint
Venture
|
The
following table summarizes our equity loss from investment in joint venture
for
the three and nine months ended September 30, 2007 and 2006:
|
For
the three months ended September 30,
|
For
the nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||||||||||||||
|
Equity
gain (loss) in investment
|
$ | (5,000 | ) | $ | (3,000 | ) | $ | (2,000 | ) | 66.7 | % | $ |
1,000
|
$ | (68,000 | ) | $ |
69,000
|
(101.5 | )% | ||||||||||||
The
losses 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 second quarter of
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 labor costs
related to the development of our second generation commercial system as well
as
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.
Liquidity
and Capital Resources
Short-term
and long-term liquidity
The
following is a summary of our key liquidity measures at September 30, 2007
and
December 31, 2006:
|
September
30,
|
December
31,
|
|||||||||||||||
|
2007
|
2006
|
$
Differences
|
%
Differences
|
|||||||||||||
|
Cash
and cash equivalents
|
$ |
17,939,000
|
$ |
8,902,000
|
$ |
9,037,000
|
101.5 | % | ||||||||
|
Short-term
investments, available for sale
|
994,000
|
3,976,000
|
(2,982,000 | ) | (75.0 | )% | ||||||||||
|
Total
cash and cash equivalents and short-term investments, available for
sale
|
$ |
18,933,000
|
$ |
12,878,000
|
$ |
6,055,000
|
47.0 | % | ||||||||
|
Current
assets
|
$ |
19,752,000
|
$ |
13,978,000
|
$ |
5,774,000
|
41.3 | % | ||||||||
|
Current
liabilities
|
5,593,000
|
6,586,000
|
(993,000 | ) | (15.1 | )% | ||||||||||
|
Working
capital
|
$ |
14,159,000
|
$ |
7,392,000
|
$ |
6,767,000
|
91.5 | % | ||||||||
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 September 30,
2008. Management actively monitors cash expenditures we incur as we
progress toward our goals of product commercialization and sales in an effort
to
match projected expenditures to available cash flow.
From
inception to September 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,
|
30
|
·
|
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,
and
|
|
·
|
Receiving
gross proceeds of $3,175,000 from the sale of our bioresorbable spine
and
orthopedic surgical implant 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.
The
following summarizes our contractual obligations and other commitments at
September 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
|
$ |
1,136,000
|
$ |
692,000
|
$ |
444,000
|
$ |
—
|
$ |
—
|
||||||||||
|
Interest
commitment on long-term obligations
|
113,000
|
89,000
|
24,000
|
—
|
—
|
|||||||||||||||
|
Operating
lease obligations
|
3,802,000
|
1,370,000
|
2,432,000
|
—
|
—
|
|||||||||||||||
|
Pre-clinical
research study obligations
|
135,000
|
135,000
|
—
|
—
|
—
|
|||||||||||||||
|
Clinical
research study obligations
|
5,670,000
|
3,781,000
|
1,889,000
|
—
|
—
|
|||||||||||||||
|
Total
|
$ |
10,856,000
|
$ |
6,067,000
|
$ |
4,789,000
|
$ |
—
|
$ |
—
|
||||||||||
Cash
(used in) provided by operating, investing, and financing activities for the
nine months ended September 30, 2007 and 2006 is summarized as
follows:
|
For
the nine months ended September 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
cash used in operating activities
|
$ | (22,637,000 | ) | $ | (10,671,000 | ) | ||
|
Net
cash provided by (used in) investing activities
|
5,414,000
|
(178,000 | ) | |||||
|
Net
cash provided by financing activities
|
26,260,000
|
16,457,000
|
||||||
31
Operating
activities
Net
cash
used in 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 an operating loss of $20,535,000 for the
nine
months ended September 30, 2007. The operating cash impact of this
loss was $22,637,000, 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, the consideration of non-cash share-based
compensation of $1,762,000, other adjustments for 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 an operating loss of $23,833,000
for the nine months ended September 30, 2006. The operating cash
impact of this loss was $10,671,000, 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 nine months ended September 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 nine months ended September 30, 2006
resulted primarily from expenditures for leasehold improvements, offset in
part
by the net proceeds from the sale of short-term investments.
Capital
spending is essential to our product innovation initiatives and to maintain
our
operational capabilities. For the nine months ended September 30,
2007 and 2006, we used cash to purchase $437,000 and $3,014,000, 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 nine months ended September 30,
2007 related mainly to the issuance of 3,746,000 shares of our common stock
and
1,873,000 common stock warrants in a registered-direct public offering in
exchange for approximately $21,500,000 ($19,901,000 net of direct offering
costs) as well as the private issuance of 1,000,000 shares of common stock
to
Green Hospital Supply, Inc. for $6,000,000.
The
net
cash provided by financing activities for the nine months ended September 30,
2006 related mainly to the issuance of 2,918,255 shares of our common stock
in a
registered-direct public offering in exchange for $16,352,000. In
addition, cash provided by financing activities reflects 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.
32
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.
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 consider whether there was objective evidence to support
the fair value of certain undelivered elements. 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).
33
We
also
agreed to performance elements under the November 4, 2005 agreements we signed
with Olympus, including:
|
·
|
Granting
the Joint Venture (which Olympus is considered to control) and maintaining
an exclusive and perpetual manufacturing license to our device technology,
including the Celution™ System and certain related intellectual property;
and
|
|
·
|
Completing
certain pre-clinical and clinical studies, assisting with product
development and seeking certain regulatory approvals and/or clearances
toward commercialization of the Celution™
System.
|
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 certain development contributions and
obligations, including pre-clinical and clinical studies, certain agreed
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 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 approval 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 our obligations
under
the agreements, 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 obligations/milestones (“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 a
specified regulatory approval. 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.
|
34
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 September 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,
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.
|
|
·
|
We
estimated the fair value of our regenerative cell reporting unit
solely
using an income approach, as we believe there are no comparable
enterprises on which to base a valuation. The assumptions
underlying this valuation method involve a substantial amount of
judgment,
particularly since our regenerative cell business has yet to generate
any
revenues and does not have a commercially viable
product.
|
Again,
the manner in which we assigned assets, liabilities, and goodwill to our
reporting units, as well as how we determined the fair value of such reporting
units, involves significant uncertainties and estimates. The
judgments employed may have an effect on whether a goodwill impairment loss
is
recognized.
35
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.
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. 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.
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 condensed 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 condensed 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
condensed financial statements.
36
Item
3.
Quantitative and Qualitative Disclosures about Market
Risk
We
are
exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates.
Interest
Rate Exposure
We
are
not subject to market risk due to fluctuations in interest rates on our
long-term obligations as they bear a fixed rate of interest. Our
exposure relates primarily to short-term investments. These
short-term investments, reported at an aggregate fair market value of $994,000
as of September 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 September 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 September 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.
Item
4.
Controls and Procedures
Christopher
J. Calhoun, our Chief Executive Officer, and Mark E. Saad, our Chief Financial
Officer, after evaluating the effectiveness of our “disclosure controls and
procedures” (as defined in Securities Exchange Act Rule 13a-15(e)), have
concluded that as of September 30, 2007, our disclosure controls and procedures
are effective.
PART
II.
OTHER INFORMATION
Item
1.
Legal
Proceedings
From
time
to time, we have been involved in routine litigation incidental to the conduct
of our business. As of September 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 (see note
11).
37
Item
1A.
Risk Factors
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 continue
to
have 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 fully 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.
38
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 next generation of 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 next
generation devices.
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,
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
performance and/or pricing 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 particularly in the cardiovascular area and for
many
other indications as well.
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. We
have also developed a regenerative cell banking platform for use in hospitals
and clinics that will preserve regenerative cells harvested using our Celution™
System for potential future use. 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.
39
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 or early 2008, 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
drive 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.
Although
we intend to launch the Cytori Celution™ System in 2008 as we await the
availability of the Joint Venture system, we cannot assure that we will be
able
to manufacture sufficient numbers to meet the market demand, or that we will
be
able to overcome any currently unforeseen difficulties in the manufacturing
of
these sophisticated medical devices.
In
the
event that the Olympus-Cytori joint venture is not successful, Cytori may not
have the resources or ability to self-manufacture sufficient numbers of
commercial devices to meet market demand, and in any event this failure may
substantially extend the time it would take for us to bring a more advanced
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.
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 (“UC”) 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 UC’s
assignors, are the true inventors of Patent 6,777,231. We are the exclusive,
worldwide licensee of the UC’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.
40
On
August
9, 2007, the United States District Court 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 UC up to 7% of royalty payments
made by a licensee (e.g., us) to UC. 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.
41
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 3 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.
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.
42
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.
Item
2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
None
|
Item
3.
Defaults Upon Senior
Securities
|
|
None
|
Item
4.
Submission of Matters to a Vote of Security
Holders
We
held
our annual meeting of stockholders on August 2, 2007. Of the
23,575,622 shares of our common stock which could be voted at the
annual meeting, 12,516,235 shares of our common stock were
represented at the annual meeting in person or by proxy, which constituted
a
quorum. Voting results were as follows:
a.
Election
of
the following persons to our Board of Directors to hold office until the next
annual meeting of stockholders:
|
|
|
For
|
|
Withheld
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Calhoun
|
|
12,439,982
|
|
70,812
|
|
5,440
|
|
|
Paul
W. Hawran
|
|
12,330,423
|
|
146,981
|
|
38,830
|
|
|
Marc
H. Hedrick, MD
|
|
12,468,352
|
|
42,872
|
|
5,010
|
|
|
Ronald
D. Henriksen
|
|
12,443,707
|
|
33,679
|
|
38,830
|
|
|
E.
Carmack Holmes, MD
|
|
12,442,020
|
|
69,204
|
|
5,010
|
|
|
David
M. Rickey
|
|
12,438,749
|
|
70,345
|
|
7,140
|
|
43
b.
The
proposal
to ratify the selection of KPMG LLP as the Company’s independent registered
public accounting firm for the fiscal year ending December 31, 2007,
received the following votes:
|
For
|
|
Against
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
12,477,670
|
|
3,075
|
|
35,490
|
|
Item
5.
Other
Information
Material
Agreements
On
August
13, 2007, we entered into a General Release Agreement (the “Release Agreement”)
with John T. Ransom, Ph.D., our former Vice President - Research
Regenerative Cell Technology.
Under
the
Release Agreement, Dr. Ransom provided us with a full release of all claims,
and
we paid him a lump sum of $66,667, and we extended the exercise period of
35,000 vested stock options owned by him through December 31, 2007. We
also agreed to provide Dr. Ransom with professional outplacement
services.
Properties
Our
main
facility is 91,000 square feet located at 3020 and 3030 Callan Road, San Diego,
California. Our lease agreement bears rent at a rate of $1.15 per
square foot, with annual increases of 3%. The lease term is 57
months, commencing on October 1, 2005 and expiring on June 30,
2010.
We
also
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 $127,000 in rent
per month.
Staff
As
of
September 30, 2007, we had 132 full-time equivalent employees, comprised of
83
employees in research and development, 7 employees in sales and marketing,
and
42 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
|
|||||
|
Research
& Development
|
83
|
-
|
-
|
83
|
||||
|
Sales
and Marketing
|
7
|
-
|
-
|
7
|
||||
|
General
& Administrative
|
0
|
-
|
42
|
42
|
||||
|
Total
|
90
|
-
|
42
|
132
|
44
|
10.48
|
Master
Cell Banking and Cryopreservation Agreement, effective August
13, 2007, by
and between Green Hospital Supply, Inc. and Cytori
Therapeutics, Inc.
|
|
10.49
|
License
& Royalty Agreement, effective August 23, 2007, by and between
Olympus-Cytori, Inc. and Cytori Therapeutics,
Inc.
|
|
10.50
|
General
Release Agreement, dated August 13, 2007, between John Ransom
and Cytori
Therapeutics, Inc.
|
|
15.1
|
Letter
re unaudited interim financial information.
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Securities Exchange Act
Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Securities Exchange Act
Rule
13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule
13a-14(b), as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
45
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, in San Diego, California, on November 13, 2007.
|
CYTORI
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
November 13, 2007
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
November 13, 2007
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|
||
46
Exhibit
10.48
MASTER
CELL BANKING AND CRYOPRESERVATION AGREEMENT
THIS
MASTER CELL BANKING AND CRYOPRESERVATIONAGREEMENT
(“Agreement”), dated August 13, 2007 (“Effective Date”), is entered
into by and between Cytori Therapeutics, Inc. and its Affiliates (including
its
wholly owned subsidiary [Cytori KK]), having a place of business at 3020 Callan
Road, San Diego, CA 92121 (“Cytori”), and
Green Hospital Supply, Inc., having a place of business at 3-20-8 Kasuga
Suita-City, Osaka 565-0853, Japan (“GHS”). Cytori and GHS are
referred to jointly as “Parties” and individually as a “Party.”
RECITALS
WHEREAS,
CYTORI has developed a proprietary, state-of-the-art system for adipose-derived
stem and regenerative cell (“ADRC”) harvesting, processing, cryopreservation,
storage, and retrieval banking that is useful in hospital settings (“Banking” or
“the Field”), and Cytori has acquired and possesses certain intellectual
property rights pertaining to stem and regenerative cell technology, including
devices, products and services used in connection with ADRCs;
WHEREAS,
GHS wishes to establish ADRC Banking facilities (“CB Facilities”) for the
acquisition, storage and retrieval of ADRCs exclusively using Cytori’s
technology, including the CelutionTM device
and related
products and disposables in the country of Japan (“the Territory”);
WHEREAS,
the Parties agree that the CB Facilities will be dedicated solely to Banking,
and the CB Facilities shall not engage in any form of ADRC cell culturing,
cell
proliferation or manipulation for specific therapeutic uses or clinical
applications (“Therapeutic Services”), nor will GHS offer or engage in any
Therapeutic Services involving ADRCs;
WHEREAS,
subject to the terms and conditions set forth herein, Cytori desires to provide
to GHS certain Cytori devices, proprietary technology, products and training
necessary for the establishment and operation of CB Facilities, and to grant
to
GHS an exclusive license to use such devices, proprietary technology, products
and training solely for the purposes of Banking in the Territory, as expressly
permitted in this Agreement;
WHEREAS,
GHS shall exclusively purchase from Cytori all such Cytori devices, proprietary
technology, products and training as described below for the purpose of Banking
in the Territory, subject to the terms and conditions set forth
herein;
NOW,
THEREFORE, the Parties agree as follows:
1. GHS
PURCHASE: GHS shall purchase all
CelutionTM
devices,
consumables, *** (collectively,
“Device(s)”) directly from Cytori. GHS may purchase products
(including, without
limitation, *** and
all other non-Device products that may be included with Packages; collectively,
“Product(s)”) from Cytori only in the form of Packages (as described
below). Cytori will provide to GHS certain initial training services
and other services (as described in Section 2) with respect to Cytori’s
proprietary methods and know-how in connection with this Agreement
(“Service(s)”). The Devices, Products and Services are more
particularly described in Exhibit A (attached hereto and
incorporated herein), and in the context of an initial CB Facility set-up,
may
be collectively referred to herein as a “Package(s).” The Devices,
Products and/or Services may be modified from time to time by written mutual
agreement of the Parties; provided, however, that notwithstanding the foregoing,
Cytori shall be entitled to substitute “next generation” Devices (including,
without limitation, the Celution Device, Device consumables and Device
disposables), so long as Cytori continues to supply Device consumables and
Device disposables that were purchased by GHS with the previous generation
Devices sold herein, for a period of no less
than *** from the date of Cytori’s last sale to GHS
of the previous generation Devices.
_________________________
***Material
has been omitted
pursuant to a request for confidential treatment filed separately with the
Securities and Exchange Commission
1
During
the Term, GHS shall not purchase any Devices and/or Packages, or any similar
or
substantially equivalent versions thereof, from any other party, unless
specifically agreed to in writing by Cytori. GHS will be responsible
for purchasing all Products (as specified on Exhibit A) from
third parties, and for supplying such Products for all CB Facilities, on an
as-needed basis, after the initial Package has been acquired from Cytori and
delivered for the establishment of a new CB Facility. If any term or
condition of this Agreement conflicts with any Exhibit, this Agreement shall
govern.
2. CYTORI
SUPPLY: Cytori will supply all Packages,
Devices and Services to GHS in accordance with this Agreement. The
Services shall include training of GHS personnel with respect to installation,
set-up and operations of, Device maintenance, technical support and provision
of
related databases. CB Facilities will purchase Packages, Devices,
Products and Services directly from GHS (unless otherwise mutually agreed by
the
Parties in writing.). Cytori shall work closely and diligently with
GHS to provide all necessary assistance and training of GHS personnel in
establishing the five (5) initial CB Facilities, including (a) reasonable
transfer of Cytori know-how, policies and procedures, and (b) advice, assistance
and model documents relating to the establishment of cGTP and other relevant
operating and servicing procedures. Additional initial training and
assistance for GHS personnel will be provided by Cytori, if reasonably
necessary, with the Parties’ agreement and understanding that GHS will
diligently endeavor to become fully self sufficient with respect to such matters
as early as possible. After the initial training period, Cytori will
provide further training of GHS personnel from time to time, as required in
connection with any next generation Devices that are offered by Cytori in
connection with this Agreement. For any further assistance (whether
with regard to such Packages, or with regard to Devices), Cytori will estimate
the cost of such assistance, and GHS will have the option of either reimbursing
Cytori for such costs or declining such assistance.
3. ADDITIONAL
OBLIGATIONS OF GHS: GHS will offer and sell
Packages, Devices and/or Products to CB Facilities only for the purpose of
conducting Banking, and shall expressly prohibit the CB Facilities from using
(and from promoting or permitting use of) Packages, Devices and/or Products
for
any other purpose (including, but not limited to, Therapeutic
Services). GHS understands and agrees that the Devices are labeled
and intended specifically for Banking purposes only, and that use of the Devices
for any other purpose(s) may cause injury or death (for example, if used for
applications outside such specified indications). Therefore, GHS
shall not, directly or indirectly, encourage or knowingly support in any way
the
sale or use of Packages or Devices for applications outside of those indications
for which they are labeled and intended by Cytori or any other manufacturer
(if
applicable). GHS will be solely responsible for providing Packages,
Devices and Products to CB Facilities, and (after the completion of the initial
training of GHS personnel by Cytori) for providing all related services and
support to such CB Facilities in connection therewith. GHS may
request that Cytori provide assistance and support directly to a CB Facility,
but Cytori shall be under no obligation to do so; however, if Cytori agrees
to
provide such assistance and support to a CB Facility, GHS and Cytori shall
agree
upon reasonable financial terms for the provision of such assistance and
support. GHS shall be solely responsible for advertising, promoting,
marketing, distributing and selling to CB Facilities the Packages, Devices
and
Products in the Field in the Territory.
4. GHS
DILIGENCE: GHS shall purchase an annual minimum number of
Packages each calendar year, as set forth in Exhibit B, which
is attached hereto and incorporated herein (“Minimum Purchase”). In
addition, GHS shall actively promote, market and sell Packages, Devices and
Products to CB Facilities during the Term. If GHS fails to meet the
Minimum Purchase amount in any given year, Cytori may have the right to
terminate this Agreement in its sole discretion.
5. LICENSE: Cytori
hereby grants to GHS an exclusive license to intellectual property of Cytori
(for example, patents, patent applications, trade secrets, trademarks,
technologies, and know-how) necessary or useful for GHS’s use, distribution,
promotion, marketing, sales, offers for sale and importation of the Devices
and
Products in the Field in the Territory. This exclusive license shall
include (without limitation) Cytori’s patent application in the Territory
corresponding to Patent Cooperation Treaty Application No. PCT/US2002/29207
entitled “Preservation of Non Embryonic Cells from Non Hematopoietic Tissues,”
as well as trade secrets, technologies and know how related to cryopreservation
and/or storage of stem and regenerative cells derived from adipose
tissue. All intellectual property included within this license grant
to GHS shall be termed collectively “Cytori IP.” GHS may grant
sublicenses under the license granted by
2
Cytori
hereunder; provided that any such sublicensees of GHS may not grant further
sublicenses unless such further sublicenses are approved in
writing by Cytori; and further provided that all sublicensees shall acquire
all
Devices and Products used in connection with the CB Facilities from
GHS. Cytori shall be provided a copy of each sublicense entered into
by GHS with each of its CB Facilities in the Field, and such sublicenses shall
be subject to all of the rights of Cytori in this Agreement regarding the
Devices, the Packages and the Cytori Material, including, but not limited to,
the terms of Section 25. In addition to any other remedies available
to Cytori, and notwithstanding any other provision of this Agreement to the
contrary, GHS and each of its sublicensees shall be jointly and severally liable
to pay Cytori a liquidated damages fee
of *** for each instance of usage of the
Devices for any purpose outside of the Field. GHS shall immediately
inform Cytori of any use by GHS or any CB Facility of the Devices for a purpose
outside of the Field.
6. FORECASTS: GHS
will provide a 12-month rolling forecast of GHS’ annual Package, Device and
Service requirements, as applicable (each, a "Forecast"). The first
six (6) months of each such Forecast will constitute an expected order of GHS
for the quantities of Packages, Devices and Services specified therein
(“Expected Orders”); the following six (6) months of each such Forecast will be
a good faith estimate, which will not be binding on GHS except to the extent
expressly specified in such Forecast. The Forecasts shall specify anticipated
purchases for each month, and shall be updated quarterly on the first week
of
January, April, July and October of each year. If Cytori cannot meet the
Expected Orders, it will notify GHS within ten (10) business days of receipt
of
such Expected Orders.
7. ORDERS: GHS
shall order Packages, Devices and Services using written purchase orders
(“Binding Purchase Orders”) which shall be contractually binding on GHS for the
Packages, Devices and Services specified therein. GHS shall provide
its Binding Purchase Orders in the format and with the lead-time specified
in
Exhibit C. The only function of GHS’ Binding
Purchase Orders shall be to communicate the desired quantities of the Packages,
Devices, and Services required by GHS, shipment instructions and shipping
dates. All other terms of the Binding Purchase Orders, and all terms
of any acknowledgment form or invoice of Cytori, shall be void and of no effect,
and the terms of this Agreement shall control over such forms, unless otherwise
specifically agreed to in writing by both Parties. Cytori will accept
all Binding Purchase Orders that are from 100% to 125% of the Expected
Orders. If Cytori receives a Binding Purchase Order in excess of 125%
of the Expected Orders, Cytori will use commercially reasonable efforts to
manufacture and deliver on time that amount exceeding 125% of the Expected
Orders, but shall be under no obligation to deliver such excess
amount.
8. PRICES: Unless
the applicable Exhibits attached hereto provide otherwise, prices for the
Packages, Devices and Services stated in an Order include all amounts payable
by
GHS. The price for the Packages, Devices and Services may be adjusted
by Cytori upon thirty (30) days written notice to GHS, but pricing will be
adjusted no more than once per calendar year, and such increases shall not
apply
to pending Binding Purchase Orders in existence at the time of the notice of
such price adjustment. Device prices shall not increase more
than *** per year. Any price
increase which is greater than *** shall require written approval of GHS, which
shall not be unreasonably withheld in the event that Cytori reasonably
demonstrates that its costs have significantly increased. GHS shall
pay to
Cytori *** *** for
the Packages and Devices; provided that in no event shall the price paid to
Cytori be less
than *** .As
of the Effective Date, Cytori’s non-binding, recommended sales price to the CB
Facilities
is *** but
GHS shall have sole discretion to determine the prices it charges to its
customers. Exhibit A sets forth minimum transfer
pricing to GHS for all Devices, as well as recommended sales prices to the
CB
Facilities for each type of Device.
9. PAYMENT/PAYMENT
REPORTS:
9.1
Payment. Cytori shall invoice GHS for each Package, Device or
Service upon shipment or delivery. Payment to Cytori shall be due
within thirty (30) days after GHS’ inspection of Packages and Devices shipped,
provided that such inspection must be completed within ten (10) days of GHS’
receipt. Payment of an invoice shall be deemed acceptance of the corresponding
Package, Device or Service. Payments by GHS to
Cytori hereunder shall be made by wire transfer of
immediately available funds to a
_________________________
***Material
has been omitted
pursuant to a request for confidential treatment filed separately with the
Securities and Exchange Commission
3
bank
account designated by Cytori in writing. If GHS fails to pay any
payment due under this Agreement on or before the date such payment is due,
such
late payment shall bear interest, to the extent permitted by applicable Law,
at
the average one-month London Inter-Bank Offering Rate (LIBOR) for the United
States Dollar as reported from time to time in The Wall Street Journal,
effective for the first date on which payment was delinquent and calculated
on
the number of days such payment is overdue.
9.2 Payment
Reports. GHS shall provide Cytori with monthly reports
identifying the amounts owed to and received by GHS from each client hospital
and/or CB Facility that corresponds to each Cytori Invoice described in Section
9.1 above, until such time as GHS has been paid in full the amounts that are
due
to GHS for the Packages, Devices or Services provided by GHS in relation to
the
Cytori Invoices.
10. SHIPMENT: Shipments
of Packages and Devices shall comply with Order instructions and the relevant
Exhibits attached hereto. All shipments shall be FCA (Incoterms 2000)
Cytori’s facility at San Diego, California, or as otherwise agreed by the
Parties in writing. GHS will select transportation modes and
carriers. GHS also will pay all related freight charges, insurance
and all import duties and fees. Cytori will provide all shipment
information to GHS within 24 hours after a Package or Device is delivered to
GHS’ carrier. If any Package or Device will be shipped to GHS from
the United States into the Territory, GHS (with the reasonable assistance of
Cytori) shall be responsible for importation of such Package or Device into
the
Territory, at GHS’ sole expense, and shall be responsible for compliance with
any applicable local Laws concerning such importation.
11.TRADEMARKS: GHS
will comply with Cytori’s instructions for use of Cytori trademarks
(“Trademarks”) and disposal of any Packages and Devices bearing
Trademarks. Trademarks may only be used in connection with Packages
and Devices in accordance with this Agreement during the Term, and may only
be
used in accordance with Cytori’s written instructions or upon Cytori’s written
approval. The Trademarks will be displayed in a prominent
position. GHS will not claim any rights to the Trademarks, and will
not do anything to lessen the significance of Trademarks. GHS shall not use
Cytori’s name or trademarks in any promotional activity or otherwise except as
mutually agreed in writing by the Parties. GHS will not adopt, use or
register any marks, businesses or domain names confusingly similar to
Trademarks.
12. NON-ENGLISH
VERSIONS OF LABELING: GHS will be responsible for ensuring
that Cytori’s labels, packaging and package inserts for Packages and Devices
comply with all applicable Laws (including local Laws) and regulatory
requirements for the Territory (including any necessary
translations). GHS shall provide reasonable assistance (for example,
proofreading and advising) with respect to Cytori’s translation of any written
materials concerning the Devices and/or Packages into Japanese (if Cytori
determines in its sole discretion to do so).
13. INSPECTION
BY GHS: On at least two (2) weeks prior written notice to
Cytori, GHS may visit Cytori’s facilities where Devices are manufactured to
inspect and audit Cytori’s processes and documentation and Cytori’s compliance
with this Agreement. Cytori will maintain quality assurance and
quality controls with respect to Device manufacturing as
appropriate. Cytori will comply with any applicable quality
requirements relating to any Device that are agreed to by the
Parties.
14. INSPECTION
BY CYTORI: GHS (a) shall maintain for at least five (5)
years its books, records, contracts and accounts relating to the marketing
and
sale of the Packages and Devices, including, without limitation, information
concerning customer accounts, inventory levels, unit sales, training materials,
prices, margins, competitor information, market trends and strategies, and
related promotional activities (collectively, "GHS Information"), and (b) shall
permit examination thereof by Cytori at reasonable times and upon reasonable
notice (provided that in no event shall such notice be less than two (2) weeks
prior written notice by Cytori). GHS shall allow representatives of
Cytori, at any reasonable time, to (c) examine GHS' place(s) of businesses
and
GHS' inventory of the Packages and Devices, and (d) audit all GHS Information
connected with the Banking sales. GHS shall provide Cytori with
copies of any documents requested by Cytori as a result of such examination
or
audit. In addition, GHS shall secure the right of Cytori to inspect
and audit (upon reasonable advance notice) the facilities and records of each
CB
Facility established hereunder, to ensure that the set-up and operations of
each
such CB Facility meet the appropriate quality standards established by Cytori,
and to inspect the labeling and condition of all inventory and Devices to ensure
compliance with this Agreement.
4
15. RECORDS: Cytori
will provide GHS with information and copies of relevant records concerning
Packages and Devices that GHS may reasonably request to enable GHS to comply
with all applicable federal, state, and municipal statutes, regulations, rules,
and ordinances relating to GHS’ use of Packages and Devices.
16. REGULATORY
COMPLIANCE: Cytori will reasonably cooperate with GHS in
GHS’ efforts to meet regulatory requirements and applicable international
standards in connection with the Packages and Devices. Each Party will comply
with all applicable laws, regulations and ordinances (“Laws”) in performing its
obligations under this Agreement.GHS shall be responsible for compliance with
any applicable local Laws and Cytori shall provide any reasonably necessary
assistance in this regard. Cytori certifies that, as of the Effective
Date, Cytori has not, and no Cytori employee, affiliate or agent has been,
debarred or proposed to be debarred by any US agency (including, but not limited
to, by the U.S. Food and Drug Administration ("FDA") under 21 U.S.C.
335).
17. REGULATORY
APPROVAL: Cytori shall be responsible for obtaining
regulatory approval of the Devices in the Field in the Territory as deemed
necessary by Cytori. Cytori shall also provide GHS with relevant
information regarding the Packages and Devices that is reasonably necessary
to
enable GHS to make additional regulatory submissions for regulatory approval
of
the Packages and Devices (the “Cytori Regulatory Information”).
18. WARRANTIES: The
sole warranty given by Cytori regarding any Package and Device shall be that
written limited warranty provided in Exhibit D, if any, which
shall accompany such Package or Device or which shall otherwise be designated
in
writing by Cytori as applicable to such Package or Device, as the same may
be
revised by Cytori from time to time. GHS agrees to provide to its
customers (including, without limitation, the CB Facilities) within the
Territory a written warranty for each particular Package and Device on terms
that are supplied by Cytori, if any, for such Package and Device. In
no event shall GHS’ warranty to such consumers be more favorable to consumers
than Cytori’s limited warranty, if any, for such Packages and
Devices.
EXCEPT
AS EXPRESSLY SO WARRANTED, CYTORI HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS,
STATUTORY AND IMPLIED, APPLICABLE TO THE PACKAGES AND/OR DEVICES, INCLUDING,
BUT
NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY, DESIGN, AND/OR FITNESS FOR
A
PARTICULAR PURPOSE. THE WRITTEN LIMITED WARRANTY, IF ANY, APPLICABLE
TO ANY PARTICULAR PACKAGE OR DEVICE SHALL STATE THE FULL EXTENT OF CYTORI'S
LIABILITY, WHETHER DIRECT OR INDIRECT, SPECIAL OR CONSEQUENTIAL, RESULTING
FROM
ANY BREACH OF SUCH WARRANTY. CYTORI FURTHER DISCLAIMS ALL EXPRESS,
STATUTORY AND IMPLIED WARRANTIES APPLICABLE TO THE PACKAGES AND/OR DEVICES
WHICH
ARE NOT MANUFACTURED BY CYTORI, OR BY A LICENSEE OR SUBLICENSEE OF
CYTORI. THE ONLY WARRANTIES APPLICABLE TO PACKAGES AND/OR DEVICES NOT
MANUFACTURED BY CYTORI OR BY A LICENSEE OR SUBLICENSEE OF CYTORI SHALL BE THE
WARRANTIES, IF ANY, OF THE MANUFACTURERS OF THOSE ITEMS.
19. NO
OTHER WARRANTIES: OTHER THAN AS SPECIFICALLY SET FORTH IN
SECTION 18, NO EXPRESS OR IMPLIED WARRANTIES ARE GIVEN BY CYTORI WITH RESPECT
TO
PACKAGES OR DEVICES SOLD BY CYTORI AND PURCHASED BY GHS PURSUANT TO THIS
AGREEMENT, OR THE PERFORMANCE OR NONPERFORMANCE OF THE PACKAGES AND DEVICES,
INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
20. INDEMNIFICATION:
20.1 Cytori
Indemnification: Cytori will indemnify, defend and hold harmless
GHS and its officers, directors and employees (the “GHS Indemnified Parties”)
from any claim, liability, loss, damage, lien, judgment, expense and cost
(including reasonable attorneys’ fees and other litigation expenses) with
respect to all claims arising from: (a) any breach of Cytori’s warranties set
forth in this Agreement; or (b) the negligence or willful misconduct of Cytori
or Cytori Indemnified Parties in the handling, packaging, labeling, manufacture,
inspection, packaging, storage and delivery of Packages and/or Devices to GHS’
shipper. Nothing in the foregoing shall
5
obligate
Cytori to indemnify GHS to the extent a third party claim is the result of
a
material breach by GHS of GHS’ obligations under this Agreement, or to the
extent the claim is one for which GHS is obliged to indemnify Cytori
hereunder.
20.2 GHS
Indemnification: GHS will indemnify, defend and hold harmless
Cytori and its officers, directors and employees (the “Cytori Indemnified
Parties”) from any claim, liability, loss, damage, lien, judgment, expense and
cost (including reasonable attorneys’ fees and other litigation expenses) with
respect to all claims arising from: (a) the use of Packages, Devices or Products
by GHS and its sublicensees and/or customers (including each CB Facility);
(b)
GHS’ or any CB Facility’s use of Devices and/or ADRCs for purposes other than
the purposes permitted under this Agreement; (c) GHS’ failure to comply with
applicable Laws in connection with Packages, Devices or Products (including,
without limitation, import thereof); or (d) the negligence or willful misconduct
of GHS or GHS Indemnified Parties in the handling, packaging, labeling,
shipping, storing, marketing, sale or disposal of Packages, Devices and
Products. Nothing in the foregoing shall obligate GHS to indemnify
Cytori to the extent a third party claim is the result of a material breach
by
Cytori of Cytori’s obligations under this Agreement, or to the extent the claim
is one for which Cytori is obliged to indemnify GHS hereunder.
21. INSURANCE: GHS
shall maintain liability insurance in an amount and for a time period which
is
reasonable and customary in the medical device industry for similarly situated
companies of comparable size and activities at its place of business. Cytori
shall maintain product liability insurance in an amount and for a time period
which is reasonable and customary in the medical device industry for similarly
situated companies of comparable size and activities for products and for
activities at its place of business.
22. LIMITATION
OF LIABILITY: NEITHER PARTY SHALL BE LIABLE TO
THE OTHER PARTY FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES
RESULTING FROM OR IN ANY WAY RELATED TO PACKAGES, DEVICES, PRODUCTS OR SERVICES,
EITHER DURING THE TERM OF THIS AGREEMENT OR AFTER THE EXPIRATION OR TERMINATION
OF THIS AGREEMENT. THIS LIMITATION SHALL APPLY REGARDLESS OF ANY
APPLICABLE LEGAL OR EQUITABLE THEORY. THE FOREGOING NOTWITHSTANDING,
NOTHING IN THIS AGREEMENT SHALL PRECLUDE A PARTY FROM TAKING WHATEVER
COMMERCIALLY REASONABLE ACTIONS ARE NECESSARY TO PREVENT IRREPARABLE HARM TO
ITS
INTERESTS.
23. CONFIDENTIAL
INFORMATION:
23.1
During the Term, a recipient Party may receive information that the disclosing
Party considers to be confidential and that is not generally known to the public
(“Confidential Information”). Confidential Information also includes
the existence of this Agreement and its terms. During and after the
Term, a recipient Party will keep secret the Confidential Information of the
disclosing Party, using such care as the recipient Party uses in maintaining
the
confidentiality of its own confidential information, but no less than a
reasonable degree of care, and will use Confidential Information of the
disclosing Party only as is necessary to perform its obligations under this
Agreement. Each recipient Party will assure that its employees,
agents and contractors abide by these confidentiality
obligations. Upon written request or at the Term’s end, each
recipient Party will, at the disclosing Party’s request, either destroy or
return to the disclosing Party all tangible materials provided by the disclosing
Party that are the disclosing Party’s Confidential Information.
23.2 Notwithstanding
the foregoing, Confidential Information does not include information that is:
(a) is or becomes a part of the public domain through no act or omission of
the
recipient Party; (b) the recipient Party can demonstrate was in its rightful
possession, without a restriction on use or disclosure, prior to receipt of
the
information from the disclosing Party; (c) the recipient Party can demonstrate
was rightfully received from a third party without a restriction on use or
disclosure; (d) the recipient Party can demonstrate by written evidence was
independently developed by the recipient Party without access to or use of
(directly or indirectly) Confidential Information of the disclosing Party;
or
(e) is required to be, and is, disclosed in response to a valid order from
a
judicial or administrative authority; provided, however, that the Receiving
Party shall promptly notify the disclosing Party upon its receipt of such order,
shall use commercially reasonable efforts to limit disclosure, and shall make
commercially reasonable efforts to obtain confidential treatment or a protective
order for the disclosure so ordered, and prior to such
6
disclosure
to permit the disclosing Party to oppose same by appropriate legal action.
It is
understood and agreed that, in the event of a breach by either party of the
covenant to maintain the confidentiality of the Confidential Information that
damages are an inadequate remedy. Any breach will cause disclosing party
irreparable injury and damage and non-disclosing party therefore agrees that
disclosing party is entitled to injunctive and equitable relief in addition
to
all other remedies available to it by law.
23.3 Any
disclosure of confidential information by one Party to the other Party in
connection with the Parties’ discussion, negotiation and anticipation of this
Agreement shall be deemed to be “Confidential Information” of the disclosing
Party, and shall be subject to the terms and conditions of this
Agreement.
24. INTELLECTUAL
PROPERTY:
24.1 Infringement
Of Cytori Intellectual Property. Cytori shall have the exclusive
right to, and the sole discretion to, prosecute any third-party infringement
of
Cytori IP worldwide (including in the Territory).
24.2 Intellectual
Property Ownership.
24.2.1 “Cytori
Material” shall include the Devices, the Packages, the Services, Cytori IP,
Cytori Regulatory Information and Cytori’s Confidential
Information.
24.2.2 Cytori
and GHS hereby agree that any discoveries, improvements, inventions, processes,
techniques, know-how and data, whether or not patentable, made or conceived
or
reduced to practice or learned by GHS and/or any of GHS’s sublicensees or CB
Facilities under this Agreement (“GHS-Related Party(ies)”), that modifies,
incorporates, practices or utilizes the Cytori Materials (such discoveries,
improvements, inventions, processes, techniques, know-how and data are
collectively referred to as “GHS Inventions”) shall be jointly owned by the
Parties in the Territory, and that all right, title and interest in and to
such
GHS Inventions shall be granted and assigned to Cytori, as the sole and
exclusive owner thereof, throughout the rest of the world.
24.2.3 GHS
shall disclose in writing to Cytori all GHS Inventions, whether or not
patentable, within thirty (30) days of identification or development (or within
thirty (30) days of GHS’ written receipt of same from any GHS-Related Party, as
the case may be). Within ninety (90) days of GHS’ disclosure of a GHS
Invention, Cytori may elect to take responsibility for preparation, filing
and
prosecution of patent applications in the Territory, at Cytori’s expense, that
disclose or claim such GHS Invention; in countries outside the Territory, Cytori
shall have the sole right to prepare, file and prosecute patent applications
on
such GHS Invention, in its sole discretion. Should Cytori not elect
to take responsibility for preparation, filing and prosecution of any such
patent application(s) with respect to a given GHS Invention in the Territory,
GHS shall have the right to do so, but only in the Territory, at its own
expense, and for its own account. GHS and the GHS-Related Parties
shall cooperate to the extent reasonably necessary to aid in the preparation,
filing and prosecution of any such patent applications by Cytori, and in the
execution and filing by Cytori of any documents required to perfect the rights
granted herein.
25.
TERM; TERMINATION; SURVIVAL: This Agreement will commence on
the Effective Date and end on the date that is the tenth (10th) year anniversary
of the Effective Date, unless terminated earlier as provided for herein
(“Term”). The Term may be extended for additional five (5) year periods upon
mutual agreement at the end of the initial Term.
25.1 Termination
for Uncured Material Breach. If a Party materially breaches this
Agreement, the non-breaching Party may provide written notice of such material
breach, and may immediately terminate this Agreement if such breach is not
cured
within forty-five (45) days after delivery of such written notice. It
is agreed and understood between the Parties that any use of the Devices by
GHS
or by any GHS-Related Party outside of the Field shall constitute a material
breach of this Agreement, and that such material breach on behalf of a
GHS-Related Party may only be cured by payment of the liquidated damages fee
and/or (at Cytori’s election) the termination of such GHS-Related Party’s rights
specified in Section 5. Repeated violations of the use limitations
set forth herein by GHS and/or by any GHS Related Party(ies) may be deemed
incurable by Cytori at any time.
25.2 Termination
for Failure to Meet Minimum Purchase Requirements. Cytori may
have the right to terminate this Agreement for GHS’ failure to meet its Minimum
Purchase requirements pursuant to Section 4.
7
25.3
Termination for Insolvency. This Agreement may be
terminated at any time by a Party upon the filing or institution of bankruptcy,
liquidation or receivership proceedings by or against the other Party; provided,
however, that in the event of any involuntary bankruptcy or receivership
proceeding, such right to terminate this Agreement shall only become effective
if the proceeding is not dismissed within sixty (60) days after the filing
thereof.
25.4 Survival. Sections
18 (Warranties), 19 (No Other Warranties), 20 (Indemnification), 22 (Limitation
of Liability), 23 (Confidentiality) and 24 (Intellectual Property), 25.4
(Survivial), 26 (Effects of Termination), 28 (Governing Law; Venue;
Jurisdiction), and 29 (Dispute Resolution) shall survive
expiration or termination of this Agreement
26. EFFECTS
OF TERMINATION. Termination of this Agreement shall not
extinguish debts and other obligations created or arising between the Parties
by
virtue of contracts or arrangements entered into hereunder before the effective
date of termination of this Agreement (the "Termination
Date"). Without limiting the generality of the foregoing, upon the
Termination Date:
26.1 GHS
shall not be relieved of its obligation to (a) pay for Packages, Devices and
Services received by GHS prior to the Termination Date, or (b) receive and
pay
for all Packages, Devices and Services covered by Binding Purchase Orders which
have been accepted by Cytori prior to the Termination Date. Unless
otherwise agreed by the Parties in writing, Cytori shall be obligated to
complete all Packages, Devices and Services Binding Purchase Orders which were
accepted by Cytori prior to the Termination Date; provided that Cytori may
demand adequate assurance of payment or advance payment in such case; and in
each such case, GHS shall be permitted to distribute such Packages and Devices,
as well as any Packages and Devices in GHS' inventory, within the Territory,
subject to Cytori’s repurchase rights set forth in Section 26.2
below.
26.2 GHS
shall submit to Cytori within thirty (30) days after the Termination Date a
list
of all of the Packages and Devices owned by GHS which were purchased from Cytori
as of the Termination Date; Cytori may, at its sole option and discretion,
purchase any or all of such Packages and/or Devices from GHS upon written notice
of its intention to do so, at prices to be agreed upon between the Parties,
but
in no event shall such prices be greater than the respective prices paid by
GHS
to Cytori for such Packages and/or Devices; after receipt of such Packages
and/or Devices from GHS, Cytori will issue an appropriate credit to GHS'
account.
26.3 GHS
shall cease to use any Cytori Trademarks, Cytori Materials and any Confidential
Information obtained from Cytori relating to or in connection with its continued
business operations, and shall promptly transfer to Cytori any and all
regulatory approvals, including any and all physical, written and descriptive
matter (including all reproductions and copies thereof) containing Confidential
Information as Cytori may specify.
26.4 In
the event of a termination of this Agreement by Cytori under Section 25.1,
GHS
shall provide Cytori with all customer information and contractual agreements
related to each of its Banking sublicensees and CB Facilities, and Cytori shall
have the right, but not the obligation, to assume such contractual relationships
in the Territory for the Field without any additional consideration to
GHS.
27. NOTICES: Any
notice required or permitted by this Agreement shall be in writing and shall
be
deemed sufficient when delivered personally, sent and confirmed by facsimile,
or
sent by reputable overnight courier, and addressed to the Party to be notified
at such Party’s address or fax number, as set forth below or as subsequently
modified by written notice in accordance with this Section 27.
28. GOVERNING
LAW; VENUE; JURISDICTION: This Agreement, all acts and
transactions pursuant hereto, and the rights and obligations of the Parties
hereto shall be governed, construed and interpreted in accordance with the
laws
of the State of New York, without giving effect to principles of conflicts
of
law.
29. DISPUTE
RESOLUTION: Disputes arising between the Parties relating to
the making or performance of this Agreement shall be resolved in the following
order of preference: (a) by good faith negotiation between executives
of GHS and Cytori who have authority to fully and finally resolve the dispute;
and then (b) by arbitration as set forth in Sections 29.1 and
29.2. All negotiations pursuant to this
8
Section
29 shall be treated as Confidential Information in accordance with the
provisions of Article 23 of this Agreement.
29.1 All
disputes that are not resolved by good faith negotiations between executives
of
GHS and Cytori shall be finally settled under the Rules of Arbitration of the
International Chamber of Commerce (the “Rules”) by three
arbitrators. Judgment on the award rendered by the panel of
arbitrators shall be binding upon the Parties and may be entered in any court
having jurisdiction thereof. GHS shall nominate one arbitrator and
Cytori shall nominate one arbitrator. The arbitrators so nominated by
GHS and Cytori, respectively, shall jointly nominate the third arbitrator within
fifteen (15) days following the confirmation of arbitrators nominated by GHS
and
Cytori. If the arbitrators nominated by Cytori and GHS cannot agree
on the third arbitrator, then such third arbitrator shall be selected as
provided in the Rules. The place of the arbitration and all hearings
and meetings shall be in the State of Hawaii, unless the Parties to the
arbitration otherwise agree. In addition to the Rules and except as
otherwise provided herein, the Parties agree that the arbitration shall be
conducted according to the International Bar Association Rules on the Taking
of
Evidence in International Commercial Arbitration. The arbitrators may
order pre-hearing production or exchange of documentary evidence, and may
require written submissions from the Parties hereto, but may not otherwise
order
pre-hearing depositions or discovery. The arbitrators shall apply the
laws of the State of New York; provided, however, that the Federal Arbitration
Act shall govern. The language of the arbitral proceedings (including
oral and written submissions and presentations) shall be English. The
arbitrators shall not issue any award, grant any relief or take any action
that
is prohibited by or inconsistent with the provisions of this
Agreement.
29.2 No
arbitration pursuant to this Section 29 shall be commenced until the Party
intending to request arbitration has first given thirty (30) days advance
written notice of its intent to the other Party, and has offered to meet and
confer with one or more responsible executives of such other Party, in an effort
to resolve the dispute(s) described in detail in such written
notice. If one or more of such responsible executives agree, within
thirty (30) days after receipt of such written notice, to meet and confer with
the requesting Party, then no arbitration shall be commenced until the Parties
have met and conferred in an effort to resolve the dispute(s) or until sixty
(60) days have elapsed from the date such written notice has been
given.
30. ASSIGNMENT: Neither
this Agreement, nor any right or obligation hereunder, shall be assignable
by a
Party without the prior written consent of the other Party, and any purported
assignment without such consent shall be void; provided, however, that either
Party may, without such consent, assign this Agreement and its rights and
obligations hereunder in connection with the transfer or sale of all or
substantially all of its business or business unit to which this Agreement
pertains, or in the event of its merger, consolidation, change in control or
similar transaction. No assignment shall relieve any Party of
responsibility for the performance of any accrued obligation
hereunder.
31. FORCE
MAJEURE EVENTS: Neither GHS nor Cytori shall be considered
in default or be liable to the other Party for any delay in performance or
non-performance caused by circumstances beyond the reasonable control of such
Party and not related to its fault or negligence, including but not limited
to,
acts of God, explosion, fire, flood, earthquake, war whether declared or not,
accident, sabotage, transportation strike or interference, order or decrees
of
any court or action of governmental authority or shortages in or an inability
to
procure materials (each a “Force Majeure Event”); provided, however, that the
affected Party use its diligent efforts to resume performance under this
Agreement as quickly as possible.
32. CREDITS
FOR CERTAIN FORCE MAJEURE EVENTS EFFECTING CB FACILITIES: In the
event GHS is unable to collect payments due from its client hospitals or CB
Facilities for Packages, Products or Devices delivered by GHS due to a Force
Majeure Event suffered by such hospital or CB Facility, and such disability
continues for at least 60 days, then GHS shall immediately notify Cytori of
its
request for a credit under this section, which notice shall include a
description of the Force Majeure Event, the amount billed by GHS, and the amount
that remains unpaid to GHS. Upon receipt of such notice, Cytori shall credit
50%
of the price paid to Cytori by GHS for the effected Packages, Products or
Devices back to GHS (which amount shall not exceed 50% of the amount owed to
GHS
by such CB Facility for these items). Cytori shall subsequently be entitled
to
recover 50% of any payments in cash or other forms of consideration made to
GHS
from such hospital or CB Facility until such time as the amount credited to
GHS
by Cytori for such disability is paid in full. GHS shall use commercially
reasonable efforts to collect
9
such
amounts due from the hospitals or CB Facilities, and GHS shall not forgive
such
debts without Cytori’s written agreement unless Cytori has been repaid in
full.
33. ENTIRE
AGREEMENT; AMENDMENT; WAIVER: This
Agreement sets forth the entire agreement and understanding of the Parties
relating to the subject matter herein and merges all prior discussions between
them with regard to such subject matter, except for any confidentiality
agreement between the Parties pertaining to the subject matter of this
Agreement. No modification of or amendment to this Agreement, nor any
waiver of any rights under this Agreement, shall be effective unless in writing
signed by the Parties to this Agreement. The failure by a Party to
enforce any rights under this Agreement shall not be construed as a waiver
by
such Party. Either Party may waive a breach without waiving any later
performance.
34. SEVERABILITY: Should
any provision of this Agreement be determined to be illegal or unenforceable,
such determination shall not affect the remaining provisions of this
Agreement.
35. INDEPENDENT
CONTRACTORS: The Parties are independent contractors and
neither can make any commitments for the other. The employees of a
Party are not employees of the other Party.
36. CONSTRUCTION: This
Agreement is the result of negotiations between, and has been reviewed by,
the
Parties hereto and their respective counsel, if any; accordingly, this Agreement
shall be deemed to be the product of both of the Parties hereto, and no
ambiguity shall be construed in favor of or against either one of the Parties
hereto.
37. COUNTERPARTS: This
Agreement may be executed in counterparts by original or facsimile signature,
each of which shall be deemed an original and all of which together shall
constitute one instrument.
IN
WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representative as of the Effective Date.
| CYTORI THERAPEUTICS, INC. | GREEN HOSPITAL SUPPLY, INC. |
| /s/ Seijiro Shirahama | /s/ Kunihisa Furukawa |
| By: Seijiro Shirahama | By: Kunihisa Furukawa |
| Title: Senior Vice President, Asia-Pacific | Title: President |
| Address: | Address: |
| 3020 Callan Road | 3-20-8 Kasuga Suita-City |
| San Diego, CA 92121 | Osaka 565-0853, Japan |
| Fax: US 858-458-0994 | Fax: |
10
Exhibit
10.49
LICENSE
& ROYALTY AGREEMENT
THIS
LICENSE & ROYALTY AGREEMENT (this
“Agreement”), dated as of the 23th
day of August,
2007 (the “Effective Date”), is made and entered into by
and between OLYMPUS-CYTORI, INC., a Delaware corporation,
located at 3030 Callan Road, San Diego, CA 92121 (The
"JVCo") and CYTORI
THERAPEUTICS,
INC., a
Delaware
corporation, located at 3020 Callan Road, San Diego, CA 92121 ("Cytori").
(JVCo
and
Cytori may each be individually referred to herein as a
“Party” and collectively as the
“Parties”).
RECITALS
A. Cytori,
JVCo and Olympus Corporation (“Olympus”) entered into a series of agreements in
November 2005 creating a joint venture (collectively, the “Joint Venture
Agreements”) dedicated to the commercial development, manufacture and sale of
JVCo Licensed Products (as defined below) according to the terms of such
agreements.
B. Cytori
is desirous of commercializing and marketing an earlier version of Cytori
Licensed Product (as defined below) (e.g., CT-800) during the Term (as defined
in Section 2.5 below) or until JVCo starts to sell its comparable “Licensed
Product(s)” defined in the License/ Commercial Agreement dated November 4, 2005
by Cytori and JVCo (“JVCo Licensed Product(s)”). Each of the Parties hereto now
recognizes that it would be beneficial to all Parties for Cytori to
commercialize and market an earlier version of the Licensed Product than had
been anticipated under the Joint Venture Agreements, and have determined that
the appropriate licenses for Cytori to conduct such early commercialization
should be granted to Cytori pursuant to all of the terms and conditions provided
below.
NOW,
THEREFORE, in consideration of the foregoing, the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
adequacy of which are acknowledged, the Parties agree as follows:
1. DEFINITIONS
|
1.1
|
Defined
Terms. As used in this Agreement, the capitalized terms set
forth in this Section 1 shall have the following
meanings:
|
“Affiliate”
means, as to any Party, any Person that, directly or indirectly, controls,
or is
controlled by, or is under common control with, such Party, where “control”
(including, with its correlative meanings, “controlled by” and “under common
control with”) means (a) the beneficial ownership of fifty percent (50%) or more
of the outstanding voting securities of a Party, or (b) the possession, directly
or indirectly, of the power to direct or cause the direction of management
or
policies of a Party, whether through the ownership of securities or partnership
or other ownership interests, by contract or otherwise.
“Agreement”
shall have the meaning set forth in the Preamble.
“Business
Day” shall mean any day on which banking institutions are open in
the United States, and excluding national holidays in Japan.
“Cytori”
shall have the meaning set forth in the Preamble.
“Development
Agreement” shall mean the License/ Joint Development Agreement
dated November 4, 2005 by and among Cytori, Olympus and JVCo.
1
“Distributor
Sale” shall
mean the last sale of Cytori Licensed Product by Cytori or an Affiliate of
Cytori to an unaffiliated third party who intends to resell the Cytori Licensed
Product.
“Effective
Date” shall have the meaning set forth in the
Preamble.
"End-User
Sale” means the last sale of Cytori Licensed
Product within the control of Cytori, or an Affiliate of Cytori, to a Hospital
or physician for use in such Hospital or Physicians facility.
"Fully
Burdened Cost of Sales” means all materials, labor
and overhead costs as determined by Cytori’s accounting policies and procedures,
including any costs associated with set-up and installation of the Cytori
Licensed Products.
“JVCo
IP” or “Licensed IP” shall mean all Intellectual Property Rights
today or hereafter owned by, licensed by or acquired by JVCo (other than JVCO
trademarks and service marks) and useable or useful in the Licensed
Field.
“Licensed
Field” shall
mean the
designing, developing, manufacturing, testing, importing, exporting,
marketing, offering to sell, selling and servicing Cytori Licensed
Products.
“Cytori
Licensed
Product(s)” shall
mean any automated
devices (and related component parts), manufactured
by Cytori
(e.g., “CT-800) ***
***
***
***
***
***
***
***
***
The
Cytori Celution System
is a current
example of a Cytori Licensed
Product.
Cytori
Licensed
Products shall
not include: ***
***
***
***
***
***
***
***
***
“Net
Sales" means the total of the gross invoice prices from the Sale of
Cytori Licensed Product by Cytori in the form of a Distributor Sale
or End –User Sale, less the sum of the following actual and customary deductions
where applicable: cash, trade or quantity discounts; sales, use,
tariff, import/export duties or other excise taxes imposed on particular sales
(excepting value added taxes or income taxes); transportation, handling and
refrigeration charges, including insurance; and allowances or credits to
customers because of rejections or returns (“Customary
Deductions”). If Cytori or any Affiliate of Cytori sells at a single
price or rate a packaged combination of products and/or services, not all of
which if sold individually would be Cytori Licensed Products, then “Net Sales”
with respect to such sales of packaged products shall equal the number of units
of each Cytori Licensed Product sold as part of such packaged
products multiplied by the respective average adjusted net selling
price for the same type of Cytori Licensed Product sold
individually, and in the same market and distribution method, over
the preceding six month period , in each case excluding rejections, defects
and
returns.
“Person”
shall mean an association, corporation, individual, partnership, trust or any
other entity or organization, including a governmental entity, other than a
Party.
_________________________
***Material
has been omitted
pursuant to a request for confidential treatment filed separately with the
Securities and Exchange Commission
2
“Term”
shall have the meaning set forth in Section 2.5.
“Three-Way
NDA” shall mean the Three-Way Non-Disclosure Agreement, dated
November 4, 2005, entered into by and among Cytori, Olympus and
JVCo.
“Intellectual
Property Rights” shall mean “Intellectual Property Rights” defined
in the License/ Commercial Agreement dated November 4, 2005 by Cytori and
JVCo.
1.2 References. In
this Agreement, a reference to:
(a) A
Section, Sub-section, Preamble, Recital, Attachment, Schedule or Exhibit is,
unless the context otherwise requires, a reference to a section or sub-section
of, or a preamble, recital, attachment, schedule or exhibit to, this
Agreement;
(b) “This
Agreement” (or any specific provision hereof) shall be construed as references
to this Agreement or that provision as amended, varied or modified from time
to
time;
(c) “¥”
or “JPY” refers to Japanese Yen, the lawful currency for the time being of
Japan. “$” or “USD” refers to United States Dollars, the lawful
currency for the time being of the United States of America; and
(d) All
references in this Agreement to “days” will, unless otherwise specified herein,
mean calendar days.
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1.3
|
Headings. Headings
in this Agreement are for ease of reference only and shall not affect
the
interpretation or construction of this
Agreement.
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2. THE
LICENSE GRANTED BY JVCO
|
2.1
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License
Grant.
|
Subject
to the terms, conditions and obligations set forth in this Agreement
including the royalty payments to be made by Cytori to JVCo hereunder,
JVCo hereby grants to Cytori a non-exclusive, worldwide license to
the
JVCo IP (including any improvements thereto) for use in the Licensed
Field
for the Term. In addition, Cytori shall be entitled to sublicense
sales
rights to its distributors during the Term, and to sublicense the
manufacture of certain component parts, but such rights shall not
extend
the third party manufacture of all or substantially all of the any
finished Cytori
Licensed Product. For avoidance of doubt, the license granted
herein is intended to allow Cytori to develop, make, and use Cytori
Licensed Products for commercial sale during the Term, and the exercise
of
the rights granted herein in accordance with the terms in this Agreement,
shall not be construed as competing with any products of the Joint
Venture
or in any way violating the Joint Venture
Agreements.
|
|
2.2
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Royalty
Payments. In consideration of the license granted by JVCo to Cytori
pursuant to Section 2.1 above (and subject to the exceptions described
in
2.2 (b)):
|
(a)
Cytori shall pay to JVCo a payment in the form of a royalty as described in
either of the following cases:
***
|
|
***
|
|
|
***
|
|
|
***
|
(b)
Cytori shall not be required to pay a royalty for its distribution or provision
of Cytori Licensed Products without charge or cost to the receiving party (i.e.
for clinical trials, regulatory, reimbursement etc.).
_________________________
***Material
has been omitted
pursuant to a request for confidential treatment filed separately with the
Securities and Exchange Commission
3
| 2.3 | Reports. Effective upon the first commercial sale of a Cytori Licensed Product, Cytori shall make quarterly royalty reports to JVCo on or before each February 15 (for the quarter ending December 31), May 15 (for the quarter ending March 31), August 15 (for the quarter ending June 30) and November 15 (for the quarter ending September 30) of each year. Each royalty report will cover Cytori's most recently completed calendar quarter and will show: | |
| (a) all Net Sales during the most recently completed calendar quarter; | ||
| (b) the Fully Burdened Cost of Sales associated with the Net Sales in 2.3 (a); | ||
| (c) the number of each type of Cytori Licensed Product sold; | ||
| (d) the royalties, in U.S. dollars, payable to JVCo hereunder; | ||
| (e) the method used to calculate the royalty ; and | ||
| (f) the exchange rates used. | ||
| If no Net Sales have been made during any reporting period, then a statement to this effect is required. | ||
|
2.4
|
Books
and Records. Cytori shall keep accurate books and records
showing all Cytori Licensed Product manufactured, and/or sold under
the
terms of this Agreement. Books and records must be preserved
for at least five (5) years from the date of the royalty payment
to which
they pertain. Books and records must be open to inspection by
representatives or agents of JVCo at reasonable times, subject to
a
reasonable and customary confidentiality agreement. JVCo shall
bear the fees and expenses of examination, but if an error in royalties
of
more than five percent (5%) of the total royalties due for any calendar
year is discovered in any examination, then Cytori shall bear the
fees and
expenses of that examination.
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|
2.5
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Term
and Termination. The term of this Agreement
(“Term”) shall commence on the Effective Date and shall
continue in full force and effect for a period of *** for each
Cytori Licensed Product offered by Cytori hereunder. The Term shall
expire
earlier with respect to any specific Cytori Licensed Product at such
time
as JVCo notifies Cytori in writing that it has an alternative commercially
salable JVCo Licensed Product manufactured by or for JVCo that serves
in
the same market as such specific Cytori Licensed Product (“Termination
Notice”). Notwithstanding the foregoing, the Term of the
license rights granted hereunder shall continue after the Term with
respect to:
|
|
|
***
|
|
|
***
|
|
|
***
|
|
|
***
|
|
|
2.6 Representations
and Warranties.
2.6.1 Representations
and Warranties of Cytori. Cytori represents and warrants to JVCo
that:
(a) Cytori
is a corporation duly organized, validly existing and in good standing under
the
laws of the State of Delaware, and that Cytori has full power and authority,
and
has taken all action necessary, to execute and deliver this Agreement and to
fulfill its obligations under, and to consummate the transactions contemplated
by, this Agreement.
_________________________
***Material
has been omitted
pursuant to a request for confidential
treatment filed
separately with the Securities and Exchange Commission
4
(b)
The execution, delivery and performance of this Agreement by Cytori will not
result in any breach or violation of, or conflict with, any third-party
contract, agreement, undertaking, judgment, decree, order, law, regulation
or
rule to which Cytori is a party or by which Cytori or any of its assets are
bound, provided Olympus Corporation gives its consent to this transaction,
which
shall be attached hereto as Exhibit I.
(c)
This Agreement has been duly and validly executed and delivered by Cytori and
is
binding upon and enforceable against Cytori in accordance with its terms, except
as enforceability may be limited or affected by applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to
or
affecting the rights of creditors and except as enforceability may be limited
by
rules of law governing specific performance, injunctive relief or other
equitable remedies.
2.6.2 Representations
and Warranties of JVCo. JVCo represents and
warrants to Cytori that:
(a)
JVCo is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, and that JVCo has full power and
authority, and has taken all action necessary, to execute and deliver this
Agreement and to fulfill its obligations under, and to consummate the
transactions contemplated by, this Agreement.
(b) The
execution, delivery and performance of this Agreement by JVCo will not result
in
any breach or violation of, or conflict with, any contract, agreement,
undertaking, judgment, decree, order, law, regulation or rule to which JVCo
is a
party or by which JVCo or any of its assets are bound, provided Olympus
Corporation gives its consent to this transaction, which shall be attached
hereto as Exhibit I.
(c)
This Agreement has been duly and validly executed and delivered by JVCo and
is
binding upon and enforceable against JVCo in accordance with its terms, except
as enforceability may be limited or affected by applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to
or
affecting the rights of creditors, and except as enforceability may be limited
by rules of law governing specific performance, injunctive relief or other
equitable remedies.
|
2.7
|
Indemnification. In
the event that any of the activities of Cytori in exercising the
rights
granted herein results in the assertion of any claim by a third party
against JVCo, Cytori shall indemnify and hold harmless JVCo and its
Affiliates, successors and assigns, and its and their respective
directors, officers, employees and agents, from and against any and
all
claims and losses resulting from Cytori’s activities, including but not
limited to attorneys fees and expenses. JVCo shall promptly notify
Cytori
of any such third party claim and Cytori shall have the full right
to
control the defense of such claim, provided that it selects counsel
reasonably acceptable to JVCo, and provided it can reasonably assure
JVCo
of its financial ability to fulfill its indemnity obligation. JVCo
shall
cooperate with Cytori in the defense of such claim, and neither
party shall settle any such claim without the other’s prior written
approval, which approval shall not be unreasonably
withheld.
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|
|
2.8 Repair,
Service and Warranty. Both Parties acknowledge and agree that
(i) Cytori shall have responsibility for repair, service and warranty
on
Cytori Licensed Products, and (ii) JVCo and Olympus shall have no
responsibility for repair, service and warranty on Cytori
Licensed Products.
|
|
3.
|
MISCELLANEOUS
PROVISIONS
|
|
3.1
|
Confidentiality. Each
Party will keep confidential all information obtained by or in connection
with this Agreement from the other Party, including marketing plans,
customer information, technical information, trade secrets, know-how
and
financial information as provided for in the Three-Way NDA, and as
otherwise provided for in the Joint Venture
Agreements.
|
|
3.2
|
Governing
Law. This Agreement shall be governed in all respects by
the laws of New York without regard to provisions regarding choice
of
laws.
|
5
|
3.3
|
Dispute
Resolution. All disputes arising out of or in connection
with this Agreement, or any relationship created by or in accordance
with
this Agreement, shall be finally settled under the Rules of the American
Arbitration Association (the “Rules”) by three
arbitrators. Judgment on the award rendered by the panel of
arbitrators shall be binding upon the Parties and may be entered
in any
court having jurisdiction thereof. JVCo shall nominate one
arbitrator and Cytori shall nominate one arbitrator. The
arbitrators so nominated by JVCo and Cytori, respectively, shall
jointly
nominate the third arbitrator within fifteen (15) days following
the
confirmation of arbitrators nominated by JVCo and Cytori. If
the arbitrators nominated by JVCo and Cytori cannot agree on the
third
arbitrator, then such third arbitrator shall be selected as provided
in
the Rules. The place of the arbitration and all hearings and
meetings shall be Singapore, unless the Parties to the arbitration
otherwise agree. The arbitrators may order pre-hearing
production or exchange of documentary evidence, and may require written
submissions from the relevant Parties hereto, but may not otherwise
order
pre-hearing depositions or discovery. The arbitrators shall
apply the laws of New York as set forth in Section 3.2; provided,
however,
that the Federal Arbitration Act shall govern. The language of
the arbitral proceedings shall be English. The arbitrators
shall not issue any award, grant any relief or take any action that
is
prohibited by or inconsistent with the provisions of this
Agreement.
|
No
arbitration pursuant to this Section 3.3 shall be commenced until the Party
intending to request arbitration has first given thirty (30) days written notice
of its intent to the other Party, and has offered to meet and confer with one
or
more responsible executives of such other Party in an effort to resolve the
dispute(s) described in detail in such written notice. If one or more
responsible executives of the other Party agree, within thirty (30) days after
receipt of such written notice, to meet and confer with the requesting Party,
then no arbitration shall be commenced until the Parties have met and conferred
in an effort to resolve the dispute(s), or until sixty (60) days has elapsed
from the date such written notice has been given.
|
3.4
|
Successors
and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding
upon,
the successors and assigns of the Parties hereto whose rights or
obligations hereunder are affected by such amendments. Neither
this Agreement nor any right, license, privilege or obligation provided
herein may be assigned or transferred by either Party without the
other
Party’s prior written consent. Any purported assignment of this Agreement
of any right and obligation therein without the written consent of
the
other party shall be null and void.
|
|
3.5
|
Entire
Agreement. This Agreement, the Joint Venture Agreements
(and any amendments thereto) and the attachments, schedules and exhibits
hereto, which are hereby expressly incorporated herein by this reference,
constitute the entire understanding and agreement between the Parties
with
regard to the subject matter hereof and thereof, and supersedes,
cancels
and annuls in its entirety any and all prior or contemporaneous agreements
and understandings, express or implied, oral or written among them
with
respect thereto. No alteration, modification, interruption or
amendment of this Agreement shall be binding upon the Parties unless
in
writing designated as an amendment hereto, and executed with equal
formality by each of the Parties.
|
|
3.6
|
Notices. Except
as otherwise expressly provided herein, all notices, requests, waivers
and
other communications made pursuant to this Agreement shall be in
writing
and shall be deemed to have been duly given (a) when hand delivered
to the
other Party; (b) when received, if sent by facsimile at the address
and
number set forth below, with a written confirmation copy of such
facsimile
sent the next business day in accordance with (c) below; (c) the
second
business day after deposit with a national overnight delivery service,
postage prepaid, addressed to the other Party as set forth below,
provided
that the sending Party receives a confirmation of delivery from the
delivery service provider; or (d) if earlier, when actually
received.
|
6
|
To
Cytori:
3020
Callan Road, San Diego, CA 92121, U.S.A.
Attn: Christopher
J. Calhoun
Fax: 858-458-0995
|
To
JVCo:
2-3
Kuboyama-cho,
Hachioji-shi,
Tokyo, 192-8512, Japan
Attn:
Masaaki Terada
Fax: +81-426-91-7350
|
A
Party
may change or supplement its address set forth above, or may designate
additional addresses, for purposes of this Section 3.6, by giving the other
Party written notice of the new address in the manner set forth
above.
|
3.7
|
Amendments
and Waivers. No term or provision of this Agreement may be
amended, waived, discharged or terminated orally but only by an instrument
in writing signed by the Party against whom the enforcement of such
amendment, waiver, discharge or termination is sought. Any
waiver shall be effective only in accordance with its express terms
and
conditions.
|
|
3.8
|
Cumulative
Remedies. Unless expressly so stated in this Agreement in
respect of any particular right or remedy, the rights and remedies
herein
provided are cumulative and not exclusive of any rights or remedies
provided by law.
|
|
3.9
|
Relationship
of Parties. This Agreement shall not be deemed to
constitute either Party the agent, the partner, the licensee, the
affiliate or the representative of the other Party, and neither Party
shall represent to any third party that it has any such relationship
or
right of representation.
|
|
3.10
|
Press
Release. No public announcements or press releases shall be
issued by either Party regarding this Agreement or any of the activities
engaged in by the Parties or JVCo pursuant to this Agreement without
the
prior written approval of the other Party; provided, however, that
either
Party shall have the right to make such public disclosure as may
be
necessary or appropriate to comply with applicable securities or
other
laws.
|
|
3.11
|
Counterparts. This
Agreement may be executed by facsimile signature in any number of
counterparts, each of which shall be an original, but all of which
together shall constitute one
instrument.
|
|
3.12
|
Severability. Should
any provision of this Agreement be determined to be illegal or
unenforceable, such determination shall not affect the remaining
provisions of this Agreement.
|
[Signature
page follows]
7
IN
WITNESS WHEREOF, the Parties have executed this License & Royalty
Agreement as of the Effective Date.
|
CYTORI
THERAPEUTICS, INC
|
OLYMPUS-CYTORI,
INC.
|
|
By: /s/
Seijiro Shirahama
|
By: /s/Yasunobu
Toyoshima
|
|
Title: Sr.
Vice President, Asia-Pacific
|
Title: Board
of Director
|
|
Date: August
23, 2007
|
Date: August
23, 2007
|
8
Exhibit
I
Consent
to License and Royalty Agreement
August
23, 2007
Olympus
Corporation
2-3
Kuboyama-cho,
Hachioji-shi,
Tokyo, 192-8512, Japan
Attn: Mr.
Shuichi Takayama
RE:
Consent to License and Royalty Agreement
Dear
Mr.
Takayama:
Cytori
Therapeutics, Inc. (Cytori) and Olympus-Cytori, Inc. (JVCo) intend to enter
into
a license and royalty agreement (Royalty Agreement) whereby Cytori would be
allowed to develop and manufacture certain Licensed Products (the Cytori
“Celution” devices and disposable components) for commercial sale in a manner
that was not contemplated in the Joint Venture Agreements by Cytori, Olympus
Corporation and the JVCo in November of 2005.
Your
Company's consent is hereby requested to allow the execution of the Royalty
Agreement by Cytori and JVCo and for the performance of each party of its rights
and obligations contained therein. It should be noted that the performance
of
the Royalty Agreement may, during the term of that Agreement conflict with
certain exclusive rights of the parties to the Joint Venture Agreements,
including Section 4.6 of the License/Joint Development Agreement. A complete
copy of the form of Royalty Agreement is attached hereto as Exhibit I for your
reference.
Please
signify your Company's consent to this Royalty Agreement and waiver of any
conflicts that this may create with the Joint Venture Agreements by having
an
authorized person sign and date this letter below.
Thank
you
for your consideration.
Sincerely,
/s/
Seijiro Shirahama
Seijiro
Shirahama
Sr.
Vice
President, Asia-Pacific
CONSENT
GRANTED (for the License and Royalty Agreement by and between Cytori
Therapeutics, Inc. and Olympus-Cytori, Inc.)
Olympus
Corporation
Name:
Shuichi Takayama
Title:
Director, Member of the Board
Date:
August 23, 2007
9
Exhibit
10.50
GENERAL
RELEASE AGREEMENT
This
General Release Agreement (the “Agreement”) is made and entered into by and
between CYTORI THERAPEUTICS, INC. (Company) and John Ransom.
WHEREAS,
John Ransom has been employed by CYTORI THERAPEUTICS, INC. as its Vice President
of Research – Regenerative Cell Technology since December 9, 2005;
WHEREAS,
for sound business reasons and in the best interests of the Company, the Company
has decided to end John Ransom’s employment with the Company effective August 2,
2007;
WHEREAS,
John Ransom and the Company do not anticipate that there will be any disputes
between them or legal claims arising out of John Ransom's separation from the
Company, the parties nevertheless desire to ensure a completely amicable parting
and to settle fully and finally any and all differences or claims that might
otherwise arise out of John Ransom's employment with the Company relative to
the
termination of his employment;
NOW,
THEREFORE, in consideration of the mutual promises contained herein, it is
agreed as follows:
|
1.
|
Separation
from Employment Relationship. The
employment relationship terminated and ceased as of August 2, 2007
(Separation Date).
|
|
2.
|
Consideration. In
consideration of John Ransom agreeing to enter into this General
Release
Agreement, CYTORI agrees to pay John Ransom a lump sum of sixty-six
thousand, six hundred and sixty seven dollars (total =$ 66,667) less
standard tax and withholding amounts. It is understood that
there will be no continuation of any benefits, except in accordance
with
applicable law, or additional vesting of stock options beyond the
Separation Date and/or otherwise provided in connection with the
1997
Stock Option and Stock Purchase Plan and/or 2004 Equity Incentive
Plan
unless expressly provided herein. John Ransom’s right to exercise stock
options vested as of the Separation Date shall extend through and
terminate on December 31, 2007. John Ransom shall also be entitled
to
outplacement services under DBM’s outplacement “DBM Select”
program.
|
|
3.
|
Confidentiality. The
parties understand and agree that this Agreement, and the matters
discussed in negotiating its terms, is entirely
confidential. It is therefore expressly understood and agreed
that John Ransom will not reveal, discuss, publish or in any way
communicate any of the terms, amount or fact of this Agreement to
any
person, organization or other entity, except as may be required by
law and
except to Employee’s immediate family members and professional
representatives, who shall be informed of and bound by this
confidentiality clause. It is also agreed and understood that Company
may
make any disclosure of the terms of the Agreement as may be required
by
law.
|
|
4.
|
Release of Claims. John Ransom, for himself and his heirs, successors and assigns, does hereby agree to waive, release, acquit and forever discharge Company, and Company’s parents, subsidiaries, affiliates, and related entities or companies, and all past and present officers, directors, shareholders, employees, agents, partners, attorneys, heirs, successors, and assigns, (hereinafter “Released Parties”) from any and all claims, actions, complaints and causes of action for monetary damages (hereinafter collectively referred to as “claims”), of whatever nature, whether known or unknown, which exist or may exist on John Ransom’s behalf against Released Parties as of the date of this Agreement, including but not limited to any and all tort claims, contract claims, wage claims, commission claims, bonus claims, overtime claims, wrongful termination claims, public policy claims, retaliation claims, statutory claims, personal injury claims, emotional distress claims, privacy claims, defamation claims, fraud claims, and any and all claims arising under any federal, state or other governmental statute, law, regulation or ordinance relating to employment, including but not limited to Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Family and Medical Leave Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the California Labor Code, and the California Fair Employment and Housing Act covering discrimination in employment, including race, color, religious creed, national origin, ancestry, physical or mental disability, medical condition, marital status, military status, family care leave, pregnancy, sex, sexual orientation, age, and harassment or retaliation. Limitation of Release-Notwithstanding the foregoing, none of the terms of this Agreement shall be construed so as to release those rights which as a matter of law or public policy cannot be waived, including but not limited to unwaivable rights or claims the Employee may have under the California Labor Code, California Fair Employment and Housing Act, or with the U.S. Equal Employment Opportunity Commission, provided that Employee agrees not to seek any monetary damages or other relief in any such proceeding. |
1
|
5.
|
Waiver
of Rights Under Section 1542. It is further
understood and agreed that John Ransom hereby expressly waives and
relinquishes any and all claims, rights or benefits that he may have
under
California Civil Code section 1542, which provides as
follows:
|
|
“A
general release does not extend to claims which the creditor does
not know
or suspect to exist in him favor at the time of executing the release
which if known by he must have materially affected him settlement
with the
debtor.”
|
| In connection with such waiver and relinquishment, John Ransom acknowledges that he may hereafter discover claims or facts in addition to or different from those which he now knows or believes to exist with respect to the matters released herein, and he expressly agrees to fully, finally and forever settle and release any and all claims, known or unknown, suspected or unsuspected, which exist or may exist on him behalf against the Released Parties at the time of execution of this Agreement, including, but not limited to, any and all claims relating to or arising from him employment with Company or the termination of that employment. |
|
6.
|
Continuing
Obligations Regarding Confidential or Proprietary
Information. John Ransom agrees to abide by all the surviving
provisions of the Employment, Confidentiality and Assignment of Inventions
Agreement which he executed on December 19, 2005, including but not
limited to, promises to protect all confidential and proprietary
information of Company.
|
|
7.
|
Release of Age Discrimination Claims. In addition to the Release in Section 4 above, John Ransom agrees to the release of all known and unknown claims, including expressly the waiver of any rights or claims arising out of the Federal Age Discrimination in Employment Act (“ADEA”) 29 U.S.C. § 621, et seq., and in connection with such waiver: | |
|
a.
|
John Ransom is hereby advised to consult with an attorney prior to signing this Agreement. | |
|
b.
|
John Ransom shall have a period of forty-five (45) days from the date of receipt of this Agreement in which to consider the terms of the Agreement. John Ransom may at his option execute this Agreement at any time during the 45-day period. | |
|
c.
|
John Ransom may revoke this Agreement at any time during the first seven (7) days following his execution of this Agreement, and this Agreement shall not be effective or enforceable until the seven-day period has expired. | |
|
8.
|
Employer
Property And Trade Secrets. John Ransom will
return to Company any and all of its property and documents which
he may
have in his possession. Including but not limited to the
following:
|
|
·
|
Any
proprietary devices and equipment, cameras, video equipment
etc.
|
|
·
|
Any
Company information, including electronic files, hard copies
etc.
|
John
Ransom further agrees never to disclose to any person or entity any confidential
or proprietary information of or about Company, except upon the express
authorization and consent of Company.
2
|
9.
|
Non-Disparagement. John
Ransom agrees that he will not at any time defame, disparage or impugn
the
reputation of Company or any employees of Company in any future
communications with any third-party or entity. “Disparage,” as
used in this Agreement, means to make any statement, written or oral,
that
casts the Company in a negative light of any kind, or implies or
attributes any negative quality to the
Company.
|
|
10.
|
COBRA. John
Ransom hereby acknowledges that Company has advised him that pursuant
to
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
he has
a right to elect continued coverage under Company’s group health plan, at
his own expense, for a period of eighteen months from the date of
his
termination.
|
|
11.
|
Ownership
of Claims. John Ransom represents
and warrants that he is the sole and lawful owner of all rights,
title and
interest in and to all released matters, claims and demands as herein
contained and that there has been no assignment or other transfer
of any
interest of any claim or demand which he may have against
Company.
|
|
12.
|
Successors
and Assigns. It is further
expressly understood and agreed by John Ransom that this Agreement
and all
of its terms shall be binding upon each party’s respective
representatives, heirs, executors, administrators, successors and
assigns.
|
|
13.
|
No
Admission Of Wrongdoing. This Agreement shall not in any way
be construed as an admission by the released parties of any acts
of
wrongdoing whatsoever against John Ransom or any other
person.
|
|
14.
|
Entire
Agreement. This General Release Agreement sets forth the
entire agreement between the parties hereto, and fully supersedes
any and
all prior agreements or understandings between the parties hereto
pertaining to the subject matter
hereof.
|
|
15.
|
Venue.
Any proceeding brought to enforce this agreement shall be brought
in San
Diego Co., CA.
|
|
16.
|
Construction. If any provision herein shall be deemed void, invalid, unenforceable, or otherwise stricken, in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provision or provisions and to alter the bounds thereof in order to render it valid and enforceable. The parties hereby agree to substitute a valid provision that will most closely approximate the economic/legal effect and intent of the invalid provision. The parties agree to execute any additional documents that may reasonably be necessary to effectuate the purposes of this agreement. |
I
HAVE
READ AND CAREFULLY CONSIDERED THIS GENERAL RELEASE AGREEMENT, AND I HAVE HAD
A
REASONABLE PERIOD OF TIME TO CONSIDER THIS AGREEMENT PRIOR TO
SIGNING. COMPANY HAS INDICATED THAT I AM FREE TO DISCUSS THIS
AGREEMENT WITH MY FAMILY AND HAVE IT REVIEWED BY MY ATTORNEY PRIOR TO SIGNING
IF
I SO DESIRE. I AM SIGNING THIS AGREEMENT FREELY AND VOLUNTARILY.
Signed:
/s/ John
Ransom
John
Ransom
Date:
August 6, 2007
CYTORI
THERAPEUTICS, INC.
Signed:
/s/ Christopher J.
Calhoun
CHRISTOPHER
J. CALHOUN
CEO
Date: August 13, 2007
3
EXHIBIT
15.1
Letter
re: Unaudited Interim Financial Information
November
13, 2007
Cytori
Therapeutics, Inc.
3020
Callan Road
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 November 9, 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.
|
/s/
KPMG LLP
|
|
|
San
Diego, California
|
|
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.
|
Date:
November 13, 2007
|
|
|
/s/
Christopher J. Calhoun
|
|
|
Christopher
J. Calhoun,
|
|
|
Chief
Executive Officer
|
|
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.
|
Date:
November 13, 2007
|
|
|
/s/
Mark E. Saad
|
|
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|
|
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350/ SECURITIES EXCHANGE ACT RULE 13a-14(b),
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Quarterly Report on Form 10-Q of Cytori Therapeutics, Inc.
for the quarterly period ended September 30, 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.
|
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
November 13, 2007
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
November 13, 2007
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|