UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to
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Commission
file number 0-32501
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CYTORI
THERAPEUTICS, INC.
(Exact
name of Registrant as Specified in Its Charter)
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DELAWARE
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33-0827593
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(State
or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S.
Employer
Identification
No.)
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3020
CALLAN ROAD, SAN DIEGO, CALIFORNIA
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92121
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (858) 458-0900
Securities
registered pursuant to Section 12(b) of the Act:
Common
stock, par value $0.001
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act. Yes o No ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes o No ý
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes ý No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in
Part III
of this Form 10-K or any amendment to this Form 10-K. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(Check one).
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Large
Accelerated Filer o
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Accelerated
Filer ý
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Non-Accelerated
Filer o
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Smaller
reporting company o
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No ý
The
aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant on June 30, 2008, the last business day of the
registrant’s most recently completed second fiscal quarter, was $107,941,235
based on the closing sales price of the registrant’s common stock on June 30,
2008 as reported on the Nasdaq Global Market, of $6.48 per share.
As of
February 28, 2009, there were 29,313,441 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for the 2009 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of the year ended December 31, 2008, are
incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Form
10-K.
TABLE
OF CONTENTS
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PART
I
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PART
II
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PART
III
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PART
IV
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PART I
General
Cytori
Therapeutics, Inc., develops, manufactures, and sells medical products to enable
the practice of regenerative medicine. Regenerative medicine describes the
emerging field that aims to repair or restore lost or damaged tissue and cell
function. Our commercial activities are currently focused on cosmetic and
reconstructive surgery in Europe and Asia-Pacific, fulfilling the demand among
physicians in Europe and Asia Pacific for clinical grade stem and regenerative
cells, and stem and regenerative cell banking (cell preservation)
worldwide. In addition, we are seeking to bring our products to
market in the United States as well as other countries. Our product pipeline
includes the development of potential new treatments for cardiovascular disease,
spinal disc degeneration, gastrointestinal disorders, liver and renal disease
and pelvic health conditions.
The
foundation of our business is the patented Celution® System
family of products which processes patients’ cells at the bedside in real time.
Each member of the Celution® System
family of products consists of a central device, a related single-use consumable
used for each patient procedure, proprietary enzymes, and related
instrumentation. Our commercialization model is based on the sale of
Celution® Systems
and on generating recurring revenues from the single-use consumable
sets.
Our
Celution® 800/CRS
System was introduced during 2008 into the European cosmetic and reconstructive
surgery market through a network of medical distributors. The Celution® 900/MB
is being marketed in Japan through our commercialization partner, Green Hospital
Supply, Inc. (Green Hospital Supply) as part of the comprehensive
StemSource® Cell
Bank, which prepares cells for cryopreservation in the event they may be used in
the future.
The most
advanced therapeutic application in our product development pipeline is
cardiovascular disease. Currently, two cardiovascular clinical trials are being
conducted in Europe with adipose-derived stem and regenerative cells, processed
with the Celution® 600
System, an earlier version of the Celution® 800/CV.
The Celution® 800/CV
has recently been introduced to these clinical sites. One of the clinical trials
is in patients suffering from chronic myocardial ischemia, a severe form of
chronic heart disease, and the other is in heart attack patients.
In the
United States, our goal is to seek regulatory and marketing approval on the
Celution®
700 System family of products. We expect to finalize our U.S.
regulatory and clinical development strategy in 2009.
Summary of
Celution® System Family
Regulatory Status
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Celution® Series
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Region
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Clinical
Applications
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Regulatory
Status
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Comments
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900/MB
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Japan
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Cell
Banking
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Approved
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900/MB
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Greece
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Cell
Banking
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CE
Mark
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800/CRS
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Europe
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Cell
Processing for re-implantation or re-infusion into same patient
(General Processing)
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CE
Mark
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Post-marketing
studies underway for reconstructive surgery
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Europe
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Seeking
cosmetic & reconstructive claims
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In
process
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800/CV
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Europe
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Will
seek cardiovascular disease claims
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In
clinical study
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800/GP
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Europe
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Will
seek multiple specific surgical claims
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Pre-clinical
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3
Summary of Celution® System Family Regulatory Status (cont’d)
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Celution®
Series
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Region
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Clinical
Applications
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Regulatory
Status
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Comments
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700/CRS
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USA
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Will
seek reconstructive surgery claims
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Pre-clinical
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700/CV
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USA
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Will
seek cardiovascular disease claims
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Pre-clinical
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700/GP
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USA
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Will
seek multiple general surgical claims
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Pre-clinical
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600
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Europe
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Cell
Concentration
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CE
Mark
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Two
cardiac clinical trials underway: chronic and acute
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200
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USA
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Blood
Processing
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510
(k) clearance
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Our
MacroPore Biosurgery operating segment manages the ThinFilm biomaterial product
line in Japan. We sold our non-Japan Thin Film business in 2004. Pending
regulatory approval in Japan, this product line would be distributed exclusively
through Senko Medical Trading Co. (“Senko”) for anti-adhesion applications, soft
tissue support, and minimization of the attachment of soft tissues throughout
the body.
Reconstructive
Surgery
The
Celution®
800/CRS System is approved in Europe as a bedside device for separating
and concentrating a patient's stem and regenerative cells, which reside
naturally within their adipose (fat) tissue, so that these cells may be
re-injected back into that same patient.
The
Celution®
800/CRS System was introduced into the European and Asia-Pacific
reconstructive surgery market in the first quarter of 2008. Our
distribution network covers the UK, France, Germany, Norway, Finland, Denmark,
Sweden, Austria and Switzerland through our commercialization partnership with
GE Healthcare, and Belgium, China, Greece, Indonesia, Israel, Italy, Korea,
Malaysia, Portugal, Singapore, Spain, Turkey and the Netherlands through a
network of independent distributors.
We hope
to begin commercializing the Celution® 800/CRS
System with indications for use for breast reconstruction for partial mastectomy
defects as early as 2010 pending supporting clinical data and expanded CE
certification. To support this goal, a 70-patient, multi-center study, RESTORE
II, was initiated in Europe in 2008. The results from this study will
also be used to support reimbursement for such procedure.
Market for Clinical-Grade
Cells
The
Celution System is being sold to physicians to fulfill their demand for access
to clinical-grade stem and regenerative cells. Celution is the only
such system broadly available in Europe today that can provide real time access
to cells, which can safely be administered to patients. Availability
at the point of care enables physicians to apply cells across an array of
applications. Certain physicians may even choose to study patient outcomes
to understand the benefit of these cells under their own independently sponsored
and regulated studies. Such ‘translational’ efforts are growing and
already represent applications as diverse as wound healing, radiation injury,
breast reconstruction, breast augmentation, HIV related facial wasting syndrome,
vocal cord paralysis, burn, urinary incontinence, fistula repair (and Crohn’s
disease), bone regeneration, cardiovascular applications, peripheral vascular
disease, renal insufficiency and acute kidney injury, and liver disease among
many others. We expect the breadth of these applications will grow
significantly as physicians continue to adopt cell based regenerative medicine
into their treatment strategies based on the availability of safe clinical grade
cells at the point of care.
StemSource® and
Cell
Banking
The
Celution® 900/MB
System is the foundation of our StemSource® Cell
Bank for cryopreserving patients’ adult stem and regenerative cells. The
StemSource® Cell Bank is being marketed to hospitals, tissue banks and stem cell
banking companies in Europe and Asia. With a StemSource® Cell
Bank on site, hospitals will be able to offer their patients the option
4
of
storing their adipose tissue-derived stem and regenerative cells and accessing
them as clinical applications are approved.
The
StemSource® Cell Bank is being marketed in Japan, Korea, Taiwan and Thailand
exclusively by Green Hospital Supply, Inc. The value of a
StemSource® Cell
Bank lies in the recurring revenue from processing and freezing. It
starts with a tissue collection procedure, which may be performed during an
already planned surgery or a separate elective procedure. The cells are prepared
for storage using the Celution® 900/MB
System, which automates the separation and concentration of stem and
regenerative cells from adipose tissue and thereby allows hospitals to more
affordably offer such service to patients.
As part
of our agreement with Green Hospital Supply, we equally split revenues in Japan,
Korea, Taiwan and Thailand from the sale to hospitals of StemSource® Cell
Banks and single-use, per-procedure consumables. Green Hospital
Supply is responsible for all sales and marketing while Cytori is responsible
for manufacturing the Celution® 900/MB
System and sourcing all necessary equipment, including but not limited to
cryopreservation chambers, cooling and thawing devices, cell banking protocols
and the proprietary software and database application.
Cytori
signed a commercialization partnership with GE Healthcare in January 2009, which
grants GE Healthcare exclusive rights to commercialize the Celution® System
in the U.K., France, Germany, Norway, Finland, Denmark, Sweden, Austria,
Switzerland, Belgium, the Netherlands and Luxembourg for clinical grade access
to stem and regenerative cells and stem cell banking.
Cardiovascular
Disease
We
currently have two clinical trials underway in Europe for adipose-derived stem
and regenerative cells processed with the Celution® 600 and
800 Systems, to study cardiovascular disease. In January 2007, we initiated a
clinical trial for chronic myocardial ischemia, a severe form of coronary artery
disease. In late 2007, we initiated a study for acute heart attacks, for which
enrollment is ongoing. Enrollment for both trials is projected to be
completed in 2009. Both are double-blind, placebo controlled safety
and feasibility studies, which will evaluate a variety of primary and secondary
safety and efficacy endpoints.
We
believe there is significant need for new forms of treatment for cardiovascular
disease, which represents one of the largest healthcare market opportunities.
The American Heart Association estimates that in the United States of America
alone there are approximately 865,000 heart attacks each year and more than
13,000,000 people suffer from coronary heart disease.
Celution® System
Pipeline
Other
applications for the Celution® System
family of products under investigation include gastrointestinal disorders,
vascular disease, pelvic health conditions, and orthopedic and spinal
applications. Our scientists are, to a varying degree, investigating these
applications in pre-clinical models.
Manufacturing
The
Celution® 800/CRS,
Celution® 900/MB,
and related single-use consumables are being manufactured at Cytori’s
headquarters in San Diego, CA. The completion of our internal
manufacturing facilities in 2007 is expected to enable us to meet anticipated
demand in 2009.
In the
future, the next generation Celution®
device is expected to be manufactured through a joint venture arrangement
between Cytori and Olympus Corporation (“Olympus”), a global optics and life
science company. Olympus-Cytori Inc. (the “Joint Venture”), enables Cytori
to access Olympus’ expertise in engineering, manufacturing and servicing of
sophisticated medical devices. The Joint Venture will supply the
Celution® System
for all therapeutic applications solely to Cytori at a formula-based transfer
price. Cytori owns Celution® System
marketing rights for all therapeutic applications.
Competition
We
compete with multiple pharmaceutical, biotechnology and medical device companies
involved in the development and commercialization of medical technologies and
therapies.
Regenerative
medicine is rapidly progressing, in large part through the development of
cell-based therapies or devices designed to isolate cells from human tissues.
Most efforts involve cell sources, such as bone marrow, embryonic and fetal
tissue, umbilical cord and peripheral blood, and skeletal muscle. We
work exclusively with adult stem and regenerative cells from adipose
tissue.
5
Companies
working in this area include, among others, Aastrom Biosciences, Inc., Baxter
International, Inc., BioHeart, Inc., Cellerix SA, Genzyme, Inc., Geron
Corporation, Isolagen, Inc., MG Biotherapeutics (a joint venture between Genzyme
and Medtronic), Osiris Therapeutics, Inc., Stem Cells, Inc. and Tissue Genesis,
Inc. Many of our competitors and potential competitors have substantially
greater financial, technological, research and development, marketing, and
personnel resources than we do. We cannot with any accuracy forecast
when or if these companies are likely to bring cell therapies to market for
indications that we are also pursuing.
Some of
our competitors are also working with adipose-derived cells. To the
best of our knowledge, none of these companies are currently conducting human
clinical trials. In addition, Cytori is aware of several surgeons who are
performing autologous fat transfers using manual methods, some of whom enrich
the fat with autologous adipose-derived cells.
Companies
researching and developing cell-based therapies for cardiovascular disease
include, among others, Baxter, BioHeart, MG Biotherapeutics, and Osiris. Baxter
completed a Phase II study in the United States using stem cells extracted from
peripheral blood for chronic myocardial ischemia. BioHeart is conducting
multiple ongoing clinical trials in the United States and Europe for its
investigational product MyoCell™, which are cultured autologous skeletal
myoblasts. We are aware that BioHeart has disclosed its intentions to
develop heart attack treatments using adipose-derived cells. Osiris
Therapeutics, Inc. completed a Phase I clinical trial using allogeneic (donor),
mesenchymal stem cells, for acute myocardial infarction and is planning a
broader Phase II study.
Research
and Development
Research
and development expenses were $17,371,000, $20,020,000 and $21,977,000 for the
years ended December 31, 2008, 2007 and 2006, respectively. For 2008, majority
of the research and development expenses were related to our regenerative cell
technology.
Our
research and development efforts in 2008 focused predominantly on the
following areas:
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Optimization
of the design, functionality and manufacturing process for the
Celution® System
family of products, single-use consumables and related instrumentation for
the entry of the device into the European reconstructive surgery market
and the StemSource®
Cell Banking market in Europe and
Asia-Pacific;
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Development
of the infrastructure and logistics in partnership with Green Hospital
Supply including building out a proprietary database and software
application and optimizing proprietary protocols, resulting in the first
sale in Japan of the StemSource®
cell banking line to the University of
Kyoto;
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Preparation
and initiation of a 70 patient European breast reconstruction
post-marketing clinical study using the Celution®
System. The study is taking place across several centers and will measure
safety, volume retention as well as other metrics related to autologous
fat transfers enriched with the Celution®
System output to correct partial mastectomy
defects;
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Implementation
and continuing enrollment in two randomized, double blind, placebo
controlled, cardiovascular disease clinical trials in Europe for chronic
myocardial ischemia and heart
attacks.
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Preparation
and submission of multiple regulatory filings in the United States,
Europe, and Japan related to various cell processing systems under
development;
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Conducting
extensive pre-clinical safety and efficacy studies investigating the use
of adipose-derived stem and regenerative cells for reconstructive surgery,
spinal disc repair, renal failure, pancreatitis, stroke, and other
therapeutic applications;
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Investigating
the cellular and molecular properties, composition, and characteristics of
stem and regenerative cells residing in adipose tissue towards improving
our intellectual property position and towards understanding how to
improve and control the therapeutic
products.
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6
Customers
Cytori
has established a network of distributors who offer our Celution® System,
instrumentation and consumables to surgeons and hospitals throughout Europe.
These distributors purchase the devices from Cytori at a contractually
agreed-upon transfer price. We also market our Celution® System
directly to customers in select countries within Europe. In addition, we offer
the Celution as part of the StemSource® Cell
Bank, a comprehensive suite of products to allow hospitals or tissue banks to
cryopreserve adipose-derived stem and regenerative cells.
In July
2004, we entered into a Distribution Agreement with Senko under which we granted
to Senko an exclusive license to sell and distribute Thin Film products in
Japan. The sale of products through Senko commences upon “commercialization,”
which requires regulatory clearance from the Japanese regulatory authorities. We
are currently pursuing the required regulatory clearance. Following
commercialization, the Distribution Agreement has a five-year duration and is
renewable for an additional five years after reaching mutually agreed minimum
purchase guarantees. In 2004, we sold all of our non-Japan Thin Film
business.
Sales
by Geographic Region
For the
year ended December 31, 2008, all of our product revenue came from sales of
Celution® 800/CRS
System to the European and Asia-Pacific reconstructive surgery market and
installation of our first StemSource® Cell
Bank in Greece. For the year ended December 31, 2007, our only product sales
came from our bioresorbable surgical implants. As these were no
longer core to our business focus, we sold our remaining interest in this line
of business to Kensey Nash in May 2007 (excluding our Thin Film products in
Japan) and we no longer receive any revenue from the sales of those
products. Prior to May 2007, we sold our products predominantly in
the United States and to a lesser extent internationally through
Medtronic.
Regenerative
Cell Technology
Beginning
in March 2008, we began sales and shipments of our Celution® 800/CRS
System to the European and Asia-Pacific reconstructive surgery
market. In September 2008 we completed installation of our first
StemSource® Cell
Bank in Greece. This product includes a combination of equipment and
service deliverables, some of which will be provided to the customer over
time. We have recorded $4,528,000 in revenue during 2008 related to
our Celution® products
and StemSource® Cell
Bank.
Additionally,
our consolidated balance sheet includes a line item entitled deferred revenues,
related party. This account primarily consists of the consideration
we have received in exchange for future obligations that we have agreed to
perform on behalf of Olympus and the Joint Venture. We recognize
deferred revenues, related party, as development revenue when certain
performance obligations are met. Such revenue recognition results
from completion of certain milestones, such as completion of product development
efforts, regulatory filings and related pre-clinical and clinical
studies. In 2008, 2007 and 2006, we recognized $774,000, $5,158,000
and $5,905,000 of revenue associated with our arrangements with Olympus,
respectively.
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 stem and 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
could conduct market research and pilot clinical studies in collaboration with
us for the therapeutic area up to December 31, 2008 when this exclusive right
expired. Accordingly, on December 31, 2008, we recognized $1,500,000
as other development revenue and reduced our deferred revenues, related party
balance for the same amount.
For the
year ended December 31, 2006, we recorded $310,000 in grant revenue related to
our agreement with the National Institutes of Health (“NIH”). Under
this agreement, the NIH reimbursed us for “qualifying expenditures” related to
research on Adipose-Derived Cell Therapy for Myocardial Infarction. There was no
similar revenue in 2007 and 2008.
For the
years ended December 31, 2008, 2007 and 2006, we recorded revenue of $47,000,
$85,000 and $102,000, respectively, related to cell processing equipment, and
adipose derived stem cell research products sold to various research
facilities. We also recorded stem cell banking revenue of $4,000,
$4,000 and $7,000 for the years ended December 31, 2008, 2007 and 2006,
respectively, related to our U.S. StemSource® Cell
Bank offering for the processing and preservation of adipose-derived stem and
regenerative cells at our FDA and California state-licensed tissue bank
facility.
7
MacroPore
Biosurgery
In 2007
and 2006 our product sales were $792,000 and $1,451,000, respectively, all of
which relate to the MacroPore Biosurgery segment. These revenues were
primarily related to orders for our radiographically identifiable Spine System
products, marketed under the name MYSTIQUE™. As noted above, we were
concerned about the level of commitment to these products from Medtronic, our
exclusive distributor, and we sold our intellectual property rights and tangible
assets related to our spine and orthopedic bioresorbable implant product line to
Kensey Nash in May 2007.
Under a
distribution agreement with Senko, we are responsible for the completion of the
initial regulatory application to the MHLW (the Japanese equivalent of the U.S.
Food and Drug Administration). We recognized development revenue
based on milestones defined within this agreement of $10,000 and $152,000 for
the years ended December 31, 2007 and 2006, respectively. We did not
recognize any similar revenue in 2008. We have not received any Thin
Film product revenue in Japan yet, and we sold all our non-Japan Thin Film
business in 2004.
We
anticipate that our future international product revenues will increase as a
result of our Distribution Agreement with Senko to the extent our Thin Film
products reach commercialization in Japan.
Planned
Capital Expenditures
Although
capital expenditures may vary significantly depending on a variety of factors,
we may spend up to $1,000,000 on capital equipment purchases in 2009, although
we will diligently seek to spend much less. These may be paid with
our available cash, or financed if appropriate. (See
additional discussion regarding Liquidity at the beginning of Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.)
Raw
Materials
Raw
materials required to manufacture the Celution® System
family of products and disposables are commonly available from multiple sources,
and we have identified and executed supply agreements with our preferred
vendors. Some specialty components are custom made for Cytori, and we
are dependent on the ability of these suppliers to deliver functioning parts in
a timely manner to meet the ongoing demand for our products. There
can be no assurance that we will be able to obtain adequate quantities of the
necessary raw materials supplies within a reasonable time or at commercially
reasonable prices. Interruptions in supplies due to price, timing, or
availability could have a negative impact on our ability to manufacture
products.
Intellectual
Property
Our
success depends in large part on our ability to protect our proprietary
technology, including the Celution® System
product platform, and to operate without infringing on the proprietary rights of
third parties. We rely on a combination of patent, trade secret, copyright and
trademark laws, as well as confidentiality agreements, licensing agreements and
other agreements, to establish and protect our proprietary rights. Our success
also depends, in part, on our ability to avoid infringing patents issued to
others. If we were judicially determined to be infringing on any third party
patent, we could be required to pay damages, alter our products or processes,
obtain licenses or cease certain activities.
To
protect our proprietary medical technologies, including the Celution® System
platform and scientific discoveries, Cytori has has three issued U.S. patents
and six issued International patents. In addition, we have 117 patent
applications pending worldwide. We are seeking patents on methods and systems
for processing adipose-derived stem and regenerative cells, on use of
adipose-derived stem and regenerative cells for a variety of therapeutic
indications, including their mechanisms of actions, and on compositions of
matter than include adipose-derived stem and regenerative cells.
In June
2008, Cytori was issued U.S. Patent No. 7,390,484 (the ‘484
patent). The ‘484 patent is a foundational patent that
protects the Celution®
System technology for processing adipose tissue to obtain a diverse
and mixed population of adipose derived stem and regenerative cells.
The ‘484 patent establishes a strong barrier-to-entry against potential
competitors and provides critical market protection while we seek regulatory
approval in the United States.
In
September 2008, Cytori was issued U.S. Patent No. 7,429,488 (‘the ‘488
patent). The ‘488 patent protects Cytori’s Celution® System based
methods of generating adipose tissue derived stem and regenerative cell enhanced
fat grafts. Cell enhanced fat grafts may be used in a variety of
cosmetic and reconstructive surgery applications, including breast
reconstruction following partial mastectomy, breast implant salvage, as well as
facial and other cosmetic applications.
8
In
January 2009, Cytori was issued U.S. Patent No. 7,473,420 (‘the 420
patent). The ‘420 patent protects combinations of the
Celution System output with various additives including, but not limited to,
agents that promote cell differentiation such as growth factors, cytokines and
protein, demineralized bone, tissue or tissue fragments, biological or
artificial scaffolds, and immunosuppressive compounds. These
additives may be combined with the Celution System output to increase efficacy,
optimize or localize cell delivery, enhance specific cell properties or promote
cell differentiation.
Cytori
has also received six international patents. Specifically, Cytori has
received patents in Korea and Singapore related to the Company’s current
Celution System devices, patents in Korea and Australia related to the Company’s
StemSource Cell Bank, and patents in Singapore and South Africa related to the
use of adipose derived stem and regenerative cells for cardiovascular
therapy.
We are
also the exclusive, worldwide licensee of the Regents of the University of
California’s rights to U.S. Patent No. 6,777,231 (the ‘231 patent), U.S. Patent
No. 7,470,537 (the ‘537 patent), six issued international patents and 17 patent
applications pending worldwide. The ‘231 patent covers isolated
adipose derived stem cells that can differentiate into two or more of a variety
of cell types. The ‘231 patent has been construed to cover isolated
adipose derived stem cells in an environment substantially free of other
cellular materials found in adipose tissue. The ‘537 patent, issued
in December 2009, covers a population of stem cells and progenitor cells which
can be obtained from adipose tissue and which express certain combinations of
cell surface markers. Specifically, the ‘537 patent covers adipose
derived stem and progenitor cells that express certain combinations of Stro-1+,
CD29+, CD44+, CD71+, CD49d+, CD90+, CD105+, SH3, CD45-, CD31- and low or
undetectable levels of CD106. International patents related to
isolated cells from adipose tissue have issued in Australia, Korea, Russia,
Singapore and South Africa.
We cannot
assure that any of the pending patent applications will be issued, that we will
develop additional proprietary products that are patentable, that any patents
issued to us will provide us with competitive advantages or will not be
challenged by any third parties or that the patents of others will not prevent
the commercialization of products incorporating our technology. Furthermore, we
cannot assure that others will not independently develop similar products,
duplicate any of our products or design around our patents. U.S. patent
applications are not immediately made public, so we might be surprised by the
grant to someone else of a patent on a technology we are actively
using.
Patent
law outside the United States is uncertain and in many countries is currently
undergoing review and revisions. The laws of some countries may not protect our
proprietary rights to the same extent as the laws of the U.S. Third parties may
attempt to oppose the issuance of patents to us in foreign countries by
initiating opposition proceedings. Opposition proceedings against any of our
patent filings in a foreign country could have an adverse effect on our
corresponding patents that are issued or pending in the U.S. It may be necessary
or useful for us to participate in proceedings to determine the validity of our
patents or our competitors’ patents that have been issued in countries other
than the U.S. This could result in substantial costs, divert our efforts and
attention from other aspects of our business, and could have a material adverse
effect on our results of operations and financial condition. We currently have
pending patent applications in Europe, Australia, Japan, Canada, China, Korea,
and Singapore, among others.
Patent
litigation results in substantial costs to us and diversion of effort, and may
be necessary from time to time to enforce or confirm the ownership of any
patents issued or licensed to us or to determine the scope and validity of third
party proprietary rights. If our competitors claim technology also claimed by us
and prepare and file patent applications in the United States, we may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office or a foreign patent office to determine priority of invention,
which could result in substantial costs to and diversion of effort, even if the
eventual outcome is favorable to us.
In the
fourth quarter of 2004, the University of Pittsburgh filed a lawsuit naming all
of the inventors who had not assigned their ownership interest in U.S. Patent
6,777,231 to the University of Pittsburgh, seeking a determination that its
assignors, rather than the University of California’s assignors, are the true
inventors of Patent No. 6,777,231. If the University of Pittsburgh wins the
lawsuit, our license rights to this patent could be nullified or rendered
non-exclusive with respect to any third party that might license rights from the
University of Pittsburgh. 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. The trial
was concluded in January 2008 and on June 9, 2008 the Court signed its final
order which we received on June 12, 2008. The Court concluded that
the University of Pittsburgh’s assignors were the sole inventors of the ‘231
Patent. The Court’s decision terminated UC’s rights to the ‘231
Patent. Upon review of the Court’s findings, we believe that the
Court’s decision was in error and that work completed at the University of
California was critical to obtaining this patent. The UC assignors
are appealing the decision. If the UC assignors’ appeal of the
Court’s decision is successful, UC’s rights to the ‘231 Patent should be
reinstated.
9
We are
not named as a party to the lawsuit, but our president, Marc Hedrick, is one of
the inventors identified on the ‘231 Patent and therefore is a named individual
defendant. Due to our license obligations to UC relating to the ‘231
Patent and other UC patent applications, we have provided substantial financial
and other assistance to the defense of the lawsuit. Since our current products
and products under development do not practice the ‘231 Patent, our primary
ongoing business activities and product development pipeline should not be
affected by the Court’s decision. Although the ‘231 Patent is unrelated to our
current products and product pipeline, we believe that the ‘231 Patent and/or
the other technology licensed from UC may have long term potential to be useful
for future product developments, and so we have elected to support UC’s legal
efforts in the appeal of the Court’s final order. We have incurred
substantial legal costs as a result of the University of Pittsburgh lawsuit to
date, but we expect future costs will be minimal since the only remaining
expense will be related to the final argument of the appeal. As a
named inventor on the patent, Marc Hedrick is entitled to receive from the UC up
to 7% of royalty payments made by a licensee (us) to UC. This
agreement was in place prior to his employment with us.
In
addition to patent protection, we rely on unpatented trade secrets and
proprietary technological expertise. We cannot assure you that others will not
independently develop or otherwise acquire substantially equivalent techniques,
somehow gain access to our trade secrets and proprietary technological expertise
or disclose such trade secrets, or that we can ultimately protect our rights to
such unpatented trade secrets and proprietary technological expertise. We rely,
in part, on confidentiality agreements with our marketing partners, employees,
advisors, vendors and consultants to protect our trade secrets and proprietary
technological expertise. We cannot assure you that these agreements will not be
breached, that we will have adequate remedies for any breach or that our
unpatented trade secrets and proprietary technological expertise will not
otherwise become known or be independently discovered by
competitors.
Failure
to obtain or maintain patent protection, or protect trade secrets, for any
reason, third party claims against our patents, trade secrets or proprietary
rights, or our involvement in disputes over our patents, trade secrets or
proprietary rights, including involvement in litigation, could have a
substantial negative effect on the results of our operations, cash flows and
financial condition.
Government
Regulation
As newly
developed medical devices, our Celution® System family of products must receive
regulatory clearances or approvals from the European Union, the FDA and, from
other state governments prior to their sale. Our current and future
Celution® Systems are or will be subject to stringent government regulation in
the United States by the FDA under the Federal Food, Drug and Cosmetic
Act. The FDA regulates the design/development process, clinical
testing, manufacture, safety, labeling, sale, distribution, and promotion of
medical devices and drugs. Included among these regulations are
pre-market clearance and pre-market approval requirements, design control
requirements, and the Quality System Regulations/Good Manufacturing
Practices. Other statutory and regulatory requirements govern, among
other things, establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and post-market
reporting.
The
Celution® System family of products must also comply with the government
regulations of each individual country in which the products are to be
distributed and sold. These regulations vary in complexity and can be as
stringent, and on occasion even more stringent, than US FDA regulations.
International government regulations vary from country to country and region to
region. For example, regulations in some parts of the world only require product
registration while other regions / countries require a complex product approval
process. Due to the fact that there are new and emerging cell therapy and cell
banking regulations that have recently been drafted and/or implemented in
various countries around the world, the application and subsequent
implementation of these new and emerging regulations have little to no
precedence. Therefore, the level of complexity and stringency is not known and
may vary from country to country, creating greater uncertainty for the
international regulatory process. Furthermore, government regulations can change
with little to no notice and may result in up-regulation of our product(s),
thereby, creating a greater regulatory burden for our cell processing and cell
banking technology products.
The
regulatory process can be lengthy, expensive, and uncertain. Before
any new medical device may be introduced to the United States of America market,
the manufacturer generally must obtain FDA clearance or approval through either
the 510(k) pre-market notification process or the lengthier pre-market approval
application (“PMA”) process. It generally takes from three to 12
months from submission to obtain 510(k) pre-market clearance, although it may
take longer. Approval of a PMA could take four or more years from the
time the process is initiated. The 510(k) and PMA processes can be
expensive, uncertain, and lengthy, and there is no guarantee of ultimate
clearance or approval. We expect that some of our future products
under development as well as Olympus-Cytori’s will be subject to the lengthier
PMA process. Securing FDA clearances and approvals may require the
submission of extensive clinical data and supporting information to the FDA, and
10
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. In addition, modifications or
enhancements of products that could affect the safety or effectiveness or effect
a major change in the intended use of a device that was either cleared through
the 510(k) process or approved through the PMA process may require further FDA
review through new 510(k) or PMA submissions.
Under the
terms of our Joint Venture Agreements with Olympus we are the party with the
primary responsibility for obtaining regulatory approvals to sell the
Olympus-Cytori, Inc. devices. To date we have prepared and submitted
multiple regulatory filings in the United States and Europe related to
various cell processing systems under development, which notably resulted in
receipt of a CE Mark on the Celution® 800
System and 510(K) clearance in the United States for various related medical
technologies, including an autologous blood processing device.
We must
comply with extensive regulations from foreign jurisdictions regarding safety,
manufacturing processes and quality. These regulations,
including the requirements for marketing authorization, may differ from the
United States FDA regulatory scheme. Specifically, in regard to our
Thin Film product line in Japan (distributed by Senko), we have been seeking
marketing authorization from the Japanese Ministry of Health, Labour and Welfare
for the past four years, but have not obtained approvals yet.
Staff
As of
December 31, 2008, we had 126 employees, including part-time and full-time
employees. These employees are comprised of 20 employees in
manufacturing, 57 employees in research and development, 17 employees in sales
and marketing and 32 employees in management and finance and
administration. From time to time, we also employ independent
contractors to support our operations. Our employees are not
represented by any collective bargaining agreements and we have never
experienced an organized work stoppage. A breakout by segment is as
follows:
|
Regenerative
Cell Technology
|
Corporate
|
Total
|
||||
|
Manufacturing
|
20
|
—
|
20
|
|||
|
Research
& Development
|
57
|
—
|
57
|
|||
|
Sales
and Marketing
|
17
|
—
|
17
|
|||
|
General
& Administrative
|
—
|
32
|
32
|
|||
|
Total
|
94
|
32
|
126
|
Web
Site Access to SEC Filings
We
maintain an Internet website at www.cytoritx.com. Through this site, we make
available free of charge our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the U.S. Securities and Exchange Commission (SEC). In
addition, we publish on our website all reports filed under Section 16(a) of the
Securities Exchange Act by our directors, officers and 10% stockholders. These
materials are accessible via the Investor Relations section of our website
within the “SEC Filings” link. Some of the information is stored directly on our
website, while other information can be accessed by selecting the provided link
to the section on the SEC website, which contains filings for our company and
its insiders.
We file
electronically with the SEC our annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of the
Securities Exchange Act of 1934. The SEC maintains an Internet site
that contains reports, proxy information and information statements, and other
information regarding issuers that file electronically with the
SEC. The address of that website is http://www.sec.gov. The
materials are also available at the SEC’s
11
Public
Reference Room, located at 100 F Street, Washington, D.C. 20549. The
public may obtain information through the public reference room by calling the
SEC at 1-800-SEC-0330.
In
analyzing our company, you should consider carefully the following risk factors
together with all of the other information included in this annual report on
Form 10-K. Factors that could adversely affect our business,
operating results, and financial condition, as well as adversely affect the
value of an investment in our common stock, include those discussed
below, as well as those discussed above in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and elsewhere throughout this
annual report on Form 10-K.
We are
subject to the following significant risks, among others:
We need to raise more
cash in the very near
term
We have
almost always had negative cash flows from operations. Our business will
continue to result in a substantial requirement for research and development
expenses for several years, during which we may not be able to bring in
sufficient cash and/or revenues to offset these expenses.
We are required to raise capital from one or more
sources in the very near term to continue our operations at or close
to the levels currently conducted. We believe that without raising
additional capital soon from accessible sources of financing, as well
as an increase in capital from our operations, we will not otherwise have
adequate funding to complete the development, pre-clinical activities, clinical
trials and marketing efforts required to successfully bring our current and
future products to market. In addition, if we are not successful in
raising additional cash very soon we will be required to negotiate with
General Electric Capital Corporation (“GECC”) and Silicon Valley Bank (“SVB”) to
obtain an amendment to the cash liquidity requirements of the Loan and Security
Agreement dated October 14, 2008 (“Loan Agreement”). If we are not successful in
obtaining either the additional finding or cash liquidity relief then we will
likely very soon thereafter be in default under the Loan Agreement. If we are in
default or if our senior secured lenders otherwise assert that there has been an
event of default, they may seek to accelerate our senior secured loan and
exercise their rights and remedies under the Loan Agreement, including the sale
of our property and other assets. In such event, we may be forced to file
a bankruptcy case or have an involuntary bankruptcy case filed against us or
otherwise liquidate our assets. Any of these events would have a
substantial and material adverse effect on our business, financial condition,
results of operations, the value of our common stock and warrants and our
ability to raise capital. There is no guarantee that adequate funds will
be available when needed from additional debt or equity financing, arrangements
with distribution partners, increased results of operations, or from other
sources, or on terms attractive to us. Although we entered into a
$15,000,000 loan facility with GECC and SVB in October 2008, we could not
access the remaining $7,500,000 under that facility as we were not able satisfy
certain financial conditions on or before December 12, 2008. The inability
to obtain sufficient additional funds in the near term will at the least require
us to significantly delay, scale back, or eliminate some or all of our research
or product development, manufacturing operations, clinical or regulatory
activities having a substantial negative effect on our results of operations and
financial condition.
Continued turmoil in the
economy could harm our business
Negative
trends in the general economy, including trends resulting from an actual or
perceived recession, tightening credit markets, increased cost of commodities,
including oil, actual or threatened military action by the United States and
threats of terrorist attacks in the United States and abroad, could cause a
reduction of investment in and available funding for companies in certain
industries, including ours. Our ability to raise capital has been and
may continue to be adversely affected by current credit conditions and the
downturn in the financial markets and the global economy.
We have never been
profitable on an operational basis and expect significant operating losses for
the next few years
We have
incurred net operating losses in each year since we started
business. As our focus on the Celution® System
platform and development of therapeutic applications for its cellular output has
increased, losses have resulted primarily from expenses associated with research
and development activities and general and administrative
expenses. While we are implementing cost reduction measures where
possible, we nonetheless expect to continue operating in a loss position on a
consolidated basis and that recurring operating expenses will be at high levels
for the next several years, in order to perform clinical trials, additional
pre-clinical research, product development, and marketing. As a
result of our historic losses, we have historically been, and continue to be,
reliant on raising outside capital to fund our operations as discussed in
the prior risk factor.
12
Our business strategy is
high-risk
We are
focusing our resources and efforts primarily on development of the Celution® System
family of products and the therapeutic applications of its cellular output,
which requires extensive cash needs for research and development
activities. This is a high-risk strategy because there is no
assurance that our products will ever become commercially viable (commercial
risk), that we will prevent 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 successfully manage a company in a new area of
business (regenerative medicine) 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 stem and regenerative cells (scientific risk), or that
our cash resources will be adequate to develop our products until we
become 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 many
investors.
We must keep our joint
venture with Olympus operating smoothly
Our
business cannot succeed on the currently anticipated timelines unless our Joint
Venture collaboration with Olympus goes well. We have given
Olympus-Cytori, Inc. an exclusive license to manufacture future generation
Celution® System
devices. If Olympus-Cytori, Inc. does not successfully develop and
manufacture these devices, we may not be able to commercialize any device or any
therapeutic products successfully into the market. In addition,
future disruption or breakup of our relationship would be extremely costly to
our reputation, in addition to causing many serious practical
problems.
We and
Olympus must overcome contractual and cultural barriers. Our
relationship is formally measured by a set of complex contracts, which have not
yet been tested in practice. In addition, many aspects of the
relationship will be non-contractual and must be worked out between the parties
and the responsible individuals. The Joint Venture is intended to
have a long life, and it is difficult to maintain cooperative relationships over
a long period of time in the face of various kinds of
change. Cultural differences, including language barrier to some
degree, may affect the efficiency of the relationship.
Olympus-Cytori,
Inc. is 50% owned by us and 50% owned by Olympus. By contract, each
side must consent before any of a wide variety of important business actions can
occur. This situation possesses a risk of potentially time-consuming
and difficult negotiations which could at some point delay the Joint Venture
from pursuing its business strategies.
Olympus
is entitled to designate the Joint Venture's chief executive officer and a
majority of its board of directors, which means that day-to-day decisions which
are not subject to a contractual veto will essentially be controlled by
Olympus. In addition, Olympus-Cytori, Inc. may require more money
than its current capitalization in order to complete development and production
of 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 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; operating results and stock price can be volatile like many life
science companies
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 biotech and medical device
fields. Due to limited operating history and the transition from the
MacroPore biomaterials to the regenerative medicine business, comparisons of our
year-to-year operating results are not necessarily meaningful and the results
for any periods should not necessarily be relied upon as an indication of future
performance. All 2007 product revenues came from our spine and
orthopedics implant product line, which we sold in May 2007.
From time
to time, we have tried to update 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 biotechnology, medical device, and pharmaceutical
companies. Many current and potential competitors have substantially
greater financial, technological, research and development, marketing, and
personnel resources. There is no assurance that
13
our
competitors will not succeed in developing alternative 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 products obsolete
and non-competitive. In general, we may not be able to prevent others
from developing and marketing competitive products similar to ours or which
perform similar functions.
Competitors
may have greater experience in developing therapies or devices, conducting
clinical trials, obtaining regulatory clearances or approvals, manufacturing and
commercialization. It is possible that competitors may obtain patent
protection, approval, or clearance from the FDA or achieve commercialization
earlier than we can, 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 competitive with
ours.
We
compete against cell-based therapies derived from alternate sources, such as
bone marrow, umbilical cord blood and potentially embryos. Doctors
historically are slow to adopt new technologies like 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 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 reconstructive surgery, cell preservation, the
cardiovascular area and many other indications.
Most 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. With our Celution®
platform, we are pursuing new approaches for reconstructive surgery,
preservation of stem and regenerative cells for potential future use, therapies
for cardiovascular disease, gastrointestinal disorders and spine and orthopedic
conditions. There is no assurance that our development programs will
be successfully completed or that required regulatory clearances or approvals
will be obtained on a timely basis, if at all.
There is
no proven path for commercializing the Celution® System
platform in a way to earn a durable profit commensurate with the medical
benefit. Although we began to commercialize our reconstructive
surgery products in Europe and certain Asian markets, and our cell banking
products in Japan, Europe, and certain Asian markets in 2008, additional market
opportunities for our products and/or services are likely to be another two to
five years away.
Successful
development and market acceptance of our products is subject to developmental
risks, including failure of inventive imagination, ineffectiveness, lack of
safety, unreliability, failure to receive necessary regulatory clearances or
approvals, high commercial cost, preclusion or obsolescence resulting from third
parties’ proprietary rights or superior or equivalent products, competition from
copycat products, and general economic conditions affecting purchasing
patterns. There is no assurance that we or our partners will
successfully develop and commercialize our products, or that our competitors
will not develop competing technologies that are less expensive or
superior. Failure to successfully develop and market our products
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 have no control over
this timing and our previous expectations have not been met. 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.
14
We have limited
manufacturing experience
We have
limited experience in manufacturing the Celution® System
platform or its consumables at a commercial level. With respect to
our Joint Venture, 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 next generation Celution® device
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 have begun introduction of the Celution® 800 and
Celution®
900-based StemSource® Cell
Bank in 2008, we cannot assure that we will be able to manufacture
sufficient numbers of such products to meet the demand, or that we will be able
to overcome unforeseen manufacturing difficulties for these sophisticated
medical devices, as we await the availability of the Joint Venture next
generation Celution®
device.
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 devices
and consumables to meet market demand, and 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 next generation
Celution®
device.
We may not be able to
protect our proprietary rights
Our
success depends in part on whether we can maintain our existing patents, obtain
additional patents, maintain trade secret protection, and operate without
infringing on the proprietary rights of third parties.
Our
amended regenerative cell technology license agreement with the Regents of the
University of California, or the 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 in the United States District Court, or
the Court, naming all of the inventors who had not assigned their ownership
interest in Patent 6,777,231, which we refer to as the ‘231 Patent, to the
University of Pittsburgh, seeking a determination that its assignors, rather
than UC’s assignors, are the true inventors of ‘231 Patent. On June
12, 2008, we received the Court’s final order concluding that the University of
Pittsburgh’s assignors were the sole inventors of the ‘231 Patent, which
terminates UC’s rights to this patent unless the decision of the Court is
overturned. The UC assignors are appealing the Court’s decision and a
Notice of Appeal was filed on July 9, 2008. We are the exclusive,
worldwide licensee of the UC’s rights under this patent in humans, 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 UC assignors do not prevail on
appeal, our license rights to this patent will be permanently lost.
There can
be no assurance that any of our 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.
15
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. This is particularly relevant to us as
we currently conduct most of our clinical trials outside of the United
States. Third parties may attempt to oppose the issuance of patents
to us in foreign countries by initiating opposition proceedings. Opposition
proceedings against any of our patent filings in a foreign country could have an
adverse effect on our corresponding patents that are issued or pending in the
U.S. It may be necessary or useful for us to participate in proceedings to
determine the validity of our patents or our competitors’ patents that have been
issued in countries other than the U.S. This could result in substantial costs,
divert our efforts and attention from other aspects of our business, and could
have a material adverse effect on our results of operations and financial
condition. We currently have pending patent applications in Europe, Australia,
Japan, Canada, China, Korea, and Singapore, among others.
We and Olympus-Cytori, Inc.
are subject to intensive FDA regulation
As newly
developed medical devices, Celution® System
family of products must receive regulatory clearances or approvals from the FDA
and, in many instances, from non-U.S. and state governments prior to their
sale. The Celution® System
family of products is subject to stringent government regulation in the United
States by the FDA under the Federal Food, Drug and Cosmetic Act. The
FDA regulates the design/development process, clinical testing, manufacture,
safety, labeling, sale, distribution, and promotion of medical devices and
drugs. Included among these regulations are pre-market clearance and
pre-market approval requirements, design control requirements, and the Quality
System Regulations/Good Manufacturing Practices. Other statutory and
regulatory requirements govern, among other things, establishment registration
and inspection, medical device listing, prohibitions against misbranding and
adulteration, labeling and post-market reporting.
The
regulatory process can be lengthy, expensive, and uncertain. Before
any new medical device may be introduced to the United States of America market,
the manufacturer generally must obtain FDA clearance or approval through either
the 510(k) pre-market notification process or the lengthier pre-market approval
application, or PMA, process. It generally takes from three to 12
months from submission to obtain 510(k) pre-market clearance, although it may
take longer. Approval of a PMA could take four or more years from the
time the process is initiated. The 510(k) and PMA processes can be
expensive, uncertain, and lengthy, and there is no guarantee of ultimate
clearance or approval. We expect that some of our future products
under development as well as Olympus-Cytori’s will be subject to the lengthier
PMA process. Securing FDA clearances and approvals may require the
submission of extensive clinical data and supporting information to the FDA, and
there can be no guarantee of ultimate clearance or approval. Failure
to comply with applicable requirements can result in application integrity
proceedings, fines, recalls or seizures of products, injunctions, civil
penalties, total or partial suspensions of production, withdrawals of existing
product approvals or clearances, refusals to approve or clear new applications
or notifications, and criminal prosecution.
Medical
devices are also subject to post-market reporting requirements for deaths or
serious injuries when the device may have caused or contributed to the death or
serious injury, and for certain device malfunctions that would be likely to
cause or contribute to a death or serious injury if the malfunction were to
recur. If safety or effectiveness problems occur after the product
reaches the market, the FDA may take steps to prevent or limit further marketing
of the product. Additionally, the FDA actively enforces regulations
prohibiting marketing and promotion of devices for indications or uses that have
not been cleared or approved by the FDA.
16
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.
Changing, New and/or
Emerging Government Regulations
Government
regulations can change without notice. Given that fact that Cytori operates in
various international markets, our access to such markets could change with
little to no warning due to a change in government regulations that suddenly
up-regulate our product(s) and create greater regulatory burden for our cell
therapy and cell banking technology products.
Due to
the fact that there are new and emerging cell therapy and cell banking
regulations that have recently been drafted and/or implemented in various
countries around the world, the application and subsequent implementation of
these new and emerging regulations have little to no precedence. Therefore, the
level of complexity and stringency is not known and may vary from country to
country, creating greater uncertainty for the international regulatory
process.
Health Insurance
Reimbursement Risks
New and
emerging cell therapy and cell banking technologies, such as those provided by
the Celution® System
family of products, may have difficulty or encounter significant delays in
obtaining health care reimbursement in some or all countries around the world
due to the novelty of our cell therapy and cell banking technology
and subsequent lack of existing reimbursement schemes / pathways. Therefore, the
creation of new reimbursement pathways may be complex and lengthy with no
assurances that such reimbursements will be successful. The lack of health
insurance reimbursement or reduced or minimal reimbursement pricing may have a
significant impact on our ability to successfully sell our cell therapy and cell
banking technology product(s) into a county or region.
Market Acceptance of New
Technology
New and
emerging cell therapy and cell banking technologies, such as those provided by
the Celution® System
family of products, may have difficulty or encounter significant delays in
obtaining market acceptance in some or all countries around the world due to the
novelty of our cell therapy and cell banking technologies. Therefore, the market
adoption of our cell therapy and cell banking technologies may be slow and
lengthy with no assurances that significant market adoption will be successful.
The lack of market adoption or reduced or minimal market adoption of our cell
therapy and cell banking technologies may have a significant impact on our
ability to successfully sell our product(s) into a country or
region.
We and/or the Joint Venture
have to maintain quality assurance certification and manufacturing
approvals
The
manufacture of our Celution® System
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
17
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, or 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 after such occurrences that we
will be able to obtain additional necessary regulatory approvals or clearances
on a timely basis, if at all. Delays in receipt of or failure to
receive such approvals or clearances, or the loss of previously received
approvals or clearances could have a substantial negative effect on our results
of operations and financial condition.
We depend on a few key
officers
Our
performance is substantially dependent on the performance of our executive
officers and other key scientific staff, including Christopher J. Calhoun, our
Chief Executive Officer, and Marc Hedrick, MD, our President. We rely
upon them for strategic business decisions and guidance. We believe that our
future success in developing marketable products and achieving a competitive
position will depend in large part upon whether we can attract and retain
additional qualified management and scientific personnel. Competition
for such personnel is intense, and there can be no assurance that we will be
able to continue to attract and retain such personnel. The loss of
the services of one or more of our executive officers or key scientific staff or
the inability to attract and retain additional personnel and develop expertise
as needed could have a substantial negative effect on our results of operations
and financial condition.
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 Cytori, 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 Cytori 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 Cytori, and this
prevention or delay adversely affect the market price of our
shares.
We pay no
dividends
We have
never paid in the past, and currently do not intend to pay any cash dividends in
the foreseeable future.
Item 1B. Unresolved Staff Comments
Not
applicable.
Item 2. Properties
We
currently lease 91,000 square feet located at 3020 and 3030 Callan Road, San
Diego, California. The related rent agreement bears rent at a rate of
$1.15 per square foot, with annual increases of 3%. The lease term is
57 months,
18
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 provides for rent at a rate of
$4.38 per square foot, expiring on November 30, 2009. We also entered
into a new lease during the second quarter of 2008 for 900 square feet of office
space located at Via Gino Capponi n. 26, Florence, Italy. The lease
agreement provides for rent at a rate of $2.63 per square foot, expiring on
April 22, 2014. Additionally, we’ve entered into several lease
agreements for corporate housing for our employees on international
assignments. For these properties, we pay an aggregate of
approximately $144,000 in rent per month.
Item 3. Legal Proceedings
From time
to time, we have been involved in routine litigation incidental to the conduct
of our business. As of December 31, 2008, 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. On June 12, 2008, we
received the Court’s final order concluding that the University of Pittsburgh’s
assignors were the sole inventors of the ‘231 Patent. The UC assignors are
appealing the Court’s decision. Since our current products and
products under development do not practice the ‘231 Patent, our primary ongoing
business activities and product development pipeline should not be affected by
the Court’s decision. Although the ‘231 Patent is unrelated to our current
products and product pipeline, we believe that the ‘231 Patent and/or the other
technology licensed from UC may have long term potential to be useful for future
product developments, and so we have elected to support UC’s legal efforts in
the appeal of the Court’s final order.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
19
PART
II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Market
Prices
From
August 2000 (our initial public offering in Germany) through September 2007 our
common stock was quoted on the Frankfurt Stock Exchange under the symbol “XMPA”
(formerly XMP). In September 2007 our stock closed trading on the Frankfurt
Stock Exchange. Effective December 19, 2005, we began trading on the
Nasdaq Capital Market under the symbol “CYTX,” and have since transferred to the
Nasdaq Global Market effective February 14, 2006. The following table shows the
high and low sales prices for our common stock for the periods indicated, as
reported by the Nasdaq Stock Market. These prices do not include retail markups,
markdowns or commissions.
Nasdaq Stock Exchange
|
High
|
Low
|
||||||
|
2007
|
|||||||
|
Quarter
ended March 31, 2007
|
$
|
7.00
|
$
|
4.56
|
|||
|
Quarter
ended June 30, 2007
|
$
|
6.69
|
$
|
5.36
|
|||
|
Quarter
ended September 30, 2007
|
$
|
6.67
|
$
|
4.85
|
|||
|
Quarter
ended December 31, 2007
|
$
|
6.50
|
$
|
4.88
|
|||
|
2008
|
|||||||
|
Quarter
ended March 31, 2008
|
$
|
6.44
|
$
|
4.62
|
|||
|
Quarter
ended June 30, 2008
|
$
|
8.56
|
$
|
4.75
|
|||
|
Quarter
ended September 30, 2008
|
$
|
7.97
|
$
|
5.00
|
|||
|
Quarter
ended December 31, 2008
|
$
|
5.65
|
$
|
1.76
|
|||
All of
our outstanding shares have been deposited with DTCC since December 9,
2005.
As of
February 28, 2009, we had approximately 22 registered holders of our common
stock. In addition, we are aware that there are at least 4,480
beneficial holders of our common stock. Because many of our shares
are held by brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of individual stockholders represented by
these record holders.
Dividends
We have
never declared or paid any dividends and do not anticipate paying any in the
foreseeable future.
Equity
Compensation Plan Information
|
Plan Category
|
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price
of outstanding options, warrants
and rights
|
Number
of securities remaining
available
for future issuance under equity compensation
plans (excluding securities reflected
in column(a))
|
|||||
|
(a)
|
(b)
|
(c)
|
||||||
|
Equity
compensation plans approved by security holders (1)
|
3,810,395
|
$
|
4.65
|
—
|
||||
|
Equity
compensation plans not approved by security holders (2)
|
2,118,312
|
$
|
5.68
|
2,190,450
|
||||
|
Total
|
5,928,707
|
$
|
5.02
|
2,190,450
|
||||
________________________________________
|
(1)
|
The
1997 Stock Option and Stock Purchase Plan expired on October 22,
2007.
|
|
(2)
|
The
maximum number of shares shall be cumulatively increased on the first
January 1 after the Effective Date, August 24, 2004, and each January 1
thereafter for 9 more years, by a number of shares equal to the lesser of
(a) 2% of the number of shares issued and outstanding on the immediately
preceding December 31, and (b) a number of shares set by the
Board.
|
20
Comparative
Stock Performance Graph
The
following graph shows how an initial investment of $100 in our common stock
would have compared to an equal investment in the Nasdaq Composite Index and the
Amex Biotechnology Index during the period from December 31, 2003, through
December 31, 2008. The performance shown is not necessarily indicative of future
price performance.
Item 6. Selected Financial Data
The
selected data presented below under the captions “Statements of Operations
Data,” “Statements of Cash Flows Data” and “Balance Sheet Data” for, and as of
the end of, each of the years in the five-year period ended December 31, 2008,
are derived from, and should be read in conjunction with, our audited
consolidated financial statements. The consolidated balance sheets as of
December 31, 2008 and 2007, and the related consolidated statements of
operations and comprehensive loss, stockholders’ equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 2008,
which have been audited by KPMG LLP, an independent registered public accounting
firm, and their report thereon, are included elsewhere in this annual report.
The consolidated balance sheets as of December 31, 2006, 2005 and 2004, and the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity (deficit), and cash flows for the years ended December 31,
2005 and 2004, which were also audited by KPMG LLP, are included with our annual
reports previously filed.
21
The
information contained in this table should also be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the financial statements and related notes thereto included
elsewhere in this report (in thousands except share and per share
data):
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||||||
|
Product
revenues:
|
||||||||||||||||||||
|
Sales
to related party
|
$ | 28 | $ | 792 | $ | 1,451 | $ | 5,634 | $ | 4,085 | ||||||||||
|
Sales
to third parties
|
4,500 | — | — | — | 2,237 | |||||||||||||||
| 4,528 | 792 | 1,451 | 5,634 | 6,322 | ||||||||||||||||
|
Cost
of product revenues
|
1,854 | 422 | 1,634 | 3,154 | 3,384 | |||||||||||||||
|
Gross
profit (loss)
|
2,674 | 370 | (183 | ) | 2,480 | 2,938 | ||||||||||||||
|
Development
revenues:
|
||||||||||||||||||||
|
Development,
related party
|
774 | 5,168 | 6,057 | 51 | 158 | |||||||||||||||
|
Other,
related party
|
1,500 | — | — | — | — | |||||||||||||||
|
Research
grants and other
|
51 | 89 | 419 | 320 | 338 | |||||||||||||||
| 2,325 | 5,257 | 6,476 | 371 | 496 | ||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
17,371 | 20,020 | 21,977 | 15,450 | 10,384 | |||||||||||||||
|
Sales
and marketing
|
4,602 | 2,673 | 2,055 | 1,547 | 2,413 | |||||||||||||||
|
General
and administrative
|
11,727 | 14,184 | 12,547 | 10,208 | 6,551 | |||||||||||||||
|
Change
in fair value of option liabilities
|
1,060 | 100 | (4,431 | ) | 3,645 | — | ||||||||||||||
|
Restructuring
charge
|
— | — | — | — | 107 | |||||||||||||||
|
Equipment
impairment charge
|
— | — | — | — | 42 | |||||||||||||||
|
Total
operating expenses
|
34,760 | 36,977 | 32,148 | 30,850 | 19,497 | |||||||||||||||
|
Total
operating loss
|
(29,761 | ) | (31,350 | ) | (25,855 | ) | (27,999 | ) | (16,063 | ) | ||||||||||
|
Other
income (expense):
|
||||||||||||||||||||
|
Gain
on sale of assets
|
— | 1,858 | — | 5,526 | — | |||||||||||||||
|
Gain
on the sale of assets, related party
|
— | — | — | — | 13,883 | |||||||||||||||
|
Interest
income
|
230 | 1,028 | 708 | 299 | 252 | |||||||||||||||
|
Interest
expense
|
(420 | ) | (155 | ) | (199 | ) | (137 | ) | (177 | ) | ||||||||||
|
Other
income (expense)
|
(40 | ) | (46 | ) | (27 | ) | (55 | ) | 15 | |||||||||||
|
Equity
loss in investments
|
(45 | ) | (7 | ) | (74 | ) | (4,172 | ) | — | |||||||||||
|
Net
loss
|
$ | (30,036 | ) | $ | (28,672 | ) | $ | (25,447 | ) | $ | (26,538 | ) | $ | (2,090 | ) | |||||
|
Basic
and diluted net loss per share
|
$ | (1.12 | ) | $ | (1.25 | ) | $ | (1.53 | ) | $ | (1.80 | ) | $ | (0.15 | ) | |||||
|
Basic
and diluted weighted average common shares
|
26,882,431 | 22,889,250 | 16,603,550 | 14,704,281 | 13,932,390 | |||||||||||||||
|
Statements
of Cash Flows Data:
|
||||||||||||||||||||
|
Net
cash used in operating activities
|
$ | (33,389 | ) | $ | (29,995 | ) | $ | (16,483 | ) | $ | (1,101 | ) | $ | (12,574 | ) | |||||
|
Net
cash provided by investing activities
|
(393 | ) | 5,982 | 591 | 911 | 13,425 | ||||||||||||||
|
Net
cash provided by (used in) financing activities
|
34,928 | 26,576 | 16,787 | 5,357 | (831 | ) | ||||||||||||||
|
Net
increase (decrease) in cash
|
1,146 | 2,563 | 895 | 5,167 | 20 | |||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
11,465 | 8,902 | 8,007 | 2,840 | 2,820 | |||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 12,611 | $ | 11,465 | $ | 8,902 | $ | 8,007 | $ | 2,840 | ||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$ | 12,611 | $ | 11,465 | $ | 12,878 | $ | 15,845 | $ | 13,419 | ||||||||||
|
Working
capital
|
10,090 | 4,168 | 7,392 | 10,459 | 12,458 | |||||||||||||||
|
Total
assets
|
25,609 | 21,507 | 24,868 | 28,166 | 25,470 | |||||||||||||||
|
Deferred
revenues, related party
|
16,474 | 18,748 | 23,906 | 17,311 | — | |||||||||||||||
|
Deferred
revenues
|
2,445 | 2,379 | 2,389 | 2,541 | 2,592 | |||||||||||||||
|
Option
liabilities
|
2,060 | 1,000 | 900 | 5,331 | — | |||||||||||||||
|
Deferred
gain on sale of assets
|
— | — | — | — | 5,650 | |||||||||||||||
|
Long-term
deferred rent
|
168 | 473 | 741 | 573 | 80 | |||||||||||||||
|
Long-term
obligations, less current portion
|
5,044 | 237 | 1,159 | 1,558 | 1,128 | |||||||||||||||
|
Total
stockholders’ equity (deficit)
|
$ | (7,717 | ) | $ | (9,400 | ) | $ | (10,813 | ) | $ | (6,229 | ) | $ | 12,833 | ||||||
22
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
report contains certain statements that may be deemed “forward-looking
statements” within the meaning of United States 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 and similar expressions or future conditional verbs such a
will, should, would, could 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.
These
statements include, without limitation, statements about our anticipated
expenditures, including those related to clinical research studies, and general
and administrative expenses; the potential size of the market for our
products, future development and/or expansion of our products
and therapies in our markets, ability to generate product
revenues or effectively manage our gross profit margins; our ability to obtain
regulatory clearance; expectations as to our future performance; the future
impact and ongoing appeal with respect to the ‘231 patent
litigation, the “Liquidity and Capital Resources” section of this
report, including our need for additional financing and the availability
thereof; and the potential enhancement of our cash position through development,
marketing, and licensing arrangements. Our actual results will
likely differ, perhaps materially, from those anticipated in these
forward-looking statements as a result of various factors, including: our need
and ability to raise additional cash, our joint ventures, risks associated
with laws or regulatory requirements applicable to us, market
conditions, product performance, unforeseen litigation, and competition within
the regenerative medicine field, to name a few. The forward-looking
statements included in this report are subject to a number of additional
material risks and uncertainties, including but not limited to the risks
described our filings with the Securities and Exchange Commission and under the
“Risk Factors” section in Part I above.
We encourage you to read our Risk
Factors 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.
Liquidity
We
incurred losses of $30,036,000, $28,672,000 and $25,447,000 for the years ended
December 31, 2008, 2007, and 2006 respectively. We have an
accumulated deficit of $162,168,000 as of December 31, 2008. Additionally,
we have used net cash of $33,389,000, $29,995,000 and $16,483,000 to fund our
operating activities for years ended December 31, 2008, 2007, and 2006,
respectively. To date these
operating losses have been funded primarily from outside sources of invested
capital.
During
2008, we initiated our commercialization activities while simultaneously
pursuing available financing sources to support operations and
growth. We have had, and continue to have, an ongoing need to raise
additional cash from outside sources to fund our operations. However,
our ability to raise capital has been adversely affected by current credit
conditions and the downturn in the financial markets and the global
economy. Accordingly, the combination of these facts raises
substantial doubt as to the Company’s ability to continue as a going
concern. The accompanying consolidated financial statements and
financial statement schedule have been prepared assuming that the Company will
continue as a going concern. If we are unsuccessful in our efforts to
raise outside capital in the near term, we will be required to significantly
reduce our research, development, and administrative operations, including
reduction of our employee base, in order to offset the lack of available
funding.
We are
pursuing financing opportunities in both the private and public debt and equity
markets as well as through strategic corporate partnerships. We have an
established history of raising capital through these platforms, and we are
currently involved in negotiations with multiple parties. Our efforts in
2008 to raise capital have taken longer than we initially anticipated. We
were however, successful in August 2008, and raised approximately $17,000,000 in
gross proceeds from a private placement of 2,825,517 unregistered shares of
common stock and 1,412,758 common stock warrants (with an original exercise
price of $8.50 per share) to a syndicate of investors including Olympus
Corporation, who acquired 1,000,000 unregistered shares and 500,000 common stock
warrants in exchange for $6,000,000 of the total proceeds raised. In
October 2008, we entered into a secured Loan Agreement with General Electric
Capital Corporation and Silicon Valley Bank (“Lenders”) to borrow up to
$15,000,000. An initial term loan of $7,500,000, less fees and
expenses, was funded on
23
October
14, 2008. We could not access the remaining $7,500,000 under this
facility as we were not able to meet certain financial prerequisites that had
been established by the Lenders.
We expect
to continue to utilize our cash and cash equivalents to fund operations through
at least the next few months, subject to minimum cash and cash liquidity
requirements of the Loan and Security Agreement with the Lenders, which requires
that we maintain at least three months of cash on hand to avoid an event of
default under the Loan and Security Agreement. We continue to seek
additional cash through product revenues, strategic collaborations, and future
sales of equity or debt securities. Although there can be no assurance
given, we hope to successfully complete one or more additional financing
transactions and corporate partnerships in the near-term. Without this
additional capital, current working capital and cash generated from sales and
containment of operating costs will not provide adequate funding for research,
sales and marketing efforts, clinical and preclinical trials, and product
development activities at their current levels. If such efforts are not
successful, we will need to significantly reduce or curtail our research and
development and other operations and this could negatively affect our ability to
achieve corporate growth goals. Specifically, we have prepared an
operating plan (plan) that calls for us to reduce operations to focus almost
entirely on the supply of current products to existing or new distribution
channels. This plan would result in reductions to our current sales and
marketing headcount (total headcount was 17 at December 31, 2008) as well as a
reduction in manufacturing headcount (total headcount of 20 at December 31,
2008). In addition, as part of the plan, there would be minimal
expenditures for ongoing scientific research, product development or clinical
research. This impacts research and development headcount (total headcount
was 57 at December 31, 2008), external subcontractor expenditures, capital
outlay and general and administrative expenditures related to the supervision of
such activities. In parallel, we would significantly reduce
administrative staff (the general and administrative headcount was 32 at
December 31, 2008) and salaries consistent with the overall reduction in scope
of operations. In aggregate, such reductions could result in eliminations
of roles for the majority of the Company’s current staff and the deferral or
elimination of all ongoing development projects until such time that cash
resources were available from operations or outside sources to re-establish
development and growth plans. Management is currently reviewing
contractual obligations related to the pre-clinical and clinical commitments
along with minimum purchase requirements to include deferral of such commitments
as part of this plan. While management is actively pursuing its near
term financial and strategic alternatives it is also, in parallel, continuing to
evaluate the timing of implementation of the alternative operating plan and the
initiation of the identified reductions. Based on the impact of the reductions
described above and a full year impact of other actions taken by management in
Q3 and Q4 of 2008, the cash operating requirements in the near term would be
reduced to a range of $1.0 to $1.2 million per month.
Overview
Cytori
Therapeutics, Inc. manufactures, develops, and internationally commercializes
innovative medical technologies, which allow physicians to practice regenerative
medicine. The Company’s main product is the Celution® System, which
is the first and only broadly available device that provides clinical grade
autologous stem and regenerative cells in real-time. This device processes a
patient’s own stem and regenerative cells at the bedside so their cells may be
redelivered during the same surgical procedure. Our commercialization model is
based on the sale of the Celution® System and generating recurring revenue
thereafter from the sale of single-use consumables used in every patient
procedure and on sales of related instrumentation and ancillary
products.
Commercial
activities are currently focused on marketing the Celution® cell processing
system and related family of products across three areas. The first is cosmetic
and reconstructive surgery in Europe and Asia-Pacific. The second is to fulfill
the demand among physicians in Europe and Asia Pacific for access to clinical
grade stem and regenerative cells. The third is to market the Celution-based
StemSource® Cell Bank worldwide to hospitals and tissue banks so they can in
turn offer patients the opportunity to cyropreserve their own adipose-derive
stem and regenerative cells.
The more
therapeutic applications that are developed for the Celution® System
and its cellular output, the more opportunities we will have to offer the
Celution® System
and related consumable sets to hospitals, clinics, and physicians. For this
reason, we are developing and allowing others to develop additional applications
for the Celution® System,
which include cardiovascular disease, for which two human clinical trials are
underway, renal failure, orthopedic damage, gastrointestinal disorders, and
pelvic health conditions, among others.
In the
first quarter of 2008, we launched the first commercial generation Celution® System
product platform. Throughout the year and into 2009, we broadened our
commercialization efforts and expanded our network of distribution partners.
This included the opening of a sales and training center in Europe designed to
educate physicians on the technology and its benefits, as well as promote sales
within the region. To support future sales efforts, we initiated a 70 patient
post-marketing study in Europe last year, with the goal of expanding claims and
seeking reimbursement for the use of the
24
Celution® System
in post-partial mastectomy defect reconstruction. Final results from this study
are expected to be reported in 2010.
In
partnership with Olympus Corporation, we made significant progress during 2008
toward finalizing the second commercial generation Celution
System. Currently, we manufacture the first commercial generation
Celution® System
and consumables at our corporate headquarters and provide all servicing for the
device through our regional offices.
Also
during 2008, we were granted several U.S. and International patents and patent
allowances, which cover various aspects of the Celution® System
technology and applications of the Celution® System
output. These developments further protect our proprietary rights and
competitive position. Lastly, during 2008 we continued enrollment of our
European cardiovascular disease clinical trials, which represent our most
advanced product pipeline application. Enrollment for both studies should be
completed in 2009 with results available as early as 2010.
Our
strategy for the future, in this current financial environment with a new
product that has multiple potential applications, is to focus the majority of
our financial resources on activities that will promote immediate sales of the
Celution System. In Europe and Asia Pacific, this entails continued investment
in the RESTORE II study to support reimbursement and includes maintaining our
level of investment into sales and marketing activities. In the United States,
we are continuing to seek regulatory and marketing approval of the Celution® 700
System family of products. We expect to finalize our U.S. regulatory and
clinical development strategy in 2009.
The
market for clinical grade cells requires substantially fewer resources as the
majority of the commercialization efforts are assumed by our distribution
partners. This allows us to further expand the installed-base of Celution®
Systems. We expect the breadth of these applications for which the device is
used in this market will grow significantly as physicians continue to adopt cell
based regenerative medicine into their treatment strategies based on the
availability of safe clinical grade cells at the point of care.
The
StemSource Cell Bank business is being offered through our commercialization
partner Green Hospital Supply in Japan, Korea, Taiwan and Thailand, and is being
offered by GE Healthcare in select European countries. We believe growth in the
cell bank business in 2009 within Asia Pacific will be driven by hospitals where
a device is already installed as part of an investigator-initiated study, and
where physicians are already familiar with the use of the system and its
benefits. The commercialization activities are performed predominantly by our
distributors, however we continue to serve in a consulting capacity to assist as
needed in sales and service.
Coinciding
with our increased investment in commercial activities is a planned reduction in
preclinical research and cardiovascular disease development expenses. Because we
have passed the feasibility stage and are now manufacturing commercial products,
we have less reliance going forward on basic and preclinical development
activities. Preclinical research will continue at a base level required to
fulfill demands for potential partnerships, expanding intellectual property, and
supporting commercial activities. For cardiovascular disease, we plan to
complete enrollment in these studies, report data in late 2009 and/or early 2010
at which point we will either seek a co-development partner or pursue further
development in a measured way until such time as we have the adequate financial
resources to invest in pivotal European studies and U.S. clinical
trials.
Cytori’s
business objectives for 2009 and beyond include the following:
|
·
|
Exceed
global Celution® System and StemSource sales target of $10 million in
2009
|
|
·
|
Expand
global distribution network in Europe and Asia-Pacific and related sales
impact
|
|
·
|
Expand
Celution® System product claims to include general and plastic surgery
procedures
|
|
·
|
Expand
Celution® System reimbursement in
Europe
|
|
·
|
Substantial
reduction in total operating
expenses
|
|
·
|
Complete
enrollment of RESTORE II in the second quarter of
2009
|
|
·
|
Report
preliminary RESTORE II results as early as the fourth quarter of 2009 on
patients who have been followed for six months at the time of
analysis
|
|
·
|
Introduce
complementary cosmetic and reconstructive surgery products in the U.S. in
the third quarter of 2009
|
|
·
|
Finalize
U.S. regulatory and clinical development and regulatory
strategy
|
|
·
|
Complete
enrollment in cardiovascular studies (PRECISE & APOLLO) and report
results in 2010
|
25
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
platform.
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 platform and certain related intellectual property, to the Joint
Venture for use in future generation devices. These devices
will process and purify adult stem and regenerative cells residing in
adipose (fat) tissue for various therapeutic clinical
applications. In exchange for this license, we received a 50%
interest in the Joint Venture, as well as an initial $11,000,000 payment
from the Joint Venture; the source of this payment was the $30,000,000
contributed to the Joint Venture by Olympus. Moreover, upon
receipt of a CE mark for the first generation Celution®
System platform in January 2006, we received an additional $11,000,000
development milestone payment from the Joint
Venture.
|
Put/Calls
and Guarantees
The
Shareholders’ Agreement between Cytori and Olympus provides that in certain
specified circumstances of insolvency or if we experience a change in control,
Olympus will have the rights to (i) repurchase our interests in the Joint
Venture at the fair value of such interests or (ii) sell its own interests in
the Joint Venture to Cytori at the higher of (a) $22,000,000 or (b) the Put’s
fair value.
As of
November 4, 2005, the fair value of the Put was determined to be
$1,500,000. At December 31, 2008 and 2007, the fair value of the Put
was $2,060,000 and $1,000,000, 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 fair value of the Put has been recorded as
a long-term liability on the balance sheet in the caption option
liability.
The
following assumptions were employed in estimating the value of the
Put:
|
December
31, 2008
|
December
31, 2007
|
November
4, 2005
|
||||||||||
|
Expected
volatility of Cytori
|
68.00 | % | 60.00 | % | 63.20 | % | ||||||
|
Expected
volatility of the Joint Venture
|
68.00 | % | 60.00 | % | 69.10 | % | ||||||
|
Bankruptcy
recovery rate for Cytori
|
21.00 | % | 21.00 | % | 21.00 | % | ||||||
|
Bankruptcy
threshold for Cytori
|
$ | 16,740,000 | $ | 9,324,000 | $ | 10,780,000 | ||||||
|
Probability
of a change of control event for Cytori
|
2.80 | % | 2.17 | % | 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
|
2.25 | % | 4.04 | % | 4.66 | % | ||||||
The Put
has no expiration date. Accordingly, we will continue to recognize a
liability for the Put and mark it to market each quarter until it is exercised
or until the arrangements with Olympus are amended.
The Joint
Venture 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 later generation Celution® System is
developed and approved by regulatory agencies, the Joint Venture would sell such
systems exclusively to us at a formula-based transfer price; we have retained
marketing rights to the second generation devices for all therapeutic
applications of adipose stem and regenerative cells.
We have
worked closely with Olympus’ team of scientists and engineers to design the
future generations of the Celution® System
so that it will contain certain product enhancements and that can be
manufactured in a streamlined manner.
In August
2007, we entered into a License and Royalty Agreement with the Joint Venture
which provides us the ability to commercially launch the Celution® System
platform earlier than we could have otherwise done so under the terms of the
26
Joint
Venture Agreements. The Royalty Agreement allows for the sale of the
Cytori-developed Celution® System
platform, including the Celution® 800/CRS
and Celution® 900/MB,
until such time as the Joint Venture’s products are commercially
available for the same market served by the Cytori platform, 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 stem and 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
could conduct market research and pilot clinical studies in collaboration with
us for the therapeutic area up to December 31, 2008 when this exclusive right
expired. Accordingly, on December 31, 2008, we recognized $1,500,000
as other development revenue and reduced our deferred revenues, related party
balance for the same amount.
On
February 8, 2008, we agreed to sell 2,000,000 shares of unregistered common
stock to Green Hospital Supply, Inc. for $12,000,000 cash, or $6.00 per share,
in a private stock placement. On February 29, 2008, we closed the
first half of the private placement with Green Hospital Supply, Inc. and
received $6,000,000. We closed the second half of the private
placement on April 30, 2008 and received the second payment of
$6,000,000.
In August
2008, we received an additional $6,000,000 from Olympus in a private placement
of 1,000,000 unregistered shares of our common stock and a warrant to purchase
an additional 500,000 shares of our common stock at an original exercise price
of $8.50 per share. The purchase price was $6.00 per unit (with each
unit consisting of one share and 50% warrant coverage). The warrant
is exercisable anytime after February 11, 2009 and will expire on August 11,
2013.
MacroPore
Biosurgery
Spine and orthopedic
products
By
selling substantially all of our spine and orthopedic surgical implant business
to Kensey Nash Corporation in the second quarter of 2007, we have completed our
transition away from the bioresorbable product line for which we were originally
founded.
Thin Film Japan Distribution
Agreement
In 2004,
we sold the majority of our Thin Film business to MAST Biosurgery
AG. 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 the field of regenerative medicine,
non-exclusive on a perpetual basis.
In the
third quarter of 2004, we entered into a Distribution Agreement with Senko
Medical Trading Company. 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.” Commercialization will occur when
one or more Thin Film product registrations are completed with the Japanese
Ministry of Health, Labour and Welfare, or MHLW. Following
commercialization, the Distribution Agreement has a duration of five years and
is renewable for an additional five years after reaching mutually agreed minimum
purchase guarantees.
We
received a $1,500,000 upfront license fee from Senko. We have
recorded the $1,500,000 received as a component of deferred revenues in the
accompanying 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 did not recognize
any development
27
revenues
with respect to Senko during the year ended December 31, 2008. To
date we have recognized a total of $371,000 in development revenues ($10,000,
$152,000, $51,000, and $158,000 for the years ended December 31, 2007, 2006,
2005, and 2004, respectively) related to this agreement.
Capital
Requirements and Liquidity
Research
and development for the Celution® System product platform and clinical
applications of adipose-derived stem and regenerative cell therapies has been
and will continue to be very costly. As a result, we expect to
continue incurring losses in the near future. We will focus our efforts on
substantially reducing research and development expenses, pre-clinical research,
and general and administrative activities throughout 2009 as we conclude our
clinical trials ( initiated in 2007) and complete the transition to a focus on
manufacturing and sale of our Celution® 800/CRS for reconstructive
surgery.
Over 99%
of our 2008 research and development expenses of $17,371,000 were related to our
regenerative cell technology business, and the majority of those were related to
optimizing the Celution® 800/CRS
for reconstructive surgery research and development of cardiovascular disease
applications. We believe research and development expenses will be
substantially reduced in 2009 (See additional discussion of liquidity at the
beginning of Management Discussion and Analysis). We plan to fund
this anticipated research and development from: existing cash and short-term
investments; payments, if any, related to potential Celution® System platform
commercialization partnerships; payments, if any, related to potential
biomaterial divestitures; potential research grants; and sale of common stock
through potential future financings. (See additional discussion regarding
Liquidity at the beginning of Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations.)
As of
December 31, 2008, we had cash and cash equivalents on hand of $12,611,000 and
an accumulated deficit of $162,168,000.
Results
of Operations
Product
revenues
Product
revenues in 2008 relate to our regenerative cell technology segment and
consisted of revenues from our Celution® System
products and Celution®
StemSource® Cell
Bank. 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 years ended December 31, 2008,
2007, and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
Celution®
Products
|
||||||||||||
|
Related
party
|
$ | 28,000 | $ | — | $ | — | ||||||
|
Third
party
|
4,500,000 | — | — | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Spine
and orthopedic products
|
— | $ | 792,000 | $ | 1,451,000 | |||||||
|
Total
product revenues
|
$ | 4,528,000 | $ | 792,000 | $ | 1,451,000 | ||||||
|
%
attributable to Medtronic
|
— | 100 | % | 100 | % | |||||||
|
%
attributable to Olympus
|
0.6 | % | — | — | ||||||||
Beginning
in March of 2008, we began sales and shipments of our Celution® 800/CRS
System to the European and Asia-Pacific reconstructive surgery
markets. Assuming all other applicable revenue recognition criteria
have been met, revenue for these product sales will be recognized upon delivery
to the customer, as all risks and rewards of ownership have been substantively
transferred to the customer at that point. For product sales to
customers who arrange for and manage all aspects of the shipping process, we
recognize revenue upon shipment from our facilities. For product
sales that include a combination of equipment, services, or other multiple
deliverables that will be provided in the future, we defer an estimate of the
fair value of those future deliverables from product revenue until such
deliverables have been provided or earned. Shipping and handling
costs that are billed to our customers are classified as revenue. As
of December 31, 2008 we had $66,000 of shipped product orders that did not reach
final destination until 2009. Revenue for these items is expected to
be
28
recognized
in the quarter ending March 31, 2009. Additionally, we deferred
$67,000 as an estimate of the fair value of future deliverables from product
revenue and will recognize when such deliverables have been provided or
earned.
Spine and
orthopedic product revenues represent sales of bioresorbable implants used in
spine and orthopedic surgical procedures. We sold substantially all
of this line of business to Kensey Nash in May 2007.
The future: We
expect to continue to generate regenerative cell technology product revenues
during 2009 from Celution® 800/CRS and consumable sales in Europe and we expect
to generate product revenues from StemSource® Cell Bank sales in Japan through
our distribution partner Green Hospital Supply, Inc. 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, pending regulatory approval.
Cost of product
revenues
Cost of
product revenues for 2008 relates to sales of Celution® System
products and a StemSource® Cell
Bank in our regenerative cell technology segment and includes material,
manufacturing labor, and overhead costs. Cost of product revenues for
2007 and 2006 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 years ended December
31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
Cost
of product revenues
|
$ | 1,811,000 | $ | — | $ | — | ||||||
|
Share-based
compensation
|
43,000 | — | — | |||||||||
|
Total
regenerative cell technology
|
1,854,000 | — | — | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Cost
of product revenues
|
— | 403,000 | 1,472,000 | |||||||||
|
Share-based
compensation
|
— | — | 88,000 | |||||||||
|
Share-based
compensation
|
— | 19,000 | 74,000 | |||||||||
|
Total
MacroPore Biosurgery
|
— | — | — | |||||||||
| 422,000 | 1,634,000 | |||||||||||
|
Total
cost of product revenues
|
$ | 1,854,000 | $ | 422,000 | $ | 1,634,000 | ||||||
|
Total
cost of product revenues as % of product revenues
|
40.9 | % | 53.3 | % | 112.6 | % | ||||||
Regenerative
cell technology:
|
·
|
The
increase in cost of product revenues for the year ended December 31, 2008
as compared to the same periods in 2007 and 2006 was due to Celution®
System product sales which commenced in 2008. Cost of sales
included an economic benefit of approximately $347,000 related to material
cost and labor/overhead previously expensed as research and development
prior to commercialization date of March 1, 2008 that was sold during the
year ended December 31, 2008. Cost of product revenues as a
percentage of product revenues was 40.9% for the year ended December 31,
2008.
|
|
·
|
Cost
of product revenues included approximately $43,000 of share-based
compensation expense for the year ended December 31,
2008. There was no share-based compensation expense for the
years ended December 31, 2007 and 2006. For further details,
see share-based compensation discussion
below.
|
MacroPore
Biosurgery:
|
·
|
The
decrease in cost of product revenues for the year ended December 31, 2008
as compared to the same period in 2007 was due to our sale of
substantially all of the spine and orthopedic product line in May
2007. The decrease in cost of product revenues for the year
ended December 31, 2007 as compared to the same period in 2006 was due to
a decrease in production and sales in anticipation of the product line
sale in May 2007.
|
29
|
·
|
Cost
of product revenues includes approximately $0, $19,000 and $74,000 of
stock-based compensation expense for the years ended December 31, 2008,
2007 and 2006, respectively. For further details, see
stock-based compensation discussion
below.
|
|
·
|
During
the years ended December 31, 2008, 2007 and 2006, we recorded a provision
of $0, $0, and $88,000, respectively, related to excess and slow-moving
inventory. In 2006, this inventory was produced in anticipation of
stocking orders from Medtronic which did not
materialize.
|
The future. We
expect to see a nominal decrease of gross profit margin for the regenerative
cell technology segment as the balance of production inventory on hand that was
previously expensed as research and development cost decreases. We expect to
incur costs related to our MacroPore products if and when commercialization is
achieved for our Japan Thin Film product line.
Development
revenues
The
following table summarizes the components of our development revenues for the
years ended December 31, 2008, 2007, and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
Milestone
revenue (Olympus)
|
$ | 774,000 | $ | 5,158,000 | $ | 5,905,000 | ||||||
|
Other
revenue (Olympus)
|
1,500,000 | — | — | |||||||||
|
Research
grant (NIH)
|
— | — | 310,000 | |||||||||
|
Regenerative
cell storage services
|
4,000 | 4,000 | 7,000 | |||||||||
|
Other
|
47,000 | 85,000 | 102,000 | |||||||||
|
Total
regenerative cell technology
|
2,325,000 | 5,247,000 | 6,324,000 | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Development
(Senko)
|
— | 10,000 | 152,000 | |||||||||
|
Total
development revenues
|
$ | 2,325,000 | $ | 5,257,000 | $ | 6,476,000 | ||||||
Regenerative
cell technology:
|
·
|
We
recognize deferred revenues, related party, as development revenue when
certain performance obligations are met (i.e., using a proportional
performance approach). During the year ended December 31, 2008,
we recognized $774,000 of revenue associated with our arrangements with
Olympus. The revenue recognized in 2008 was a result of
completing two study milestones in the first
quarter.
|
Additionally,
we recognized $1,500,000 of other development revenue that relates to the
agreement we entered into on February 23, 2006, in which we granted Olympus an
exclusive right to negotiate a commercialization collaboration for the use of
adipose stem and regenerative cells for a specific therapeutic area outside of
cardiovascular disease. In exchange for this right, we received a
$1,500,000 payment from Olympus. As part of this agreement, Olympus
could conduct market research and pilot clinical studies in collaboration with
us for the therapeutic area up to December 31, 2008 when this exclusive right
expired. Accordingly, on December 31, 2008, we recognized $1,500,000
as other development revenue and reduced our deferred, related party balance for
the same amount.
During
the year ended December 31, 2007, we recognized $5,158,000 of revenue associated
with our arrangements with Olympus. The revenue recognized in 2007
was a result of completing a pre-clinical study milestone in the second quarter
and completing a development milestone in the third quarter. During
the year ended December 31, 2006, we recognized $5,905,000 of revenue associated
with our arrangements with Olympus. The revenue recognized in 2006
was a result of completing a pre-clinical study milestone in the first quarter,
receiving a CE mark for the Celution® 600 System, and reaching three additional
milestones in the fourth quarter. One milestone related to the
completion of a pre-clinical study while the other two were results of product
development efforts.
30
|
·
|
The
research grant revenue related to our agreement with the National
Institutes of Health (“NIH”). Under this arrangement, the NIH
reimbursed us for “qualifying expenditures” related to research on
Adipose-Derived Cell Therapy for Myocardial Infarction. To
receive funds under the grant arrangement, we were required to (i)
demonstrate that we incurred “qualifying expenses,” as defined in the
grant agreement between the NIH and us, (ii) maintain a system of
controls, whereby we can accurately track and report all expenditures
related solely to research on Adipose-Derived Cell Therapy for Myocardial
Infarction, and (iii) file appropriate forms and follow appropriate
protocols established by the NIH.
|
During
the year ended December 31, 2006, we incurred $479,000 in expenditures, of which
$310,000 were qualified. We recognized a total of $310,000 in
revenues for the year ended December 31, 2006, which included 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 2008 and 2007.
MacroPore
Biosurgery (Thin Film):
Under a
Distribution Agreement with Senko we are entitled to earn payments based on
achieving the following defined milestones:
|
·
|
Upon
notifying Senko of completion of the initial regulatory application to the
MHLW for the Thin Film product, we were entitled to a nonrefundable
payment of $1,250,000. We so notified Senko on
September 28, 2004, received payment in October of 2004, and recorded
deferred revenues of $1,250,000. As of December 31, 2006, of
the amount deferred, we have recognized development revenues of $371,000
($10,000 in 2007, $152,000 in 2006, $209,000 prior to
2006).
|
|
·
|
In
addition, we also received a $1,500,000 license fee that was recorded as a
component of deferred revenues in the accompanying balance
sheet. Because the $1,500,000 in license fees is potentially
refundable, such amounts will not be recognized as revenues until the
refund rights expire. Specifically, half of the license fee is
refundable if the parties agree commercialization is not achievable and a
proportional amount is refundable if we terminate the arrangement, other
than for material breach by Senko, before three years
post-commercialization.
|
|
·
|
We
are also entitled to a non-refundable payment of $250,000 once we achieve
commercialization.
|
The future: We
expect to recognize additional development revenues from our regenerative cell
technology segment during 2009, as the anticipated completion for the next phase
of our Joint Venture and other Olympus product development performance
obligations is in 2009. If we are successful in achieving certain
milestone points related to these activities, we may recognize approximately
$1,200,000 in revenues in 2009. 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 expect to 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 if and 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, if achieved, as the refund rights associated with the license
payment expire.
31
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 years ended December 31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
Regenerative
cell
technology
|
$ | 14,319,000 | $ | 12,889,000 | $ | 11,967,000 | ||||||
|
Development
milestone (Joint Venture)
|
2,546,000 | 6,293,000 | 7,286,000 | |||||||||
|
Research
grants
(NIH)
|
— | — | 479,000 | |||||||||
|
Stock-based
compensation
|
501,000 | 645,000 | 1,015,000 | |||||||||
|
Total
regenerative cell technology
|
17,366,000 | 19,827,000 | 20,747,000 | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Bioresorbable
polymer implants
|
— | 111,000 | 1,027,000 | |||||||||
|
Development
milestone (Senko)
|
— | 80,000 | 178,000 | |||||||||
|
Thin
Film related
research
|
5,000 | — | — | |||||||||
|
Stock-based
compensation
|
— | 2,000 | 25,000 | |||||||||
|
Total
MacroPore
Biosurgery
|
5,000 | 193,000 | 1,230,000 | |||||||||
|
Total
research and development expenses
|
$ | 17,371,000 | $ | 20,020,000 | $ | 21,977,000 | ||||||
Regenerative
cell technology:
|
·
|
Regenerative
cell technology expenses relate to the development of a technology
platform that involves using adipose tissue as a source of 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 during the last few
years. Labor-related expenses, not including share-based
compensation, decreased by $1,494,000 for the year ended December 31, 2008
as compared to the same period in 2007 primarily due to the decrease in
headcount for our research and development department as a result of
achievement of commercialization and transfer of employees from research
and development to the manufacturing department. Professional
services expense increased by $310,000 from 2007 to 2008, primarily due to
increased use of consultants and temporary labor during the year ended
December 31, 2008. Pre-clinical and clinical study expense
decreased by $1,023,000 from 2007 to 2008 primarily due to a reduction in
pre-clinical study activity as we focus on our clinical studies.
Additionally, although the overall cost of a clinical trial is generally
higher than for a preclinical study, such costs are typically spread out
over a longer period of time. Expenses for supplies increased
by $352,000 from 2007 to 2008, primarily due to timing of use of inventory
supplies for research purposes and purchases of production supplies prior
to the related product line
commercialization.
|
|
·
|
Professional
services expense (including pre-clinical and clinical study costs)
decreased by $1,163,000 from 2006 to 2007, of which $422,000 was
attributed to a decrease in pre-clinical and clinical study expense
primarily due to a transition in focus from pre-clinical studies to
clinical studies. Rent and utilities expense decreased by
$316,000 from 2006 to 2007 primarily due the termination of leases at our
Top Gun location in San Diego, CA. These decreases were offset
by an increase in travel expense of $389,000 and an increase in repair and
maintenance expense of $382,000 from 2006 to
2007.
|
|
·
|
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, including the next
generation Celution® device. These development activities,
which began in November 2005, include performing pre-clinical and clinical
studies, seeking regulatory approval, and performing product development
related to therapeutic applications for adipose stem and regenerative
cells for multiple large markets. For the years ended December
31, 2008, 2007 and 2006, costs associated with the development of the
device were $2,546,000, $6,293,000 and $7,286,000,
respectively. These expenses were comprised of $1,310,000,
$3,217,000 and $3,663,000 in labor and related benefits, $706,000,
$1,973,000 and $2,405,000 in consulting and other professional services,
$111,000, $567,000 and $872,000 in supplies and $419,000, $536,000 and
$346,000 in other miscellaneous expense,
respectively.
|
32
|
·
|
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 year ended December 31, 2006, we incurred
$479,000 of direct expenses relating entirely to Phase I and
II. Of these expenses, $169,000 were not reimbursed in
2006. To date, we have incurred $1,125,000 of direct expenses
($180,000 of which were not reimbursed) relating to both Phases I and II
of the agreement. There were no comparable expenditures in 2008
and 2007 as our work under this NIH agreement was completed during
2006.
|
|
·
|
Stock-based
compensation for the regenerative cell technology segment of research and
development was $501,000, $645,000 and $1,015,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. See stock-based
compensation discussion below for more
details.
|
MacroPore
Biosurgery:
|
·
|
Our
bioresorbable surgical implants platform technology is used for
development of spine and orthopedic products and Thin Film
products. Research and development expenses for bioresorbable
polymer implants substantially decreased in 2007 and were essentially
ceased by 2008, due to the termination of spine and orthopedics product
research upon sale of substantially all of this 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 years ended December 31, 2007 and 2006, we
incurred $80,000 and $178,000, respectively, of expenses related to this
regulatory and registration process. We did not incur any
expenses related to this regulatory and registration process for the year
ended December 31, 2008.
|
|
·
|
Share-based
compensation for the MacroPore Biosurgery segment of research and
development for the years ended December 31, 2007 and 2006 was $2,000 and
$25,000, respectively. There were no share-based compensation
expenses for the MacroPore Biosurgery segment of research and development
for the year ended December 31, 2008. See share-based
compensation discussion below for more
details.
|
The future: Our
strategy is to substantially reduce our research and development expenditures in
2009 and we anticipate expenditures in this area to be well below the
expenditures in 2008 as we shift our focus toward manufacturing and
sales. (See additional discussion regarding Liquidity at the beginning of Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations.)
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 years ended December 31, 2008, 2007 and
2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
International
sales and marketing
|
$ | 4,065,000 | $ | 2,231,000 | $ | 1,271,000 | ||||||
|
Stock-based
compensation
|
361,000 | 265,000 | 517,000 | |||||||||
|
Total
regenerative cell technology
|
4,426,000 | 2,496,000 | 1,788,000 | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
General
corporate marketing
|
— | 21,000 | 154,000 | |||||||||
|
International
sales and marketing
|
176,000 | 156,000 | 104,000 | |||||||||
|
Stock-based
compensation
|
— | — | 9,000 | |||||||||
|
Total
MacroPore Biosurgery
|
176,000 | 177,000 | 267,000 | |||||||||
|
Total
sales and marketing
|
$ | 4,602,000 | $ | 2,673,000 | $ | 2,055,000 | ||||||
33
Regenerative
Cell Technology:
|
·
|
The
increase in international sales and marketing expense for the year ended
December 31, 2008 as compared to the same period in 2007 was mainly
attributed to the increase in salary and related benefits expense of
$974,000, not including share-based compensation, an increase in travel
related expenses of $321,000, and an increase in printing, supplies, and
postage of $155,000, which are due to our emphasis in seeking strategic
alliances and/or co-development partners for our regenerative cell
technology as well as sales and marketing efforts related to our
commercialization activities.
|
The
increase in international sales and marketing expense for the year ended
December 31, 2007 as compared to same period in 2006 was mainly attributed to
the increase in salary and related benefits expense of $409,000, as well as
other increases due to our regenerative cell technology strategy.
|
·
|
Stock-based
compensation for the regenerative cell segment of sales and marketing for
the year ended December 31, 2008, 2007 and 2006 was $361,000, $265,000 and
$517,000, respectively. See stock-based compensation discussion
below for more details.
|
MacroPore
Biosurgery:
|
·
|
General
corporate marketing expenditures relate to expenditures for maintaining
our corporate image and reputation within the research and surgical
communities relevant to bioresorbable
implants. Expenditures in this area declined to $0 in
2008 from $21,000 in 2007 and $154,000 in 2006 as we focused on our
regenerative cell technology business and shifted our focus 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.
|
|
·
|
Stock-based
compensation for the MacroPore Biosurgery segment of sales and marketing
for the years ended December 31, 2006 was $9,000. There was no
stock-based compensation for the MacroPore Biosurgery segment of sales and
marketing for the years ended December 31, 2008 and 2007. See
stock-based compensation discussion below for more
details.
|
The future. We
expect sales and marketing expenditures related to the regenerative cell
technology to be maintained at or near current levels as we continue to expand
our base of distribution partners, strategic alliances and co-development
partners, as well as market our Celution® System
and StemSource® Cell
Bank. (See additional discussion regarding Liquidity at the beginning of Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.)
General and administrative
expenses
General
and administrative expenses include costs for administrative personnel, legal
and other professional expenses and general corporate expenses. The
following table summarizes the general and administrative expenses for the years
ended December 31, 2008, 2007, and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
General
and administrative
|
$ | 10,375,000 | $ | 12,805,000 | $ | 10,967,000 | ||||||
|
Stock-based
compensation
|
1,352,000 | 1,379,000 | 1,580,000 | |||||||||
|
Total
general and administrative expenses
|
$ | 11,727,000 | $ | 14,184,000 | $ | 12,547,000 | ||||||
|
·
|
General
and administrative expense, for the year ended December 31, 2008 as
compared to the same period in 2007 decreased by $2,457,000. An
overall decrease in general and administrative expenses (excluding
share-based compensation) occurred primarily from a decrease in legal fees
related to the ‘231 Patent (see below) of $1,793,000 and decrease
in salary and related benefit expense, excluding share-based
compensation) of $729,000 for the year ended December 31, 2008 as compared
to the same periods in 2007.
|
34
|
·
|
General
and administrative expense, for the year ended December 31, 2007 as
compared to the same period in 2006 increased by
$1,637,000. This was primarily a result of increases in salary
and related benefit expense of $802,000 and increases in professional
services of $1,160,000, offset by a decrease in stock-based compensation
of $201,000 for the year ended December 31, 2007 as compared with
2006. The increase in salary and related benefit expense was
mainly attributed to an increase in headcount. The increase in
professional services was mainly attributed to an increase of $266,000 in
consulting services, increases in accounting fees of $196,000, and an
increase in legal expenses of $863,000, partly incurred in connection with
the 231 Patent (see below), offset by a decrease in other professional
services of $165,000. In addition, we incurred a non-recurring
fee of $322,000 related to our February 2007 sale of common
stock.
|
|
·
|
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 we are not successful in
overturning the Court’s decision on the ‘231 Patent, our license rights to
the ‘231 Patent will be lost. Since our current products and
products under development do not practice the ‘231 Patent, our primary
ongoing business activities and product development pipeline should not be
affected by the Court’s decision. Although the ‘231 Patent is unrelated to
our current products and product pipeline, we believe that the ‘231 Patent
and/or the other technology licensed from UC may have long term potential
to be useful for future product developments, and so we have elected to
support UC’s legal efforts in the appeal of the Court’s final
order. 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 years ended December 31, 2008, 2007 and 2006, we expensed $625,000,
$2,418,000 and $2,189,000, respectively, for legal fees related to this
license. Our legal expenses related to this lawsuit and
the appeal will fluctuate depending upon the activity incurred during each
period.
|
|
·
|
Stock-based
compensation related to general and administrative expense for the years
ended December 31, 2007, 2006 and 2005 was $1,352,000, $1,379,000 and
$1,580,000, respectively. See stock-based compensation
discussion below for more details.
|
The future. We
expect general and administrative expenses to be further reduced in 2009
compared to the prior three years as we are seeking ways to minimize these
expenses where possible. (See additional discussion regarding
Liquidity at the beginning of Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations.)
Stock-based compensation
expenses
As noted
previously, we adopted SFAS 123R on January 1, 2006.
Stock-based
compensation expenses include charges related to options issued to employees,
directors and non-employees. Prior to January 1, 2006, the
stock-based compensation expenditures connected to options granted to employees
and directors (in their capacity as board members) is the difference between the
exercise price of the stock based awards and the market value of our underlying
common stock on the date of the grant. Unearned employee stock-based
compensation is amortized over the remaining vesting periods of the options,
which generally vest over a four-year period from the date of
grant. From January 1, 2006 onwards, we adopted FASB No. 123 (revised
2004), “Share-based payments.” Under this pronouncement, we measure
stock-based compensation expense based on the grant-date fair value of any
awards granted to our employees. Such expense is recognized over the
period of time that employees provide service to us and earn all rights to the
awards.
35
Stock-based
compensation expense related to options to purchase common stock issued to
non-employees is the fair value of the stock on the date of issuance, even if
such stock contains sales restrictions. The following table
summarizes the components of our stock-based compensation for the years ended
December 31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative cell
technology:
|
||||||||||||
|
Cost
of product revenues
|
$ | 43,000 | $ | — | $ | — | ||||||
|
Research
and development related
|
501,000 | 645,000 | 1,015,000 | |||||||||
|
Sales
and marketing related
|
361,000 | 265,000 | 517,000 | |||||||||
|
Total
regenerative cell technology
|
905,000 | 910,000 | 1,532,000 | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Cost
of product revenues
|
— | 19,000 | 74,000 | |||||||||
|
Research
and development related
|
— | 2,000 | 25,000 | |||||||||
|
Sales
and marketing related
|
— | — | 9,000 | |||||||||
|
Total
MacroPore Biosurgery
|
— | 21,000 | 108,000 | |||||||||
|
General
and administrative related
|
1,352,000 | 1,379,000 | 1,580,000 | |||||||||
|
Total
stock-based compensation
|
$ | 2,257,000 | $ | 2,310,000 | $ | 3,220,000 | ||||||
Regenerative
cell technology:
|
·
|
Of
the $910,000 charge to stock-based compensation for the year ended
December 31, 2007, $6,000 related to award modifications for the
termination of the employment of our Vice President of Research,
Regenerative Cell Technology. 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.
|
|
·
|
In
the first quarter of 2006, we issued 2,500 shares of restricted common
stock to a non-employee scientific advisor. The stock is
restricted in that it cannot be sold for a specified period of
time. There are no vesting requirements. Because the
shares issued are not subject to additional future vesting or service
requirements, the stock-based compensation expense of $18,000 recorded in
the first quarter of 2006 constitutes the entire expense related to this
grant, and no future period charges will be reported. The
scientific advisor also receives cash consideration as services are
performed.
|
General
and Administrative:
|
·
|
During
the first quarter of 2008, we issued to our officers and directors stock
options to purchase up to 450,000 shares of our common stock, with a
four-year graded vesting schedule for our officers and two-year graded
vesting for our directors. The grant date fair value of option awards
granted to our officers and directors was $2.73 per share. The resulting
share-based compensation expense of $1,230,000, net of estimated
forfeitures, will be recognized as expense over the respective service
periods.
|
|
·
|
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.
|
|
·
|
Of
the $1,379,000 charge to stock-based compensation for the year ended
December 31, 2007, $58,000 related to award modifications for the
termination of the employment of two 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.
|
During
the second quarter of 2007, we made company-wide stock option grants to our
non-executive employees to purchase 213,778 shares of our common stock, subject
to a four-year graded vesting schedule. The grant date fair value for the awards
was $3.65 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.
36
Of the
$3,220,000 charge to stock-based compensation for the year ended December 31,
2006, $420,000 related to extensions and cancellations of awards previously
granted to (a) our former Senior Vice President of Finance and Administration,
who retired in May 2006, and (b) (i) our former Senior Vice President, Business
Development, (ii) our former Vice President, Marketing and Development, and
(iii) the position of a less senior employee, whose positions were eliminated
during 2006. The charge reflects the incremental fair value of the
extended vested stock options over the fair value of the original awards at the
modification date as well as the acceleration of unrecognized compensation cost
associated with cancelled option awards that would have been recognized if the
four individuals continued to vest in their options until the end of their
employment term. There will be no further charges related to these
modifications.
The future. We
will continue to grant options (which will result in an expense) to our
employees and, as appropriate, to non-employee service providers. In
addition, previously-granted options will continue to vest in accordance with
their original terms. As of December 31, 2008, the total compensation
cost related to non-vested stock options not yet recognized for all our plans is
approximately $3,494,000. These costs are expected to be recognized over a
weighted average period of 1.67 years.
Change in fair value of
option liabilities
The
following is a table summarizing the change in fair value of option liabilities
for the years ended December 31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Change
in fair value of option liability.
|
$ | — | $ | — | $ | (3,731,000 | ) | |||||
|
Change
in fair value of put option liability
|
1,060,000 | 100,000 | (700,000 | ) | ||||||||
|
Total
change in fair value of option liabilities.
|
$ | 1,060,000 | $ | 100,000 | $ | (4,431,000 | ) | |||||
|
·
|
We
granted Olympus an option to acquire 2,200,000 shares of our common stock
in 2005. The exercise price of the option shares was $10 per
share. We had accounted for this grant as a liability because
had the option been exercised, we would have been required to deliver
listed shares of our common stock to settle the option
shares. In accordance with EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” the fair value of this option was re-measured at the
end of each quarter, using the Black-Scholes option pricing model, with
the movement in fair value reported in the statement of operations as a
change in fair value of option liabilities. This option expired
unexercised on December 31, 2006.
|
|
·
|
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 value of the Put 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.
37
The
following assumptions were employed in estimating the value of the
Put:
|
December
31, 2008
|
December
31, 2007
|
December
31, 2006
|
||||||||||
|
Expected
volatility of Cytori
|
68.00 | % | 60.00 | % | 66.00 | % | ||||||
|
Expected
volatility of the Joint Venture
|
68.00 | % | 60.00 | % | 56.60 | % | ||||||
|
Bankruptcy
recovery rate for Cytori
|
21.00 | % | 21.00 | % | 21.00 | % | ||||||
|
Bankruptcy
threshold for Cytori
|
$ | 16,740,000 | $ | 9,324,000 | $ | 10,110,000 | ||||||
|
Probability
of a change of control event for Cytori
|
2.80 | % | 2.17 | % | 1.94 | % | ||||||
|
Expected
correlation between fair values of Cytori and the Joint Venture in the
future
|
99.00 | % | 99.00 | % | 99.00 | % | ||||||
|
Risk
free interest rate
|
2.25 | % | 4.04 | % | 4.71 | % | ||||||
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.
Other income
(expense)
Gain on
sale of assets was $1,858,000 for the year ended December 31,
2007. There was no gain on sale of assets for the years ended
December 31, 2008 and 2006.
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 2007
as planned, and the associated costs were classified against the deferred
balance, reducing it to zero. No further costs or adjustments
relating to this product line sale are anticipated.
The
revenues and expenses related to the spine and orthopedic product line
transferred to Kensey Nash for the years ended December 31, 2007 and 2006 were
as follows:
|
For
the years ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 792,000 | $ | 1,451,000 | ||||
|
Cost
of product revenues
|
(422,000 | ) | (1,634,000 | ) | ||||
|
Research
& development
|
(113,000 | ) | (1,052,000 | ) | ||||
|
Sales
& marketing
|
(21,000 | ) | (163,000 | ) | ||||
The future. No
additional gains will be recognized related to either sale.
38
Financing
items
The
following table summarizes interest income, interest expense, and other income
and expenses for the years ended December 31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
$ | 230,000 | $ | 1,028,000 | $ | 708,000 | ||||||
|
Interest
expense
|
(420,000 | ) | (155,000 | ) | (199,000 | ) | ||||||
|
Other
income (expense)
|
(40,000 | ) | (46,000 | ) | (27,000 | ) | ||||||
|
Total
|
$ | (230,000 | ) | $ | 827,000 | $ | 482,000 | |||||
|
·
|
Interest
income decreased for the year December 31, 2008 as compared to the same
period in 2007 due to a decrease in interest rates and cash balance
available for investment. Interest income increased in 2007 as
compared to 2006 due to a larger balance of funds available for
investment, as a result of (i) the sale of common stock and common stock
warrants under the shelf registration statement in February 2007, (ii)
proceeds from the common stock private placement to Green Hospital Supply,
Inc. in April 2007, and (iii) proceeds from the sale of our bioresorbable
spine and orthopedic surgical implant product line to Kensey Nash in May
2007.
|
|
·
|
Interest
expense increased in 2008 as compared to 2007 due to interest incurred as
well as non-cash amortization of debt issuance costs and debt discount
associated with a new term loan. In October 2008, we entered
into a secured Loan Agreement with General Electric Capital Corporation
and Silicon Valley Bank (“Lenders”) to borrow up to
$15,000,000. An initial term loan of $7,500,000, less fees and
expenses, funded on October 14, 2008. Interest expense
decreased in 2007 as compared to 2006 due to the lower principal balances
on our long-term equipment-financed borrowings, which were fully repaid in
2008.
|
|
·
|
The
changes in other income (expense) in 2008, 2007 and 2006 resulted
primarily from changes in foreign currency exchange
rates.
|
The
future. Interest income earned in 2009 will be dependent
on our levels of funds available for investment as well as general economic
conditions. We expect interest expense to increase in 2009 as we
continue to repay the term loan balance.
Equity loss from investment
in Joint Venture
The
following table summarizes equity loss from investment in joint venture for the
years ended December 31, 2008, 2007 and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Equity
loss from investment in joint venture
|
$ | (45,000 | ) | $ | (7,000 | ) | $ | (74,000 | ) | |||
The
losses relate entirely to our 50% equity interest in the Joint Venture, which we
account for using the equity method of accounting.
The future. We do
not expect to recognize significant losses from the activities of the Joint
Venture in the foreseeable future. Over the next two to three years,
the Joint Venture is expected to incur labor costs related to the development of
our second generation commercial system as well as general and administrative
expenses, offset by royalty and other revenue expected to be generated by our
current Celution® 800/CRS and future generation devices. Though
we have no obligation to do so, we plan to contribute funding to the Joint
Venture to cover any costs should the Joint Venture deplete its cash
balance.
39
Liquidity
and Capital Resources
Short-term and long-term
liquidity
The
following is a summary of our key liquidity measures at December 31, 2008, 2007
and 2006:
|
Years
ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
and cash equivalents
|
$ | 12,611,000 | $ | 11,465,000 | $ | 8,902,000 | ||||||
|
Short-term
investments, available for sale
|
— | — | 3,976,000 | |||||||||
|
Total
cash and cash equivalents and short-term investments, available for
sale
|
$ | 12,611,000 | $ | 11,465,000 | $ | 12,878,000 | ||||||
|
Current
assets
|
$ | 17,225,000 | $ | 12,238,000 | $ | 13,978,000 | ||||||
|
Current
liabilities
|
7,135,000 | 8,070,000 | 6,586,000 | |||||||||
|
Working
capital
|
$ | 10,090,000 | $ | 4,168,000 | $ | 7,392,000 | ||||||
In order
to continue the operations of our regenerative cell business at or near current
levels, we will need to raise additional capital in the very near
term.
During
2008, we initiated our commercialization activities while simultaneously
pursuing available financing sources to support operations and
growth. We have had, and continue to have, an ongoing need to raise
additional cash from outside sources to fund our operations. However,
our ability to raise capital has been adversely affected by current credit
conditions and the downturn in the financial markets and the global
economy. Accordingly, the combination of these facts raises
substantial doubt as to the Company’s ability to continue as a going
concern. The accompanying consolidated financial statements and
financial statement schedule have been prepared assuming that the Company will
continue as a going concern. If we are unsuccessful in our efforts to
raise outside capital in the near term, we will be required to significantly
reduce our research, development, and administrative operations, including
reduction of our employee base, in order to offset the lack of available
funding.
We are
pursuing financing opportunities in both the private and public debt and equity
markets as well as through strategic corporate partnerships. We have
an established history of raising capital through these platforms, and we are
currently involved in negotiations with multiple parties. Our efforts
in 2008 to raise capital have taken longer than we initially
anticipated. However, in August 2008, we raised approximately
$17,000,000 in gross proceeds from a private placement of 2,825,517 unregistered
shares of common stock and 1,412,758 common stock warrants (with an original
exercise price of $8.50 per share) to a syndicate of investors including Olympus
Corporation, who acquired 1,000,000 unregistered shares and 500,000 common stock
warrants in exchange for $6,000,000 of the total proceeds raised. In
October 2008, we entered into a secured Loan agreement with General Electric
Capital Corporation and Silicon Valley Bank (“Lenders”) to borrow up to
$15,000,000. An initial term loan of $7,500,000, less fees and
expenses, was funded on October 14, 2008. We could not access the
remaining $7,500,000 under this facility as we were not able to meet certain
financial prerequisites that had been established by the Lenders.
We expect
to continue to utilize our cash and cash equivalents to fund operations through
at least the next few months, subject to minimum cash and cash liquidity
requirements of the Loan and Security Agreement with the Lenders, which requires
that we maintain at least three months of cash on hand to avoid an event of
default under the Loan and Security Agreement. We continue to seek
additional cash through product revenues, strategic collaborations, and future
sales of equity or debt securities. Although there can be no assurance
given, we hope to successfully complete one or more additional financing
transactions and corporate partnerships in the near-term. Without this
additional capital, current working capital and cash generated from sales and
containment of operating costs will not provide adequate funding for research,
sales and marketing efforts, clinical and preclinical trials, and product
development activities at their current levels. If such efforts are not
successful, we will need to significantly reduce or curtail our research and
development and other operations and this could negatively affect our ability to
achieve corporate growth goals. Specifically, we have prepared an
operating plan (plan) that calls for us to reduce operations to focus almost
entirely on the supply of current products to existing or new distribution
channels. This plan would result in reductions to our current sales and
marketing headcount (total headcount was 17 at December 31, 2008) as well as a
reduction in manufacturing headcount (total headcount of 20 at December 31,
2008). In addition, as part of this plan, there would be minimal
expenditures for ongoing scientific research, product development or clinical
research. This impacts research and development headcount (total headcount
was 57 at December 31, 2008), external
40
subcontractor
expenditures, capital outlay and general and administrative expenditures related
to the supervision of such activities. In parallel, we would
significantly reduce administrative staff (the general and administrative
headcount was 32 at December 31, 2008) and salaries consistent with the overall
reduction in scope of operations. In aggregate, such reductions could
result in eliminations of roles for the majority of the Company’s current staff
and the deferral or elimination of all ongoing development projects until such
time that cash resources were available from operations or outside sources to
re-establish development and growth plans. Management is currently
reviewing contractual obligations related to the pre-clinical and clinical
commitments along with minimum purchase requirements to include deferral of such
commitments as part of this plan. While management is actively
pursuing its near term financial and strategic alternatives it is also, in
parallel, continuing to evaluate the timing of implementation of the alternative
operating plan and the initiation of the identified reductions. Based on the
impact of the reductions described above contemplated by the plan and a full
year impact of other actions taken by management in Q3 and Q4 of 2008, the cash
operating requirements in the near term would be reduced to a range of $1.0 to
$1.2 million per month.
From
inception to December 31, 2008, we have financed our operations primarily
by:
|
·
|
Issuing
stock in pre-IPO transactions, a 2000 initial public offering in Germany,
and 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,
|
|
·
|
Licensing
distribution rights to Thin Film in Japan, in exchange for 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,
|
|
·
|
Selling
1,100,000 shares of common stock to Olympus under an agreement which
closed in May 2005,
|
|
·
|
Receiving
upfront and milestone fees from our Joint Venture with Olympus, which was
entered into in November 2005,
|
|
·
|
Receiving
funds in exchange for granting Olympus an exclusive right to negotiate in
February 2006,
|
|
·
|
Receiving
$16,219,000 in net proceeds from a common stock sale under the shelf
registration statement in August
2006,
|
|
·
|
Receiving
$19,901,000 in net proceeds from the sale of common stock plus common
stock warrants under the shelf registration statement in February
2007,
|
|
·
|
Receiving
$6,000,000 in net proceeds from a 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.
|
|
·
|
Receiving
$12,000,000 in net proceeds from a private placement to Green Hospital
Supply, Inc. during first half
2008.
|
|
·
|
Receiving
$17,000,000 in gross proceeds in August 2008 from a private placement of
2,825,517 unregistered shares of common stock and 1,412,758 common stock
warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors including Olympus Corporation, who acquired
1,000,000 unregistered shares and 500,000 common stock warrants in
exchange for $6,000,000 of the total proceeds
raised.
|
|
·
|
Obtaining
a term loan of $7,500,000 from General Electric Capital Corporation and
Silicon Valley Bank (Lenders) in October
2008.
|
41
In
January 2006, we also received an additional $11,000,000 upon our receipt of a
CE mark for the Celution® 600 and received an additional $1,500,000 in the first
half of 2006 in exchange for the grant to Olympus of an exclusive right to
negotiate a commercialization collaboration for the use of adipose stem and
regenerative cells for a specific therapeutic area outside of cardiovascular
disease.
In August
2006, we sold 2,918,000 shares of our common stock at $5.75 per share for an
aggregate of approximately $16,800,000. Olympus purchased $11,000,000
of these shares and the remaining balance was purchased by certain institutional
investors. We received proceeds of $16,219,000, net of related
offering costs and fees.
In
February 2007, we sold units consisting of 3,746,000 shares of common stock and
1,873,000 common stock warrants (with an exercise price of $6.25 per share) to
institutional and accredited investors. We received proceeds of
approximately $19,901,000, net of related offering costs and fees.
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 in April
2007.
In May
2007, we successfully divested substantially all of our spine and orthopedic
product line to Kensey Nash for gross proceeds of $3,175,000.
On
February 8, 2008, we agreed to sell 2,000,000 shares of unregistered common
stock to Green Hospital Supply, Inc., a related party, for $12,000,000 cash, or
$6.00 per share in a private stock placement. On February 29, 2008,
we closed the first half of the private placement with Green Hospital Supply,
Inc. and received $6,000,000. We closed the second half of the
private placement on April 30, 2008 and received the second payment of
$6,000,000. As of December 31, 2008, Green Hospital Supply, Inc. holds
approximately 10.2% of our issued and outstanding shares.
On August
11, 2008, we raised approximately $17,000,000 in gross proceeds from a private
placement of 2,825,517 unregistered shares of common stock and 1,412,758 common
stock warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors including Olympus Corporation, who acquired 1,000,000
unregistered shares and 500,000 common stock warrants in exchange for $6,000,000
of the total proceeds raised.
On
October 14, 2008, General Electric Capital Corporation and Silicon Valley Bank
(together, the “Lenders”) funded a term loan in the amount of $7,500,000 less
fees and expenses. In connection with the loan facility, on October
14, 2008, we issued to each Lender a warrant to purchase up to 89,074 shares of
our common stock at an exercise price of $4.21 per share. These
warrants are immediately exercisable and will expire on October 14,
2018.
Our cash
requirements for 2009 and beyond will depend on numerous factors, including our
successful restructuring of our operating plan and business strategies as
described above. Under our previous operating plan, we would have
expected to incur research and development expenses at high levels in our
regenerative cell platform for an extended period of time. Under the
new plan, we will seek to reduce these expenditures as much as
possible.
The
following summarizes our contractual obligations and other commitments at
December 31, 2008, and the effect such obligations could have on our liquidity
and cash flow in future periods (see additional discussion regarding Liquidity
at the beginning of Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations):
|
Payments
due by period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1
year
|
1
– 3 years
|
3
– 5 years
|
More
than
5
years
|
|||||||||||||||
|
Long-term
obligations
|
$ | 7,914,000 | $ | 2,047,000 | $ | 5,847,000 | $ | 20,000 | $ | — | ||||||||||
|
Interest
commitment on long-term obligations
|
1,376,000 | 741,000 | 628,000 | 7,000 | — | |||||||||||||||
|
Operating
lease obligations
|
2,746,000 | 1,754,000 | 899,000 | 85,000 | 8,000 | |||||||||||||||
|
Minimum
purchase requirements
|
2,125,000 | 850,000 | 1,275,000 | — | — | |||||||||||||||
|
Pre-clinical
research study obligations
|
563,000 | 563,000 | — | — | — | |||||||||||||||
|
Clinical
research study obligations
|
5,839,000 | 4,000,000 | 1,839,000 | — | — | |||||||||||||||
|
Total
|
$ | 20,563,000 | $ | 9,955,000 | $ | 10,488,000 | $ | 112,000 | $ | 8,000 | ||||||||||
42
Net cash
(used in) provided by operating, investing and financing activities for the
years ended December 31, 2008, 2007 and 2006, is summarized as
follows:
|
Years
Ended
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash used in operating activities
|
$ | (33,389,000 | ) | $ | (29,995,000 | ) | $ | (16,483,000 | ) | |||
|
Net
cash provided by (used in) investing activities
|
(393,000 | ) | 5,982,000 | 591,000 | ||||||||
|
Net
cash provided by financing activities
|
34,928,000 | 26,576,000 | 16,787,000 | |||||||||
Operating
activities
Net cash
used in operating activities for all periods presented resulted primarily from
expenditures related to our regenerative cell research and development
efforts.
Research
and development efforts, other operational activities, and a comparatively small
amount of product sales generated a $30,036,000 net loss for the year ended
December 31, 2008. The cash impact of this loss was $33,389,000,
after adjusting for the $774,000 of deferred revenue, related party, recognized
in 2008, for which cash was received in earlier years, $1,533,000 of
depreciation and amortization, a $1,060,000 change in the value of our put
option, $2,257,000 non-cash stock based compensation expense, and $178,000 of
non-cash amortization of deferred financing costs and debt discount along with
other changes in working capital due to timing of product shipments (accounts
receivable) and payment of liabilities.
Research
and development efforts, other operational activities, and a comparatively small
amount of product sales generated a $28,672,000 net loss for the year ended
December 31, 2007. The cash impact of this loss was $29,995,000,
after adjusting for the $5,158,000 of deferred revenue, related party,
recognized in 2007, for which cash was received in earlier years, $1,858,000 of
gain on sale of assets, $1,616,000 of depreciation and $2,310,000 non-cash stock
based compensation expense, along with other changes in working capital due to
timing of product shipments (accounts receivable) and payment of
liabilities.
Research
and development efforts, other operational activities, and a comparatively small
amount of product sales generated a $25,447,000 net loss for the year ended
December 31, 2006. The cash impact of this loss was $16,483,000,
after adjusting for the $11,000,000 cash we received in 2006 from the Joint
Venture upon obtaining the CE Mark in the first quarter of 2006, the $1,500,000
received from Olympus mentioned above, $2,120,000 of non-cash depreciation and
amortization, $3,220,000 non-cash stock based compensation expense, and
$4,431,000 non-cash change in the fair value of option liabilities, along with
other changes in working capital due to timing of product shipments and payment
of liabilities.
Investing
activities
Net cash
used by investing activities for the year ended December 31, 2008 resulted
primarily from purchases of property and equipment.
Net cash
provided by investing activities for the year ended December 31, 2007 resulted
primarily from net proceeds from the purchase and sale of short-term investments
and proceeds from the sale of assets, offset in part by purchases of property
and equipment.
Net cash
provided by investing activities for the year ended December 31, 2006 resulted
primarily from net proceeds from the purchase and sale of short-term
investments, offset in part by expenditures for leasehold
improvements.
Capital
spending is essential to our product innovation initiatives and to maintain our
operational capabilities. For the years ended December 31, 2008, 2007
and 2006, we used cash to purchase $393,000, $563,000 and $3,138,000,
respectively, of property and equipment to support manufacturing of our
bioresorbable implants and for the research and development of the regenerative
cell technology platform. The increase in 2006 capital spending was
caused primarily by expenditures for leasehold improvements made to our new
facilities.
Financing
Activities
The net
cash provided by financing activities for the year ended December 31, 2008
related mainly to the private issuance of 2,000,000 shares of unregistered
common stock to Green Hospital Supply, Inc. for $12,000,000 and the private
43
placement
offering of 2,825,517 unregistered shares of common stock and 1,412,758 common
stock warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors for approximately $17,000,000 in gross proceeds, of which
Olympus Corporation acquired 1,000,000 unregistered shares and 500,000 common
stock warrants in exchange for $6,000,000 of the total proceeds
raised. Additionally, in October 2008, we obtained a term loan in the
amount of $7,500,000, less fees and expenses, from General Electric Capital
Corporation and Silicon Valley Bank (together, the “Lenders”).
The net
cash provided by financing activities for the year ended December 31, 2007
related mainly to the issuance of common stock and common stock warrants under
the shelf registration statement in exchange for net proceeds of $19,901,000 as
well as a common stock private placement made with Green Hospital Supply, Inc.
for net proceeds of $6,000,000. Net cash proceeds provided by
financing activities also included proceeds from the exercise of employee stock
options, offset to some extent by principal payments on long-term
obligations.
The net
cash provided by financing activities for the year ended December 31, 2006
related mainly to the issuance of 2,918,255 shares of our common stock in
exchange for $16,219,000, net of related expenses. Net cash provided
by financing activities also included proceeds from the exercise of employee
stock options, offset by 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 requires us to make estimates and
assumptions that affect the reported amounts of our assets, liabilities,
revenues and expenses, and that affect our recognition and disclosure of
contingent assets and liabilities.
While our
estimates are based on assumptions we consider reasonable at the time they were
made, our actual results may differ from our estimates, perhaps
significantly. If results differ materially from our estimates, we
will make adjustments to our financial statements prospectively as we become
aware of the necessity for an adjustment.
We
believe it is important for you to understand our most critical accounting
policies. These are our policies that require us to make our most
significant judgments and, as a result, could have the greatest impact on our
future financial results.
Revenue
Recognition
We derive
our revenue from a number of different sources, including but not limited
to:
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Fees
for achieving certain defined milestones under research and/or development
arrangements.
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Product
sales, and
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Payments
under license or distribution
agreements.
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A number
of our revenue generating arrangements are relatively simple in nature, meaning
that there is little judgment necessary with regard to the timing of when we
recognize revenues or how such revenues are presented in the financial
statements.
However,
we have also entered into more complex arrangements, including but not limited
to our contracts with Olympus, Senko, and the NIH. Moreover, some of
our non-recurring transactions, such as our disposition of the majority of our
Thin Film business to MAST, contain elements that relate to our 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 as follows:
Multiple-element
arrangements
Some of
our revenue generating arrangements contains a number of distinct revenue
streams, known as “elements.” For example, our Distribution Agreement
with Senko contains direct or indirect future revenue streams related
to:
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A
distribution license fee (which was paid at the outset of the
arrangement),
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Milestone
payments for achieving commercialization of the Thin Film product line in
Japan,
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44
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Training
for representatives of Senko,
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Sales
of Thin Film products to Senko, and
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Royalty
payments on future product sales made by Senko to its end
customers.
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Emerging
Issues Task Force Issue 00-21, “Revenue Arrangements with Multiple Deliverables”
(“EITF 00-21”), governs whether each of the above elements in the arrangement
should be accounted for individually, or whether the entire contract should be
treated as a single unit of accounting.
EITF
00-21 indicates that individual elements may be separately accounted for only
when:
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The
delivered element has stand alone value to the
customer,
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There
is objective evidence of the fair value of the remaining undelivered
elements, and
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If
the arrangement contains a general right of return related to any products
delivered, delivery of the remaining goods and services is probable and
within the complete control of the
seller.
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In the
case of the Senko Distribution Agreement, we determined that (a) the milestones
payments for achieving commercialization and (b) the future sale of Thin Film
products to Senko were “separable” elements. That is, each of these
elements, upon delivery, will have stand alone value to Senko and there will be
objective evidence of the fair value of any remaining undelivered elements at
that time. The arrangement does not contain any general right of
return, and so this point is not relevant to our analysis.
On the
other hand, we concluded that (a) the upfront distribution license fee, (b) the
revenues from training for representatives of Senko, and (c) the payments in the
form of royalties on future product sales are not separable elements under EITF
00-21.
In
arriving at our conclusions, we had to consider whether our customer, Senko,
would receive stand alone value from each delivered element. We also,
in some cases, had to 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).
We also
agreed to perform elements under the November 4, 2005 agreements we signed with
Olympus, including:
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Granting
the Joint Venture (which Olympus is considered to control) an exclusive
and perpetual manufacturing license to our device technology, including
the Celution® System platform and certain related intellectual property;
and
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Completing
certain pre-clinical and clinical studies, assisting with product
development and seeking regulatory approval and/or clearances toward
commercialization of the Celution® System
platform.
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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 product development assistance, certain agreed regulatory
filings and generally associated pre-clinical and clinical studies necessary for
the Joint Venture to derive value from the license.
45
Recognition
Besides
determining whether to account separately for components of a multiple-element
arrangement, we also use judgment in determining the appropriate accounting
period in which to recognize revenues that we believe (a) have been earned and
(b) are realizable. The following describes some of the recognition
issues we have considered during the reporting period.
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Product
Revenues
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We
recognize revenue from product sales when the following fundamental
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the price to the customer is fixed or
determinable and (iv) collection of the resulting accounts receivable is
reasonably assured.
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For all
sales, we use a binding purchase order or a signed agreement as evidence of
arrangement. Revenue for these product sales will be recognized upon
delivery to the customer, as all risks and rewards of ownership have been
substantively transferred to the customer at that point. For
Celution® 800/CRS
System sales to customers who arrange for and manage the shipping process, we
recognize revenue upon shipment from our facilities. Shipping and
handling costs that are billed to our customers are classified as revenue, in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, “Accounting
for Shipping and Handling Fees and Costs” (“EITF 00-10”). Delivery
occurs when goods are shipped and title of risk of loss transfer to the
customer, in accordance with the terms specified in the arrangement with the
customer. The customer’s obligation to pay and the payment terms are
set at the time of delivery and are not dependent on the subsequent use or
resale of our product.
For those
sales that include multiple deliverables, we allocate revenue based on the
relative fair values of the individual components as determined in accordance
with EITF 00-21. When more than one element such as product
maintenance or technical support services are included in an arrangement, we
allocate revenue between the elements based on each element’s relative fair
value, provided that each element meets the criteria for treatment as a separate
unit of accounting. An item is considered a separate unit of
accounting if it has value to the customer on a standalone basis and there is
objective and reliable evidence of the fair value of the undelivered
items. Fair value is generally determined based upon the price
charged when the element is sold separately. In the absence of fair
value for a delivered element, we allocate revenue first to the fair value of
the undelivered elements and allocate the residual revenue to the delivered
elements. Deferred service revenue is recognized ratably over the
period the services are provided. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit of
accounting, resulting in a deferral of revenue recognition for delivered
elements until all undelivered elements have been fulfilled.
An
allowance for doubtful accounts is maintained for estimated losses resulting
from the inability of our customers to make required payments. This
reserve is determined by analyzing specific customer accounts and applying
historical loss rates to the aging of remaining accounts receivable
balances. If the financial condition of our customer were to
deteriorate, resulting in tehir inability to pay their accounts when due,
additional reserves might be required.
Before
the disposal of substantially all of our bioresorbable spine and orthopedic
product line in May 2007, we sold our (non-Thin Film) MacroPore Biosurgery
products to Medtronic, Inc., a related party. We recognized revenue
on product sales to Medtronic upon shipment of ordered products to Medtronic, as
title and risk of loss were transferred at that point. In May 2007,
we sold to Kensey Nash our intellectual property rights and tangible assets
related to our bioresorbable spine and orthopedic product line.
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Upfront
License Fees/Milestones
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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
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46
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correspond
with the cash we received upon achieving certain
milestones. For example, the first such milestone payment for
$1,250,000 became payable to us when we filed a commercialization
application with the Japanese regulatory authorities. However,
we determined that the payment received was not commensurate with the
level of effort expended, particularly when compared with other steps we
believe are necessary to commercialize the Thin Film product line in
Japan. Accordingly, we did not recognize the entire $1,250,000
received as revenues, but instead all but $371,000 of this amount is
classified 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 to these estimates 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 for the Thin Film
product.
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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 expect 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 de-recognition of amounts recorded in the
deferred revenues, related party, account as we complete various
milestones underlying the development services. Proportional
performance methodology was elected due to the nature of our development
obligations and efforts in support of the Joint Venture (“JV”), including
product development activities, and regulatory efforts to support the
commercialization of the JV products. The application of this methodology
uses the achievement of R&D milestones as outputs of value to the
JV. We received up-front, non-refundable payments in connection
with these development obligations, which we have broken down into
specific R&D milestones that are definable and substantive in nature,
and which will result in value to the JV when achieved. Revenue
will be recognized as the above mentioned R&D milestones are
completed. We established the R&D milestones based upon our
development obligations to the JV and the specific R&D support
activities to be performed to achieve these obligations. Our
R&D milestones consist of the following primary performance
categories: product development, regulatory approvals, and
generally associated pre-clinical and clinical
trials. Within each category are milestones that take
substantive effort to complete and are critical pieces of the overall
progress towards completion of the next generation product, which we are
obligated to support within the agreements entered into with
Olympus. To determine whether substantive effort was required
to achieve the milestones, we considered the external costs, required
personnel and relevant skill levels, the amount of time required to
complete each milestone, and the interdependent relationships between the
milestones, in that the benefits associated with the completion of one
milestone generally support and contribute to the achievement of the
next. Determination of the relative values assigned to each
milestone involved substantial judgment. The assignment process
was based on discussions with persons responsible for the development
process and the relative costs of completing each milestone. We
considered the costs of completing the milestones in allocating the
portion of the “deferred revenues, related party” account balance to each
milestone. Management believes that, while the costs incurred
in achieving the various milestones are subject to estimation, due to the
high correlation of such costs to outputs achieved, the use of external
contract research organization (“CRO”) costs and internal labor costs as
the basis for the allocation process provides management the ability to
accurately and reasonably estimate such costs. 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.
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Government
Grants
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We
are at times eligible to receive grants from the NIH related to various
research activities. 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,
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the
Company records 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 statements of operations. Additionally, research
arrangements we have with NIH, as well commercial enterprises such as
Olympus and Senko, are considered a key component of our central and
ongoing operations. Moreover, the government obtains rights
under the arrangement, in the same manner (but perhaps not to the same
extent) as a commercial customer that similarly contracts with us to
perform research activities. For instance, the government and
any authorized third parties may use our federally funded research and/or
inventions without payment of royalties to us. Accordingly, the
inflows from such arrangements are presented as revenues in the
consolidated statements of
operations.
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Our
policy was 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.
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 December 31, 2008. 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 the same
as our two operating segments.
Specifically,
the process for testing goodwill for impairment under SFAS 142 involves the
following steps:
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Company
assets and liabilities, including goodwill, are allocated to each
reporting unit for purposes of completing the goodwill impairment
test.
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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.
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If
the fair value of the reporting unit is lower than its carrying amount,
goodwill may be impaired – additional testing is
required.
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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:
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The
asset will be employed in or the liability relates to the operations of a
reporting unit.
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The
asset or liability will be considered in determining the fair value of the
reporting unit.
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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.
In 2007,
all goodwill that previously had been assigned to our MacroPore Biosurgery
reporting unit was derecognized as a result of our sale of our spine and
orthopedic product line to Kensey Nash. Accordingly, there was no
need to test this component of our business for goodwill impairment in 2008 and
2007.
Also, in
2008, we completed our goodwill impairment testing for our regenerative cell
technology reporting unit using an income-based approach incorporating
discounted projections of estimated future cash flows as well as a market-based
approach. We concluded that the fair value of this unit exceeded its
carrying value, and that none of our reported goodwill was
impaired.
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.
48
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.
We
concluded that the Olympus-Cytori Joint Venture was a VIE based on the following
factors:
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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, we contributed $300,000 and $150,000 in the
fourth quarter of 2007 and first quarter of 2006, respectively, to fund
the Joint Venture’s ongoing
operations.
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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.
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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:
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The
business operations of the Joint Venture will be most closely aligned to
those of Olympus (i.e., the manufacture of
devices).
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Olympus
controls the Board of Directors, as well as the day-to-day operations of
the Joint Venture.
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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, 2008 or for the year then
ended. However, certain balance sheet and income statement captions
would have been presented in a different manner. For instance, we
would not have presented a single line item entitled investment in joint venture
in our balance sheet but, instead, would have performed a line by line
consolidation of each of the Joint Venture’s accounts into our financial
statements.
Net
Operating Loss and Tax Credit Carryforwards
We have
established a valuation allowance against our net deferred tax assets due to the
uncertainty surrounding the realization of such assets. We periodically evaluate
the recoverability of the deferred tax assets. At such time as it is determined
that it is more likely than not that deferred assets are realizable, the
valuation allowance will be reduced. We have recorded a valuation allowance of
$61,965,000 as of December 31, 2008 to reflect the estimated amount of deferred
tax assets that may not be realized. We increased our valuation allowance by
approximately $11,529,000 during the year ended December 31, 2008. The valuation
allowance includes approximately $579,000 related to stock option deductions,
the benefit of which, if realized, will eventually be credited to equity and not
to income.
At
December 31, 2008, we had federal and state tax loss carryforwards of
approximately $117,177,000 and $98,679,000 respectively. The federal
and state net operating loss carryforwards begin to expire in 2019 and
2011 respectively, if unused. At December 31, 2008, we had
federal and state tax credit carryforwards of approximately $3,364,000 and
$3,043,000
49
respectively. The
federal credits will begin to expire in 2017, if unused, and $160,000 of the
state credits will begin to expire in 2009 if unused. The remaining
state credits carry forward indefinitely. In addition, we had a
foreign tax loss carryforward of $4,142,000 and $93,000 in Japan and Italy,
respectively.
The
Internal Revenue Code limits the future availability of net operating loss and
tax credit carryforwards that arose prior to certain cumulative changes in a
corporation’s ownership resulting in a change of control of Cytori. Due to prior
ownership changes as defined in IRC Section 382, a portion of our net operating
loss and tax credit carryforwards are limited in their annual
utilization. In September 1999, we experienced an ownership change
for purposes of the IRC Section 382 limitation. As of December 31,
2008, these pre-change net operating losses and credits are fully
available.
Additionally,
in 2002 when we purchased StemSource, we acquired federal and state net
operating loss carryforwards of approximately $2,700,000 and $2,700,000
respectively. This event triggered an ownership change for purposes
of IRC Section 382. It is estimated that the pre-change net operating
losses and credits will be fully available by 2008.
We have
completed an update to our IRC Section 382 study analysis through April 17,
2007. We have not had any additional ownership changes based on this
study.
Recent
Accounting Pronouncements
In July
2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with FASB Statement
No. 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.
On January 1, 2008, we adopted certain
provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 provides a single definition of fair value and a
common framework for measuring fair value as well as new disclosure requirements
for fair value measurements used in financial statements. SFAS 157
applies to reported balances that are required or permitted to be measured at
fair value under existing pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.
In February 2008, the FASB issued Staff
Position “Effective Date
of FASB Statement No. 157” (FSP No. 157-2), which delayed the adoption date
until January 1, 2009 for non-financial assets and liabilities that are measured
at fair value on a non-recurring basis, such as goodwill and identifiable
intangible assets. We do not expect the adoption of the SFAS 157 for
non-financial assets and liabilities to have a material impact on our
consolidated financial position or results of operations.
On
January 1, 2008, we also adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which permits
companies to choose to measure many financial instruments and certain other
items at fair value. However, we have not elected to measure any
additional financial instruments or other items at fair value under the
provisions of this standard.
In March
2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) on Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use 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, which we adopted effective January 1, 2008. The
adoption of EITF 07-3 did not have a significant effect on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51” ("SFAS
160"). SFAS 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for annual periods beginning on or after
December 15, 2008. We do not believe that the adoption of SFAS 160
will have a significant effect on our consolidated financial
statements.
50
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” ("SFAS 141R"). SFAS 141R retains the fundamental
requirements of Statement No. 141 to account for all business combinations using
the acquisition method (formerly the purchase method) and for an acquiring
entity to be identified in all business combinations. However, the
new standard requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141R is effective for
acquisitions made on or after the first day of annual periods beginning on or
after December 15, 2008. We do not believe that the adoption of SFAS
141R will have a significant effect on our consolidated financial
statements.
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force on EITF Issue 07-1, “Accounting for Collaborative Arrangements”
(“EITF 07-1”). EITF 07-1 requires collaborators to present the
results of activities for which they act as the principal on a gross basis and
report any payments received from (made to) other collaborators based on other
applicable GAAP or, in the absence of other applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and consistently
applied accounting policy election. The guidance is effective for
fiscal years beginning after December 15, 2008. We are currently in
the process evaluating whether the adoption of EITF 07-1 will have a significant
effect on our consolidated financial statements.
In June
2008, the FASB ratified the consensus on EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock” (“EITF
07-5”). EITF 07-5 provides a framework for
evaluating the terms of a particular instrument to determine whether such
instrument is considered a derivative financial instrument. EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied by recording a cumulative effect
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) as of the date of adoption. We anticipate the adoption of
EITF 07-5 will result is the recognition of a liability for the warrants issued
in August 2008 as part of our private placement of common stock of approximately
$2.9 million and a corresponding increase in stockholders’ deficit as of January
1, 2009. Future changes in the fair value of the warrant liability will be
recognized as a component of earnings (loss).
In
October 2008, the FASB issued Staff Position “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (FSP No.
157-3). FSP No. 157-3 clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when market
for that financial asset is not active. This guidance is effective
upon issuance, including prior periods for which financial statements have not
been issued. The adoption of FSP No. 157-3 did not have a significant
effect on our consolidated financial statements.
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets.” This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill
and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141R, and other U.S. generally
accepted accounting principles. This FSP is effective for our interim and annual
financial statements beginning after November 15, 2008. We do not expect the
adoption of this FSP will have a material impact on the our financial
statements.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
We are
exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates.
Interest
Rate Exposure
We are
not subject to market risk due to fluctuations in interest rates on our
long-term obligations as they bear a fixed rate of interest. Our
exposure relates primarily to short-term investments, including funds classified
as cash equivalents. Investment securities are subject to market rate
risk as their fair value will fall if market interest rates
increase. If market interest rates were to increase immediately and
uniformly by 100 basis points from the levels prevailing at December 31, 2008,
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
51
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 activities in Europe and Japan. Transaction
gains or losses resulting from cash balances and revenues have not been
significant in the past and we are not engaged in any hedging activity in the
Euro, the Yen or other currencies. Based on our cash balances and
revenues derived from markets other than the United States for the year ended
December 31, 2008, a hypothetical 10% adverse change in the Euro or Yen against
the U.S. dollar would not result in a material foreign currency exchange
loss. Consequently, we do not expect that reductions in the value of
such sales denominated in foreign currencies resulting from even a sudden or
significant fluctuation in foreign exchange rates would have a direct material
impact on our financial position, results of operations or cash
flows.
Notwithstanding
the foregoing, the indirect effect of fluctuations in interest rates and foreign
currency exchange rates could have a material adverse effect on our business,
financial condition and results of operations. For example, foreign
currency exchange rate fluctuations may affect international demand for our
products. In addition, interest rate fluctuations may affect our
customers’ buying patterns. Furthermore, interest rate and currency
exchange rate fluctuations may broadly influence the United States and foreign
economies resulting in a material adverse effect on our business, financial
condition and results of operations.
Under our
Japanese Thin Film agreement with Senko, we would receive payments in the nature
of royalties based on Senko’s net sales, which would be Yen
denominated.
52
|
Item 8. Financial Statements and Supplementary
Data
|
53
|
PART
I. FINANCIAL INFORMATION
|
||||||||||||||||
|
Item
1. Financial Statements
|
||||||||||||||||
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We have
audited the accompanying consolidated balance sheets of Cytori Therapeutics,
Inc. (the Company) and subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations and comprehensive loss,
stockholders’ equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2008. In connection with our audits of
the consolidated financial statements, we have also audited the accompanying
schedule of valuation and qualifying accounts. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Cytori Therapeutics, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The
accompanying consolidated financial statements and financial statement schedule
have been prepared assuming that the Company will continue as a going concern.
As discussed in note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern. The
Company’s research and development activities have historically required
substantial capital resources and its ability to raise capital has been
adversely affected by current economic conditions. Management’s plans
in regard to these matters are also described in note 1. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Cytori Therapeutics, Inc.’s internal control
over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated
March 6, 2009, expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
|
/s/
KPMG LLP
|
San
Diego, California
March 6,
2009
54
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Cytori
Therapeutics, Inc.:
We have
audited Cytori Therapeutics, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Cytori Therapeutics, Inc.'s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting
(Item 9A). Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Cytori Therapeutics, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Cytori
Therapeutics, Inc. as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive loss, stockholders’
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 2008, and our report dated March 6, 2009, expressed an
unqualified opinion on those consolidated financial statements.
|
/s/
KPMG LLP
|
San
Diego, California
March 6,
2009
55
CYTORI THERAPEUTICS, INC.
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 12,611,000 | $ | 11,465,000 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts of $122,000 and $1,000
in 2008 and 2007, respectively
|
1,308,000 | 9,000 | ||||||
|
Inventories,
net
|
2,143,000 | — | ||||||
|
Other
current assets
|
1,163,000 | 764,000 | ||||||
|
Total
current assets
|
17,225,000 | 12,238,000 | ||||||
|
Property
and equipment, net
|
2,552,000 | 3,432,000 | ||||||
|
Investment
in joint venture
|
324,000 | 369,000 | ||||||
|
Other
assets
|
729,000 | 468,000 | ||||||
|
Intangibles,
net
|
857,000 | 1,078,000 | ||||||
|
Goodwill
|
3,922,000 | 3,922,000 | ||||||
|
Total
assets
|
$ | 25,609,000 | $ | 21,507,000 | ||||
|
Liabilities
and Stockholders’ Deficit
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 5,088,000 | $ | 7,349,000 | ||||
|
Current
portion of long-term obligations
|
2,047,000 | 721,000 | ||||||
|
Total
current liabilities
|
7,135,000 | 8,070,000 | ||||||
|
Deferred
revenues, related party
|
16,474,000 | 18,748,000 | ||||||
|
Deferred
revenues
|
2,445,000 | 2,379,000 | ||||||
|
Option
liability
|
2,060,000 | 1,000,000 | ||||||
|
Long-term
deferred rent
|
168,000 | 473,000 | ||||||
|
Long-term
obligations, less current portion
|
5,044,000 | 237,000 | ||||||
|
Total
liabilities
|
33,326,000 | 30,907,000 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
deficit:
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; -0- shares issued
and outstanding in 2008 and 2007
|
— | — | ||||||
|
Common
stock, $0.001 par value; 95,000,000 shares authorized; 31,176,275 and
25,962,222 shares issued and 29,303,441 and 24,089,388 shares outstanding
in 2008 and 2007, respectively
|
31,000 | 26,000 | ||||||
|
Additional
paid-in capital
|
161,214,000 | 129,504,000 | ||||||
|
Accumulated
deficit
|
(162,168,000 | ) | (132,132,000 | ) | ||||
|
Treasury
stock, at cost
|
(6,794,000 | ) | (6,794,000 | ) | ||||
|
Amount
due from exercises of stock
options
|
— | (4,000 | ) | |||||
|
Total
stockholders’ deficit
|
(7,717,000 | ) | (9,400,000 | ) | ||||
|
Total
liabilities and stockholders’ deficit
|
$ | 25,609,000 | $ | 21,507,000 | ||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
56
CYTORI THERAPEUTICS, INC.
|
For the Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Product
revenues:
|
||||||||||||
|
Related
party
|
$ | 28,000 | $ | 792,000 | $ | 1,451,000 | ||||||
|
Third
party
|
4,500,000 | — | — | |||||||||
| 4,528,000 | 792,000 | 1,451,000 | ||||||||||
|
Cost
of product revenues
|
1,854,000 | 422,000 | 1,634,000 | |||||||||
|
Gross
profit (loss)
|
2,674,000 | 370,000 | (183,000 | ) | ||||||||
|
Development
revenues:
|
||||||||||||
|
Development,
related party
|
774,000 | 5,158,000 | 5,905,000 | |||||||||
|
Other,
related party
|
1,500,000 | — | — | |||||||||
|
Development
|
— | 10,000 | 152,000 | |||||||||
|
Research
grants and other
|
51,000 | 89,000 | 419,000 | |||||||||
| 2,325,000 | 5,257,000 | 6,476,000 | ||||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
17,371,000 | 20,020,000 | 21,977,000 | |||||||||
|
Sales
and marketing
|
4,602,000 | 2,673,000 | 2,055,000 | |||||||||
|
General
and administrative
|
11,727,000 | 14,184,000 | 12,547,000 | |||||||||
|
Change
in fair value of option liabilities
|
1,060,000 | 100,000 | (4,431,000 | ) | ||||||||
|
Total
operating expenses
|
34,760,000 | 36,977,000 | 32,148,000 | |||||||||
|
Operating
loss
|
(29,761,000 | ) | (31,350,000 | ) | (25,855,000 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Gain
on sale of assets
|
— | 1,858,000 | — | |||||||||
|
Interest
income
|
230,000 | 1,028,000 | 708,000 | |||||||||
|
Interest
expense
|
(420,000 | ) | (155,000 | ) | (199,000 | ) | ||||||
|
Other
expense, net
|
(40,000 | ) | (46,000 | ) | (27,000 | ) | ||||||
|
Equity
loss from investment in joint venture
|
(45,000 | ) | (7,000 | ) | (74,000 | ) | ||||||
|
Total
other income (loss)
|
(275,000 | ) | 2,678,000 | 408,000 | ||||||||
|
Net
loss
|
(30,036,000 | ) | (28,672,000 | ) | (25,447,000 | ) | ||||||
|
Other
comprehensive income (loss) - unrealized holding income
(loss)
|
— | (1,000 | ) | 17,000 | ||||||||
|
Comprehensive
loss
|
$ | (30,036,000 | ) | $ | (28,673,000 | ) | $ | (25,430,000 | ) | |||
|
Basic
and diluted net loss per common share
|
$ | (1.12 | ) | $ | (1.25 | ) | $ | (1.53 | ) | |||
|
Basic
and diluted weighted average common shares
|
26,882,431 | 22,889,250 | 16,603,550 | |||||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
57
CYTORI THERAPEUTICS, INC.
FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
|
Accumulated
|
Amount
due
|
|||||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
From
|
||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Paid-in
|
Accumulated
|
Treasury
Stock
|
Comprehensive
|
Exercises
of
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Shares
|
Amount
|
Income
(Loss)
|
Stock
Options
|
Total
|
||||||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
18,194,283 | $ | 18,000 | $ | 82,196,000 | $ | (78,013,000 | ) | 2,872,834 | $ | (10,414,000 | ) | $ | (16,000 | ) | $ | — | $ | (6,229,000 | ) | ||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 3,202,000 | — | — | — | — | — | 3,202,000 | |||||||||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
397,205 | 1,000 | 934,000 | — | — | — | — | — | 935,000 | |||||||||||||||||||||||||||
|
Compensatory
common stock awards
|
2,500 | — | 18,000 | — | — | — | — | — | 18,000 | |||||||||||||||||||||||||||
|
Sale
of common stock
|
2,918,255 | 3,000 | 16,216,000 | — | — | — | — | — | 16,219,000 | |||||||||||||||||||||||||||
|
Stock
issued for license amendment
|
100,000 | — | 487,000 | — | — | — | — | — | 487,000 | |||||||||||||||||||||||||||
|
Amount
due from exercises of stock options
|
— | — | — | — | — | — | — | (15,000 | ) | (15,000 | ) | |||||||||||||||||||||||||
|
Unrealized
gain on investments
|
— | — | — | — | — | — | 17,000 | — | 17,000 | |||||||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2006
|
— | — | — | (25,447,000 | ) | — | — | — | — | (25,447,000 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
21,612,243 | 22,000 | 103,053,000 | (103,460,000 | ) | 2,872,834 | (10,414,000 | ) | 1,000 | (15,000 | ) | (10,813,000 | ) | |||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 2,310,000 | — | — | — | — | — | 2,310,000 | |||||||||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
604,334 | 1,000 | 1,863,000 | — | — | — | — | — | 1,864,000 | |||||||||||||||||||||||||||
|
Sale
of common stock
|
3,745,645 | 3,000 | 19,898,000 | — | — | — | — | — | 19,901,000 | |||||||||||||||||||||||||||
|
Sale
of treasury stock
|
— | — | 2,380,000 | — | (1,000,000 | ) | 3,620,000 | — | — | 6,000,000 | ||||||||||||||||||||||||||
|
Amount
due from exercises of stock options
|
— | — | — | — | — | — | — | 11,000 | 11,000 | |||||||||||||||||||||||||||
|
Unrealized
loss on investments
|
— | — | — | — | — | — | (1,000 | ) | — | (1,000 | ) | |||||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2007
|
— | — | — | (28,672,000 | ) | — | — | — | — | (28,672,000 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
25,962,222 | 26,000 | 129,504,000 | (132,132,000 | ) | 1,872,834 | (6,794,000 | ) | — | (4,000 | ) | (9,400,000 | ) | |||||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 2,257,000 | — | — | — | — | — | 2,257,000 | |||||||||||||||||||||||||||
|
Issuance
of common stock under stock option plan
|
388,536 | — | 790,000 | — | — | — | — | — | 790,000 | |||||||||||||||||||||||||||
|
Sale
of common stock
|
4,825,517 | 5,000 | 28,099,000 | — | — | — | — | — | 28,104,000 | |||||||||||||||||||||||||||
|
Amount
due from exercises of stock options
|
— | — | — | — | — | — | — | 4,000 | 4,000 | |||||||||||||||||||||||||||
|
Allocation
of fair value for debt warrants
|
— | — | 564,000 | — | — | — | — | — | 564,000 | |||||||||||||||||||||||||||
|
Net
loss for the year ended December 31, 2008
|
— | — | — | (30,036,000 | ) | — | — | — | — | (30,036,000 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
31,176,275 | $ | 31,000 | $ | 161,214,000 | $ | (162,168,000 | ) | 1,872,834 | $ | (6,794,000 | ) | $ | — | $ | — | $ | (7,717,000 | ) | |||||||||||||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
58
CYTORI THERAPEUTICS, INC.
|
For the Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (30,036,000 | ) | $ | (28,672,000 | ) | $ | (25,447,000 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,533,000 | 1,616,000 | 2,120,000 | |||||||||
|
Amortization
of deferred financing costs and debt discount
|
178,000 | — | — | |||||||||
|
Inventory
provision
|
— | 70,000 | 88,000 | |||||||||
|
Warranty
provision (reversal)
|
(44,000 | ) | (65,000 | ) | (23,000 | ) | ||||||
|
Increase
(reduction) in allowance for doubtful accounts
|
121,000 | (1,000 | ) | (7,000 | ) | |||||||
|
Change
in fair value of option liabilities
|
1,060,000 | 100,000 | (4,431,000 | ) | ||||||||
|
Gain
on sale of assets
|
— | (1,858,000 | ) | — | ||||||||
|
Stock-based
compensation
|
2,257,000 | 2,310,000 | 3,220,000 | |||||||||
|
Stock
issued for license amendment
|
— | — | 487,000 | |||||||||
|
Equity
loss from investment in joint venture
|
45,000 | 7,000 | 74,000 | |||||||||
|
Increases
(decreases) in cash caused by changes in operating assets and
liabilities:
|
||||||||||||
|
Accounts
receivable
|
(1,420,000 | ) | 217,000 | 598,000 | ||||||||
|
Inventories
|
(2,143,000 | ) | — | 6,000 | ||||||||
|
Other
current assets
|
(147,000 | ) | (70,000 | ) | (90,000 | ) | ||||||
|
Other
assets
|
(63,000 | ) | (40,000 | ) | 30,000 | |||||||
|
Accounts
payable and accrued expenses
|
(2,217,000 | ) | 1,827,000 | 281,000 | ||||||||
|
Deferred
revenues, related party
|
(2,274,000 | ) | (5,158,000 | ) | 6,595,000 | |||||||
|
Deferred
revenues
|
66,000 | (10,000 | ) | (152,000 | ) | |||||||
|
Long-term
deferred rent
|
(305,000 | ) | (268,000 | ) | 168,000 | |||||||
|
Net
cash used in operating activities
|
(33,389,000 | ) | (29,995,000 | ) | (16,483,000 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from the sale and maturity of short-term investments
|
5,739,000 | 28,007,000 | 67,137,000 | |||||||||
|
Purchases
of short-term investments
|
(5,739,000 | ) | (24,032,000 | ) | (63,258,000 | ) | ||||||
|
Proceeds
from the sale of assets
|
— | 3,175,000 | — | |||||||||
|
Costs
from sale of assets
|
— | (305,000 | ) | — | ||||||||
|
Purchases
of property and equipment
|
(393,000 | ) | (563,000 | ) | (3,138,000 | ) | ||||||
|
Investment
in joint venture
|
— | (300,000 | ) | (150,000 | ) | |||||||
|
Net
cash provided by (used in) investing activities
|
(393,000 | ) | 5,982,000 | 591,000 | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Principal
payments on long-term obligations
|
(958,000 | ) | (1,200,000 | ) | (952,000 | ) | ||||||
|
Proceeds
from long-term obligations
|
7,500,000 | — | 600,000 | |||||||||
|
Debt
issuance costs
|
(513,000 | ) | — | — | ||||||||
|
Proceeds
from exercise of employee stock options
|
795,000 | 1,875,000 | 920,000 | |||||||||
|
Proceeds
from sale of common stock
|
28,954,000 | 21,500,000 | 16,780,000 | |||||||||
|
Costs
from sale of common stock
|
(850,000 | ) | (1,599,000 | ) | (561,000 | ) | ||||||
|
Proceeds
from sale of treasury stock
|
— | 6,000,000 | — | |||||||||
|
Net
cash provided by financing activities
|
34,928,000 | 26,576,000 | 16,787,000 | |||||||||
|
Net
increase in cash and cash equivalents
|
1,146,000 | 2,563,000 | 895,000 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
11,465,000 | 8,902,000 | 8,007,000 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 12,611,000 | $ | 11,465,000 | $ | 8,902,000 | ||||||
59
|
For the Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Supplemental
disclosure of cash flows information:
|
||||||||||||
|
Cash
paid during period for:
|
||||||||||||
|
Interest
|
$ | 180,000 | $ | 160,000 | $ | 201,000 | ||||||
|
Taxes
|
— | 2,000 | 1,000 | |||||||||
|
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||||||
|
Fair
value of warrants allocated to additional paid in capital
|
$ | 564,000 | $ | — | $ | — | ||||||
|
Final
payment fee of the long-term debt
|
375,000 | |||||||||||
|
Amount
due from exercise of stock options
|
— | 4,000 | 15,000 | |||||||||
THE
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
60
CYTORI THERAPEUTICS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
1.
|
Organization
and Operations
|
The
Company
Cytori
Therapeutics, Inc., develops, manufactures and sells medical technologies to
enable the practice of regenerative medicine. Our commercial activities are
currently focused on reconstructive surgery in Europe and stem cell banking
(cell preservation) in Japan and we are seeking to bring our products to market
in the United States as well as other countries. Our product pipeline is
developing potential new treatments for cardiovascular disease, orthopedic
damage, gastrointestinal disorders, and pelvic health.
Our Thin
Film product line will be marketed exclusively in Japan by Senko Medical Trading
Co. (“Senko”) following regulatory approval of the product in
Japan.
We have
two subsidiaries located in Japan and Italy.
Principles
of Consolidation
The
consolidated financial statements include our accounts and those of our
subsidiaries. All significant intercompany transactions and balances
have been eliminated. Management evaluates its investments on an
individual basis for purposes of determining whether or not consolidation is
appropriate. In instances where we do not demonstrate control through
decision-making ability and/or a greater than 50% ownership interest, we account
for the related investments under the cost or equity method, depending upon
management’s evaluation of our ability to exercise and retain significant
influence over the investee. Our investment in the Olympus-Cytori, Inc. joint
venture has been accounted for under the equity method of accounting (see note 3
for further details).
Certain
Risks and Uncertainties
We have a
limited operating history and our prospects are subject to the risks and
uncertainties frequently encountered by companies in the early stages of
development and commercialization, especially those companies in rapidly
evolving and technologically advanced industries such as the biotech/medical
device field. Our future viability largely depends on our ability to complete
development of new products and receive regulatory approvals for those products.
No assurance can be given that our new products will be successfully developed,
regulatory approvals will be granted, or acceptance of these products will be
achieved. The development of medical devices for specific therapeutic
applications is subject to a number of risks, including research, regulatory and
marketing risks. There can be no assurance that our development stage products
will overcome these hurdles and become commercially viable and/or gain
commercial acceptance.
For the
years ended December 31, 2007 and 2006, we recorded bioresorbable product
revenue from Medtronic of $792,000 and $1,451,000, respectively, which
represented 13.1% and 18.3% of total product and development revenues,
respectively. We sold substantially all of our bioresorbable spine
and orthopedic surgical implant product line to Kensey Nash in May
2007. There was no bioresorbable product revenue recorded in
2008.
Liquidity
and Capital Availability
We
incurred losses of $30,036,000, $28,672,000 and $25,447,000 for the years ended
December 31, 2008, 2007, and 2006 respectively. We have an
accumulated deficit of $162,168,000 as of December 31, 2008. Additionally,
we have used net cash of $33,389,000, $29,995,000 and $16,483,000 to fund our
operating activities for years ended December 31, 2008, 2007, and 2006,
respectively. To date these
operating losses have been funded primarily from outside sources of invested
capital.
During
2008, we initiated our commercialization activities while simultaneously
pursuing available financing sources to support operations and
growth. We have had, and continue to have, an ongoing need to raise
additional cash from outside sources to fund our operations. However,
our ability to raise capital has been adversely affected by current credit
conditions and the downturn in the financial markets and the global
economy. Accordingly, the combination of these facts raises
substantial doubt as to the Company’s ability to continue as a going
concern. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. If we are unsuccessful in our efforts to raise outside
capital in the near term, we will be required to significantly reduce our
research, development, and administrative operations, including reduction of our
employee base, in order to offset the lack of available funding.
61
We are
pursuing financing opportunities in both the private and public debt and equity
markets as well as through strategic corporate partnerships. We have an
established history of raising capital through these platforms, and we are
currently involved in negotiations with multiple parties. Our efforts in
2008 to raise capital have taken longer than we initially anticipated. In
August 2008, we raised approximately $17,000,000 in gross proceeds from a
private placement of 2,825,517 unregistered shares of common stock and 1,412,758
common stock warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors including Olympus Corporation, who acquired 1,000,000
unregistered shares and 500,000 common stock warrants in exchange for $6,000,000
of the total proceeds raised. In
October 2008, we entered into a secured Loan Agreement with General Electric
Capital Corporation and Silicon Valley Bank (“Lenders”) to borrow up to
$15,000,000. An initial term loan of $7,500,000, less fees and
expenses, was funded on October 14, 2008. We could not access the
remaining $7,500,000 under this facility as we were not able to meet certain
financial prerequisites that had been established by the Lenders.
We expect
to continue to utilize our cash and cash equivalents to fund operations through
at least the next few months, subject to minimum cash and cash liquidity
requirements of the Loan and Security Agreement with the Lenders, which requires
that we maintain at least three months of cash on hand to avoid an event of
default under the Loan and Security Agreement. We continue to seek
additional cash through product revenues, strategic collaborations, and future
sales of equity or debt securities. Although there can be no assurance
given, we hope to successfully complete one or more additional financing
transactions and corporate partnerships in the near-term. Without this
additional capital, current working capital and cash generated from sales and
containment of operating costs will not provide adequate funding for research,
sales and marketing efforts, clinical and preclinical trials, and product
development activities at their current levels. If such efforts are not
successful, we will need to significantly reduce or curtail our research and
development and other operations and this could negatively affect our ability to
achieve corporate growth goals. Specifically, we have prepared an
operating plan (plan) that calls for us to reduce operations to focus almost
entirely on the supply of current products to existing or new distribution
channels. In addition, as part of this plan, there would be minimal
expenditures for ongoing scientific research, product development or clinical
research. This impacts research and development headcount, external
subcontractor expenditures, capital outlay and general and administrative
expenditures related to the supervision of such activities. In
parallel, we would significantly reduce administrative staff and salaries
consistent with the overall reduction in scope of operations. In
aggregate, such reductions could result in eliminations of roles for the
majority of the Company’s current staff and the deferral or elimination of all
ongoing development projects until such time that cash resources were available
from operations or outside sources to re-establish development and growth
plans. Management is currently reviewing contractual obligations related
to the pre-clinical and clinical commitments along with minimum purchase
requirements to include deferral of such commitments as part of this
plan. While management is actively pursuing its near term financial
and strategic alternatives it is also, in parallel, continuing to evaluate the
timing of implementation of the alternative operating plan and the initiation of
the identified reductions.
|
2.
|
Summary
of Significant Accounting Policies
|
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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. Our most significant estimates
and critical accounting policies involve recognizing revenue, evaluating
goodwill for impairment, accounting for product line dispositions, valuing our
put option arrangement with Olympus Corporation (Put option) (see notes 3 and
4), determining the assumptions used in measuring share-based compensation
expense, valuing our deferred tax assets, assessing how to report our investment
in Olympus-Cytori, Inc., valuing allowance for doubtful accounts and
inventories.
Actual
results could differ from these estimates. Current economic
conditions, including illiquid credit markets and volatile equity markets,
contribute to the inherent uncertainty of such
estimates. Management’s estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the consolidated
financial statements in the periods they are determined to be
necessary.
Presentation
Certain
prior period amounts have been reclassified to conform to current period
presentation.
Cash
and Cash Equivalents
We
consider all highly liquid investments with maturities of three months or less
at the time of purchase to be cash equivalents. Investments with original
maturities of three months or less that were included with and classified as
cash and cash equivalents totaled $11,718,000 and $10,502,000 as of December 31,
2008 and 2007, respectively. We maintain our cash at insured
financial
62
institutions. The
combined account balances at each institution periodically exceed FDIC insurance
coverage, and as a result, there is a concentration of credit risk related to
amounts in excess of FDIC limits. We believe that the risk is not
significant.
Short-term
Investments
We invest
excess cash in money market funds, highly liquid debt instruments of financial
institutions and corporations with strong credit ratings, and in United States
government obligations. We have established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
We
evaluate our investments in accordance with the provisions of Statement of
Financial Standards (“SFAS”) No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” Based on our intent, our investment
policies and our ability to liquidate debt securities, we classify short-term
investment securities within current assets. Available-for-sale securities are
carried at fair value, with unrealized gains and losses reported as accumulated
other comprehensive income (loss) within stockholders’ equity. The amortized
cost basis of debt securities is periodically adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
as a component of interest income or interest expense. The amortized cost basis
of securities sold is based on the specific identification method and all such
realized gains and losses are recorded as a component within other income
(expense). We review the carrying values of our investments and write
down such investments to estimated fair value by a charge to the statements of
operations when the severity and duration of a decline in the value of an
investment is considered to be other than temporary. The cost of
securities sold or purchased is recorded on the settlement date.
After
considering current market conditions, and in order to minimize our risk,
management has elected to invest all excess funds in money market funds and
other highly liquid investments that are appropriately classified as cash
equivalents as of December 31, 2008 and 2007.
Fair
Value of Financial Instruments
The
carrying amounts of our cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate their fair value due to the short-term
nature of these balances. The carrying amounts of our current portion
of long-term obligations and long-term obligations approximate fair value as the
terms and rates of interest for these instruments approximate terms and market
rates of interest currently available to us for similar instruments. Our option
liability is already reported at its fair value based on established option
pricing theory and assumptions (notes 3 and 4). Short-term
investments are also reported at fair value in the financial
statements.
Inventories
Inventories
include the cost of material, labor, and overhead, and are stated at the lower
of average cost, determined on the first-in, first-out (FIFO) method, or
market. We periodically evaluate our on-hand stock and make
appropriate provisions for any stock deemed excess or
obsolete. Manufacturing costs resulting from lower than “normal”
production levels are expensed as incurred.
Our
inventory balance as of December 31, 2008 includes the cost of materials on hand
as of December 31, 2008 that we purchased on or after March 1,
2008. March 1, 2008 is considered our commercialization date based on
completion of final development activities associated with our Celution® 800/CRS
System products. All materials purchased prior to the
commercialization date were expensed as research and development expense during
the period they were purchased, of which $78,000 (with a net book value of $0)
was on hand as of December 31, 2008 to be utilized in future
manufacturing.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
expense, which includes the amortization of capitalized leasehold improvements,
is provided for on a straight-line basis over the estimated useful lives of the
assets, or the life of the lease, whichever is shorter, and range from three to
five 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.
Impairment
In
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” we assess certain of our long-lived assets, such as property
and equipment and intangible assets other than goodwill, for potential
impairment when there is a change in circumstances that indicates carrying
values of assets may not be recoverable. Such long-lived assets are deemed to
63
be
impaired when the undiscounted cash flows expected to be generated by the asset
(or asset group) are less than the asset’s carrying amount. Any required
impairment loss would be measured as the amount by which the asset’s carrying
value exceeds its fair value, and would be recorded as a reduction in the
carrying value of the related asset and a charge to operating
expense. We recognized no impairment losses during any of the periods
presented in these financial statements.
Goodwill
and Intangibles
SFAS No.
142, “Goodwill and Other Intangible Assets,” establishes financial accounting
and reporting standards for acquired goodwill and other intangible
assets. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets are not amortized but are reviewed at least annually for impairment.
Separable intangible assets that have finite useful lives will continue to be
amortized over their respective useful lives.
SFAS No.
142 requires that goodwill be tested for impairment on at least an annual basis
or whenever events or changes in circumstances indicate that the carrying value
of goodwill may not be recoverable. We completed this testing as of November 30,
2008, and concluded that no impairment existed.
In 2007,
all goodwill that had been assigned to our MacroPore Biosurgery reporting unit
was derecognized during our sale of substantially all of our spine and
orthopedic product line to Kensey Nash (see note 5).
Intangibles,
consisting of patents and core technology purchased in the acquisition of
StemSource, Inc. in 2002, are being amortized on a straight-line basis over
their expected lives of ten years.
The
changes in the carrying amounts of other indefinite and finite-life intangible
assets and goodwill for the years ended December 31, 2008 and 2007 are as
follows:
|
December 31, 2008
|
||||||||||||
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Total
|
||||||||||
|
Other
intangibles, net:
|
||||||||||||
|
Beginning
balance
|
$ | 1,078,000 | $ | — | $ | 1,078,000 | ||||||
|
Amortization
|
(221,000 | ) | — | (221,000 | ) | |||||||
|
Ending
balance
|
857,000 | — | 857,000 | |||||||||
|
Goodwill,
net:
|
||||||||||||
|
Beginning
balance
|
3,922,000 | — | 3,922,000 | |||||||||
|
Disposal
of assets
|
— | — | — | |||||||||
|
Ending
balance
|
3,922,000 | — | 3,922,000 | |||||||||
|
Total
goodwill and other intangibles, net
|
$ | 4,779,000 | $ | — | $ | 4,779,000 | ||||||
|
Cumulative
amortization of other intangible assets
|
$ | 1,359,000 | $ | — | $ | 1,359,000 | ||||||
|
December 31, 2007
|
||||||||||||
|
Regenerative
Cell Technology
|
MacroPore
Biosurgery
|
Total
|
||||||||||
|
Other
intangibles, net:
|
||||||||||||
|
Beginning
balance
|
$ | 1,300,000 | $ | — | $ | 1,300,000 | ||||||
|
Amortization
|
(222,000 | ) | — | (222,000 | ) | |||||||
|
Ending
balance
|
1,078,000 | — | 1,078,000 | |||||||||
|
Goodwill,
net:
|
||||||||||||
|
Beginning
balance
|
3,922,000 | 465,000 | 4,387,000 | |||||||||
|
Disposal
of assets
|
— | (465,000 | ) | (465,000 | ) | |||||||
|
Ending
balance
|
3,922,000 | — | 3,922,000 | |||||||||
|
Total
goodwill and other intangibles, net
|
$ | 5,000,000 | $ | — | $ | 5,000,000 | ||||||
|
Cumulative
amortization of other intangible assets
|
$ | 1,138,000 | $ | — | $ | 1,138,000 | ||||||
64
As of
December 31, 2008, future estimated amortization expense for these other
intangible assets is expected to be as follows:
|
2009
|
222,000
|
|||
|
2010
|
222,000
|
|||
|
2011
|
222,000
|
|||
|
2012
|
191,000
|
|||
|
$
|
857,000
|
|||
Revenue
Recognition
Product
Sales
We
recognize revenue from product sales when the following fundamental criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred, (iii) the price to the customer is fixed or determinable and (iv)
collection of the resulting accounts receivable is reasonably
assured.
For all
sales, we use a binding purchase order or a signed agreement as evidence of
arrangement. Revenue for these product sales will be recognized upon
delivery to the customer, as all risks and rewards of ownership have been
substantively transferred to the customer at that point. For
Celution® 800/CRS
System sales to customers who arrange for and manage the shipping process, we
recognize revenue upon shipment from our facilities. Shipping and
handling costs that are billed to our customers are classified as revenue, in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-10, “Accounting
for Shipping and Handling Fees and Costs” (“EITF 00-10”). The
customer’s obligation to pay and the payment terms are set at the time of
delivery and are not dependent on the subsequent use or resale of our
product.
For those
sales that include multiple deliverables, we allocate revenue based on the
relative fair values of the individual components as determined in accordance
with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”
(“EITF 00-21”). When more than one element such as product
maintenance or technical support services are included in an arrangement, we
allocate revenue between the elements based on each element’s relative fair
value, provided that each element meets the criteria for treatment as a separate
unit of accounting. An item is considered a separate unit of
accounting if it has value to the customer on a standalone basis and there is
objective and reliable evidence of the fair value of the undelivered
items. Fair value is generally determined based upon the price
charged when the element is sold separately. In the absence of fair
value for a delivered element, we allocate revenue first to the fair value of
the undelivered elements and allocate the residual revenue to the delivered
elements. Deferred service revenue is recognized ratably over the
period the services are provided. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a single unit of
accounting, resulting in a deferral of revenue recognition for delivered
elements until all undelivered elements have been fulfilled.
An
allowance for doubtful accounts is maintained for estimated losses resulting
from the inability of our customers to make required payments. This
reserve is determined by analyzing specific customer accounts and applying
historical loss rates to the aging of remaining accounts receivable
balances. If the financial condition of our customer were to
deteriorate, resulting in their inability to pay their accounts when due,
additional reserves might be required.
Before
the disposal of substantially all of our bioresorbable spine and orthopedic
product line in May 2007, we sold our (non-Thin Film) MacroPore Biosurgery
products to Medtronic, Inc. We recognized revenue on product sales to
Medtronic upon shipment of ordered products to Medtronic, as title and risk of
loss were transferred at that point. In May 2007, we sold to Kensey
Nash our intellectual property rights and tangible assets related to our
bioresorbable spine and orthopedic product line (see note 5).
License/Distribution
Fees
We
recognize any upfront payments received from license/distribution agreements as
revenues over the period in which the customer benefits from the
license/distribution agreement.
To date,
we have not received any upfront license payments that are separable under EITF
00-21. Accordingly, such license revenues have been combined with
other elements, such as research and development activities, for purposes of
revenue recognition. For instance, we account for the license fees
and milestone payments under the Distribution Agreement with Senko as a single
unit of accounting. Similarly, we have attributed the upfront fees
received under the arrangements with Olympus Corporation, a related party (see
note 3), to a single unit of accounting comprising a license we granted to
Olympus-Cytori, Inc. (the “Joint Venture”), a related party, as well as
development services we agreed to perform for this entity.
In the
first quarter of 2006, we granted Olympus an exclusive right to negotiate a
commercialization collaboration for the use of adipose stem and regenerative
cells for a specific therapeutic area outside of cardiovascular
disease. In exchange for this right, we received $1,500,000 from
Olympus, which was non-refundable but could be applied towards a definitive
commercial collaboration in the future. As part of this agreement,
Olympus would conduct market research and pilot clinical studies in
65
collaboration
with us for the therapeutic area up to December 31, 2008 when this exclusive
right expired. The $1,500,000 payment was received in the second quarter of
2006 and recorded as deferred revenues, related party. Accordingly,
on December 31, 2008, we recognized $1,500,000 as other development revenue and
reduced our deferred revenues, related party balance for the same
amount.
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
recorded the $1,500,000 received as deferred revenues in the accompanying
consolidated balance sheets. 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. We are currently
pursuing the required regulatory clearance in order to initiate
commercialization.
Research
and Development
We earn
revenue for performing tasks under research and development agreements with both
commercial enterprises, such as Olympus and Senko, and governmental agencies
like the National Institutes of Health (“NIH”). Revenue earned under
development agreements is classified as either research grant or development
revenues depending on the nature of the arrangement. Revenues derived
from reimbursement of direct out-of-pocket expenses for research costs
associated with grants are presented 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 our
consolidated statements of operations.
Additionally,
research and development arrangements we have with commercial enterprises such
as Olympus and Senko are considered a key component of our central and ongoing
operations. Accordingly, when recognized, the inflows from such
arrangements are presented as revenues in our consolidated 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
3). Approximately $4,689,000 of this amount related to common stock
that we issued, as well as two 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®
600. The difference between the proceeds received and the fair values
of the common stock and option liability 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 (or
“JV”), rather than additional equity investment in
Cytori. 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 platform
and certain related intellectual property, and (b) provide future development
contributions related to commercializing the Celution® System
platform. As noted above, the license and development services are
not separable under EITF 00-21. The recognition of this deferred
amount requires achievement of service related milestones, under a proportional
performance methodology. If and as such revenues are recognized,
deferred revenue will be decreased. Proportional performance
methodology was elected due to the nature of our development obligations and
efforts in support of the Joint Venture (“JV”), including product development
activities and regulatory efforts to support the commercialization of the JV
products. The application of this methodology uses the achievement of R&D
milestones as outputs of value to the JV. We received up-front,
non-refundable payments in connection with these development obligations, which
we have broken down into specific R&D milestones that are definable and
substantive in nature, and which will result in value to the JV when
achieved. Revenue will be recognized as the above mentioned R&D
milestones are completed.
We
established the R&D milestones based upon our development obligations to the
JV and the specific R&D support activities to be performed to achieve these
obligations. Our R&D milestones consist of the following primary
performance categories: product development, regulatory approvals,
and generally associated pre-clinical and clinical
trials. Within each category are milestones that take
substantive effort to complete and are critical pieces of the overall progress
towards completion of the next generation product, which we are obligated to
support within the agreements entered into with Olympus.
To
determine whether substantive effort was required to achieve the milestones, we
considered the external costs, required personnel and relevant skill levels, the
amount of time required to complete each milestone, and the interdependent
relationships between the milestones, in that the benefits associated with the
completion of one milestone generally support and contribute to the achievement
of the next.
Determination
of the relative values assigned to each milestone involved substantial
judgment. The assignment process was based on discussions with
persons responsible for the development process and the relative costs of
completing each milestone.
66
We
considered the costs of completing the milestones in allocating the portion of
the “deferred revenues, related party” account balance to each
milestone. Management believes that, while the costs incurred in
achieving the various milestones are subject to estimation, due to the high
correlation of such costs to outputs achieved, the use of external contract
research organization costs and internal labor costs as the basis for the
allocation process provides management the ability to accurately and reasonably
estimate such costs.
Of the
amounts received and deferred, we recognized development revenues of $774,000
and $5,158,000 in the years ended December 31, 2008 and 2007,
respectively. All related development costs are expensed as incurred
and are included in research and development expense on the statement of
operations.
In the
third quarter of 2004, we entered into a Distribution Agreement with
Senko. Under this agreement, we granted to Senko an exclusive license
to sell and distribute certain Thin Film products in Japan. We have
also earned or will be entitled to earn additional payments under the
Distribution Agreement based on achieving the following defined research and
development milestones:
|
·
|
In
2004, we received a nonrefundable payment of $1,250,000 from Senko after
filing an initial regulatory application with the Japanese Ministry of
Health, Labour and Welfare (“MHLW”) related to the Thin Film product
line. We initially recorded this payment as deferred revenues
of $1,250,000.
|
|
·
|
Upon
the achievement of commercialization (i.e., regulatory approval by the
MHLW), we will be entitled to an additional nonrefundable payment of
$250,000.
|
Of the
amounts received and deferred, we recognized development revenues of $10,000 and
$152,000 in the years ended December 31, 2007 and 2006, respectively,
representing the fair value of the completed milestones relative to the fair
value of the total efforts expected to be necessary to achieve regulatory
approval by the MHLW. There was no development revenue recognized
during the year ended December 31, 2008. As noted above, the license
and the milestone components of the Senko Distribution Agreement are accounted
for as a single unit of accounting. This single element includes a
$1,500,000 license fee which is potentially refundable. We have
recognized, and will continue to recognize, the non-contingent fees allocated to
this combined deliverable as we complete performance obligations under the
Distribution Agreement with Senko. We will not recognize the
potentially refundable portion of the fees until the right of refund
expires. See note 6 for further details. Accordingly, we
expect to recognize approximately $1,129,000 (consisting of 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
if and when commercialization is achieved. We will not recognize the
potentially refundable portion of the fees ($1,500,000) until the right of
refund expires.
Under our
agreement with the NIH, we were reimbursed for “qualifying expenditures” related
to research on adipose-derived cell therapy for myocardial
infarction. To receive funds under the grant arrangement, we were
required to (i) demonstrate that we incurred “qualifying expenses,” as defined
in the grant agreement between the NIH and us, (ii) maintain a system of
controls, whereby we could accurately track and report all expenditures related
solely to research on Adipose-Derived Cell Therapy for Myocardial Infarction,
and (iii) file appropriate forms and follow appropriate protocols established by
the NIH. When we were reimbursed for costs incurred under grant
arrangements with the NIH, we recognized revenues for the lesser
of:
|
·
|
Qualifying
costs incurred (and not previously recognized) to date, plus any allowable
grant fees for which we are entitled to funding from the NIH;
or
|
|
·
|
The
outputs generated to date versus the total outputs expected to be achieved
under the research arrangement.
|
For the
year ended December 31, 2006, we recognized NIH grant revenue of
$310,000. Our work under this NIH agreement was completed in 2006; as
a result, there were no comparable revenues or costs in 2008 and
2007.
Warranty
For the
bioresorbable spine and orthopedic products, we provided a limited warranty
under our agreements with our customers for products that fail to comply with
product specifications. We have recorded a reserve for estimated costs we may
incur under our warranty program. In May 2007, we sold to Kensey Nash
our intellectual property rights and tangible assets related to our
bioresorbable spine and orthopedic product line.
Beginning
in March 2008, we began sales and shipments of our Celution® 800/CRS
System to the European and Asia-Pacific reconstructive surgery
market. In September 2008 we completed installation of our first
StemSource® Cell
Bank. We are selling medical device equipment for use with humans,
which is subjected to exhaustive and highly controlled specification compliance
and fitness testing and validation procedures before it can be approved for sale
ensuring that the products will be free of defects.
67
We
believe that the rigorous nature of the testing and compliance efforts serves to
minimize the likelihood of defects in material or workmanship to a level
substantially less than “probable”, and a warranty estimate is not justified at
this time. Accordingly, we did not record a warranty reserve for our
Celution® 800/CRS
System and StemSource® Cell
Bank product line during the year ended December 31, 2008.
The
following summarizes the movements in our warranty obligations, which is
included in accounts payable and accrued expenses, at December 31, 2008, 2007
and 2006:
|
As of
January 1,
|
Additions/
(Deductions) to
expenses
|
Claims
|
As of
December 31,
|
|||||||||||||
|
2008:
|
||||||||||||||||
|
Warranty
obligations
|
$ | 67,000 | $ | (44,000 | ) | $ | — | $ | 23,000 | |||||||
|
2007:
|
||||||||||||||||
|
Warranty
obligations
|
$ | 132,000 | $ | (65,000 | ) | $ | — | $ | 67,000 | |||||||
|
2006:
|
||||||||||||||||
|
Warranty
obligations
|
$ | 155,000 | $ | (23,000 | ) | $ | — | $ | 132,000 | |||||||
Research
and Development
Research
and development expenditures, which are charged to operations in the period
incurred, include costs associated with the design, development, testing and
enhancement of our products, regulatory fees, the purchase of laboratory
supplies, pre-clinical and clinical studies. Included in these expenditures are
salaries and benefits related to these efforts (excluding stock based
compensation), which were approximately $6,189,000 in 2008.
Also
included in research and development expenditures are costs incurred to support
research grant reimbursement and costs incurred in connection with our
development arrangements with Olympus and Senko.
Expenditures
related to the Joint Venture with Olympus include costs that are necessary to
support the commercialization of future generation devices based on our
Celution® System platform. These development activities, which began in November
2005, include performing pre-clinical and clinical trials, seeking regulatory
approval, and performing product development related to therapeutic applications
for adipose stem and regenerative cells for multiple large markets. For the
years ended December 31, 2008, 2007 and 2006, costs associated with the
development of the device were $2,546,000, $6,293,000 and $7,286,000,
respectively.
Our
agreement with the NIH entitled us to qualifying expenditures of up to $950,000
for Phase I and Phase II related to research on Adipose-Derived Cell Therapy for
Myocardial Infarction. We incurred $479,000 ($169,000 of which were not
reimbursed) of direct expenses for the year ended December 31, 2006. There were
no comparable expenditures in 2008 and 2007 as our work under the NIH agreement
was completed during 2006.
Under a
Distribution Agreement with Senko we are responsible for the completion of the
initial regulatory application to the MHLW and commercialization of the Thin
Film product line in Japan. During the years ended December 31, 2007 and 2006,
we incurred $80,000 and $178,000, respectively, of expenses related to this
regulatory and registration process. We did not incur any expenses related to
this regulatory and registration process during the year ended December 31,
2008. We are currently pursuing the required regulatory clearance in
order to initiate commercialization.
Deferred
Financing Costs and Other Debt-Related Costs
Deferred
financing costs are capitalized and amortized to interest expense over the term
of its associated debt instrument. We evaluate the terms of the debt
instruments to determine if any embedded or freestanding derivatives or
conversion features exist. We allocate the aggregate proceeds of the
debt between the warrants and the debt based on their relative fair values in
accordance with Accounting Principle Board No. 14 (APB 14), “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.” The fair value of the warrant
issued to the Lenders is calculated utilizing the Black-Scholes option-pricing
model. We are amortizing the resultant discount over the term of the debt
through maturity date using the effective interest method. If the
maturity of the debt is accelerated because of default or early debt repayment,
then the amortization is accelerated.
68
Income
Taxes
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income (loss) in the years in
which those temporary differences are expected to be recovered or
settled. Due to our history of loss, a full valuation allowance was
recognized against deferred tax assets.
Stock
Based Compensation
Accounting
Policy
On
January 1, 2006, we adopted the provisions of Financial Accounting Standards
Board Statement No. 123R, “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method. SFAS 123R requires us to measure all share-based
payment awards granted after January 1, 2006, including those with employees, at
fair value. Under SFAS 123R, the fair value of stock options and
other equity-based compensation must be recognized as expense in the statements
of operations over the requisite service period of each award.
In
addition, beginning January 1, 2006, we have recognized compensation expense
under SFAS 123R for the unvested portions of outstanding share-based awards
previously granted under our (a) 2004 Equity Incentive Plan and (b) 1997 Stock
Option and Stock Purchase Plan, over the periods these awards continue to
vest. This compensation expense is recognized based on the fair
values and attribution methods that were previously disclosed in our prior
period financial statements under Financial accounting Standards Board Statement
No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
Other
Comprehensive Income (Loss)
Comprehensive
income (loss) is the total of net income (loss) and all other non-owner changes
in equity. Other comprehensive income (loss) refers to these revenues, expenses,
gains, and losses that, under generally accepted accounting principles, are
included in comprehensive income (loss) but excluded from net income
(loss).
During
the years ended December 31, 2007 and 2006, our only element of other
comprehensive income (loss) resulted from unrealized gains (losses) on
available-for-sale investments, which are reflected in the consolidated
statements of stockholders’ equity as accumulated other comprehensive income
(loss). We did not have any comparable other comprehensive income
(loss) during the year ended December 31, 2008.
Segment
Information
We report
our financial results based on two distinct operating segments – (a)
Regenerative cell technology and (b) MacroPore Biosurgery, which manufactures
bioresorbable implants.
Our
regenerative cell technology segment develops, manufactures and sells medical
technologies to enable the practice of regenerative medicine with an initial
focus on reconstructive surgery and cell banking. Our
commercialization model is based on the sale of Celution® Systems and their
related harvest and delivery instrumentation, and on generating recurring
revenues from single-use consumable sets utilized during each patient
procedure.
Our
MacroPore Biosurgery unit 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. Also, until after the
second quarter of 2007, the MacroPore Biosurgery segment manufactured and
distributed the HYDROSORBTM family
of spine and orthopedic implants.
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.
During
the second half of 2007, we had minimal activity in the MacroPore Biosurgery
operating segment as a result of sale in May 2007 to Kensey Nash of the
intellectual property rights and tangible assets related to the spine and
orthopedic bioresorbable implant product line. However, due to
production and sales activity in the MacroPore Biosurgery operating segment
prior to the sale to Kensey Nash, we have reported two operating segments
through December 31, 2008.
69
Prior
year results presented below have been developed on the same basis as the
current year amounts. For all periods presented, we did not have any
intersegment transactions.
The
following tables provide information regarding the performance and assets of our
operating segments:
|
Years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Revenues:
|
||||||||||||
|
Regenerative
cell technology
|
$ | 6,853,000 | $ | 5,247,000 | $ | 6,324,000 | ||||||
|
MacroPore
Biosurgery
|
— | 802,000 | 1,603,000 | |||||||||
|
Total
revenues
|
$ | 6,853,000 | $ | 6,049,000 | $ | 7,927,000 | ||||||
|
Segment
operating income (losses):
|
||||||||||||
|
Regenerative
cell technology
|
(16,793,000 | ) | $ | (17,075,000 | ) | $ | (16,211,000 | ) | ||||
|
MacroPore
Biosurgery
|
(181,000 | ) | 9,000 | (1,528,000 | ) | |||||||
|
General
and administrative expenses
|
(11,727,000 | ) | (14,184,000 | ) | (12,547,000 | ) | ||||||
|
Changes
in fair value of option liabilities
|
(1,060,000 | ) | (100,000 | ) | 4,431,000 | |||||||
|
Total
operating loss
|
$ | (29,761,000 | ) | $ | (31,350,000 | ) | $ | (25,855,000 | ) | |||
|
As of December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets:
|
||||||||
|
Regenerative
cell technology
|
$ | 13,240,000 | $ | 11,591,000 | ||||
|
MacroPore
Biosurgery
|
— | — | ||||||
|
Corporate
assets
|
12,369,000 | 9,916,000 | ||||||
|
Total
assets
|
$ | 25,609,000 | $ | 21,507,000 | ||||
We
derived our revenues from the following products, research grants, development
and service activities:
|
Years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Regenerative
cell technology:
|
||||||||||||
|
Product
revenues:
|
||||||||||||
|
Celution®
products
|
$ | 4 ,528,000 | $ | — | $ | — | ||||||
|
Development
revenues:
|
||||||||||||
|
Milestone
revenue (Olympus)
|
774,000 | 5,158,000 | 5,905,000 | |||||||||
|
Other
(Olympus)
|
1,500,000 | — | — | |||||||||
|
Research
grant (NIH)
|
— | — | 310,000 | |||||||||
|
Regenerative
cell storage services
|
4,000 | 4,000 | 7,000 | |||||||||
|
Other
|
47,000 | 85,000 | 102,000 | |||||||||
|
Total
regenerative cell technology
|
6,853,000 | 5,247,000 | 6,324,000 | |||||||||
|
MacroPore
Biosurgery:
|
||||||||||||
|
Product
revenues:
|
||||||||||||
|
Spine
& orthopedic products
|
— | 792,000 | 1,451,000 | |||||||||
|
Development
revenues
|
— | 10,000 | 152,000 | |||||||||
|
Total
MacroPore Biosurgery
|
— | 802,000 | 1,603,000 | |||||||||
|
Total
revenues
|
$ | 6,853,000 | $ | 6,049,000 | $ | 7,927,000 | ||||||
The
following table provides geographical information regarding our sales to
external customers:
|
For the Years Ended
December 31,
|
U.S. Revenues
|
Non-U.S. Revenues
|
Total Revenues
|
|||||||||
|
2008
|
$ | 2,290,000 | $ | 4,563,000 | $ | 6,853,000 | ||||||
|
2007
|
$ | 6,010,000 | $ | 39,000 | $ | 6,049,000 | ||||||
|
2006
|
$ | 7,827,000 | $ | 100,000 | $ | 7,927,000 | ||||||
At
December 31, 2008 and 2007, our long-lived assets, net of depreciation,
excluding goodwill and intangibles (all of which are in the U.S.), are located
in the following jurisdictions:
|
As of
December 31,
|
U.S. Domiciled
|
Non-U.S. Domiciled
|
Total
|
|||||||||
|
2008
|
$ | 3,197,000 | $ | 408,000 | $ | 3,605,000 | ||||||
|
2007
|
$ | 3,932,000 | $ | 337,000 | $ | 4,269,000 | ||||||
Loss
Per Share
We
compute loss per share based on the provisions of SFAS No. 128, “Earnings Per
Share.” Basic per share data is computed by dividing net income or loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted per share data is computed by dividing
net income or loss available to common stockholders by the
70
weighted
average number of common shares outstanding during the period increased to
include, if dilutive, the number of additional common share equivalents that
would have been outstanding if potential common shares had been issued using the
treasury stock method. Potential common shares were related entirely to
outstanding but unexercised option awards and warrants for all periods
presented.
We have
excluded all potentially dilutive securities from the calculation of diluted
loss per share attributable to common stockholders for the years ended December
31, 2008, 2007 and 2006, as their inclusion would be antidilutive. Potentially
dilutive common shares excluded from the calculations of diluted loss per share
were 9,393,574, 7,880,098 and 5,934,029 for the years ended December 31, 2008,
2007 and 2006, respectively.
Recent
Accounting Pronouncements
In July
2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with FASB Statement
No. 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.
On
January 1, 2008, we adopted certain provisions of SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 provides a single definition of
fair value and a common framework for measuring fair value as well as new
disclosure requirements for fair value measurements used in financial
statements. SFAS 157 applies to reported balances that are required
or permitted to be measured at fair value under existing pronouncements;
accordingly, the standard does not require any new fair value measurements of
reported balances.
In February 2008, the FASB issued Staff
Position “Effective Date
of FASB Statement No. 157” (FSP No. 157-2), which delayed the adoption date
until January 1, 2009 for non-financial assets and liabilities that are measured
at fair value on a non-recurring basis, such as goodwill and identifiable
intangible assets. We do not expect the adoption of the SFAS 157 for
non-financial assets and liabilities to have a material impact on our
consolidated financial position or results of operations.
On
January 1, 2008, we also adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which permits
companies to choose to measure many financial instruments and certain other
items at fair value. However, we have not elected to measure any
additional financial instruments or other items at fair value under the
provisions of this standard.
In March
2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) on Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use 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, which we adopted effective January 1, 2008. The
adoption of EITF 07-3 did not have a significant effect on our consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51” ("SFAS
160"). SFAS 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for annual periods beginning on or after
December 15, 2008. We do not believe that the adoption of SFAS 160
will have a significant effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” ("SFAS 141R"). SFAS 141R retains the fundamental
requirements of Statement No. 141 to account for all business combinations using
the acquisition method (formerly the purchase method) and for an acquiring
entity to be identified in all business combinations. However, the
new standard requires the acquiring entity in a business combination to
recognize all the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141R is effective for
acquisitions made on or after the first day of annual periods beginning on or
after December 15, 2008. We do not believe that the adoption of SFAS
141R will have a significant effect on our consolidated financial
statements.
71
In
December 2007, the FASB ratified the consensus reached by the Emerging Issues
Task Force on EITF Issue 07-1, “Accounting for Collaborative Arrangements”
(“EITF 07-1”). EITF 07-1 requires collaborators to present the
results of activities for which they act as the principal on a gross basis and
report any payments received from (made to) other collaborators based on other
applicable GAAP or, in the absence of other applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and consistently
applied accounting policy election. The guidance is effective for
fiscal years beginning after December 15, 2008. We are currently in
the process evaluating whether the adoption of EITF 07-1 will have a significant
effect on our consolidated financial statements.
In
October 2008, the FASB issued Staff Position “Determining the Fair Value of a
Financial Asset when the Market for That Asset is not Active” (FSP No.
157-3). FSP No. 157-3 clarifies the application of SFAS 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when market
for that financial asset is not active. This guidance is effective
upon issuance, including prior periods for which financial statements have not
been issued. The adoption of FSP No. 157-3 did not have a significant
effect on our consolidated financial statements.
In June
2008, the FASB ratified the consensus on EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock” (“EITF
07-5”). EITF 07-5 provides a framework for
evaluating the terms of a particular instrument to determine whether such
instrument is considered a derivative financial instrument. EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied by recording a cumulative effect
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) as of the date of adoption. We anticipate the adoption of
EITF 07-5 will result is the recognition of a liability for the warrants issued
in August 2008 as part of our private placement of common stock of approximately
$2.9 million and a corresponding increase in stockholders’ deficit as of January
1, 2009. Future changes in the fair value of the warrant liability
will be recognized as a component of earnings (loss).
In April
2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
the Useful Life of Intangible Assets.” This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill
and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141R, and other U.S. generally
accepted accounting principles. This FSP is effective for our interim and annual
financial statements beginning after November 15, 2008. We do not expect the
adoption of this FSP will have a material impact on the our financial
statements.
|
3.
|
Transactions
with Olympus Corporation
|
Initial
Investment by Olympus Corporation in Cytori
In 2005,
we entered into a common stock purchase agreement (the “Purchase Agreement”)
with Olympus in which we received $11,000,000 in cash proceeds.
Under the
Purchase 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 option as a liability.
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 is based on
achievement of related milestones, under a proportional performance
methodology. If and such revenues are recognized, deferred revenue
will be decreased (see note 2 – Revenue Recognition).
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, which was non-refundable but could be applied
towards a definitive commercial collaboration in the future. As part
of this agreement, Olympus would conduct market research and pilot clinical
studies in collaboration with us for the therapeutic area up to December 31,
2008 when this exclusive right expired. The $1,500,000 payment was
received in the second quarter of 2006 and recorded as deferred revenues,
related party. Accordingly, on December 31, 2008, we recognized
$1,500,000 as other development revenue and reduced our deferred revenues,
related party balance for the same amount.
72
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.
On August
11, 2008, we raised approximately $17,000,000 in gross proceeds from a private
placement of 2,825,517 unregistered shares of common stock and 1,412,758 common
stock warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors including Olympus Corporation, who acquired 1,000,000
unregistered shares and 500,000 common stock warrants in exchange for $6,000,000
of the total proceeds raised.
As of
December 31, 2008, Olympus holds approximately 13.7% (unaudited) 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 platform
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 Celution®
600 in January 2006, we received an additional $11,000,000 development
milestone payment from the Joint
Venture.
|
We have
determined that the Joint Venture is a variable interest entity (“VIE”) pursuant
to FASB Interpretation No. 46 (revised 2003), “Consolidation of Variable
Interest Entities - an interpretation of ARB No. 51” (“FIN 46R”), but that
Cytori is not the VIE’s primary beneficiary. Accordingly, we have
accounted for our interests in the Joint Venture using the equity method of
accounting, since we can have significant influence over the Joint Venture’s
operations. At December 31, 2008, the carrying value of our
investment in the Joint Venture is $324,000.
We are
under no obligation to provide additional funding to the Joint Venture, but may
choose to do so. We contributed $300,000 and $150,000 to the Joint
Venture during 2007 and 2006, respectively. The Company made no
contribution during 2008.
Put/Calls
and Guarantees
The
Shareholders’ Agreement between Cytori and Olympus provides that in certain
specified circumstances of insolvency or if we experience a change in control,
Olympus will have the rights to (i) repurchase our interests in the Joint
Venture at the fair value of such interests or (ii) sell its own interests in
the Joint Venture to Cytori at the higher of (a) $22,000,000 or (b) the Put’s
fair value.
As of
November 4, 2005, the fair value of the Put was determined to be
$1,500,000. At December 31, 2008 and 2007, the fair value of the Put
was $2,060,000 and $1,000,000, respectively. Fluctuations in the Put
value are recorded in the consolidated statements of operations as a component
of change in fair value of option liabilities. The fair value of the Put has
been recorded as a long-term liability in the caption option liability in our
consolidated balance sheets.
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.
73
The
following assumptions were employed in estimating the value of the
Put:
|
December
31, 2008
|
December
31, 2007
|
November
4, 2005
|
||||||||||
|
Expected
volatility of
Cytori
|
68.00 | % | 60.00 | % | 63.20 | % | ||||||
|
Expected
volatility of the Joint Venture
|
68.00 | % | 60.00 | % | 69.10 | % | ||||||
|
Bankruptcy
recovery rate for
Cytori
|
21.00 | % | 21.00 | % | 21.00 | % | ||||||
|
Bankruptcy
threshold for
Cytori
|
$ | 16,740,000 | $ | 9,324,000 | $ | 10,780,000 | ||||||
|
Probability
of a change of control event for Cytori
|
2.80 | % | 2.17 | % | 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
|
2.25 | % | 4.04 | % | 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 later 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 Joint Venture’s Celution® System or Systems, to provide
monthly forecasts to the Joint Venture specifying the quantities of each
category of devices that we intend to purchase over a rolling six-month
period. Although we are not subject to any minimum purchase
requirements, we are obliged to buy a minimum percentage of the products
forecasted by us in such reports. Since we can effectively control
the number of devices we will agree to purchase and because no commercial
devices have yet been developed to trigger the forecast requirement, we estimate
that the fair value of this guarantee is de minimis as of December 31,
2008.
In August
2007 we entered into a License and Royalty Agreement with the Joint
Venture. This Royalty Agreement provides us the ability to
commercially launch the Celution® System
platform 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 systems, including Celution® 800/CRS
and Celution® 900/MB,
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. During the year ended December 31, 2008, in
connection with our sales of our Celution® 800/CRS
System products to the European and Asia-Pacific reconstructive surgery market,
we incurred approximately $157,000 in royalty cost related to our agreement with
the Joint Venture. This cost is included as a component of cost of
product revenues in our consolidated condensed statement of
operations.
Deferred
revenues, related party
As of
December 31, 2008, 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
revenue recognition policies set out in note 2). These contributions
include product development, regulatory approvals, and generally associated
pre-clinical and clinical trials to support the commercialization of the
Celution® System platform. Our obligations also include maintaining
the exclusive and perpetual license to our device technology, including the
Celution® System platform and certain related intellectual
property.
74
Condensed
financial information for the Joint Venture
A summary
of the unaudited condensed financial information for the Joint Venture as of
December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007, and
2006 and reconciliation from the net loss of the joint venture to Cytori’s
equity loss from investment in joint venture is as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
Balance
Sheets
|
||||||||
|
Assets:
|
||||||||
|
Cash
|
$ | 646,000 | $ | 713,000 | ||||
|
Amounts
due from related party
|
24,000 | — | ||||||
|
Prepaid
insurance
|
9,000 | 9,000 | ||||||
|
Computer
equipment and software, net
|
20,000 | 24,000 | ||||||
|
Total
assets
|
$ | 699,000 | $ | 746,000 | ||||
|
Liabilities
and Stockholders’ Equity:
|
||||||||
|
Accrued
expenses
|
$ | 36,000 | $ | 27,000 | ||||
|
Amounts
due to related
party
|
16,000 | 72,000 | ||||||
|
Stockholders’
equity
|
647,000 | 647,000 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 699,000 | $ | 746,000 | ||||
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Statements
of Operation
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||
|
Revenues:
|
||||||||||||
|
Royalty
revenue
|
$ | 157,000 | $ | — | $ | — | ||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development expense
|
— | — | 11,000,000 | |||||||||
|
General
and administrative expense:
|
||||||||||||
|
Accounting
and other corporate services
|
75,000 | 40,000 | 172,000 | |||||||||
|
Quality
system services
|
64,000 | 36,000 | - | |||||||||
|
Other
|
24,000 | 10,000 | 2,000 | |||||||||
|
Operating
expenses
|
163,000 | 86,000 | 11,174,000 | |||||||||
|
Operating
loss
|
(6,000 | ) | (86,000 | ) | (11,174,000 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
5,000 | 7,000 | - | |||||||||
|
Net
loss
|
$ | ( 1,000 | ) | $ | (79,000 | ) | $ | (11,174,000 | ) | |||
|
Reconciliation
to equity loss from investment in joint venture
|
||||||||||||
|
Net
loss
|
$ | ( 1,000 | ) | $ | (79,000 | ) | $ | (11,174,000 | ) | |||
|
Intercompany
eliminations
|
88,000 | (65,000 | ) | (11,026,000 | ) | |||||||
|
Net
loss after intercompany eliminations
|
(89,000 | ) | (14,000 | ) | (148,000 | ) | ||||||
|
Cytori’s
percentage of interest in joint venture
|
50 | % | 50 | % | 50 | % | ||||||
|
Cytori’s
equity loss from investment in joint
venture
|
$ | (45,000 | ) | $ | (7,000 | ) | $ | (74,000 | ) | |||
4. Fair
Value Measurements
As
discussed in note 2, Fair Value of Financial Instruments, we adopted SFAS 157 on
January 1, 2008. SFAS 157 emphasizes that fair value is a
market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability. SFAS 157 establishes a three-level hierarchy to
prioritize the inputs used in the valuation techniques to derive fair
values. The basis for fair value measurements for each level within
the hierarchy is described below, with Level 1 having the highest priority and
Level 3 having the lowest:
|
·
|
Level
1: Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2: Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs are
observable in active markets.
|
|
·
|
Level
3: Valuations derived from valuation techniques in which one or more
significant inputs are unobservable in active
markets.
|
75
The
following table provides a summary of the recognized assets and liabilities that
we measure at fair value on a recurring basis:
|
Balance
as of
|
Basis
of Fair Value Measurements
|
|||||||||||||||
|
December
31, 2008
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
equivalents
|
$ | 11,718,000 | $ | 11,718,000 | $ | — | $ | — | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Put
option liability
|
$ | (2,060,000 | ) | $ | — | $ | — | $ | (2,060,000 | ) | ||||||
We use
quoted market prices to determine the fair value of our cash equivalents, which
consist of money market funds and other highly liquid, exchange-traded fixed
income and equity securities, and therefore these are classified in Level 1 of
the fair value hierarchy.
Our put
option liability (see note 3) is valued using an option pricing theory based
simulation analysis (i.e., a Monte Carlo simulation). Assumptions are made 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. Because some of the inputs to our valuation model are either
not observable quoted prices or are not derived principally from or corroborated
by observable market data by correlation or other means, the put option
liability is classified as Level 3 in the fair value hierarchy.
The
following table summarizes the change in our Level 3 put option liability
value:
|
Year
ended
|
Year
ended
|
|||||||
|
Put
option liability
|
December
31, 2008
|
December
31, 2007
|
||||||
|
Beginning
balance
|
$ | (1,000,000 | ) | $ | (900,000 | ) | ||
|
Increase in
fair value recognized in operating expenses
|
(1,060,000 | ) | (100,000 | ) | ||||
|
Ending
balance
|
$ | (2,060,000 | ) | $ | (1,000,000 | ) | ||
No other
assets or liabilities are measured at fair value on a recurring basis, or have
been measured at fair value on a non-recurring basis subsequent to initial
recognition, on the accompanying consolidated condensed balance sheet as of
December 31, 2008.
|
5.
|
Gain
on Sale of Assets
|
Spine
& Orthopedics Product Line
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 2007
as planned, and the associated costs were classified against the deferred
balance, reducing it to zero. No further costs or adjustments
relating to this product line sale were incurred subsequent to August
2007.
76
The
revenues and expenses related to the spine and orthopedic product line
transferred to Kensey Nash for the years ended December 31, 2007 and 2006 were
as follows:
|
Years
ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenues
|
$ | 792,000 | $ | 1,451,000 | ||||
|
Cost
of product revenues
|
(422,000 | ) | (1,634,000 | ) | ||||
|
Research
& development
|
(113,000 | ) | (1,052,000 | ) | ||||
|
Sales
& marketing
|
(21,000 | ) | (163,000 | ) | ||||
|
6.
|
Thin
Film Japan Distribution Agreement
|
In the
third quarter of 2004, we entered into a Distribution Agreement with
Senko. Under this agreement, we granted to Senko an exclusive license
to sell and distribute certain Thin Film products in
Japan. Specifically, the license covers Thin Film products with the
following indications:
|
·
|
Anti-adhesion,
|
|
·
|
Soft
tissue support, and
|
|
·
|
Minimization
of the attachment of soft tissues throughout the
body.
|
The
Distribution Agreement with Senko commences upon
“commercialization.” Essentially, commercialization occurs when one
or more Thin Film product registrations are completed with the
MHLW.
Following
commercialization, the Distribution Agreement has a duration of five years and
is renewable for an additional five years after reaching mutually agreed minimum
purchase guarantees.
The
Distribution Agreement also provides for us to supply certain products to Senko
at fixed prices over the life of the agreement once we have received approval to
market these products in Japan. In addition to the product price,
Senko will also be obligated to make royalty payments to us of 5% of the sales
value of any products Senko sells to its customers during the first three years
post-commercialization.
At the
inception of this arrangement, we received a $1,500,000 license fee which was
recorded as deferred revenues in 2004. We have also received
$1,250,000 in milestone payments from Senko. See “Revenue Recognition” under
note 2 above for our policies with regard to the timing of when these amounts
will be recognized as revenues.
As part
of the Thin Film sales agreement we granted MAST a right to acquire our Thin
Film-related interest in Japan. This right expired unexercised on May
31, 2007.
|
7.
|
Short-term
Investments
|
We did
not have any short-term investments as of December 31, 2008 and 2007, as all our
excess cash is included with cash and cash equivalents in the accompanying
consolidated balance sheets.
Proceeds
from sales and maturity of short term investments for the years ended December
31, 2008, 2007 and 2006 were $5,739,000, $28,007,000 and $67,137,000,
respectively. Gross realized losses for such sales were approximately $1,000 for
the year ended December 31, 2006. There were no gross realized losses
for such sales for the years ended December 31, 2008 and 2007.
77
|
8.
|
Composition
of Certain Financial Statement
Captions
|
Inventories,
net
As of
December 31, 2008 and 2007, inventories, net, were comprised of the
following:
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 712,000 | $ | — | ||||
|
Work
in process
|
347,000 | — | ||||||
|
Finished
goods
|
1,084,000 | — | ||||||
| $ | 2,143,000 | $ | — | |||||
Other
Current Assets
As of
December 31, 2008 and 2007, other current assets were comprised of the
following:
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Prepaid
insurance
|
$ | 208,000 | $ | 287,000 | ||||
|
Prepaid
other
|
390,000 | 411,000 | ||||||
|
Capitalized
debt issuance costs, current
|
252,000 | — | ||||||
|
Other
receivables
|
313,000 | 66,000 | ||||||
| $ | 1,163,000 | $ | 764,000 | |||||
Property
and Equipment, net
As of
December 31, 2008 and 2007, property and equipment, net, were comprised of the
following:
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Manufacturing
and development equipment
|
$ | 2,996,000 | $ | 2,833,000 | ||||
|
Office
and computer equipment
|
2,665,000 | 2,430,000 | ||||||
|
Leasehold
improvements
|
3,125,000 | 3,124,000 | ||||||
| 8,786,000 | 8,387,000 | |||||||
|
Less
accumulated depreciation and amortization
|
(6,234,000 | ) | (4,955,000 | ) | ||||
| $ | 2,552,000 | $ | 3,432,000 | |||||
Accounts
Payable and Accrued Expenses
As of
December 31, 2008 and 2007, accounts payable and accrued expenses were comprised
of the following:
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Accrued
legal fees
|
$ | 1,196,000 | $ | 2,749,000 | ||||
|
Accrued
R&D studies
|
1,110,000 | 1,263,000 | ||||||
|
Accounts
payable
|
464,000 | 479,000 | ||||||
|
Accrued
vacation
|
774,000 | 816,000 | ||||||
|
Accrued
bonus
|
— | 886,000 | ||||||
|
Accrued
expenses
|
842,000 | 623,000 | ||||||
|
Deferred
rent
|
305,000 | 265,000 | ||||||
|
Warranty
reserve
|
23,000 | 67,000 | ||||||
|
Accrued
accounting fees
|
302,000 | 131,000 | ||||||
|
Accrued
payroll
|
72,000 | 70,000 | ||||||
| $ | 5,088,000 | $ | 7,349,000 | |||||
78
|
9.
|
Commitments
and Contingencies
|
We have
contractual obligations to make payments on leases of office, manufacturing, and
corporate housing space as follows:
|
Years
Ending December 31,
|
Operating
Leases
|
|||
|
2009
|
1,754,000 | |||
|
2010
|
814,000 | |||
|
2011
|
85,000 | |||
|
2012
|
60,000 | |||
|
2013
|
25,000 | |||
|
2014
|
8,000 | |||
|
Total
|
$ | 2,746,000 | ||
On May
24, 2005, we entered into a lease for 91,000 square feet of space located at
3020 and 3030 Callan Road, San Diego, California. The majority of our
operations are located in this facility. The agreement bears monthly
rent at an initial rate of $1.15 per square foot, with annual increases of
3%. The lease term is 57 months, commencing on October 1, 2005 and
expiring on June 30, 2010. Payments for our Callan Road location
commenced in June 2006.
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 $4.38
per square foot, for a term of two years expiring on November 30,
2009.
Additionally,
we entered into a new lease during the second quarter of 2008 for a 900 square
feet of office space located at Via Gino Capponi n. 26, Florence,
Italy. The lease agreement provides for rent at a rate of $2.63 per
square foot, expiring on April 22, 2014. Additionally, we’ve entered
into several lease agreements for corporate housing for our employees on
international assignments.
Rent
expense, which includes common area maintenance, for the years ended December
31, 2008, 2007 and 2006 was $2,015,000, $1,992,000 and $2,397,000,
respectively.
We have
entered into agreements with various clinical research organizations for
pre-clinical and clinical development studies, which have provisions for
cancellation. Under the terms of these agreements, the vendors provide a variety
of services including conducting pre-clinical development research, enrolling
patients, recruiting patients, monitoring studies and data analysis. Payments
under these agreements typically include fees for services and reimbursement of
expenses. The timing of payments due under these agreements was estimated based
on current schedules of pre-clinical and clinical studies in
progress. As of December 31, 2008, we have pre-clinical research
study obligations of $563,000 (all of which are expected to be complete within a
year) and clinical research study obligations of $5,839,000 ($4,000,000 of which
are expected to be complete within a year). Should the timing of the
pre-clinical and clinical trials change, the timing of the payment of these
obligations would also change.
During
2008, we entered into a supply agreement with minimum purchase requirements
clause. As of December 31, 2008, we have minimum purchase obligations
of $2,125,000 ($850,000 of which are to be expected to complete within a
year).
We are
subject to various claims and contingencies related to legal
proceedings. Due to their nature, such legal proceedings involve
inherent uncertainties including, but not limited to, court rulings,
negotiations between affected parties and governmental
actions. Management assesses the probability of loss for such
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability
to us that may arise as a result of currently pending legal proceedings will not
have a material adverse effect on our financial condition, liquidity, or results
of operations as a whole.
Refer to
note 10 for a discussion of our commitments and contingencies related to our
interactions with the University of California.
Refer to
note 3 for a discussion of our commitments and contingencies related to our
transactions with Olympus, including (a) our obligation to the Joint Venture in
future periods and (b) certain put and call rights embedded in the arrangements
with Olympus.
Refer to
note 6 for a discussion of our commitments and contingencies related to our
arrangements with Senko.
79
|
10.
|
License
Agreement
|
On
October 16, 2001, StemSource, Inc. entered into an exclusive worldwide license
agreement with the Regents of the University of California or 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 number 6,777,231, which we refer to as the ‘231 Patent, 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 affected
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 the
‘231 Patent to the University of Pittsburgh. It was seeking a
determination that its assignors, rather than UC’s assignors, are the true
inventors of the ‘231 Patent. This lawsuit has subjected us to and
will likely continue to subject us to significant costs and
expenses.
On August
9, 2007, the United States District Court, or the Court, granted the University
of Pittsburgh’s motion for Summary Judgment in part, determining that the
University of Pittsburgh’s assignors were properly named as inventors on the
‘231 Patent, and that all other inventorship issues shall be determined
according to the facts presented at trial. The trial was concluded in
January 2008 and on June 9, 2008 the Court signed its final order which we
received on June 12, 2008. The Court concluded that the University of
Pittsburgh’s assignors were the sole inventors of the ‘231
Patent. The Court’s decision terminated UC’s rights to the ‘231
Patent. Upon review of the Court’s findings, we believe that the
Court’s decision was in error. The UC assignors have agreed to appeal
the decision and a Notice of Appeal was filed on July 9, 2008. If the
UC assignors’ appeal of the Court’s decision is successful, UC’s rights to the
‘231 Patent should be reinstated.
We are
not named as a party to the lawsuit, but our president, Marc Hedrick, is one of
the inventors identified on the ‘231 Patent and therefore is a named individual
defendant. Due to our license obligations to UC relating to the ‘231
Patent and other UC patent applications, we have provided substantial financial
and other assistance to the defense of the lawsuit. Since our current products
and products under development do not practice the ‘231 Patent, our primary
ongoing business activities and product development pipeline should not be
affected by the Court’s decision. Although the ‘231 Patent is unrelated to our
current products and product pipeline, we believe that the ‘231 Patent and/or
the other technology licensed from UC may have long term potential to be useful
for future product developments, and so we have elected to support UC’s legal
efforts in the appeal of the Court’s final order.
In the
years ended December 31, 2008, 2007 and 2006, we expensed $625,000, $2,418,000
and $2,189,000, respectively, for legal fees related to this
license. These expenses have been classified as general and
administrative expense in the accompanying consolidated financial
statements. We believe that the $896,000 accrued as of December 31,
2008 is a reasonable estimate of our liability for the unpaid expenses incurred
through December 31, 2008.
|
11.
|
Long-term
Obligations
|
On
October 14, 2008, we entered into a Loan and Security Agreement with General
Electric Capital Corporation and Silicon Valley Bank (together, the “Lenders”)
pursuant to which the Lenders agreed to make term loans to the Company in the
aggregate principal amount of $15,000,000, and secured by property and assets of
the Company. An initial term loan of $7,500,000, less fees and
expenses, funded on October 14, 2008. The term loan accrues interest
at a fixed rate of 10.58% per annum and is payable over a 37-month
period. At maturity of each term loan, we will also make a final
payment equal to 5% ($375,000) of the term loan, and treated it as a discount to
the loan. We may incur additional fees if we elect to prepay a term
loan. In connection with the loan facility, on October 14, 2008, we
issued to each Lender a warrant to purchase up to 89,074 shares of our common
stock at an exercise price of $4.21 per share. These warrants are
immediately exercisable and will expire on October 14, 2018. We could
not access the remaining $7,500,000 under this facility as we were not able to
meet certain financial prerequisites that had been established by the
Lenders.
80
We
allocated the aggregate proceeds of the term loan between the warrants and the
debt obligations based on their relative fair values in accordance with
Accounting Principle Board No. 14 (APB 14), “ Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants .” The fair value
of the warrant issued to the Lenders is calculated utilizing the Black-Scholes
option-pricing model. We are amortizing the resultant discount of $564,000 over
the term of the loan using the effective interest method, with effective
interest rate being 21.28%. If the maturity of the debt is accelerated because
of defaults or conversions, then the amortization is accelerated. We were in
compliance with our financial and non-financial covenants as of December 31,
2008. As of December 31, 2008, unamortized balance of the aggregate
debt discount is $823,000.
Additional
details relating to the above term loan that is outstanding as of December 31,
2008, are presented in the following table:
|
Origination Date
|
Original
Loan Amount
|
Interest
Rate
|
Current
Monthly
Payment*
|
Term
|
Remaining
Principal
(Face
Value)
|
||||||||||||
|
October
2008
|
$ | 7,500,000 | 10.58 | % | $ | 71,000 |
37
Months
|
$ | 7,500,000 | ||||||||
________________________________________
* Current
payment is interest only (starting March 2009 monthly payment will be $263,000
which includes principal and interest)
As of
December 31, 2008, the future contractual principal payments on all of our
promissory notes are as follows:
|
For
the Years Ending December 31,
|
||||
|
2009
|
$ | 2,047,000 | ||
|
2010
|
2,706,000 | |||
|
2011
|
2,747,000 | |||
|
Total
|
$ | 7,500,000 | ||
|
Reconciliation
of Face Value to Book Value
|
||||
|
Total
debt and lease obligation, including final payment fee (Face
Value)
|
$ | 7,914,000 | ||
|
Less:
Debt Discount
|
(823,000 | ) | ||
|
Total:
|
7,091,000 | |||
|
Less:
Current Portion
|
(2,047,000 | ) | ||
|
Long-Term
Obligation
|
$ | 5,044,000 | ||
Additionally,
we entered into a capital lease for the printers for our main
building. We recorded value of the leased printers in our
property, plant, and equipment balance and accrued $39,000 in long term
obligations, respectively.
Our
interest expense for the years ended December 31, 2008, 2007 and 2006 (all of
which related to the loan entered into October 2008 and promissory notes issued
in connection with our Amended Master Security Agreement, which was fully repaid
in 2008) was $420,000, $155,000 and $199,000, respectively. For the
year ended December 31, 2008, interest expense is calculated using the effective
interest method, therefore it is inclusive of non-cash amortization in the
amount of $178,000 related to the amortization of the debt discount and
capitalized loan fees.
|
12.
|
Income
Taxes
|
Due to
our net loss position for the years ended December 31, 2008, 2007 and 2006, and
since we have recorded a full valuation allowance against deferred tax assets,
there was no provision or benefit for income taxes recorded. There were no
components of current or deferred federal or state income tax provisions for the
years ended December 31, 2008, 2007, and 2006.
81
A
reconciliation of the total income tax provision tax rate to the statutory
federal income tax rate of 34% for the years ended December 31, 2008, 2007 and
2006 is as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Income
tax expense (benefit) at federal statutory rate
|
(34.00 | )% | (34.00 | )% | (34.00 | )% | ||||||
|
Stock
based
compensation
|
0.56 | % | 0.92 | % | 0.99 | % | ||||||
|
Credits
|
(1.67 | )% | (4.87 | )% | (2.72 | )% | ||||||
|
Change
in federal valuation
allowance
|
38.38 | % | 41.62 | % | 34.52 | % | ||||||
|
Equity
loss on investment in Joint Venture
|
0.06 | % | 0.01 | % | 0.12 | % | ||||||
|
Other,
net
|
(3.33 | )% | (3.68 | )% | 1.09 | % | ||||||
| 0.00 | % | 0.00 | % | 0.00 | % | |||||||
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities as of December 31, 2008 and
2007 are as follows:
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Allowances
and reserves
|
$ | 84,000 | $ | 55,000 | ||||
|
Accrued
expenses
|
452,000 | 582,000 | ||||||
|
Deferred
revenue and gain on sale of assets
|
4,950,000 | 5,910,000 | ||||||
|
Stock
based compensation
|
2,965,000 | 2,528,000 | ||||||
|
Net
operating loss carryforwards
|
48,265,000 | 37,704,000 | ||||||
|
Income
tax credit carryforwards
|
4,665,000 | 4,140,000 | ||||||
|
Capitalized
assets and other
|
371,000 | 284,000 | ||||||
|
Property
and equipment, principally due to differences in
depreciation
|
549,000 | — | ||||||
| 62,301,000 | 51,203,000 | |||||||
|
Valuation
allowance
|
(61,965,000 | ) | (50,435,000 | ) | ||||
|
Total
deferred tax assets, net of allowance
|
336,000 | 768,000 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment, principally due to differences in
depreciation
|
— | (338,000 | ) | |||||
|
Intangibles
|
(336,000 | ) | (430,000 | ) | ||||
|
Other
|
— | — | ||||||
|
Total
deferred tax liability
|
(336,000 | ) | (768,000 | ) | ||||
|
Net
deferred tax assets (liability)
|
$ | — | $ | — | ||||
We have
established a valuation allowance against our net deferred tax asset due to the
uncertainty surrounding the realization of such assets. Management periodically
evaluates the recoverability of the deferred tax asset. At such time as it is
determined that it is more likely than not that deferred assets are realizable,
the valuation allowance will be reduced. We have recorded a valuation allowance
of $61,965,000 as of December 31, 2008 to reflect the estimated amount of
deferred tax assets that may not be realized. We increased our valuation
allowance by approximately $11,529,000 for the year ended December 31, 2008. The
valuation allowance includes approximately $579,000 related to stock option
deductions, the benefit of which will be credited to equity if ever
utilized.
At
December 31, 2008, we had federal and state tax net operating loss carryforwards
of approximately $117,177,000 and $98,679,000, respectively. The federal and
state net operating loss carryforwards begin to expire in 2019 and 2011,
respectively, if unused. At December 31, 2008, we had federal and state tax
credit carryforwards of approximately $3,364,000 and $3,043,000, respectively.
The federal credits will begin to expire in 2017, if unused, and $160,000 of the
state credits will begin to expire in 2009 if unused. The remaining state
credits carry forward indefinitely. In addition, we had a foreign tax
loss carryforward of $4,142,000 and $93,000 in Japan and Italy,
respectively.
The
Internal Revenue Code limits the future availability of net operating loss and
tax credit carryforwards that arose prior to certain cumulative changes in a
corporation’s ownership resulting in a change of our control. Due to prior
ownership changes as defined in IRC Section 382, a portion of the net operating
loss and tax credit carryforwards are limited in their annual utilization. In
September 1999, we experienced an ownership change for purposes of the IRC
Section 382 limitation. As of December 31, 2007, these pre-change net operating
losses and credits are fully available.
Additionally,
in 2002 when we purchased StemSource, we acquired federal and state net
operating loss carryforwards of approximately $2,700,000 and $2,700,000,
respectively. This event triggered an ownership change for purposes of IRC
Section 382. It is estimated that the pre-change net operating losses and
credits will be fully available by 2008.
We have
completed an update to our IRC Section 382 study analysis through April 17,
2007. We have not had any additional ownership changes based on this
study.
82
As a
result of the adoption of SFAS 123R, we recognize windfall tax benefits
associated with the exercise of stock options directly to stockholders’ equity
only when realized. Accordingly, deferred tax assets are not
recognized for net operating loss carryforwards resulting from windfall tax
benefits occurring from January 1, 2006 onward. At December 31, 2008,
deferred tax assets do not include $1,193,000 of excess tax benefits from
stock-based compensation.
We
adopted FIN 48 on January 1, 2007. There were no unrecognized tax
benefits as of the date of adoption.
Following
is a tabular reconciliation of the unrecognized tax benefits activity during
2008:
|
Unrecognized
Tax Benefits – December 31, 2007
|
$ | 716,000 | ||
|
Gross
increases – tax positions in prior period
|
— | |||
|
Gross
decreases – tax positions in prior period
|
— | |||
|
Gross
increase – current-period tax positions
|
236,000 | |||
|
Settlements
|
— | |||
|
Lapse
of statute of limitations
|
— | |||
|
Unrecognized
Tax Benefits – December 31, 2008
|
$ | 952,000 |
None of
the amount included in the FIN 48 liability if recognized would affect the
Company’s effective tax rate, since it would be offset by an equal reduction in
the deferred tax asset valuation allowance. The Company’s deferred
tax assets are fully reserved.
The
Company did not recognize interest related to unrecognized tax benefits in
interest expense and penalties in operating expenses as of December 31,
2008.
The
Company’s material tax jurisdictions are United States and
California. The Company is currently not under examination by the
Internal Revenue Service or any other taxing authority.
The
Company’s tax years for 1999 and forward can be subject to examination by the
United States and California tax authorities due to the carryforward of net
operating losses and research development credits.
The
Company does not foresee material changes to its gross FIN 48 liability within
the next twelve months.
|
13.
|
Employee
Benefit Plan
|
We
implemented a 401(k) retirement savings and profit sharing plan (the “Plan”)
effective January 1, 1999. We may make discretionary annual contributions to the
Plan, which is allocated to the profit sharing accounts based on the number of
years of employee service and compensation. At the sole discretion of the Board
of Directors, we may also match the participants’ contributions to the Plan. We
made no discretionary or matching contributions to the Plan in 2008, 2007 and
2006.
|
14.
|
Stockholders’
Deficit
|
Preferred
Stock
We have
authorized 5,000,000 shares of $.001 par value preferred stock, with no shares
outstanding as of December 31, 2008 and 2007. Our Board of Directors is
authorized to designate the terms and conditions of any preferred stock we issue
without further action by the common stockholders.
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.
On
February 8, 2008, we agreed to sell 2,000,000 shares of unregistered common
stock to Green Hospital Supply, Inc., a related party, for $12,000,000 cash, or
$6.00 per share in a private stock placement. On February 29, 2008,
we closed the first half of the private placement with Green Hospital Supply,
Inc. and received $6,000,000. We closed the second half of the
private placement on April 30, 2008 and received the second payment of
$6,000,000. As of December 31, 2008, Green Hospital Supply, Inc., a related
party, holds approximately 10.2% (unaudited) of our issued and outstanding
shares.
83
On August
11, 2008, we raised approximately $17,000,000 in gross proceeds from a private
placement of 2,825,517 unregistered shares of common stock and 1,412,758 common
stock warrants (with an original exercise price of $8.50 per share) to a
syndicate of investors including Olympus Corporation, who acquired 1,000,000
unregistered shares and 500,000 common stock warrants in exchange for $6,000,000
of the total proceeds raised.
We have
accounted for the warrants as permanent equity, consistent with EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”. The warrants must be settled through a
cash exercise whereby the warrant holder exchanges cash for shares of Cytori
common stock, unless the exercise occurs when the related registration statement
is not effective, in which case the warrant holder can only exercise through the
cashless exercise feature of the warrant agreement.
In June
2008, the FASB ratified the consensus on EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock” (“EITF
07-5”). EITF 07-5 provides a framework for
evaluating the terms of a particular instrument to determine whether such
instrument is considered a derivative financial instrument. EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied by recording a cumulative effect
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) as of the date of adoption. We anticipate the adoption of
EITF 07-5 will result is the recognition of a liability for the warrants issued
in August 2008 as part of our private placement of common stock of approximately
$2.9 million and a corresponding increase in stockholders’ deficit as of January
1, 2009. Future changes in the fair value of the warrant liability will be
recognized as a component of earnings (loss).
Warrant
Adjustments
Our
issuance of warrants with an exercise price of $4.21 per share to the Lenders,
triggered an adjustment to the exercise price and number of shares issuable
under the warrants issued to investors in our August 2008 private placement
financing. As a result, the common stock warrants issued on August
11, 2008, are currently exercisable for 1,413,896 shares of our common stock at
an exercise price of $8.49 per share.
Treasury
Stock
On August
11, 2003, the Board of Directors authorized the repurchase of up to 3,000,000
shares of our common stock in the open market, from time to time until August
10, 2004 at a purchase price per share not to exceed €15.00, based on the
exchange rate in effect on August 11, 2003. During 2003, we repurchased 614,099
shares of our Common Stock at an average cost of $3.69 per share for a total of
$2,266,000.
In 2003,
we sold 150,500 shares of treasury stock for $542,000 at an average price of
$3.60 per share. The basis of the treasury stock sold was the weighted average
purchase price or $3.67 per share with the difference of $10,000 accounted for
as a reduction to additional paid-in capital.
On
December 6, 2003, we exchanged 1,447,755 shares of common stock (all listed on
the Frankfurt Stock Exchange) held in our treasury for 1,447,755 of our unlisted
outstanding common stock issued to former StemSource shareholders. $104,000 was
accounted for as a charge against additional paid-in capital relating to the
difference between the weighted average purchase price and fair market value of
the listed shares held in treasury at the time of the exchange.
In 2004,
we repurchased 27,650 shares of our common stock for $76,000 on the open market
at a price of $2.75 per share. Additionally in 2004, we repurchased 262,602
shares of our common stock for $976,000 from a former director and officer of
StemSource at a price of $3.72 per share.
Our
repurchase program expired on August 10, 2004. We have no plans to initiate a
new repurchase program at this time.
In April
2007, we sold 1,000,000 shares of unregistered common stock from our treasury to
Green Hospital Supply, Inc. for $6,000,000 cash, or $6.00 per
share. The basis of the treasury stock sold was the weighted average
purchase price, or $3.62 per share, and the difference of $2.38 per share, or
$2,380,000, was accounted for as an increase to additional paid-in
capital.
|
15.
|
Stockholders
Rights Plan
|
On May
28, 2003, the Board of Directors declared a dividend distribution of one
preferred share purchase right (a “Right”) for each outstanding share of our
common stock. The dividend is payable to the stockholders of record on June 10,
2003, and with respect to shares of common stock issued thereafter until the
Distribution Date (as defined below) and, in certain circumstances, with respect
to shares of common stock issued after the Distribution Date. Except as set
forth below, each Right, when it becomes exercisable, entitles the registered
holder to purchase from us one one-thousandth (1/1000th) of a share of our
Series RP Preferred
84
Stock,
$0.001 par value per share (the “Preferred Stock”), at a price of $25.00 per one
one-thousandth (1/1000th) of a share of Preferred Stock, subject to adjustment.
Each share of the Preferred Stock would entitle the holder to our common stock
with a value of twice that paid for the Preferred Stock. The description and
terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”)
between us and Computershare Trust Company, Inc., as Rights Agent, dated as of
May 29, 2003, and as amended on May 12, 2005 and August 28, 2007.
The
Rights attach to all certificates representing shares of our common stock
outstanding, and are evidenced by a legend on each share certificate,
incorporating the Rights Agreement by reference. The Rights trade with and only
with the associated shares of our common stock and have no impact on the way in
which holders can trade our shares. Unless the Rights Agreement was to be
triggered, it would have no effect on the Company’s consolidated balance sheet
or income statement and should have no tax effect on the Company or its
stockholders. The Rights Agreement is triggered upon the earlier to occur of (i)
a person or group of affiliated or associated persons having acquired, without
the prior approval of the Board, beneficial ownership of 15% or more of the
outstanding shares of our common stock or (ii) 10 days, or such later date as
the Board may determine, following the commencement of or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in a person or group of affiliated or associated persons becoming
an Acquiring Person (as defined in the Rights Agreement) except in certain
circumstances (the “Distribution Date”). The Rights are not exercisable until
the Distribution Date and will expire at the close of business on May 29, 2013,
unless we redeem them earlier.
|
16.
|
Stock-based
Compensation
|
During
2004, we adopted the 2004 Equity Incentive Plan (the “2004 Plan”), which
provides our employees, directors and consultants the opportunity to purchase
our common stock through non-qualified stock options, stock appreciation rights,
restricted stock units, or restricted stock and cash awards. The 2004
Plan initially provides for issuance of 3,000,000 shares of our common stock,
which number may be cumulatively increased (subject to Board discretion) on an
annual basis beginning January 1, 2005, which annual increase shall not exceed
2% of our then outstanding stock. As of December 31, 2008, there are
2,190,450 securities remaining and available for future issuances under 2004
Plan, which is exclusive of securities to be issued upon an exercise of
outstanding options, warrants, and rights.
During
1997, we adopted the 1997 Stock Option and Stock Purchase Plan (the “1997
Plan”), which provides for the direct award or sale of shares and for the grant
of incentive stock options (“ISOs”) and non-statutory options to employees,
directors or consultants. The 1997 Plan, as amended, provides for the
issuance of up to 7,000,000 shares of our common stock. The exercise
price of ISOs cannot be less than the fair market value of the underlying shares
on the date of grant. ISOs can be granted only to employees. The 1997
Plan expired on October 22, 2007.
Generally,
awards issued under the 2004 Plan or the 1997 Plan are subject to four-year
vesting, and have a contractual term of 10 years. Most awards contain
one of the following two vesting provisions:
|
·
|
12/48
of a granted award will vest after one year of service, while an
additional 1/48 of the award will vest at the end of each month thereafter
for 36 months, or
|
|
·
|
1/48
of the award will vest at the end of each month over a four-year
period.
|
85
A summary
of activity for the year ended December 31, 2008 is as follows:
|
Options
|
Weighted
Average Exercise Price
|
|||||||
|
Balance
as of January 1, 2008
|
6,007,275 | $ | 4.85 | |||||
|
Granted
|
534,250 | $ | 5.21 | |||||
|
Exercised
|
(388,536 | ) | $ | 2.04 | ||||
|
Expired
|
(146,777 | ) | $ | 6.50 | ||||
|
Cancelled/forfeited
|
(77,505 | ) | $ | 5.68 | ||||
|
Balance
as of December 31, 2008
|
5,928,707 | $ | 5.02 | |||||
|
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Balance
as of December 31, 2008
|
5,928,707 | $ | 5.02 | 5.34 | $ | 936,815 | ||||||||||
|
Vested
and expected to vest at December 31, 2008
|
5,825,490 | $ | 5.00 | 5.29 | $ | 933,678 | ||||||||||
|
Vested
and exercisable at December 31, 2008
|
4,775,056 | $ | 4.85 | 4.62 | $ | 901,759 | ||||||||||
The
following table summarizes information about options outstanding as of December
31, 2008:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range of Exercise Price
|
Number
of Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
in Years
|
Number
of Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||
|
Less
than $2.00
|
32,218 | $ | 0.72 | 0.5 | 32,218 | $ | 0.72 | |||||||||||||||
| $ | 2.00 – 3.99 | 1,538,168 | $ | 3.06 | 3.7 | 1,488,784 | $ | 3.07 | ||||||||||||||
| $ | 4.00 – 5.99 | 2,759,822 | $ | 4.76 | 6.4 | 1,989,179 | $ | 4.56 | ||||||||||||||
| $ | 6.00 – 7.99 | 1,265,332 | $ | 6.84 | 5.1 | 1,013,064 | $ | 6.89 | ||||||||||||||
| $ | 8.00 – 9.99 | 256,167 | $ | 8.67 | 6.9 | 174,811 | $ | 8.68 | ||||||||||||||
|
More
than $10.00
|
77,000 | $ | 13.18 | 1.2 | 77,000 | $ | 13.18 | |||||||||||||||
| 5,928,707 | 4,775,056 | |||||||||||||||||||||
The total
intrinsic value of stock options exercised was $1,849,000, $1,758,000, and
$1,913,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
The fair
value of each option awarded during the year ended December 31, 2008, 2007, and
2006 was estimated on the date of grant using the Black-Scholes-Merton option
valuation model based on the following weighted-average
assumptions:
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
term
|
5
years
|
6
years
|
6
years
|
|||||||||
|
Risk-free
interest rate
|
2.83 | % | 4.59 | % | 4.50 | % | ||||||
|
Volatility
|
59.62 | % | 74.61 | % | 78.61 | % | ||||||
|
Dividends
|
— | — | — | |||||||||
|
Resulting
weighted average grant date fair value
|
$ | 2.77 | $ | 3.74 | $ | 5.26 | ||||||
Through
December 31, 2007, the expected term assumption was estimated using the
“simplified method,” as described in Staff Accounting Bulletin No. 107,
“Share-Based Payment” (“SAB 107”). This method estimates the expected
term of an option based on the average of the vesting period and the contractual
term of an option award. Starting January 1, 2008, following
the guidance of Staff Accounting Bulletin No. 110, “Share-Based Payment” we
calculated the expected term of our stock options based on our historical
data. The expected term is calculated for and applied to all employee
awards as a single group as we do not expect (nor does historical data suggest)
substantially different exercise or post-vesting termination behavior amongst
our employee population. The fair value of each option awarded during
the year ended December 31, 2008 was estimated assuming an expected term of 5.0
years.
We
estimate volatility based on the historical volatility of our daily stock price
over the period preceding grant date commensurate with the expected term of the
option.
The
weighted average risk-free interest rate represents the interest rate for
treasury constant maturity instruments published by the Federal Reserve Board.
If the term of available treasury constant maturity instruments is not equal to
the expected term of an
86
employee
option, we use the weighted average of the two Federal Reserve securities
closest to the expected term of the employee option.
The
dividend yield has been assumed to be zero as we (a) have never declared or paid
any dividends and (b) do not currently anticipate paying any cash dividends on
our outstanding shares of common stock in the foreseeable future.
The
following summarizes the total compensation cost recognized in the accompanying
financial statements:
|
Years
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
compensation cost for share-based payment arrangements recognized in the
statement of operations (net of tax of $0)
|
$ | 2,257,000 | $ | 2,310,000 | $ | 3,220,000 | ||||||
As of
December 31, 2008, the total compensation cost related to non-vested stock
options not yet recognized for all of our plans is approximately $3,494,000.
These costs are expected to be recognized over a weighted average period of 1.67
years.
In
calculating the fair value of option awards granted after January 1, 2006, we
generally used the same methodologies and assumptions employed prior to our
adoption of SFAS 123R. For instance, our estimate of expected
volatility is based exclusively on our historical volatility, since we have
granted options that vest purely based on the passage of time and otherwise meet
the criteria to exclusively rely on historical volatility, as set out in SAB
107. We did, however, change our policy of attributing the cost of
share-based payment awards granted after January 1, 2006 from the “graded
vesting approach” to the “straight-line” method. We believe that this change
more accurately reflects the manner in which our employees vest in an option
award.
Cash
received from stock option and warrant exercises for the years ended December
31, 2008, 2007 and 2006 was approximately $795,000, $1,875,000, and $920,000,
respectively. SFAS 123R requires that cash flows resulting from
tax deductions in excess of the cumulative compensation cost recognized for
options exercised (excess tax benefits) be classified as cash inflows provided
by financing activities and cash outflows used in operating
activities. No income tax benefits have been recorded related to the
stock option exercises. SFAS 123R prohibits recognition of tax
benefits for exercised stock options until such benefits are
realized. As we presently have tax loss carryforwards from prior
periods and expect to incur tax losses in 2008, we are not able to benefit from
the deduction for exercised stock options in the current reporting
period.
In
November 2005, the FASB issued Staff Position (FSP) No. FAS 123(R)-3,
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards” (FSP 123R-3). We have elected to adopt the alternative
transition method provided in the FSP 123R-3 for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R. The alternative transition
method includes simplified methods to establish the beginning balance of the
APIC pool related to the tax effects of employee stock-based compensation, and
to determine the subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123R.
To settle
stock option awards that will be exercised, we will issue new shares of our
common stock. At December 31, 2008, we have an aggregate of
64,104,526 shares authorized and available to satisfy option exercises under our
plans.
Cash used
to settle equity instruments granted under share-based payment arrangements
amounted to $0 in all periods presented.
Award
Modifications
On August
2, 2007, our Senior Vice President – Research - Regenerative Cell Technology
(“VP”) terminated employment with us. We paid the former VP a lump
sum cash severance payment of $66,667 and extended the exercise period of his
35,000 vested stock options through December 31, 2007. In addition to
the cash severance payment, we recorded stock based compensation expense of
$5,741 in the third quarter of 2007, which reflects the incremental fair value
of the extended vested stock options (over the fair value of the original awards
at the modification date).
In
connection with the sale of our HYDROSORB™ spine and orthopedics surgical
implant product line, we eliminated the positions of two less senior employees
on August 31, 2007. At the time these positions were eliminated, we
(a) accelerated the vesting of 2,084 unvested stock options held by these two
employees, and (b) extended the exercise period of 37,292 vested stock options
owned by them through December 31, 2008. 16,041 unvested stock
options held by these two employees were forfeited.
In
connection with the above modifications and in accordance with SFAS 123R, we
recorded additional stock based compensation expense of $58,402 in the year
ended December 31, 2007, as a component of general and
administrative. This charge constitutes the entire expense related to
the modification of these options, and no future period charges will be
required.
87
Marshall
G. Cox retired from our board of directors (and his employment by the Company
thereby ceased) on May 3, 2007. We subsequently entered into a
consulting agreement with Mr. Cox whereby he will continue to provide services
to the Company through March 1, 2009. Subject to his continued
service to the Company, all of Mr. Cox’s outstanding stock options previously
granted to him in his capacity as a director will continue to vest and be
exercisable, in accordance with their original terms. As of May 3,
2007, Mr. Cox held a total of 91,250 unvested stock options. After
May 3, 2007, the fair value of Mr. Cox’s unvested stock options will be
remeasured each reporting period until they fully vest. There was no
additional stock based compensation expense recorded as a result of the
modification of Mr. Cox’s options.
In May
2006, our Senior Vice President of Finance and Administration, Treasurer, and
Principal Accounting Officer terminated full-time employment with
us. In connection with his full-time employment termination, we
extended the exercise period of his 204,997 vested stock options as of May 31,
2006 to December 31, 2007. Moreover, we entered into a part-time
employment agreement with him according to which all stock option vesting ceased
as of May 31, 2006, resulting in the cancellation of 75,003 non-vested stock
options on May 31, 2006.
In
connection with a broader reduction in force, we eliminated the positions of our
Senior Vice President, Business Development, and Vice President, Marketing &
Development, on July 25, 2006. We subsequently entered into
short-term employment agreements with the individuals formerly holding these
positions. These individuals continued to provide service to us
following the elimination of their former positions on July 25,
2006. At the time these positions were eliminated, 142,686 non-vested
stock options held by these two employees were forfeited. Moreover,
subject to certain restrictions, we extended the exercise period for 328,564
vested stock options held by these employees to December 31, 2007.
We also
eliminated the position of a less senior employee on July 31,
2006. Simultaneously, we continued the individual’s employment in a
new capacity; however, we cancelled 8,125 non-vested stock options held by this
individual on July 31, 2006.
In
connection with the above modifications and in accordance with SFAS 123R, we
recorded additional expense of $567,000 in the year ended December 31, 2006, as
components of research and development, general and administrative and sales and
marketing expense. This charge constitutes the entire expense related
to these options, and no future period charges will be required.
Non-Employee
Stock Based Compensation
In the
fourth quarter of 2007, we granted an option to purchase 22,500 shares of our
common stock to a non-employee scientific advisor. The stock option
has a contractual term of 10 years and 7,500 shares vested on May 31, 2008, with
two remaining tranches of 7,500 shares each to vest on May 31, 2009 and 2010,
subject to the individual’s continued service to the Company. This
scientific advisor will also be receiving cash consideration as services are
performed. We will remeasure the fair value of this advisor’s
unvested stock options each reporting period until they fully vest, and the
resulting stock based compensation expense will be recorded as a component of
research and development expenses.
|
17.
|
Related
Party Transactions
|
Refer to
note 3 for a discussion of related party transactions with Olympus and note 14
for a discussion of related party transactions with Green Hospital Supply,
Inc.
88
|
18.
|
Quarterly
Information (unaudited)
|
The
following unaudited quarterly financial information includes, in management’s
opinion, all the normal and recurring adjustments necessary to fairly state the
results of operations and related information for the periods
presented.
|
For the three months ended
|
||||||||||||||||
|
March 31,
2008
|
June 30,
2008
|
September 30,
2008
|
December 31,
2008
|
|||||||||||||
|
Product
revenues
|
$ | 153,000 | $ | 1,404,000 | $ | 2,319,000 | $ | 652,000 | ||||||||
|
Gross
profit
|
93,000 | 729,000 | 1,671,000 | 181,000 | ||||||||||||
|
Development
revenues
|
811,000 | 12,000 | 1,000 | 1,501,000 | ||||||||||||
|
Operating
expenses
|
9,232,000 | 9,113,000 | 8,481,000 | 7,934,000 | ||||||||||||
|
Other
income
|
55,000 | (41,000 | ) | (8,000 | ) | (281,000 | ) | |||||||||
|
Net
loss
|
$ | (8,273,000 | ) | $ | (8,413,000 | ) | $ | (6,817,000 | ) | $ | (6,533,000 | ) | ||||
|
Basic
and diluted net loss per share
|
$ | (0.34 | ) | $ | (0.33 | ) | $ | (0.24 | ) | $ | (0.22 | ) | ||||
|
For the three months ended
|
||||||||||||||||
|
March 31,
2007
|
June 30,
2007
|
September 30,
2007
|
December 31,
2007
|
|||||||||||||
|
Product
revenues
|
$ | 280,000 | $ | 512,000 | $ | — | $ | — | ||||||||
|
Gross
profit
|
55,000 | 315,000 | — | — | ||||||||||||
|
Development
revenues
|
45,000 | 1,814,000 | 3,373,000 | 25,000 | ||||||||||||
|
Operating
expenses
|
8,908,000 | 8,245,000 | 8,983,000 | 10,841,000 | ||||||||||||
|
Other
income
|
139,000 | 2,120,000 | 282,000 | 137,000 | ||||||||||||
|
Net
loss
|
$ | (8,669,000 | ) | $ | (3,996,000 | ) | $ | (5,328,000 | ) | $ | (10,679,000 | ) | ||||
|
Basic
and diluted net loss per share
|
$ | (0.43 | ) | $ | (0.17 | ) | $ | (0.22 | ) | $ | (0.44 | ) | ||||
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or furnished pursuant
to the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As
required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this Annual Report of Form 10-K. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective and were operating at
a reasonable assurance level as of December 31, 2008.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we have conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with
89
the
policies or procedures may deteriorate. Based on our evaluation under
the framework in Internal Control - Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.
The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
90
PART
III
Item 10. Directors, Executive Officers and Corporate
Governance
The
information called for by Item 10 is incorporated herein by reference to the
material under the captions “Election of Directors” and “Directors, Executive
Officers and Corporate Governance” in our proxy statement for our 2009 annual
stockholders’ meeting, which will be filed with the SEC on or before April 30,
2009.
Item 11. Executive Compensation
The
information called for by Item 11 is incorporated herein by reference to the
material under the caption “Executive Compensation” in our proxy statement for
our 2009 annual stockholders’ meeting, which will be filed with the SEC on or
before April 30, 2009.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The
information called for by Item 12 is incorporated herein by reference to the
material under the caption “Security Ownership of Certain Beneficial Owners and
Management” in our proxy statement for our 2009 annual stockholders’ meeting,
which will be filed with the SEC on or before April 30, 2009.
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The
information called for by Item 13 is incorporated herein by reference to the
material under the caption “Information Concerning Directors and Executive
Officers- Certain Relationships and Related Transactions” in our proxy statement
for our 2009 annual stockholders’ meeting, which will be filed with the SEC on
or before April 30, 2009.
Item 14. Principal Accountant Fees and
Services
The
information called for by Item 14 is incorporated herein by reference to the
material under the caption “Principal Accountant Fees and Services” in our proxy
statement for our 2009 annual stockholders meeting, which will be filed with the
SEC on or before April 30, 2009.
91
PART
IV
Item 15. Exhibits, Financial Statement
Schedules
|
(a)
(1)
|
Financial
Statements
|
|
|
(a)
(2)
|
Financial
Statement Schedules
|
|
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
For the
years ended December 31, 2008, 2007 and 2006
(in
thousands of dollars)
|
Balance at
beginning of
year
|
Additions/(Reductions)
((charges)/ credits to
expense)
|
Charged to
Other
Accounts
|
Deductions
|
Balance at
end of year
|
||||||||||||||||
|
Allowance for doubtful
accounts
|
||||||||||||||||||||
|
Year
ended December 31, 2008
|
$ | 1 | $ | 121 | $ | — | $ | — | $ | 122 | ||||||||||
|
Year
ended December 31, 2007
|
$ | 2 | $ | 1 | $ | — | $ | (2 | ) | $ | 1 | |||||||||
|
Year
ended December 31, 2006
|
$ | 9 | $ | — | $ | — | $ | (7 | ) | $ | 2 | |||||||||
92
Table
of Contents
|
(a)
(3)
|
Exhibits
|
|
|
Exhibit
Number
|
Description
|
|
|
2.5
|
Asset
Purchase Agreement dated May 30, 2007, by and
between Cytori Therapeutics, Inc. and MacroPore Acquisition Sub, Inc
(filed as Exhibit 2.5 to our Form 10-Q Quarterly Report as
filed on August 14, 2007 and incorporated by reference
herein)
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation (filed as Exhibit 3.1
to our Form 10-Q Quarterly Report as filed on August 13, 2002 and
incorporated by reference herein)
|
|
|
3.2
|
Amended
and Restated Bylaws of Cytori Therapeutics, Inc. (filed as
Exhibit 3.2 to our Form 10-Q Quarterly Report, as filed on
August 14, 2003 and incorporated by reference herein)
|
|
|
3.3
|
Certificate
of Ownership and Merger (effecting name change to Cytori Therapeutics,
Inc.) (filed as Exhibit 3.1.1 to our Form 10-Q, as filed on November 14,
2005 and incorporated by reference herein)
|
|
|
4.1
|
Rights
Agreement, dated as of May 19, 2003, between Cytori Therapeutics, Inc. and
Computershare Trust Company, Inc. as Rights Agent, which includes: as
Exhibit A thereto, the Form of Certificate of Designation, Preferences and
Rights of Series RP Preferred Stock of Cytori Therapeutics, Inc.; as
Exhibit B thereto, the Form of Right Certificate; and, as Exhibit C
thereto, the Summary of Rights to Purchase Series RP Preferred Stock
(filed as Exhibit 4.1 to our Form 8-A which was filed on May 30, 2003 and
incorporated by reference herein)
|
|
|
4.1.1
|
Amendment
No. 1 to Rights Agreement dated as of May 12, 2005, between Cytori
Therapeutics, Inc. and Computershare Trust Company, Inc. as Rights Agent
(filed as Exhibit 4.1.1 to our Form 8-K, which was filed on May 18, 2005
and incorporated by reference herein).
|
|
|
4.1.2
|
Amendment
No. 2 to Rights Agreement, dated as of August 28, 2007, between us and
Computershare Trust Company, N.A. (as successor to Computershare Trust
Company, Inc.), as Rights Agent (filed as Exhibit 4.1.1 to our Form 8-K,
which was filed on September 4, 2007 and incorporated by reference
herein).
|
|
|
10.1#
|
Amended
and Restated 1997 Stock Option and Stock Purchase Plan (filed as
Exhibit 10.1 to our Form 10 registration statement, as amended,
as filed on March 30, 2001 and incorporated by reference
herein)
|
|
|
10.1.1#
|
Board
of Directors resolution adopted November 9, 2006 regarding determination
of fair market value for stock option grant purposes (incorporated by
reference to Exhibit 10.10.1 filed as exhibit 10.10.1 to our Form 10-K
Annual Report, as filed on March 30, 2007 and incorporated by
reference herein)
|
|
|
10.2+
|
Development
and Supply Agreement, made and entered into as of January 5, 2000, by
and between the Company and Medtronic (filed as Exhibit 10.4 to our
Form 10 registration statement, as amended, as filed on June 1,
2001 and incorporated by reference herein)
|
|
|
10.3+
|
Amendment
No. 1 to Development and Supply Agreement, effective as of
December 22, 2000, by and between the Company and Medtronic (filed as
Exhibit 10.5 to our Form 10 registration statement, as amended,
as filed on June 1, 2001 and incorporated by reference
herein)
|
|
|
10.4+
|
License
Agreement, effective as of October 8, 2002, by and between the Company and
Medtronic PS Medical, Inc. (filed as Exhibit 2.2 to our Current
Report on Form 8-K which was filed on October 23, 2002 and
incorporated by reference herein)
|
|
|
10.5+
|
Amendment
No. 2 to Development and Supply Agreement, effective as of September
30, 2002, by and between the Company and Medtronic, Inc. (filed as
Exhibit 2.4 to our Current Report on Form 8-K which was filed on
October 23, 2002 and incorporated by reference herein)
|
|
|
10.7
|
Amended
Master Security Agreement between the Company and General Electric
Corporation, September, 2003 (filed as Exhibit 10.1 to our
Form 10-Q Quarterly Report, as filed on November 12, 2003 and
incorporated by reference herein)
|
|
|
10.8#
|
Asset
Purchase Agreement dated May 7, 2004 between Cytori Therapeutics, Inc. and
MAST Biosurgery AG (filed as Exhibit 2.1 to our Form 8-K Current Report,
as filed on May 28, 2004 and incorporated by reference
herein.)
|
|
|
10.8.1
|
Settlement
Agreement dated August 9, 2005, between MAST Biosurgery AG, MAST
Biosurgery, Inc. and the Company (filed as Exhibit 10.26 to our Form 10-Q,
which was filed on November 14, 2005 and incorporated by reference
herein)
|
|
|
10.9#
|
Offer
Letter for the Position of Chief Financial Officer dated June 2, 2004
between the Company and Mark Saad (filed as Exhibit 10.18 to our
Form 10-Q Quarterly Report, as filed on August 16, 2004 and
incorporated by reference herein)
|
|
|
10.10#
|
2004
Equity Incentive Plan of Cytori Therapeutics, Inc. (filed as
Exhibit 10.1 to our Form 8-K Current Report, as filed on August
27, 2004 and incorporated by reference herein)
|
|
|
10.10.1#
|
Board
of Directors resolution adopted November 9, 2006 regarding determination
of fair market value for stock option grant purposes (filed as
Exhibit 10.10.1 to our Form 10-K Annual Report, as filed on
March 30, 2007 and incorporated by reference herein)
|
|
|
10.11
|
Exclusive
Distribution Agreement, effective July 16, 2004 by and between the Company
and Senko Medical Trading Co. (filed as Exhibit 10.25 to our
Form 10-Q Quarterly Report, as filed on November 15, 2004 and
incorporated by reference herein)
|
|
|
10.12#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori Therapeutics,
Inc. 1997 Stock Option and Stock Purchase Plan; (Nonstatutory) (filed as
Exhibit 10.19 to our Form 10-Q Quarterly Report, as filed on
November 15, 2004 and incorporated by reference herein)
|
|
|
|
||
|
10.13#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori Therapeutics,
Inc. 1997 Stock Option and Stock Purchase Plan; (Nonstatutory) with Cliff
(filed as Exhibit 10.20 to our Form 10-Q Quarterly Report, as
filed on November 15, 2004 and incorporated by reference
herein)
|
|
|
10.14#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori Therapeutics,
Inc. 1997 Stock Option and Stock Purchase Plan; (Incentive) (filed as
Exhibit 10.21 to our Form 10-Q Quarterly Report, as filed on
November 15, 2004 and incorporated by reference herein)
|
|
|
10.15#
|
Notice
and Agreement for Stock Options Grant Pursuant to Cytori Therapeutics,
Inc. 1997 Stock Option and Stock Purchase Plan; (Incentive) with Cliff
(filed as Exhibit 10.22 to our Form 10-Q Quarterly Report, as
filed on November 15, 2004 and incorporated by reference
herein)
|
|
|
10.16#
|
Form
of Options Exercise and Stock Purchase Agreement Relating to the 2004
Equity Incentive Plan (filed as Exhibit 10.23 to our Form 10-Q
Quarterly Report, as filed on November 15, 2004 and incorporated by
reference herein)
|
|
|
10.17#
|
Form
of Notice of Stock Options Grant Relating to the 2004 Equity Incentive
Plan (filed as Exhibit 10.24 to our Form 10-Q Quarterly Report,
as filed on November 15, 2004 and incorporated by reference
herein)
|
|
|
10.18#
|
Separation
Agreement and General Release dated July 15, 2005, between John K. Fraser
and the Company (filed as Exhibit 10.25 to our Form 10-Q Quarterly Report
as filed on November 14, 2005 and incorporated by reference
herein)
|
|
|
10.19#
|
Consulting
Agreement dated July 15, 2005, between John K. Fraser and the Company
(filed as Exhibit 10.28 to our Form 10-Q Quarterly Report as filed on
November 14, 2005 and incorporated by reference herein)
|
|
|
10.20
|
Agreement
Between Owner and Contractor dated October 10, 2005, between Rudolph and
Sletten, Inc. and the Company (filed as Exhibit 10.20 to our Form 10-K
Annual Report as filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.21#
|
Severance
Agreement and General Release dated August 10, 2005, between Sharon V.
Schulzki and the Company (filed as Exhibit 10.27 to our Form 10-Q
Quarterly report as filed on November 14, 2005 and incorporated by
reference herein)
|
|
|
10.22
|
Common
Stock Purchase Agreement dated April 28, 2005, between Olympus Corporation
and the Company (filed as Exhibit 10.21 to our Form 10-Q Quarterly Report
as filed on August 15, 2005 and incorporated by reference
herein)
|
|
|
10.23
|
Sublease
Agreement dated May 24, 2005, between Biogen Idec, Inc. and the Company
(filed as Exhibit 10.21 to our Form 10-Q Quarterly Report as filed on
August 15, 2005 and incorporated by reference herein)
|
|
|
10.24#
|
Employment
Offer Letter to Doug Arm, Vice President of Development—Biologics, dated
February 1, 2005 (filed as Exhibit 10.21 to our Form 10-Q Quarterly Report
as filed on August 15, 2005 and incorporated by reference
herein)
|
|
|
10.25#
|
Employment
Offer Letter to Alex Milstein, Vice-President of Clinical Research, dated
May 1, 2005 (filed as Exhibit 10.21 to our Form 10-Q Quarterly Report as
filed on August 15, 2005 and incorporated by reference
herein)
|
|
|
10.26#
|
Employment
Offer Letter to John Ransom, Vice-President of Research, dated November
15, 2005 (filed as Exhibit 10.26 to our Form 10-K Annual Report as filed
on March 30, 2006 and incorporated by reference herein)
|
|
|
10.27+
|
Joint
Venture Agreement dated November 4, 2005, between Olympus Corporation and
the Company (filed as Exhibit 10.27 to our Form 10-K Annual Report as
filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.28+
|
License/
Commercial Agreement dated November 4, 2005, between Olympus-Cytori, Inc.
and the Company (filed as Exhibit 10.28 to our Form 10-K Annual Report as
filed on March 30, 2006 and incorporated by reference
herein)
|
|
|
10.28.1
|
Amendment
One to License/ Commercial Agreement dated November 14, 2007, between
Olympus-Cytori, Inc. and the Company (filed as Exhibit 10.28.1 to our Form
10-K Annual Report as filed on March 14, 2008 and incorporated by
reference herein).
|
|
|
10.29+
|
License/
Joint Development Agreement dated November 4, 2005, between Olympus
Corporation, Olympus-Cytori, Inc. and the Company (filed as Exhibit 10.29
to our Form 10-K Annual Report as filed on March 30, 2006 and incorporated
by reference herein)
|
|
|
10.29.1
|
Amendment
No. 1 to License/ Joint Development Agreement dated May 20, 2008, between
Olympus Corporation, Olympus-Cytori, Inc. and the Company (filed as
Exhibit 10.29.1 to our Form 10-Q Quarterly Report as filed on August 11,
2008 and incorporated by reference herein).
|
|
|
10.30+
|
Shareholders
Agreement dated November 4, 2005, between Olympus Corporation and the
Company (filed as Exhibit 10.30 to our Form 10-K Annual Report as filed on
March 30, 2006 and incorporated by reference herein)
|
|
|
10.31+
|
Exclusive
Negotiation Agreement with Olympus Corporation, dated February 22, 2006
(filed as Exhibit 10.31 to our Form 10-Q Quarterly Report as filed on May
15, 2006 and incorporated by reference herein)
|
|
|
10.32
|
Common
Stock Purchase Agreement, dated August 9, 2006, by and between Cytori
Therapeutics, Inc. and Olympus Corporation (filed as Exhibit 10.32 to our
Form 8-K Current Report as filed on August 15, 2006 and incorporated by
reference herein)
|
|
|
10.33
|
Form
of Common Stock Subscription Agreement, dated August 9, 2006 (Agreements
on this form were signed by Cytori and each of respective investors in the
Institutional Offering) (filed as Exhibit 10.33 to our Form 8-K Current
Report as filed on August 15, 2006 and incorporated by reference
herein)
|
|
|
10.34
|
Placement
Agency Agreement, dated August 9, 2006, between Cytori Therapeutics, Inc.
and Piper Jaffray & Co. (filed as Exhibit 10.34 to our Form 8-K
Current Report as filed on August 15, 2006 and incorporated by reference
herein)
|
|
|
10.35#
|
Stock
Option Extension Agreement between Bruce A. Reuter and Cytori
Therapeutics, Inc. effective July 25, 2006 (filed as Exhibit 10.35 to our
Form 10-Q Quarterly Report as filed on November 145, 2006 and incorporated
by reference herein)
|
|
|
10.36#
|
Stock
Option Extension Agreement between Elizabeth A. Scarbrough and Cytori
Therapeutics, Inc. effective July 25, 2006 (filed as Exhibit 10.36 to our
Form 10-Q Quarterly Report as filed on November 14, 2006 and incorporated
by reference herein)
|
|
|
10.37#
|
Employment
Agreement between Bruce A. Reuter and Cytori Therapeutics, Inc. effective
July 25, 2006 (filed as Exhibit 10.37 to our Form 10-Q Quarterly Report as
filed on November 14, 2006 and incorporated by reference
herein)
|
|
|
10.38#
|
Employment
Agreement between Elizabeth A. Scarbrough and Cytori Therapeutics, Inc.
effective July 25, 2006 (filed as Exhibit 10.38 to our Form 10-Q Quarterly
Report as filed on November 14, 2006 and incorporated by reference
herein)
|
|
|
10.39+
|
Exclusive
License Agreement between us and the Regents of the University of
California dated October 16, 2001 (filed as Exhibit 10.10 to our Form 10-K
Annual Report as filed on March 31, 2003 and incorporated by reference
herein)
|
|
|
10.39.1
+
|
Amended
and Restated Exclusive License Agreement, effective September 26, 2006, by
and between The Regents of the University of California and Cytori
Therapeutics, Inc. (filed as Exhibit 10.39 to our Form 10-Q Quarterly
Report as filed on November 14, 2006 and incorporated by reference
herein)
|
|
|
10.40#
|
Stock
Option Extension Agreement between Charles Galetto and Cytori
Therapeutics, Inc. signed on May 24, 2006 and effective as of June 1, 2006
(filed as Exhibit 10.20 to our Form 10-Q Quarterly Report as filed on
August 14, 2006 and incorporated by reference herein)
|
|
|
10.41#
|
Part-time
Employment Agreement between Charles Galetto and Cytori Therapeutics, Inc.
signed on May 24, 2006 and effective as of June 1, 2006 (filed as Exhibit
10.21 to our Form 10-Q Quarterly Report as filed on August 14, 2006 and
incorporated by reference herein)
|
|
|
10.42
|
Placement
Agency Agreement, dated February 23, 2007, between Cytori Therapeutics,
Inc. and Piper Jaffray & Co. (filed as Exhibit 10.1 to our
Form 8-K Current Report as filed on February 26, 2007 and
incorporated by reference herein).
|
|
|
10.43
|
Financial
services advisory engagement letter agreement, dated February 16, 2007,
between Cytori Therapeutics, Inc. and WBB Securities, LLC (filed as
Exhibit 10.2 to our Form 8-K Current Report as filed on February 26, 2007
and incorporated by reference herein)
|
|
|
10.44
|
Form
of Subscription Agreement, dated February 23, 2007 (filed as Exhibit 10.3
to our Form 8-K Current Report as filed on February 26, 2007 and
incorporated by reference herein)
|
|
|
10.45
|
Form
of Warrant to be dated February 28, 2007 (filed as Exhibit 10.4 to our
Form 8-K Current Report as filed on February 26, 2007 and incorporated by
reference herein)
|
|
|
10.46
|
Common
Stock Purchase Agreement, dated March 28, 2007, by and between Cytori
Therapeutics, Inc. and Green Hospital Supply, Inc. (filed as Exhibit 10.46
to our Form 10-Q Quarterly Report as filed on May 11, 2007 and
incorporated by reference herein).
|
|
|
10.47
|
Consulting
Agreement, dated May 3, 2007, by and between Cytori Therapeutics, Inc. and
Marshall G. Cox. (filed as Exhibit 10.47 to our Form 10-Q
Quarterly Report as filed on August 14, 2007 and incorporated by reference
herein).
|
|
|
10.48+
|
Master
Cell Banking and Cryopreservation Agreement, effective August 13, 2007, by
and between Green Hospital Supply, Inc. and Cytori
Therapeutics, Inc. (filed as Exhibit 10.48 to our Form 10-Q Quarterly
Report as filed on November 13, 2007 and incorporated by reference
herein).
|
|
|
10.48.1
|
Amendment
No. 1 to Master Cell Banking and Cryopreservation Agreement, effective
June 4, 2008, by and between Green Hospital Supply, Inc. and the Company
(filed as Exhibit 10.48.1 to our Form 8-K Current Report as filed on June
10, 2008 and incorporated by reference herein).
|
|
|
10.49+
|
License
& Royalty Agreement, effective August 23, 2007, by and between
Olympus-Cytori, Inc. and Cytori
Therapeutics, Inc. (filed as Exhibit 10.49 to our Form 10-Q
Quarterly Report as filed on November 13, 2007 and incorporated by
reference herein).
|
|
|
10.50
|
General
Release Agreement, dated August 13, 2007, between John Ransom and Cytori
Therapeutics, Inc. (filed as Exhibit 10.49 to our Form 10-Q Quarterly
Report as filed on November 13, 2007 and incorporated by reference
herein).
|
|
|
10.51
|
Common
Stock Purchase Agreement, dated February 8, 2008, by and between Green
Hospital Supply, Inc. and Cytori
Therapeutics, Inc. (filed as Exhibit 10.51 to our Form 8-K Current Report
as filed on February 19, 2008 and incorporated by reference
herein).
|
|
|
10.51.1
|
Amendment
No. 1 to Common Stock Purchase Agreement, dated February 29, 2008, by and
between Green Hospital Supply, Inc. and Cytori Therapeutics, Inc. (filed
as Exhibit 10.51.1 to our Form 8-K Current Report as filed on February 29,
2008 and incorporated by reference herein).
|
|
|
10.52#
|
Agreement
for Acceleration and/or Severance, dated January 31, 2008, by and between
Christopher J. Calhoun and Cytori
Therapeutics, Inc. (filed as Exhibit 10.52 to our Form 10-K Annual Report
as filed on March 14, 2008 and incorporated by reference
herein).
|
|
|
10.53#
|
Agreement
for Acceleration and/or Severance, dated January 31, 2008, by and between
Marc H. Hedrick and Cytori
Therapeutics, Inc. (filed as Exhibit 10.53 to our Form 10-K Annual Report
as filed on March 14, 2008 and incorporated by reference
herein).
|
|
|
10.54#
|
Agreement
for Acceleration and/or Severance, dated January 31, 2008, by and between
Mark E. Saad and Cytori
Therapeutics, Inc. (filed as Exhibit 10.54 to our Form 10-K Annual Report
as filed on March 14, 2008 and incorporated by reference
herein).
|
|
|
10.55
|
Common
Stock Purchase Agreement, dated August 7, 2008, by and between the Company
and Olympus Corporation (filed as Exhibit 10.32 to our current report on
Form 8-K filed on August 8, 2008 and incorporated by reference
herein).
|
|
|
10.55.1
|
Amendment
No. 1 to Common Stock Purchase Agreement, dated August 8, 2008, by and
between the Company and Olympus Corporation (filed as Exhibit 10.32.1 to
our current report on Form 8-K filed on August 14, 2008 and incorporated
by reference herein).
|
|
|
10.56
|
Securities
Purchase Agreement, dated August 7, 2008, by and among the Company and the
Purchasers identified on the signature pages thereto (filed as Exhibit
10.33 to our current report on Form 8-K filed on August 8, 2008 and
incorporated by reference herein).
|
|
|
10.57
|
Form
of Warrant to Purchase Common Stock issued on August 11, 2008 pursuant to
the Securities Purchase Agreement, dated August 7, 2008, by and among the
Company and the Purchasers identified on the signature pages thereto
(filed as Exhibit 10.34 to our current report on Form 8-K filed on August
8, 2008 and incorporated by reference herein).
|
|
|
10.58
|
Registration
Rights Agreement, dated August 7, 2008, by and among the Company and the
Purchasers identified on the signature pages thereto (filed as Exhibit
10.35 to our current report on Form 8-K filed on August 8, 2008 and
incorporated by reference herein).
|
|
|
10.59
|
Loan
and Security Agreement, dated October 14, 2008, by and among the Company,
General Electric Capital Corporation, and the other lenders signatory
thereto (filed herewith).
|
|
|
10.60
|
Promissory
Note issued by the Company in favor of General Electric Capital
Corporation or any subsequent holder thereof, pursuant to the Loan and
Security Agreement dated October 14, 2008 (filed
herewith).
|
|
|
10.61
|
Warrant
to Purchase Common Stock issued by the Company on October 14, 2008 in
favor of GE Capital Equity Investments, Inc., pursuant to the Loan and
Security Agreement dated October 14, 2008 (filed
herewith).
|
|
|
10.62
|
Warrant
to Purchase Common Stock issued by the Company on October 14, 2008 in
favor of Silicon Valley Bank, pursuant to the Loan and Security Agreement
dated October 14, 2008 (filed herewith).
|
|
|
14.1
|
Code
of Ethics (filed as Exhibit 14.1 to our Annual Report on
Form 10-K which was filed on March 30, 2004 and incorporated by
reference herein)
|
|
|
23.1
|
Consent
of KPMG LLP, Independent Registered Public Accounting Firm (filed
herewith).
|
|
|
31.1
|
Certification
of Principal Executive Officer Pursuant to Securities Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
|
|
|
31.2
|
Certification
of Principal Financial Officer Pursuant to Securities Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
|
|
|
32.1
|
Certifications
Pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule
13a-14(b), as adopted pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002 (filed herewith).
|
_______________________________________
+ Portions
of these exhibits have been omitted pursuant to a request for confidential
treatment.
# Indicates
management contract or compensatory plan or arrangement.
93
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
CYTORI
THERAPEUTICS, INC.
|
||
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Christopher
J. Calhoun
|
||
|
Chief
Executive Officer
|
||
|
March
6, 2009
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this annual report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Ronald D. Henriksen
|
Chairman
of the Board of Directors
|
March
6, 2009
|
||
|
Ronald
D. Henriksen
|
||||
|
/s/
Christopher J. Calhoun
|
Chief
Executive Officer, Vice-Chairman, Director (Principal Executive
Officer)
|
March
6, 2009
|
||
|
Christopher
J. Calhoun
|
||||
|
/s/
Marc H. Hedrick, MD
|
President,
Director
|
March
6, 2009
|
||
|
Marc
H. Hedrick, MD
|
||||
|
/s/
Mark E. Saad
|
Chief
Financial Officer (Principal Financial Officer)
|
March
6, 2009
|
||
|
Mark
E. Saad
|
||||
|
/s/
John W. Townsend
|
Chief
Accounting Officer
|
March
6, 2009
|
||
|
John
W. Townsend
|
||||
|
/s/
David M. Rickey
|
Director
|
March
6, 2009
|
||
|
David
M. Rickey
|
||||
|
/s/
Rick Hawkins
|
Director
|
March
6, 2009
|
||
|
Rick
Hawkins
|
||||
|
/s/
E. Carmack Holmes, MD
|
Director
|
March
6, 2009
|
||
|
E.
Carmack Holmes, MD
|
||||
|
/s/
Paul W. Hawran
|
Director
|
March
6, 2009
|
||
|
Paul
W. Hawran
|
94
Exhibit
10.59
LOAN
AND SECURITY AGREEMENT
THIS LOAN AND SECURITY
AGREEMENT, dated as of October 14, 2008 (as amended, restated,
supplemented or otherwise modified from time to time, this “Agreement”) is among
GENERAL ELECTRIC CAPITAL CORPORATION (“GECC”), in its
capacity as agent for Lenders (as defined below) (together with its successors
and assigns in such capacity, “Agent”), the
financial institutions who are or hereafter become parties to this Agreement as
lenders (together with GECC, collectively the “Lenders”, and each
individually, a “Lender”), CYTORI
THERAPEUTICS, INC., a Delaware corporation (“Borrower”), and the
other entities or persons, if any, who are or hereafter become parties to this
Agreement as guarantors (each a “Guarantor” and
collectively, the “Guarantors”, and
together with Borrower, each a “Loan Party” and
collectively, “Loan
Parties”).
RECITALS
Borrower wishes to borrow funds from
time to time from Lenders, and Lenders desire to make loans, advances and other
extensions of credit, severally and not jointly, to Borrower from time to time
pursuant to the terms and conditions of this Agreement.
AGREEMENT
Loan
Parties, Agent and Lenders agree as follows:
|
1.
|
DEFINITIONS.
|
As used
in this Agreement, all capitalized terms shall have the definitions as provided
herein. Any accounting term used but not defined herein shall be
construed in accordance with generally accepted accounting principles in the
United States of America, as in effect from time to time (“GAAP”) and all
calculations shall be made in accordance with GAAP. The term
“financial statements” shall include the accompanying notes and
schedules. All other terms used but not defined herein shall have the
meaning given to such terms in the Uniform Commercial Code as adopted in the
State of New York, as amended and supplemented from time to time (the “UCC”).
|
2.
|
LOANS
AND TERMS OF PAYMENT.
|
2.1. Promise to
Pay. Borrower promises to pay Agent, for the ratable accounts
of Lenders, when due pursuant to the terms hereof, the aggregate unpaid
principal amount of all loans, advances and other extensions of credit made
severally by the Lenders to Borrower under this Agreement, together with
interest on the unpaid principal amount of such loans, advances and other
extensions of credit at the interest rates set forth herein.
2.2. Term Loans.
(a) Commitment. Subject
to the terms and conditions hereof, each Lender, severally, but not jointly,
agrees to make term loans (each a “Term Loan” and
collectively, the “Term Loans”) to
Borrower from time to time on any Business Day (as defined below) during the
period from the Closing Date (as defined below) until December 12, 2008 (the
“Commitment
Termination Date”) in an aggregate principal amount not to exceed such
Lender’s commitment as identified on Schedule A hereto
(such commitment of each Lender as it may be amended to
-1-
reflect
assignments made in accordance with this Agreement or terminated or reduced in
accordance with this Agreement, its “Commitment”, and the
aggregate of all such commitments, the “Commitments”). Notwithstanding
the foregoing, the aggregate principal amount of the Term Loans made hereunder
shall not exceed $15,000,000 (the “Total
Commitment”). Each Lender’s obligation to fund a Term Loan
shall be limited to such Lender’s Pro Rata Share (as defined below) of such Term
Loan. Subject to the terms and conditions hereof, the initial Term
Loan shall be made on the Closing Date in an aggregate principal amount equal to
$7,500,000 (the “Initial Term
Loan”). After the Initial Term Loan, Borrower may
request one (1) additional Term Loan, and such subsequent Term Loan (the “Subsequent Term
Loan”) must be in an amount equal to $7,500,000.
(b) Method of
Borrowing. When Borrower desires a Term Loan, Borrower will
notify Agent (which notice shall be irrevocable) by facsimile (or by telephone,
provided that such telephonic notice shall be promptly confirmed in writing, but
in any event on or before the following Business Day) on the date that is ten
(10) Business Days prior to the day the Term Loan (other than the Initial Term
Loan) is to be made (or such shorter period of time as Agent may agree). Agent
and Lenders may act without liability upon the basis of such written or
telephonic notice believed by Agent to be from any authorized officer of
Borrower. Agent and Lenders shall have no duty to verify the
authenticity of the signature appearing on any such written notice.
(c) Funding of Term
Loans. Promptly after receiving a request for a Term Loan,
Agent shall notify each Lender of the contents of such request and such Lender’s
Pro Rata Share of the requested Term Loan. Upon the terms and subject
to the conditions set forth herein, each Lender, severally and not jointly,
shall make available to Agent its Pro Rata Share of the requested Term Loan, in
lawful money of the United States of America in immediately available funds, to
the Collection Account (as defined below) prior to 11:00 a.m. (New York time) on
the specified date. Agent shall, unless it shall have determined that
one of the conditions set forth in Section 4.1 or 4.2, as applicable, has not
been satisfied, by 4:00 p.m. (New York time) on such day, credit the amounts
received by it in like funds to Borrower by wire transfer to, unless otherwise
specified in a Disbursement Letter (as defined below), the following deposit
account of Borrower (or such other deposit account as specified in writing by an
authorized officer of Borrower and acceptable to Agent) (the “Designated Deposit
Account”):
Bank
Name: U.S. Bank N.A.
Bank
Address: XXXXXXX
ABA#:
XXXXXXX
Account
#: XXXXXXX
Account
Name: Cytori
Ref:
XXXXXXX
(d) Notes. If
requested by a Lender, the Term Loans of such Lender shall be evidenced by a
promissory note substantially in the form of Exhibit A hereto
(each a “Note”
and, collectively, the “Notes”), and Borrower
shall execute and deliver a Note to such Lender. Each Note shall
represent the obligation of Borrower to pay to such Lender the lesser of (a) the
aggregate unpaid principal amount of all Term Loans made by such Lender to or on
behalf of Borrower under this Agreement or (b) the amount of such Lender’s
Commitment, in each case together with interest thereon as prescribed in Section
2.3(a).
(e) Agent May Assume
Funding. Unless Agent shall have received notice from a Lender
prior to the date of any particular Term Loan that such Lender will not make
available to
-2-
Agent
such Lender’s Pro Rata Share of such Term Loan, Agent may assume that such
Lender has made such amount available to it on the date of such Term Loan in
accordance with subsection (c) of this Section 2.2, and may (but shall not be
obligated to), in reliance upon such assumption, make available a corresponding
amount for the account of Borrower on such date. If and to the extent
that such Lender shall not have so made such amount available to Agent, such
Lender and Borrower severally agree to repay to Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the day
such amount is made available to Borrower until the day such amount is repaid to
Agent, at (i) in the case of Borrower, a rate per annum equal to the interest
rate applicable thereto pursuant to Section 2.3(a), and (ii) in the case of such
Lender, a floating rate per annum equal to, for each day from the day such
amount is made available to Borrower until such amount is reimbursed to Agent,
the weighted average of the rates on overnight federal funds transactions among
members of the Federal Reserve System, as determined by Agent in its sole
discretion (the “Federal Funds Rate”)
for the first Business Day and thereafter, at the interest rate applicable to
such Term Loan. If such Lender shall repay such corresponding amount
to Agent, the amount so repaid shall constitute such Lender’s loan included in
such Term Loan for purposes of this Agreement.
2.3. Interest and
Repayment.
(a) Interest. Each
Term Loan shall accrue interest in arrears from the date made until
such Term Loan is fully repaid at a fixed per annum rate of interest equal to
10.58%. All computations of interest and fees calculated on a per
annum basis shall be made by Agent on the basis of a 360-day year, in each case
for the actual number of days occurring in the period for which such interest
and fees are payable. Each determination of an interest rate or the
amount of a fee hereunder shall be made by Agent and shall be conclusive,
binding and final for all purposes, absent manifest error. As used
herein, the term “Treasury Rate” means a per annum rate of interest equal to the
rate published by the Board of Governors of the Federal Reserve System in
Federal Reserve Statistical Release H.15 entitled “Selected Interest Rates”
under the heading “U.S. Government Securities/Treasury Constant Maturities” as
the three year treasuries constant maturities rate. In the event
Release H.15 is no longer published, Agent shall select a comparable publication
to determine the U.S. Treasury note yield to maturity.
(b) Payments of Principal and
Interest. For the Initial Term Loan, Borrower shall pay to the
Agent, for the ratable benefit of the Lenders, (i) one payment of interest only
(payable in arrears) for the period from the Closing Date to and including
October 31, 2008 at the rate of interest determined in accordance with Section
2.3(a), to be paid on November 1, 2008, (ii) three (3) consecutive payments
of interest only (payable in arrears) at the rate of interest determined in
accordance with Section 2.3(a) on the first day of each calendar month (a “Scheduled Payment
Date”) commencing on December 1, 2008 and (iii) thirty-three (33) equal
consecutive payments of principal and interest (payable in arrears) at the rate
of interest determined in accordance with Section 2.3(a) on each Scheduled
Payment Date commencing on March 1, 2009. For the Subsequent Term
Loan, Borrower shall pay to the Agent, for the ratable benefit of the Lenders,
(i) one payment of interest only (payable in arrears) for the period from date
of funding such Subsequent Term Loan to and including the last day of the month
in which the Subsequent Term Loan was made at the rate of interest determined in
accordance with Section 2.3(a), to be paid on the first day of the calendar
month occurring after the month in which the Subsequent Term Loan was made, and
(ii) thirty-six (36) equal consecutive payments of principal and interest
(payable in arrears) at the rate of interest determined in accordance with
Section 2.3(a) on each Scheduled Payment Date commencing on the first day of the
second calendar month occurring after the month during which the Subsequent Term
Loan was made. The amount of each such payment of principal and
interest with respect to each of the Initial Term Loan and the Subsequent Term
-3-
Loan
shall be calculated by the Agent and shall be sufficient to fully amortize the
principal and interest due with respect to the applicable Term Loan over such
repayment period. Each scheduled payment of interest only or interest
and principal hereunder is referred to herein as a “Scheduled
Payment.” Notwithstanding the foregoing, all unpaid principal
and accrued interest with respect to a Term Loan is due and payable in full to
Agent, for the ratable benefit of Lenders, on the earlier of (A) the first day
of the thirty-seventh month following the date such Term Loan was made or (B)
the date that such Term Loan otherwise becomes due and payable hereunder,
whether by acceleration of the Obligations (as defined below) pursuant to
Section 8.2 or otherwise (the earlier of (A) or (B), the “Applicable Term Loan
Maturity Date”). Each Scheduled Payment, when paid, shall be applied
first to the payment of accrued and unpaid interest on the applicable Term Loan
and then to unpaid principal balance of such Term Loan. Without
limiting the foregoing, all Obligations shall be due and payable on the
Applicable Term Loan Maturity Date for the last Term Loan made.
(c) No
Reborrowing. Once a Term Loan is repaid or prepaid, it cannot
be reborrowed.
(d) Payments. All
payments (including prepayments) to be made by any Loan Party under any Debt
Document shall be made in immediately available funds in U.S. dollars, without
setoff or counterclaim to the Collection Account (as defined below) before 11:00
a.m. (New York time) on the date when due. All payments received by
Agent after 11:00 a.m. (New York time) on any Business Day or at any time
on a day that is not a Business Day shall be deemed to be received on the next
Business Day. Whenever any payment required under this Agreement
would otherwise be due on a date that is not a Business Day, such payment shall
instead be due on the next Business Day, and additional fees or interest, as the
case may be, shall accrue and be payable for the period of such
extension. The payment of any Scheduled Payment prior to its due date
shall be deemed to have been received on such due date for purposes of
calculating interest hereunder. All Scheduled Payments due
to Agent and Lenders under Section 2.3(b) shall be effected by automatic debit
of the appropriate funds from Borrower’s operating account specified on the EPS
Setup Form (as defined below). As used herein, the term
“Collection
Account” means the following account of Agent (or such other account as
Agent shall identify to Borrower in writing):
Bank
Name: Deutsche Bank
Bank
Address: XXXXXXX
ABA
Number: XXXXXXX
Account
Number: XXXXXXX
Account
Name: GECC HH Cash Flow Collections
Ref:
XXXXXXX
(e) Withholdings and Increased
Costs. All payments shall be made free and clear of any taxes,
withholdings, duties, impositions or other charges (other than taxes on the
overall net income of any Lender and comparable taxes), such that Agent and
Lenders will receive the entire amount of any Obligations, regardless of source
of payment. If Agent or any Lender shall have reasonably determined
that the introduction of or any change in, after the date hereof, any law,
treaty, governmental (or quasi-governmental) rule, regulation, guideline or
order reduces the rate of return on Agent or such Lender’s capital as a
consequence of its obligations hereunder or increases the cost to Agent or such
Lender of agreeing to make or making, funding or maintaining any Term Loan, then
Borrower shall from time to time upon demand by Agent or such Lender (with a
copy of such demand to Agent) promptly pay to Agent for its own account or for
the account of such Lender, as the case may be, additional amounts sufficient to
compensate Agent or such Lender for such reduction or for such increased
cost. A certificate as to the amount of such
-4-
reduction
or such increased cost submitted by Agent or such Lender (with a copy to Agent)
to Borrower shall be conclusive and binding on Borrower, absent manifest error,
provided that, neither Agent nor any Lender shall be entitled to payment of any
amounts under this Section 2.3(e) unless it has delivered such certificate to
Borrower within 180 days after the occurrence of the changes or events giving
rise to the increased costs to, or reduction in the amounts received by, Agent
or such Lender. This provision shall survive the termination of this
Agreement. Any Lender claiming any additional amounts payable pursuant to this
Section 2.3(e)
shall use its reasonable efforts (consistent with its internal policies and
requirements of law) to change the jurisdiction of its lending office if such a
change would reduce any such additional amounts (or any similar amount that may
thereafter accrue) and would not, in the sole determination of such Lender, be
otherwise disadvantageous to such Lender. Each Lender organized under the laws
of a jurisdiction outside the United States as to which payments to be made
under this Agreement or under the Notes are exempt from United States
withholding tax under an applicable statute or tax treaty shall provide to
Borrower and Agent a properly completed and executed IRS Form W 8ECI or Form W
8BEN or other applicable form, certificate or document prescribed by the IRS or
the United States.
(f) Loan
Records. Each Lender shall maintain in accordance with its
usual practice accounts evidencing the Obligations of Borrower to such Lender
resulting from such Lender’s Pro Rata Share of each Term Loan, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Agreement. Agent shall maintain in accordance with
its usual practice a loan account on its books to record the Term Loans and any
other extensions of credit made by Lenders hereunder, and all payments thereon
made by Borrower. The entries made in such accounts shall, to the
extent permitted by applicable law, be prima facie evidence of the existence and
amounts of the Obligations recorded therein absent manifest error; provided, however, that no
error in such account and no failure of any Lender or Agent to maintain any such
account shall affect the obligations of Borrower to repay the Obligations in
accordance with their terms.
(g) Payment of
Expenses. Agent is authorized to, and at its sole election
may, debit funds
from Borrower’s operating account specified on the EPS Setup Form (as defined
below) to pay all fees, expenses, costs and interest owing by Borrower
under this Agreement or any of the other Debt Documents if and to the extent
Borrower fails to pay any such amounts within three (3) Business Days of the
date when due.
2.4. Prepayments. Borrower
can voluntarily prepay, upon five (5) Business Days’ prior written notice to
Agent, any Term Loan in full, but not in part. Upon the date of (a)
any voluntary prepayment of a Term Loan in accordance with the immediately
preceding sentence or (b) any mandatory prepayment of a Term Loan required under
this Agreement (whether by acceleration of the Obligations pursuant to Section
8.2 or otherwise, except to the extent that the sole basis for such acceleration
is the occurrence of an Event of Default under Section 8.1(h)), Borrower shall
pay to Agent, for the ratable benefit of the Lenders, a sum equal to (i) all
outstanding principal plus accrued interest with respect to such Term Loan,
(ii) the Final Payment Fee (as such term is defined in Section 2.7(d)) for
such Term Loan, and (iii) a prepayment premium (as yield maintenance for the
loss of a bargain and not as a penalty) equal to: (i) 4% of such prepayment
amount, if such prepayment is made on or before the one year anniversary of such
Term Loan, (ii) 3% of such prepayment amount, if such prepayment is made after
the one year anniversary of such Term Loan but on or before the two year
anniversary of such Term Loan, and (iii) 2% of such prepayment amount, if such
prepayment is made after the two year anniversary of such Term Loan but before
the first day of the thirty-seventh month following the date such Term Loan was
made.
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2.5. Late Fees. If Agent
does not receive any Scheduled Payment or other payment under any Debt Document
from any Loan Party within 5 days after its due date, then, at Agent’s election
or upon the request of the Requisite Lenders (as defined below), such Loan Party
agrees to pay to Agent for the ratable benefit of all Lenders, a late fee equal
to (a) 5% of the amount of such unpaid payment or (b) such lesser amount
that, if paid, would not cause the interest and fees paid by such Loan Party
under this Agreement to exceed the Maximum Lawful Rate (as defined below) (the
“Late
Fee”).
2.6. Default Rate. All
Term Loans and other Obligations shall bear interest, at the option of Agent or
upon the request of the Requisite Lenders, from and after the occurrence and
during the continuation of an Event of Default (as defined below), at a rate
equal to the lesser of (a) 5% above the rate of interest applicable to such
Obligations as set forth in Section 2.3(a) immediately prior to the occurrence
of the Event of Default and (b) the Maximum Lawful Rate (the “Default
Rate”). The application of the Default Rate shall not be
interpreted or deemed to extend any cure period or waive any Default or Event of
Default or otherwise limit the Agent’s or any Lender’s right or remedies
hereunder. All interest payable at the Default Rate shall be payable
on demand.
2.7. Lender Fees.
(a) Agency
Fee. On the Closing Date, Borrower shall pay to Agent, for its
own account, a non-refundable agency fee in an amount equal to $175,000, which
fee shall be fully earned when paid.
(b) Closing
Fee. On the Closing Date, Borrower shall pay to Agent, for the
benefit of Lenders in accordance with their Pro Rata Shares, a non-refundable
closing fee in an amount equal to $300,000, which fee shall be fully earned when
paid.
(c) Unused Line Fee. On the Commitment
Termination Date, Borrower shall pay to Agent, for the benefit of Lenders in
accordance with their Pro Rata Shares, a non-refundable unused line fee equal to
1.0% of the undrawn amount of the Total Commitment as of such date, which fee
shall be fully earned on the Commitment Termination Date, regardless of whether
the Subsequent Term Loan is advanced.
(d) Final Payment
Fee. On the
date upon which the outstanding principal amount of any Term Loan is repaid in
full, or if earlier, is required to be repaid in full (whether by scheduled
payment, voluntary prepayment, acceleration of the Obligations pursuant to
Section 8.2 or otherwise), Borrower shall pay to Agent, for the ratable accounts
of Lenders, a fee equal to 5.0% of the original principal amount of such Term
Loan (the “Final
Payment Fee”), which Final Payment Fee shall be deemed to be fully-earned
on the Closing Date.
2.8. Maximum Lawful
Rate. Anything herein, any Note or any other Debt Document (as
defined below) to the contrary notwithstanding, the obligations of Loan Parties
hereunder and thereunder shall be subject to the limitation that payments of
interest shall not be required, for any period for which interest is computed
hereunder, to the extent (but only to the extent) that contracting for or
receiving such payment by Agent and Lenders would be contrary to the provisions
of any law applicable to Agent and Lenders limiting the highest rate
of interest which may be lawfully contracted for, charged or received
by Agent and Lenders, and in such event Loan Parties shall pay Agent
and Lenders interest at the highest rate permitted by applicable law (“Maximum Lawful
Rate”); provided, however, that if at
any time thereafter the rate of interest payable hereunder or thereunder is less
than the Maximum Lawful Rate, Loan Parties shall continue to pay interest
hereunder at the Maximum Lawful Rate until such time as the total interest
received by Agent and Lenders is equal to the total interest that would have
been received had the interest payable hereunder been (but for the operation of
this paragraph) the interest rate payable
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since the
making of the Initial Term Loan as otherwise provided in this Agreement, any
Note or any other Debt Document.
2.9. Authorization and Issuance of the
Warrants. Borrower has duly authorized the issuance to Lenders
(or their respective affiliates or designees) of stock purchase warrants
substantially in the form of the warrant attached hereto as Exhibit F
(collectively, the “Warrants”) evidencing
Lenders’ (or their respective affiliates or designees) right to acquire their
respective Pro Rata Share of up to 178,148 shares of common stock of Borrower at
an exercise price of $4.21 per share. Subject to the terms and
conditions of the Warrants, the exercise period shall expire ten (10) years from
the date such Warrants are issued.
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3.
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CREATION
OF SECURITY INTEREST.
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3.1. Grant of Security
Interest. As security for the prompt payment and performance,
whether at the stated maturity, by acceleration or otherwise, of all Term Loans
and other debt, obligations and liabilities of any kind whatsoever of Borrower
to Agent and Lenders under the Debt Documents whether for principal, interest,
fees, expenses, prepayment premiums, indemnities, reimbursements or other sums,
and whether or not such amounts accrue after the filing of any petition in
bankruptcy or after the commencement of any insolvency, reorganization or
similar proceeding, and whether or not allowed in such case or proceeding),
absolute or contingent, now existing or arising in the future, including but not
limited to the payment and performance of any outstanding Notes, and any
renewals, extensions and modifications of such Term Loans (such indebtedness
under the Notes, Term Loans and other debt, obligations and liabilities in
connection with the Debt Documents are collectively called the “Obligations”), and as
security for the prompt payment and performance by each Guarantor of the
Guaranteed Obligations as defined in the Guaranty (as defined below), each Loan
Party does hereby grant to Agent, for the benefit of Agent and Lenders, a
security interest in the property listed below (all hereinafter collectively
called the “Collateral”):
All of
such Loan Party’s personal property of every kind and nature whether now owned
or hereafter acquired by, or arising in favor of, such Loan Party, and
regardless of where located, including, without limitation, all accounts,
chattel paper (whether tangible or electronic), commercial tort claims, deposit
accounts, documents, equipment, financial assets, fixtures, goods, instruments,
investment property (including, without limitation, all securities accounts),
inventory, letter-of-credit rights, letters of credit, securities, supporting
obligations, cash, cash equivalents, any other contract rights (including,
without limitation, rights under any license agreements), or rights to the
payment of money, and general intangibles (including Intellectual Property, as
defined in Section 3.3 below), and all books and records of such Loan Party
relating thereto, and in and against all additions, attachments, accessories and
accessions to such property, all substitutions, replacements or exchanges
therefor, all proceeds, insurance claims, products, profits and other rights to
payments not otherwise included in the foregoing (with each of the foregoing
terms that are defined in the UCC having the meaning set forth in the
UCC).
Notwithstanding
the provisions of this Section 3.1 or Section 3.3 below, the grant of security
interest herein shall not extend to and the term “Collateral” shall not include:
(i) to the extent that Borrower would incur adverse tax consequences resulting
from a pledge of 100% of the shares of the outstanding capital stock of any
Subsidiary of Borrower that is incorporated or organized in a jurisdiction other
than the United States or any state or territory thereof (each, a “Foreign Subsidiary”),
more than 65% of the issued and outstanding voting capital stock of such Foreign
Subsidiary or Foreign Subsidiaries, as applicable (but the Collateral shall
still include 100% of the shares of the outstanding non-voting capital stock of
such Foreign Subsidiary or Foreign Subsidiaries, as applicable), (ii) any
license or contract (in each case to the extent such license or contract is not
prohibited by this Agreement), and the property
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subject
to such license or contract, to the extent and only to the extent that (A) the
granting of such security interest is prohibited by any applicable statute, law
or regulation, or would constitute a default under the license or contract, as
applicable, and (B) such prohibition or default is enforceable under applicable
law (including without limitation Sections 9-406, 9-407 and 9-408 of the UCC);
provided that
upon the termination or expiration of any such prohibition, such license,
contract and/or property, as applicable, shall automatically be subject to the
security interest granted in favor of the Agent hereunder and become part of the
“Collateral” or (iii) Borrower’s stock in Olympus-Cytori, Inc., a Delaware
corporation (such entity, “Olympus-Cytori” and
such stock, the “Olympus-Cytori
Stock”); provided that upon
the termination or expiration of all provisions in the Olympus Agreements (as
defined below) prohibiting the granting of a Lien in the Olympus-Cytori Stock,
the Olympus-Cytori Stock shall automatically be subject to the security interest
granted in favor of the Agent hereunder and become part of the
“Collateral.”
Each Loan
Party hereby represents and covenants that such security interest constitutes a
valid, first priority security interest (subject only to Permitted Liens) in the
presently existing Collateral, and will constitute a valid, first priority
security interest (subject only to Permitted Liens) in Collateral acquired after
the date hereof. Each Loan Party hereby covenants that it shall give
written notice to Agent promptly upon the acquisition by such Loan Party or
creation in favor of such Loan Party of any commercial tort claim after the
Closing Date.
3.2. Financing
Statements. Each Loan Party hereby authorizes Agent to file
UCC financing statements with all appropriate jurisdictions to perfect Agent’s
security interest (for the benefit of itself and the Lenders) granted
hereby.
3.3. Grant of Intellectual Property
Security Interest. The Collateral shall include all
intellectual property of each Loan Party, which shall be defined as any and all
copyright, trademark, servicemark, patent, design right, software, license,
trade secret and intangible rights of a Loan Party and any applications,
registrations, claims, products, awards, judgments, amendments, renewals,
extensions, improvements and insurance claims related thereto (collectively,
“Intellectual
Property”) now or hereafter owned or licensed by a Loan Party, together
with all accessions and additions thereto, proceeds and products thereof
(including, without limitation, any proceeds resulting under insurance
policies). In order to perfect or protect Agent’s security interest
and other rights in Loan Party’s Intellectual Property, each Loan Party hereby
authorizes Agent to file one or more intellectual property security agreements,
substantially in the form executed and delivered to Agent on the Closing Date
(each an “Intellectual
Property Security Agreement” and collectively, the “Intellectual Property
Security Agreements”) with the United States Patent and Trademark Office
and/or United States Copyright Office, as each are applicable and required by
Agent.
3.4. Termination of Security
Interest. Upon the date on which all of the Obligations (other
than contingent indemnity obligations that survive the termination of this
Agreement and for which no claim has been asserted) are indefeasibly repaid in
full in cash, all of the Commitments hereunder are terminated, and this
Agreement shall have been terminated (the “Termination Date”),
and upon receipt of a payoff letter or termination agreement executed by the
Loan Parties in form and substance acceptable to Agent, Agent shall, at Loan
Parties’ sole cost and expense and without any recourse, representation or
warranty, release its Liens in the Collateral.
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4.
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CONDITIONS
OF CREDIT EXTENSIONS
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4.1. Conditions Precedent to Initial Term
Loan. No Lender shall be obligated to make the Initial Term
Loan, or to take, fulfill, or perform any other action hereunder, until the
following have been delivered to the Agent and each Lender (the date on which
the Lenders make the Initial Term Loan after
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all such
conditions shall have been satisfied in a manner satisfactory to Agent or waived
in accordance with this Agreement, the “Closing
Date”):
(a) a
counterpart of this Agreement duly executed by each Loan Party;
(b) a
certificate executed by the Secretary of each Loan Party, the form of which is
attached hereto as Exhibit B (the “Secretary’s
Certificate”), providing verification of incumbency and attaching (i)
such Loan Party’s board resolutions approving the transactions contemplated by
this Agreement and the other Debt Documents and (ii) such Loan Party’s governing
documents;
(c) Notes
duly executed by Borrower in favor of each applicable Lender (if requested by
such Lender);
(d) filed
copies of UCC financing statements, collateral assignments, and terminations
statements, with respect to the Collateral, as Agent shall request;
(e) certificates
of insurance evidencing the insurance coverage, and satisfactory additional
insured and lender loss payable endorsements, in each case as required pursuant
to Section 6.4 herein;
(f) current
UCC lien, judgment, bankruptcy and tax lien search results demonstrating that
there are no other security interests or other Liens on the Collateral, other
than Permitted Liens (as defined below);
(g) a Warrant
in favor of each Lender (or its affiliate or designee);
(h) the
Intellectual Property Security Agreement required by Section 3.3 above, duly
executed by each Loan Party;
(i) a
certificate of good standing of each Loan Party from the jurisdiction of such
Loan Party’s organization and a certificate of foreign qualification from each
jurisdiction where such Loan Party’s failure to be so qualified could reasonably
be expected to have a Material Adverse Effect (as defined below), in each case
as of a recent date acceptable to Agent;
(j) a
landlord consent and/or bailee letter in favor of Agent executed by the landlord
or bailee, as applicable, for any third party location (other than a Permitted
Location as defined below) where (a) any Loan Party’s principal place of
business is located, (b) any Loan Party’s books or records are located or (c)
Collateral with an aggregate value in excess of $50,000 is located (each of the
locations described in the immediately preceding clauses (a), (b) and (c), a
“Collateral
Location”), a form of which is attached hereto as Exhibit C-1 and Exhibit C-2, as
applicable (each an “Access
Agreement”);
(k) a legal
opinion of Loan Parties’ counsel, in form and substance satisfactory to
Agent;
(l) a
completed EPS set-up form, a form of which is attached hereto as Exhibit E (the “EPS Setup
Form”);
(m) a
completed perfection certificate, duly executed by each Loan Party (the “Perfection
Certificate”), a form of which Agent previously delivered to
Borrower;
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(n) one or
more Account Control Agreements (as defined below), in form and substance
reasonably acceptable to Agent, duly executed by the applicable Loan Parties and
the applicable depository or financial institution, for each deposit and
securities account listed on the Perfection Certificate, to the extent required
pursuant to the terms and conditions of Section
7.10;
(o) a pledge
agreement, in form and substance satisfactory to Agent, executed by each Loan
Party and pledging to Agent, for the benefit of itself and the Lenders, a
security interest in (a) 100% of the shares of the outstanding capital stock, of
any class, of each Subsidiary (as defined below) of each Loan Party that is not
a Foreign Subsidiary, (b) to the extent that Borrower would incur adverse tax
consequences resulting from a pledge of 100% of the shares of the outstanding
capital stock of any Foreign Subsidiary, 65% of the shares of the outstanding
voting capital stock and 100% of the shares of the outstanding non-voting
capital stock of each such Foreign Subsidiary and (c) any and all Indebtedness
(as defined in Section 7.2 below) owing to Loan Parties (the “Pledge
Agreement”);
(p) a
guaranty agreement (together with any other guaranty that purports to provide
for a guaranty of the Obligation, the “Guaranty”), in form
and substance satisfactory to Agent, executed by each Guarantor;
(q) a
disbursement instruction letter, in form and substance satisfactory to Agent,
executed by each Loan Party, Agent and each Lender (the “Disbursement
Letter”);
(r) Borrower
shall have unrestricted balance sheet cash and Cash Equivalents (as defined
below) in one or more deposit accounts or securities accounts over which Agent
has obtained control under Section 7.10 of not less than the product of (i)
negative three (-3) times (ii) the Cash Burn Amount (as defined below) at such
time;
(s) evidence
of the payment of all loans and other indebtedness, obligations and liabilities
of any kind whatsoever of Borrower to GECC in connection with (i) those two
certain promissory notes in the original principal amounts of $600,000 and
$1,380,467.48, respectively, made by Borrower in favor of GECC and (ii) that
certain Master Security Agreement dated as of October 1, 2001 by and between
Borrower and GECC (as amended, restated, supplemented or otherwise modified from
time to time, and together with all schedules attached thereto) (such loans,
indebtedness, obligations and liabilities, collectively, the (“GE Equipment
Indebtedness”);
(t) all other
documents and instruments as Agent or the Lenders may reasonably deem necessary
or appropriate to effectuate the intent and purpose of this Agreement (together
with the Agreement, Note, Warrants, Intellectual Property Security Agreements,
the Perfection Certificate, the Pledge Agreement, the Guaranty, if any, the
Secretary’s Certificate and the Disbursement Letter, and all other agreements,
instruments, documents and certificates executed and/or delivered to or in favor
of Agent and/or the Lenders from time to time in connection with this Agreement
or the transactions contemplated hereby, the “Debt Documents”);
and
(u) Agent and
Lenders shall have received the fees required to be paid by Borrower, if any, in
the respective amounts specified in Section 2.7, and Borrower shall have
reimbursed Agent and Lenders for all reasonable fees, costs and expenses of
closing presented as of the date of this Agreement.
4.2. Conditions Precedent to All Term
Loans. No Lender shall be obligated to make any Term Loan,
including the Initial Term Loan, unless the following additional conditions have
been satisfied:
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(a) (i) all
representations and warranties in Section 5 below shall be true as of the date
of such Term Loan, except to the extent such representations and warranties
expressly refer to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date; (ii) no Event of
Default or any other event, which with the giving of notice or the passage of
time, or both, would constitute an Event of Default (such event, a “Default”) has
occurred and is continuing or will result from the making of any Term Loan, and
(iii) Agent shall have received a certificate from an authorized officer of each
Loan Party confirming each of the foregoing;
(b) Agent
shall have received the redelivery or supplemental delivery of the items set
forth in the following sections to the extent circumstances have changed since
the Initial Term Loan: Sections 4.1(b), (e), (f), (g), (i), (j), (k),
(m) and (q);
(c) with
respect to the Subsequent Term Loan only, Agent shall have received evidence
satisfactory to Agent and the Lenders that Borrower has, at the time of and
after giving effect to such Term Loan, satisfied each of the following
conditions precedent:
(i) (A) If
the Subsequent Term Loan is to be made on or prior to October 31, 2008, the
aggregate gross income from the sale of inventory of Borrower and its
consolidated Subsidiaries for the period of 3 consecutive months ending as of
September 30, 2008 shall not be less than $2,300,000; (B) if the Subsequent Term
Loan is to be made after October 31, 2008 but prior to November 30, 2008, the
aggregate gross income from the sale of inventory of Borrower and its
consolidated Subsidiaries for the period of 3 consecutive months ending as of
October 31, 2008 shall not be less than $3,100,000, and (C) if the Subsequent
Term Loan is to be made on or after November 30, 2008 but prior to the
Commitment Termination Date, the aggregate gross income from the sale of
inventory of Borrower and its consolidated Subsidiaries for the period of 3
consecutive months ending as of November 30, 2008 shall not be less than
$4,000,000;
(ii) (A) If
the Subsequent Term Loan is to be made on or prior to October 31, 2008, the
aggregate expenses (excluding non-cash expenses relating to the granting of
stock options) and non-financed capital expenditures of Borrower and its
consolidated Subsidiaries for the period of 3 consecutive months ending as of
September 30, 2008 shall not be greater than $9,100,000; (B) if the Subsequent
Term Loan is to be made after October 31, 2008 but prior to November 30, 2008,
the aggregate expenses (excluding non-cash expenses relating to the granting of
stock options) and non-financed capital expenditures of Borrower and its
consolidated Subsidiaries for the period of 3 consecutive months ending as of
October 31, 2008 shall not be greater than $8,800,000, and (C) if the Subsequent
Term Loan is to be made on or after November 30, 2008 but prior to the
Commitment Termination Date, the aggregate expenses (excluding non-cash expenses
relating to the granting of stock options) and non-financed capital expenditures
of Borrower and its consolidated Subsidiaries for the period of 3 consecutive
months ending as of November 30, 2008 shall not be greater than
$8,600,000;
(iii) Borrower
shall have received at least $10,000,000 in unrestricted net cash proceeds from
the sale and issuance of Borrower’s equity securities after the Closing Date,
which equity issuance shall be on terms and conditions not otherwise prohibited
by any provision of this Agreement or the other Debt Documents;
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(iv) The
market capitalization of Borrower is not less than $100,000,000 based on the
10-day trailing average of Borrower’s common stock price, as determined as of
the close of business on the Business Day (as defined below) immediately prior
to the proposed date of the Subsequent Term Loan;
(v) Borrower
shall have unrestricted balance sheet cash and Cash Equivalents (as defined
below) in one or more deposit accounts or securities accounts over which Agent
has obtained control under Section 7.10 of not less than the product of (i)
negative six (-6) times (ii) the Cash Burn Amount (as such term is defined in
Section 7.12
below) at such time; and
(vi) Evidence
that all obligations set forth in that certain Post-Closing Obligations Letter
dated October 14, 2008 by and between Borrower and Agent have been satisfied;
and
(d) Agent and
Lenders shall have received such other documents, agreements, instruments or
information as Agent or such Lender shall reasonably request.
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5.
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REPRESENTATIONS
AND WARRANTIES OF LOAN PARTIES.
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Each Loan
Party, jointly and severally, represents, warrants and covenants to Agent and
each Lender that:
5.1. Due Organization and
Authorization. Each Loan Party’s exact legal name is as set
forth in the Perfection Certificate (or as disclosed to and consented to by
Agent pursuant to Section 7.4) and each Loan Party is, and will remain, duly
organized, existing and in good standing under the laws of the State of its
organization as specified in the Perfection Certificate, has its chief executive
office at the location specified in the Perfection Certificate, and is, and will
remain, duly qualified and licensed in every jurisdiction wherever necessary to
carry on its business and operations, except where the failure to be so
qualified and licensed could not reasonably be expected to have a Material
Adverse Effect. This Agreement and the other Debt Documents have been
duly authorized, executed and delivered by each Loan Party and constitute legal,
valid and binding agreements enforceable in accordance with their terms, subject
only to bankruptcy, moratorium, insolvency and other laws of general application
affecting secured creditors and general principles of equity. The
execution, delivery and performance by each Loan Party of each Debt Document
executed or to be executed by it is in each case within such Loan Party’s
powers.
5.2. Required
Consents. No filing, registration, qualification with, or
approval, consent or withholding of objections from, any governmental authority
or instrumentality or any other entity or person is required with respect to the
entry into, or performance by any Loan Party of, any of the Debt Documents,
except any already obtained.
5.3. No
Conflicts. Except as described in the note to Item 8 in
Section D on Schedule
B hereto, the entry into, and performance by each Loan Party of, the Debt
Documents will not (a) violate any of the organizational documents of such Loan
Party, (b) violate any law, rule, regulation, order, award or judgment
applicable to such Loan Party, or (c) result in any breach of or constitute a
default under, or result in the creation of any Lien on any of such Loan Party’s
property (except for Liens in favor of Agent, on behalf of itself and Lenders)
pursuant to, any indenture, mortgage, deed of trust, bank loan, credit
agreement, or other Material Agreement (as defined below) to which such Loan
Party is a party. As used herein, “Material Agreement”
means (i) any agreement or contract required to be filed by a Loan
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Party
with the Securities and Exchange Commission (“SEC”) pursuant to
Item 601(b)(10) of Regulation S-K (other than (x) employment or compensation
related agreements, including agreements relating to stock option grants to
employees, consultants and directors, and (y) agreements that have been filed
with the SEC but that have been assigned or terminated or as to which no Loan
Party has any continuing obligations and is owed no further consideration or
performance by the other parties thereto, in each case, prior to the date of
this Agreement) and (ii) the Olympus Agreements (as defined below). A
list of all Material Agreements as of the Closing Date is set forth on Schedule B
hereto. As used herein, the “Olympus Agreements”
means each of (1) that certain Joint Venture Agreement, dated as of November 4,
2005 (the “Joint
Venture Agreement”), between Borrower and Olympus Corporation, a Japanese
corporation (“Olympus”), (2) that
certain Shareholders Agreement, dated as of November 4, 2005 (the “Shareholders
Agreement”), between Borrower and Olympus, and (3) all other agreements,
documents and instruments executed or delivered in connection with the Joint
Venture Agreement or the Shareholders Agreement, in each case as the Joint
Venture Agreement, the Shareholders Agreement and such other agreements,
documents and instruments are amended, modified, restated or replaced from time
to time in accordance with the terms and conditions of this
Agreement.
5.4. Litigation. Except
as disclosed in the Perfection Certificate or as disclosed to Agent pursuant to
Section 6.2(d), there are no actions, suits, proceedings or investigations
pending against or affecting any Loan Party before any court, federal, state,
provincial, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any basis thereof,
the outcome of which could reasonably be expected to have a Material Adverse
Effect, or which questions the validity of the Debt Documents, or the other
documents required thereby or any action to be taken pursuant to any of the
foregoing, nor have any such actions, suits, proceedings or investigations been
threatened in writing. As used in this Agreement, the term “Material Adverse
Effect” means a material adverse effect on any of (a) the operations,
business, assets, properties, or condition (financial or otherwise) of Borrower,
individually, or the Loan Parties, collectively, (b) the ability of a Loan Party
to perform any of its obligations under any Debt Document to which it is a
party, (c) the legality, validity or enforceability of any Debt Document, (d)
the rights and remedies of Agent or Lenders under any Debt Document or (e) the
validity, perfection or priority of any Lien in favor of Agent, on behalf of
itself and Lenders, on any of the Collateral.
5.5. Financial
Statements. All financial statements delivered to Agent and
Lenders pursuant to Section 6.3 have been prepared in accordance with GAAP
(subject, in the case of unaudited financial statements, to the absence of
footnotes and normal year end audit adjustments), and since the date of the most
recent audited financial statement, no event has occurred which has had or could
reasonably be expected to have a Material Adverse Effect. There has
been no material adverse deviation from the most recent annual operating plan of
Borrower delivered to Agent and Lenders in accordance with Section
6.3.
5.6. Use of
Proceeds. The proceeds of the Term Loans shall be used to
repay in full the GE Equipment Indebtedness and for working capital, capital
expenditures and other general corporate purposes.
5.7. Collateral. Each
Loan Party is, and will remain, the sole and lawful owner, and in possession of,
the Collateral, and has the sole right and lawful authority to grant the
security interest described in this Agreement. The Collateral is, and
will remain, free and clear of all liens, security interests, claims and
encumbrances of any kind whatsoever (each, a “Lien”), except for
(a) Liens in favor of Agent, on behalf of itself and Lenders, to secure the
Obligations, (b) Liens (i) with respect to the payment of taxes, assessments or
other governmental charges or (ii) of suppliers, carriers, materialmen,
warehousemen, workmen or mechanics and other similar Liens, in each case imposed
by law and arising in the ordinary course of business, and securing amounts that
are not yet delinquent (in the case of taxes) or not yet due (with respect to
all cases described in the immediately preceding clauses (i) and (ii) other
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than
taxes) or that in any case are being contested in good faith by appropriate
proceedings diligently conducted and with respect to which adequate reserves or
other appropriate provisions are maintained on the books of the applicable Loan
Party in accordance with GAAP and which do not involve, in the judgment of
Agent, any risk of the sale, forfeiture or loss of any of the Collateral (a
“Permitted
Contest”), (c) Liens existing on the date hereof and set forth on Schedule B hereto,
(d) Liens securing Indebtedness (as defined in Section 7.2 below) permitted
under Section 7.2(c) below, provided that (i) such Liens exist prior to the
acquisition of, or attach substantially simultaneous with, or within 20 days
after the, acquisition, repair, improvement or construction of, such property
financed by such Indebtedness and (ii) such Liens do not extend to any property
of a Loan Party other than the property (and any attachments, additions,
accessions thereto and proceeds thereof) acquired or built, or the improvements
or repairs, financed by such Indebtedness, (e) licenses described in Section
7.3(c), (d) and (e) below and the rights and interests of licensors under
licenses where a Loan Party is the licensee (to the extent such licenses are
permitted under this Agreement), (f) zoning restrictions, easements, rights of
way, encroachments or other restrictions on the use of, and other minor defects
or irregularities in title with respect to, any real property of Borrower or its
Subsidiaries so long as the same do not materially impair the use of such real
property by Borrower or such Subsidiary, (g) purported Liens evidenced by the
filing of precautionary UCC financing statements relating solely to operating
leases of personal property entered into in the ordinary course of business, (h)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods,
(i) pledges or cash deposits made in the ordinary course of business in
connection with workers’ compensation, unemployment insurance or other types of
social security benefits (other than any Lien imposed by ERISA) that secure
amounts that are not past due, (j) bankers’ Liens or other set-off rights in
favor of other financial institutions arising in connection with the Loan
Parties’ deposit and securities accounts held at such institutions, to the
extent the same are permitted under the Account Control Agreement with respect
to such deposit or securities accounts, (k) Liens arising from judgments,
decrees or attachments that do not constitute an Event of Default hereunder, (l)
Liens of Silicon Valley Bank on a Certificate of Deposit in an aggregate amount
not to exceed $250,000 (the “SVB Certificate of
Deposit”) issued by Silicon Valley Bank to Borrower to secure Borrower’s
reimbursement obligations with respect to (i) credit card, payroll
and foreign exchange services provided by Silicon Valley Bank to Borrower and
(ii) standby letters of credit issued by Silicon Valley Bank on behalf of
Borrower, in each case to the extent permitted under Section 7.2(g) (such
reimbursement obligations collectively hereinafter referred to as the “SVB Cash Management
Obligations”), and (m) Liens of landlords (i) arising by statute or under
any lease or related contractual obligation entered into in the ordinary course
of business, (ii) on fixtures and movable tangible property located on the real
property leased or subleased from such landlord, (iii) for amounts not yet due
or that are being contested in good faith by appropriate proceedings diligently
conducted, (iv) for which adequate reserves or other appropriate provisions are
maintained on the books of such Loan Party in accordance with GAAP and (v) which
Liens are subordinated to the security interests granted under Section 3.1
pursuant to an Access Agreement (all of such Liens described in the foregoing
clauses (a) through (m) are called “Permitted
Liens”).
5.8. Compliance with
Laws.
(a) Each Loan
Party is and will remain in compliance in all respects with all laws, statutes,
ordinances, rules and regulations applicable to it, except to the extent that
any such non-compliance, individually or in the aggregate, could not reasonably
be expected to result in a Material Adverse Effect.
(b) Without
limiting the generality of the immediately preceding clause (a), each Loan Party
further agrees that it is and will remain in compliance in all material respects
with all U.S. economic sanctions laws, Executive Orders and implementing
regulations as promulgated by the U.S. Treasury Department's Office of Foreign
Assets Control (“OFAC”), and all
applicable anti-
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money
laundering and counter-terrorism financing provisions of the Bank Secrecy Act
and the USA Patriot Act and all regulations issued pursuant to it. No
Loan Party nor any of its subsidiaries, affiliates or joint ventures (A) is a
person or entity designated by the U.S. Government on the list of the Specially
Designated Nationals and Blocked Persons (the “SDN List”) with which
a U.S. person or entity cannot deal with or otherwise engage in business
transactions, (B) is a person or entity who is otherwise the target of U.S.
economic sanctions laws such that a U.S. person or entity cannot deal or
otherwise engage in business transactions with such person or entity; or (C) is
controlled by (including without limitation by virtue of such person being a
director or owning voting shares or interests), or acts, directly or indirectly,
for or on behalf of, any person or entity on the SDN List or a foreign
government that is the target of U.S. economic sanctions prohibitions such that
the entry into, or performance under, this Agreement or any other Debt Document
would be prohibited under U.S. law. The SDN List is maintained by
OFAC and is available at:
http://www.ustreas.gov/offices/enforcement/ofac/sdn/.
(c) Each Loan
Party has met the minimum funding requirements of the United States Employee
Retirement Income Security Act of 1974 (as amended, “ERISA”) with respect
to any employee benefit plans subject to ERISA. No Loan Party is an
“investment company” or a company “controlled” by an “investment company” within
the meaning of the Investment Company Act of 1940. No Loan Party is
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations T, U and X of the Board of Governors of the Federal
Reserve System (the “Federal Reserve
Board”).
5.9. Intellectual
Property. The Intellectual Property is and will remain free
and clear of all Liens, except for Permitted Liens described in clauses (b)(i),
(d) (to the extent consisting of software financed in connection with the
acquisition of related equipment) and (e) of Section 5.7. No Loan
Party has nor will it enter into any other agreement or financing arrangement in
which such Loan Party has agreed that it will not grant a security interest in
such Loan Party’s Intellectual Property to any other party (other than
agreements with licensors that prohibit such Loan Party from encumbering or
assigning the license from such licensor or the Intellectual Property licensed
from such licensor, but only to the extent that such prohibition is not
enforceable under applicable law, including, without limitation, Sections 9-406,
9-407 and 9-408 of the UCC). Except as disclosed in the Perfection
Certificate and except as disclosed to the Agent in writing after the Closing
Date, as of the Closing Date and each date a Term Loan is advanced to Borrower,
no Loan Party has any interest in, or title to any Intellectual Property that is
(i) a registered trademark, or a trademark for which an application has been
filed, (ii) a registered copyright, or a copyright for which an application has
been filed, or (iii) a registered patent or a patent
application. Upon filing of the Intellectual Property Security
Agreements with the United States Patent and Trademark Office and the United
States Copyright Office, as applicable, and the filing of appropriate financing
statements, all action necessary or desirable to protect and perfect Agent’s
Lien on each Loan Party’s Intellectual Property that is registered or for which
an application has been filed shall have been duly taken. Each Loan Party owns or
has rights to use all Intellectual Property material to the conduct of its
business as now conducted by it or proposed to be conducted by it, without any
actual or claimed infringement upon the rights of third parties.
5.10. Solvency. Both
before and after giving effect to each Term Loan, the transactions contemplated
herein, and the payment and accrual of all transaction costs in connection with
the foregoing, each Loan Party is and will be Solvent. As used
herein, “Solvent” means, with
respect to a Loan Party on a particular date, that on such date (a) the fair
value of the property of such Loan Party (including intangible assets and
goodwill) is greater than the total amount of liabilities, including contingent
liabilities, of such Loan Party; (b) the present fair salable value of the
assets of such Loan Party is not less than the amount that will be required to
pay the probable liability of such Loan Party on
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its debts
as they become absolute and matured; (c) such Loan Party does not intend to, and
does not believe that it will, incur debts or liabilities beyond such Loan
Party’s ability to pay as such debts and liabilities mature; (d) such Loan Party
is not engaged in a business or transaction, and is not about to engage in a
business or transaction, for which such Loan Party’s property would constitute
an unreasonably small capital; and (e) such Loan Party is not “insolvent” within
the meaning of Section 101(32) of the United States Bankruptcy Code (11 U.S.C. §
101, et. seq), as amended from time to time. The amount of contingent
liabilities (such as litigation, guaranties and pension plan liabilities) at any
time shall be computed as the amount that, in light of all the facts and
circumstances existing at the time, represents the amount that can be reasonably
be expected to become an actual or matured liability.
5.11. Taxes; Pension. All
federal (and all material state and local) tax returns, reports and statements,
including information returns, required by any governmental authority to be
filed by each Loan Party and its Subsidiaries have been filed with the
appropriate governmental authority and all federal (and all material state and
local) taxes, levies, assessments and similar charges have been paid prior to
the date on which any fine, penalty, interest or late charge may be added
thereto for nonpayment thereof (or any such fine, penalty, interest, late charge
or loss has been paid), excluding taxes, levies, assessments and similar charges
or other amounts which are the subject of a Permitted Contest. Proper
and accurate amounts have been withheld by each Loan Party from its respective
employees for all periods in compliance with applicable laws and such
withholdings have been timely paid to the respective governmental
authorities. Each Loan Party has paid all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans in
accordance with their terms, and no Loan Party has withdrawn from participation
in, or has permitted partial or complete termination of, or permitted the
occurrence of any other event with respect to, any such plan which could
reasonably be expected to result in any liability of a Loan Party, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental authority.
5.12.
Full
Disclosure. Loan Parties hereby confirm that all of the
information disclosed on the Perfection Certificate is true, correct and
complete as of the date of this Agreement and as of the date of each Term
Loan. No representation, warranty or other statement made by or on
behalf of a Loan Party in any Debt Document or any document delivered by any
Loan Party in connection therewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading, it being recognized by Agent and Lenders that the projections and
forecasts provided by Loan Parties in good faith and based upon reasonable and
stated assumptions are not to be viewed as facts and that actual results during
the period or periods covered by any such projections and forecasts may differ
from the projected or forecasted results.
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6.
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AFFIRMATIVE
COVENANTS.
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6.1. Good Standing. Each
Loan Party shall maintain its and each of its Subsidiaries’ existence and good
standing in its jurisdiction of organization and maintain qualification in each
jurisdiction in which the failure to so qualify could reasonably be expected to
have a Material Adverse Effect. Each Loan Party shall maintain, and
shall cause each of its Subsidiaries to maintain, in full force all licenses,
approvals and agreements, the loss of which could reasonably be expected to have
a Material Adverse Effect. “Subsidiary” means,
with respect to a Loan Party, any entity the management of which is, directly or
indirectly controlled by, or of which an aggregate of more than 50% of the
outstanding voting capital stock (or other voting equity interest) is, at the
time, owned or controlled, directly or indirectly by, such Loan Party or one or
more Subsidiaries of such Loan Party, and, unless the contest otherwise requires
each reference to a Subsidiary herein shall be a reference to a Subsidiary of
Borrower. For avoidance of doubt, Olympus-Cytori shall not be deemed
to be a Subsidiary of Borrower for so long as Borrower does
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not own
or control, directly or indirectly, more than 50% of the outstanding voting
capital stock of Olympus-Cytori.
6.2. Notice to Agent and
Lenders. Loan Parties shall provide Agent and Lenders with
(a) notice of any change in the accuracy of the Perfection Certificate or
any of the representations and warranties provided in Section 5 above,
immediately upon the occurrence of any such change, (b) notice of the occurrence
of any Default or Event of Default, promptly (but in any event within 3 Business
Days) after the date on which any executive officer of a Loan Party obtains
knowledge of the occurrence of any such event, (c) copies of all statements,
reports and notices made available generally by Borrower to its security holders
and notice of all filings on forms 10K, 10Q and 8K filed with the SEC or any
securities exchange or governmental authority exercising a similar function,
promptly, but in any event within 5 Business Days of delivering or receiving
such information to or from such persons, (d) a report of any legal actions
pending or threatened against Borrower or any Subsidiary that could reasonably
be expected to result in damages or costs to Borrower or any Subsidiary of
$250,000 or more promptly, but in any event within 5 Business Days, upon receipt
of notice thereof, (e) notice of any new applications or registrations that any
Loan Party has made or filed in respect of any Intellectual Property or any
material adverse change in status of any outstanding application or registration
within 20 Business Days of such receipt of confirmation of the filing of such
application or filing or receipt of notice of such change in status, and (f)
notices of all material statements, reports and notices delivered to or by a
Loan Party in connection with any Material Agreement promptly (but in any event
within 5 Business Days) upon receipt thereof, and copies of the same upon
Agent’s request.
6.3. Financial
Statements. If Borrower is a private company, it shall deliver
to Agent and Lenders (a) unaudited consolidated and, if available, consolidating
balance sheets, statements of operations and cash flow statements within 30 days
of each month end, in a form acceptable to Agent and Lenders and certified by
Borrower’s president, chief executive officer or chief financial officer, and
(b) its complete annual audited consolidated and, if available, consolidating
financial statements prepared under GAAP and certified by an independent
certified public accountant selected by Borrower and satisfactory to Agent and
Lenders within 120 days of the fiscal year end or, if sooner, at such time as
Borrower’s Board of Directors receives the certified audit. If
Borrower is a publicly held company, it shall deliver to Agent and Lenders
quarterly unaudited consolidated and, if available, consolidating balance
sheets, statements of operations and cash flow statements and annual audited
consolidated and, if available, consolidating balance sheets, statements of
operations and cash flow statements, certified by a recognized firm of certified
public accountants, within 5 days after the statements are required to be
provided to the SEC, and if Agent requests, Borrower shall deliver to Agent and
Lenders monthly unaudited consolidated and, if available, consolidating balance
sheets, statements of operations and cash flow statements within 30 days after
the end of each month. All such statements are to be prepared using
GAAP (subject, in the case of unaudited financial statements, to the absence of
footnotes and normal year end audit adjustments) and, if Borrower is a publicly
held company, are to be in compliance with applicable SEC
requirements. All financial statements delivered pursuant to this
Section 6.3 shall be accompanied by a compliance certificate, signed by the
chief financial officer of Borrower, in the form attached hereto as Exhibit D, and a
management discussion and analysis that includes a comparison to budget for the
respective fiscal period and a comparison of performance for such fiscal period
to the corresponding period in the prior year. Borrower shall deliver
to Agent and Lenders (i) as soon as available and in any event not later than 45
days after the end of each fiscal year of Borrower, an annual operating plan for
Borrower, on a consolidated and, if available, consolidating basis, approved by
the Board of Directors of Borrower, for the current fiscal year, in form and
substance approved by the Board of Directors of Borrower and (ii) such budgets,
sales projections, or other financial information as Agent or any Lender may
reasonably request from time to time generally prepared by Borrower in the
ordinary course of business.
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6.4. Insurance. Borrower, at
its expense, shall maintain, and shall cause each Subsidiary to maintain,
insurance (including, without limitation, comprehensive general liability,
hazard, and business interruption insurance) with respect to all of its
properties and businesses (including, the Collateral), in such amounts and
covering such risks as is carried generally in accordance with sound business
practice by companies in similar businesses similarly situated and in any event
with deductible amounts, insurers and policies that shall be reasonably
acceptable to Agent. Borrower shall deliver to Agent certificates of
insurance evidencing such coverage, together with endorsements to such policies
naming Agent as a lender loss payee or additional insured, as appropriate, in
form and substance satisfactory to Agent. Each policy shall provide
that coverage may not be canceled or altered by the insurer except upon 30
days prior written notice to Agent and shall not be subject to
co-insurance . Borrower appoints Agent as its attorney-in-fact to
make, settle and adjust all claims under and decisions with respect to
Borrower’s policies of insurance, and to receive payment of and execute or
endorse all documents, checks or drafts in connection with insurance payments.
Agent shall not act as Borrower’s attorney-in-fact unless an Event of Default
has occurred and is continuing. The appointment of Agent as
Borrower’s attorney in fact is a power coupled with an interest and is
irrevocable until all of the Obligations are indefeasibly paid in full. Proceeds
of insurance shall be applied, at the option of Agent, to repair or replace the
Collateral or to reduce any of the Obligations if (a) such proceeds are received
at any time that a Default or an Event of Default has occurred and is continuing
or (b) no Default or Event of Default has occurred and is continuing at the time
such proceeds are received but such proceeds exceed in the aggregate $250,000 in
any calendar year.
6.5. Taxes. Borrower
shall, and shall cause each Subsidiary to, timely file all federal (and all
material state and local) tax reports and pay and discharge all federal (and all
material state and local) taxes, assessments and governmental charges or levies
imposed upon it, or its income or profits or upon its properties or any part
thereof, before the same shall be in default and before the date on which
penalties attach thereto, except to the extent such taxes, assessments and
governmental charges or levies are the subject of a Permitted
Contest.
6.6. Agreement with
Landlord/Bailee. Unless otherwise agreed to by the Agent in
writing, and except with respect to Permitted Locations (as defined below), each
Loan Party shall obtain and maintain such Access Agreement(s) with respect to
any Collateral Location as Agent may require. With respect to
Collateral Locations (other than locations of the type described in clauses (ii)
and (iii) of the definition of Permitted Location below) for which the Loan
Parties have not delivered a fully executed Access Agreement to Agent, upon
Agent’s request Borrower shall deliver to Agent evidence in form reasonably
satisfactory to Agent that rental payments owing by any Loan Party were made and
a certification that no default or event of default exists under such Loan
Party’s the lease or leases for such Collateral
Locations. Notwithstanding anything in this Agreement to the
contrary, the failure to obtain a fully executed Access Agreement with respect
to a Collateral Location shall not constitute a Default or Event of Default
hereunder. As used herein, “Permitted Locations” means the following locations:
(i) facilities located outside of the United States at which a Loan Party
maintains Celution Systems (as defined below) in such Loan Party’s ordinary
course of business, (ii) locations where Celution Systems may be temporarily
located by a Loan Party for use in clinical trials by an unaffiliated third
party in such Loan Party’s ordinary course of business, (iii) locations where
Celution Systems may be temporarily located by a Loan Party with physicians for
demonstration, testing and product development purposes in such Loan Party’s
ordinary course of business, and (iv) locations where Collateral may be
temporarily located by a Loan Party for maintenance or repair in such Loan
Party’s ordinary course of business; provided, that with respect to the
locations described in the immediately preceding clauses (i) through and
including (iv), the book value of all Collateral at such locations shall at no
time be greater than $200,000 per location or $750,000 in the
aggregate. As used herein, “Celution Systems” means the family of
products (600, 700, 800, 900/MB & next generation Celution device), which
processes patients’ cells at the bedside in real time separating a therapeutic
dose of stem and regenerative cells from a patient’s own fat tissue, including
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a central
processing device, a related single-use consumable used for each patient
specific procedure, and supportive procedural components.
6.7. Protection of Intellectual
Property. Each Loan Party shall take all necessary actions to:
(a) protect, defend and maintain the validity and enforceability of its
Intellectual Property to the extent material to the conduct of its business now
conducted by it or proposed to be conducted by it, (b) promptly advise Agent and
Lenders in writing of material infringements of its Intellectual Property and,
should the Intellectual Property be material to such Loan Party’s business, take
all appropriate actions to enforce its rights in its Intellectual Property
against infringement, misappropriation or dilution and to recover any and all
damages for such infringement, misappropriation or dilution, (c) not allow any
Intellectual Property material to such Loan Party’s business to be abandoned,
forfeited or dedicated to the public without Agent’s written consent, except
that a Loan Party may abandon or forfeit registrations with respect to such
Intellectual Property in jurisdictions outside the United States where, in the
good faith business judgment of Borrower’s board of directors, the value of the
registrations of such Intellectual Property is outweighed by the cost of
maintaining such registrations in such jurisdiction, and (d) notify Agent
promptly, but in any event within 10 Business Days, if it knows or has reason to
know that any application or registration relating to any patent, trademark or
copyright (now or hereafter existing) material to its business may become
abandoned or dedicated, or if any adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the United States
Copyright Office or any court) regarding such Loan Party’s ownership of any
Intellectual Property material to its business, its right to register the same,
or to keep and maintain the same. Each Loan Party shall remain liable
under each of its Intellectual Property licenses pursuant to which it is a
licensee (“Licenses”) to observe
and perform all of the conditions and obligations to be observed and performed
by it thereunder, to the extent that such License is material to the Loan
Parties’ business. None of Agent or any Lender shall have any
obligation or liability under any such License by reason of or arising out of
this Agreement, the granting of a Lien, if any, in such License or the receipt
by Agent (on behalf of itself and Lenders) of any payment relating to any such
License. None of Agent or any Lender shall be required or obligated
in any manner to perform or fulfill any of the obligations of any Loan Party
under or pursuant to any License, or to make any payment, or to make any inquiry
as to the nature or the sufficiency of any payment received by it or the
sufficiency of any performance by any party under any License, or to present or
file any claims, or to take any action to collect or enforce any performance or
the payment of any amounts which may have been assigned to it or which it may be
entitled at any time or times.
6.8. Special
Collateral Covenants.
(a) Each Loan
Party shall remain in possession of its respective Collateral solely at (1) the
location(s) specified on the Perfection Certificate, (2) Permitted Locations and
(3) locations where portable goods of a deminimis nature (such as laptops,
phones and other similar equipment) may be located with employees or consultants
of a Loan Party in such Loan Party’s ordinary course of business; except that
Agent, on behalf of itself and Lenders, shall have the right to possess (i) any
chattel paper or instrument that constitutes a part of the Collateral, (ii) any
other Collateral in which Agent’s security interest (on behalf of itself and
Lenders) may be perfected only by possession and (iii) any Collateral after the
occurrence of an Event of Default in accordance with this Agreement and the
other Debt Documents.
(b) Each Loan
Party shall (i) use the Collateral only in its trade or business, (ii) maintain
all of the Collateral in good operating order and repair, normal wear and tear
excepted, and (iii) use and maintain the Collateral only in compliance with
manufacturers’ recommendations or prudent industry practices and all applicable
laws, except where a failure to do so could not reasonably be expected to have a
Material Adverse Effect.
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(c) Agent and
Lenders do not authorize and each Loan Party agrees it shall not (i) part with
possession of any of the Collateral (except in accordance with Section 6.8(a)
above, to Agent (on behalf of itself and Lenders), or for a Permitted
Disposition), or (ii) remove any of the Collateral from the continental United
States except as provided in clause (i) of the definition of “Permitted
Locations” in Section 6.6.
(d) Each Loan
Party shall pay promptly when due all federal (and all material state and local)
taxes, license fees, assessments and public and private charges levied or
assessed on any of the Collateral, on its use, or on this Agreement or any of
the other Debt Documents, other than in connection with a Permitted
Contest. At its option, Agent may, after good faith consultation with
Borrower (unless a Default or an Event of Default has occurred and is
continuing), discharge taxes, Liens, security interests or other encumbrances at
any time levied or placed on the Collateral and may pay for the maintenance,
insurance and preservation of the Collateral and effect compliance with the
terms of this Agreement or any of the other Debt Documents. Each Loan
Party agrees to reimburse Agent, on demand, all costs and expenses incurred by
Agent in connection with such payment or performance and agrees that such
reimbursement obligation shall constitute Obligations.
(e) Each Loan
Party shall, at all times, keep accurate and complete records of the
Collateral.
(f) Each Loan
Party agrees and acknowledges that any third person who may at any time possess
all or any portion of the Collateral shall be deemed to hold, and shall hold,
the Collateral as the agent of, and as pledge holder for, Agent (on behalf of
itself and Lenders). Agent may at any time give notice to any third person
described in the preceding sentence that such third person is holding the
Collateral as the agent of, and as pledge holder for, Agent (on behalf of itself
and Lenders).
(g) Each Loan
Party shall, during normal business hours, and in the absence of a Default or an
Event of Default, upon one Business Day’s prior notice, as frequently as Agent
determines to be appropriate: (i) provide Agent (who may be accompanied by
representatives of any Lender) and any of its officers, employees and agents
access to the properties, facilities, advisors and employees (including
officers) of each Loan Party and to the Collateral, (ii) permit Agent (who may
be accompanied by representatives of any Lender), and any of its officers,
employees and agents, to inspect, audit and make extracts from any Loan Party’s
books and records (or at the request of Agent, deliver true and correct copies
of such books and records to Agent), and (iii) permit Agent (who may be
accompanied by representatives of any Lender), and its officers, employees and
agents, to inspect, review, evaluate and make test verifications and counts of
the Collateral of any Loan Party; provided, however,
that absent the occurrence and continuance of a Default or Event of Default,
Borrower shall only be obligated to reimburse Agent for costs and expenses under
Section 10.5 with respect to four (4) such inspections and audits during any
calendar year. Upon Agent’s request, each Loan Party will promptly
notify Agent in writing of the location of any Collateral (excluding the
portable goods of a deminimis nature described in Section
6.8(a)(3)). If a Default or Event of Default has occurred and
is continuing or if access is necessary to preserve or protect the Collateral as
determined by Agent, each such Loan Party shall provide such access to Agent and
to each Lender at all times and without advance notice. Each Loan
Party shall make available to Agent and its auditors or counsel, as quickly as
is possible under the circumstances, originals or copies of all books and
records that Agent or such Lender may reasonably
request. Notwithstanding any other provision of this Agreement or any
other Debt Document, so long as no Default or Event of Default then exists, each
Loan Party shall have the right to deny or restrict the Agent, the Lenders and
their
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respective
representatives, access to highly confidential and proprietary scientific data
and specifications, in each case, solely to the extent pertaining to Celution
Systems.
6.9. MacroPore
Dissolution. On or prior to November 13, 2008, Borrower shall
deliver to Agent, in form and substance reasonably satisfactory to Agent,
evidence of the dissolution of MacroPore Biosurgery, Inc., a Delaware
corporation (such dissolution, the “MacroPore
Dissolution”).
6.10. Further
Assurances. Each Loan Party shall, upon request of Agent,
furnish to Agent such further information, execute and deliver to Agent such
documents and instruments (including, without limitation, UCC financing
statements) and shall do such other acts and things as Agent may at any time
reasonably request relating to the perfection or protection of the security
interest created by this Agreement or for the purpose of carrying out the intent
of this Agreement and the other Debt Documents.
|
7.
|
NEGATIVE
COVENANTS
|
7.1. Liens. No Loan
Party shall, and no Loan Party shall permit any of its Subsidiaries to, (a)
create, incur, assume or permit to exist any Lien on any Collateral, including,
without limitation, any Intellectual Property, except Permitted Liens or (b)
become a party to any agreement that would prohibit the granting of a security
interest in such Loan Party’s Collateral to Agent (other than agreements with
licensors that prohibit such Loan Party or Subsidiary from encumbering or
assigning the license from such licensor or the Intellectual Property licensed
from such licensor, but only to the extent that such prohibition is not
enforceable under applicable law, including, without limitation, Sections 9-406,
9-407 and 9-408 of the UCC).
7.2. Indebtedness. No Loan
Party shall, and no Loan Party shall permit any of its Subsidiaries to, directly
or indirectly create, incur, assume, permit to exist, guarantee or otherwise
become or remain directly or indirectly liable with respect to, any Indebtedness
(as hereinafter defined), except for (a) the Obligations, (b) Indebtedness
existing on the date hereof and set forth on Schedule B to this Agreement, (c)
Indebtedness consisting of capitalized lease obligations and purchase money
Indebtedness, in each case incurred by Borrower or any of its Subsidiaries to
finance the acquisition, repair, improvement or construction of fixed or capital
assets of such person, provided that (i) the aggregate outstanding principal
amount of all such Indebtedness does not exceed $250,000 at any time and (ii)
the principal amount of such Indebtedness does not exceed the lower of the cost
or fair market value (plus taxes, shipping and installation expenses) of the
property so acquired or built or of such repairs or improvements financed with
such Indebtedness (each measured at the time of such acquisition, repair,
improvement or construction is made), (d) obligations under any foreign exchange
contract, currency swap agreement, interest rate swap, cap or collar agreement
or other similar agreement or arrangement entered into by a Loan Party in the
ordinary course of business and designed to alter the risks arising from
fluctuations in currency values or interest rates, but not for speculative
purposes, (e) guaranties by one or more Loan Parties of obligations or
liabilities of other Loan Parties, so long as no Default or Event of Default
would occur either before or after giving effect to any such guaranty, (f)
Indebtedness incurred by Foreign Subsidiaries from third party financial
institutions in an aggregate amount not in excess of $250,000; (g) Indebtedness
consisting of SVB Cash Management Obligations owing by Borrower to Silicon
Valley Bank in an amount not to exceed $250,000 in the aggregate at any time;
and (h) Indebtedness owing by any Loan Party to another Loan Party, provided
that (i) each Loan Party shall have executed and delivered to each other Loan
Party a demand note (each, an “Intercompany Note”)
to evidence such intercompany loans or advances owing at any time by each Loan
Party to the other Loan Parties, which Intercompany Note shall be in form and
substance reasonably satisfactory to Agent and shall be pledged and delivered to
Agent pursuant to the Pledge Agreement as additional Collateral for the
Obligations, (ii) any and all Indebtedness of any Loan Party to another Loan
Party shall be subordinated to the Obligations pursuant to the subordination
terms set forth in each Intercompany Note, and (iii) no Default or Event of
Default
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would
occur either before or after giving effect to any such Indebtedness. The
term “Indebtedness” means,
with respect to any person, at any date, without duplication, (i) all
obligations of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes or other similar instruments, or
upon which interest payments are customarily made, (iii) all obligations of such
person to pay the deferred purchase price of property or services, but excluding
obligations to trade creditors incurred in the ordinary course of business and
not past due by more than 90 days, (iv) all capital lease obligations
of such person, (v) the principal balance outstanding under any synthetic lease,
tax retention operating lease, off-balance sheet loan or similar off-balance
sheet financing product, (vi) all obligations of such person to purchase
securities (or other property) which arise out of or in connection with the
issuance or sale of the same or substantially similar securities (or property),
(vii) all contingent or non-contingent obligations of such person to reimburse
any bank or other person in respect of amounts paid under a letter of credit or
similar instrument, (viii) all equity securities of such person subject to
repurchase or redemption otherwise than at the sole option of such person, (ix)
all “earnouts” and similar payment obligations of such person, (x) all
indebtedness secured by a Lien on any asset of such person, whether or not such
indebtedness is otherwise an obligation of such person, (xi) all obligations of
such person under any foreign exchange contract, currency swap agreement,
interest rate swap, cap or collar agreement or other similar agreement or
arrangement designed to alter the risks of that person arising from fluctuations
in currency values or interest rates, in each case whether contingent or
matured, and (xii) all obligations or liabilities of others guaranteed by such
person.
7.3. Dispositions. No
Loan Party shall, and no Loan Party shall permit any of its Subsidiaries to,
convey, sell, rent, lease, sublease, mortgage, license, transfer or otherwise
dispose of (collectively, “Transfer”) any of the
Collateral or any Intellectual Property, except for the following (collectively,
“Permitted
Dispositions”): (a) sales of inventory in the ordinary course of
business; (b) dispositions by a Loan Party or any of its Subsidiaries of
tangible assets for cash and fair value that are no longer used or useful in the
business of such Loan Party or such Subsidiary so long as (i) no Default or
Event of Default exists at the time of such disposition or would be caused after
giving effect thereto and (ii) the fair market value of all such assets disposed
of does not exceed $75,000 in any calendar year; (c) non-exclusive licenses for
the use of any Loan Party’s Intellectual Property in the ordinary course of
business; (d) exclusive licenses for the use of any Loan Party’s Intellectual
Property in the ordinary course of business, so long as, with respect to each
such exclusive license, (i) no Default or Event of Default exists at the time of
such Transfer, (ii) the license constitutes an arms-length transaction made in
connection with a bona fide corporate collaboration, distribution agreement or
similar arrangement in the ordinary course of business and the terms of which,
on their face, do not provide for a sale or assignment of any Intellectual
Property, (iii) the applicable Loan Party delivers 30 days prior written notice
and a brief summary of the terms of the license to Agent, (iv) the applicable
Loan Party delivers to Agent copies of the final executed licensing documents in
connection with the license promptly upon consummation of the license, and (v)
all royalties, milestone payments or other proceeds arising from the licensing
agreement are paid to a deposit account that is governed by an Account Control
Agreement; (e) licenses of Intellectual Property pursuant to the terms and
conditions of the Olympus Agreements as they exist on the Closing Date; (f) the
sale by Borrower of all or substantially all of the assets related to the
SurgiWrap Thin Film business, so long as, with respect to such sale of assets,
(i) no Default or Event of Default exists at the time of such sale, (ii) such
sale constitutes an arms-length transaction with a non-affiliate, (iii) Borrower
delivers to Agent copies of the final executed sale agreement upon consummation
of the sale, (iv) Borrower shall receive net cash proceeds of at least
$1,000,000 from such sale and (v) all such cash proceeds are paid to a deposit
account that is governed by an Account Control Agreement; and (g) the MacroPore
Dissolution.
7.4. Change in Name, Location or Executive
Office; Change in Business; Change in Fiscal Year. No Loan
Party shall, and no Loan Party shall permit any of its Subsidiaries to, (a)
change its name or its state of organization without the prior written consent
of Agent (such consent not to be unreasonably withheld), (b) relocate its chief
executive office without 30 days prior written notification to
-22-
Agent,
(c) engage in any business other than or reasonably related or incidental
to the businesses currently engaged in by the Loan Parties and their
Subsidiaries, (d) cease to conduct business substantially in the manner
conducted by the Loan Parties and their Subsidiaries as of the date of this
Agreement or (e) change its fiscal year end.
7.5. Mergers or
Acquisitions. No Loan Party shall merge or consolidate, and no
Loan Party shall permit any of its Subsidiaries to merge or consolidate, with or
into any other person or entity (other than mergers of a Subsidiary into a Loan
Party in which such Loan Party is the surviving entity, or mergers of a Loan
Party (other than Borrower) into another Loan Party) or acquire, or permit any
of its Subsidiaries to acquire, all or substantially all of the capital stock or
property of another person or entity or all or substantially all of the assets
constituting any line of business, division, branch, operating division or other
unit operation of another person or entity. Notwithstanding the
foregoing, Borrower may acquire all or substantially all of the assets or stock
of another business entity (such business entity, the “Target”) so long as
(a) Agent and each Lender shall receive at least twenty (20) Business Days’
prior written notice of such proposed acquisition, which notice shall include a
reasonably detailed description of such proposed acquisition; (b) such
acquisition shall only involve assets located in the United States and comprise
a business, or those assets of a business, substantially of the type engaged in
by Borrower or its Subsidiaries and which business would not subject Agent or
any Lender to regulatory or third party approvals in connection with the
exercise of its rights and remedies under this Agreement or any other Debt
Documents other than approvals applicable to the exercise of such rights and
remedies with respect to Borrower prior to such acquisition; (c) such
acquisition shall be consensual and shall have been approved by Target’s board
of directors or similar governing body (as applicable); (d) the purchase price
paid and/or payable in cash or other property (other than capital stock) in
connection with all acquisitions (including all transaction costs and all
Indebtedness, liabilities and contingent obligations incurred or assumed in
connection therewith or otherwise reflected in a consolidated balance sheet of
Borrower and Target) shall not exceed $1,000,000 during the term of this
Agreement; (e) with respect to an acquisition paid for in whole or in part with
capital stock, such acquisition shall not result in any decrease in the Tangible
Net Worth (as defined below) of the Loan Parties; (f) the business and assets
acquired in such acquisition shall be free and clear of all Liens (other than
Permitted Liens); (g) at or prior to the closing of any acquisition, Agent will
be granted a first priority perfected Lien (subject to Permitted Liens), for the
ratable benefit of Agent and Lenders, in all assets or stock acquired pursuant
thereto and Borrower shall have executed such documents and taken such actions
as may be required by Agent in connection therewith; (h) at the time of such
acquisition and after giving effect thereto, no Default or Event of Default has
occurred and is continuing; and (i) immediately after the consummation of such
acquisition and after giving effect thereto, Borrower shall have unrestricted
balance sheet cash and Cash Equivalents in one or more deposit accounts or
securities accounts over which Agent has obtained control under Section 7.10 of
not less than the product of (x) negative twelve (-12) times (y) the Cash Burn
Amount (as such term is defined in Section 7.12 below) based on pro forma
financial statements that are delivered to and approved by Agent and
Lenders. “Tangible Net Worth” means, on any date, the consolidated
total assets of the Loan Parties and their Subsidiaries minus, (x) any
amounts attributable to (1) goodwill, (2) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(3) reserves not already deducted from assets, and (y) the obligations that
should, under GAAP, be classified as liabilities on Borrower’s consolidated
balance sheet, including all Indebtedness.
7.6. Restricted
Payments. No Loan Party shall, and no Loan Party shall permit
any of its Subsidiaries to, (a) declare or pay any dividends (other than the
payment of dividends to Borrower and the payment of dividends of a Subsidiary of
a Loan Party (other than Borrower) to such Loan Party) or make any other
distribution or payment on account of or redeem, retire, defease or purchase any
of its capital stock (including without limitation any repurchase of any shares
of Olympus-Cytori, whether pursuant to Section 8.3 of the Shareholders Agreement
or otherwise), (b) purchase, redeem, defease or prepay any
-23-
principal
of, premium, if any, interest or other amount payable in respect of any
Indebtedness prior to its scheduled maturity, (c) make any payment in respect of
management fees or consulting fees (or similar fees) to any equityholder or
other affiliate of Borrower, or (d) be a party to or bound by an agreement that
restricts a Subsidiary from paying dividends or otherwise distributing property
to Borrower; provided, however,
the foregoing shall not restrict: (i) the declaration or payment of dividends,
or the making of distributions, payable solely in Borrower’s capital stock, (ii)
the conversion of debt securities into capital stock, or (iii) the issuance of
capital stock upon the exercise or conversion of warrants or
options.
7.7. Investments. No
Loan Party shall, and no Loan Party shall permit any of its Subsidiaries to,
directly or indirectly (a) acquire or own, or make any loan, advance or capital
contribution (an “Investment”) in or to
any person or entity, (b) acquire or create any Subsidiary (other than in
connection with an acquisition permitted under the terms and conditions of
Section 7.5), or (c) engage in any joint venture or partnership with any other
person or entity, other than: (i) Investments existing on the date hereof
and set forth on Schedule B to this
Agreement, (ii) Investments in cash and Cash Equivalents (as defined
below), (iii) cash Investments by Borrower in Olympus-Cytori in an aggregate
amount in any calendar year not to exceed $350,000 for the purpose paying
operating expenses of Olympus-Cytori in the ordinary course of its business,
(iv) Investments consisting of extensions of credit in the nature of accounts
receivable or notes receivable arising from the grant of trade credit in the
ordinary course of business, and Investments received in satisfaction or partial
satisfaction thereof from financially troubled account debtors to the extent
reasonably necessary in order to prevent or limit loss; (v) acquisitions
permitted under the terms and conditions of Section 7.5, (vi) Investments by a
Loan Party in any other Loan Party; (vi) loans or advances to employees of
Borrower or any of its Subsidiaries to finance travel, entertainment and
relocation expenses and other ordinary business purposes in the ordinary course
of business as presently conducted, provided that the aggregate outstanding
principal amount of all loans and advances permitted pursuant to this clause
(vi) shall not exceed $100,000 at any time; (vii) Investments in joint ventures
or strategic alliances in the ordinary course of the Loan Parties’ business
consisting of the licensing of technology, the development of technology or the
providing of support, provided that (I) any cash Investments by the Loan Parties
do not exceed $100,000 in the aggregate in any fiscal year and (II) no Default
or Event of Default exists at the time of such Investment or would be caused
after giving effect thereto, and (viii) Investments pursuant to Borrower’s
investment policy attached hereto as Exhibit G (but not
any changes to such policy unless approved by Agent) (collectively, the “Permitted
Investments”). The term “Cash Equivalents”
means (v) any readily-marketable securities (i) issued by, or directly,
unconditionally and fully guaranteed or insured by the United States federal
government or (ii) issued by any agency of the United States federal
government the obligations of which are fully backed by the full faith and
credit of the United States federal government, (w) any readily-marketable
direct obligations issued by any other agency of the United States federal
government, any state of the United States or any political subdivision of any
such state or any public instrumentality thereof, in each case having a rating
of at least “A-1” from S&P or at least “P-1” from Moody’s, (x) any
commercial paper rated at least “A-1” by S&P or
“P-1” by
Moody’s and issued by any entity organized under the laws of any state of the
United States, (y) any U.S. dollar-denominated time deposit, insured certificate
of deposit, overnight bank deposit or bankers’ acceptance issued or accepted by
(i) Agent or (ii) any commercial bank that is (A) organized under the laws
of the United States, any state thereof or the District of Columbia, (B)
“adequately capitalized” (as defined in the regulations of its primary federal
banking regulators) and (C) has Tier 1 capital (as defined in such regulations)
in excess of $250,000,000 or (z) shares of any United States money market fund
that (i) has substantially all of its assets invested continuously in the types
of investments referred to in clause (v), (w), (x) or (y) above with
maturities as set forth in the proviso below, (ii) has net assets in excess of
$500,000,000 and (iii) has obtained from either S&P or Moody’s the highest
rating obtainable for money market funds in the United States; provided, however, that the
maturities of all obligations specified in any of clauses (v), (w), (x) and (y) above shall not
exceed 365 days. For the avoidance of doubt, “Cash Equivalents” does
not include (and each Loan Party is prohibited from purchasing or purchasing
participations in) any auction rate securities or other corporate
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or
municipal bonds with a long-term nominal maturity for which the interest rate is
reset through a Dutch auction.
7.8. Transactions with
Affiliates. No Loan Party shall, and no Loan Party shall
permit any of its Subsidiaries to, directly or indirectly enter into or permit
to exist any transaction with any Affiliate (as defined below) of a Loan Party
or any Subsidiary of a Loan Party except for (a) sales of equity securities of
Borrower in bona fide equity financings for the purpose of raising capital; (b)
Investments by a Loan Party in its Subsidiaries to the extent permitted under
Section 7.7; (c) transactions among Loan Parties; and (d) transactions that are
in the ordinary course of such Loan Party’s or such Subsidiary’s business, upon
fair and reasonable terms that are no more favorable to such Affiliate than
would be obtained in an arm’s length transaction. As used herein,
“Affiliate”
means, with respect to a Loan Party or any Subsidiary of a Loan Party, (i) each
person that, directly or indirectly, owns or controls 5% or more of the stock or
membership interests having ordinary voting power in the election of directors
or managers of such Loan Party or such Subsidiary, and (ii) each person that
controls, is controlled by or is under common control with such Loan Party or
such Subsidiary.
7.9. Compliance. No Loan
Party shall, and no Loan Party shall permit any of its Subsidiaries to, (a) fail
to comply with the laws and regulations described in clauses (b) or (c) of
Section 5.8 herein, (b) use any portion of the Term Loans to purchase or carry
margin stock (within the meaning of Regulation U of the Federal Reserve Board)
or (c) fail to comply in any material respect with, or violate in any material
respect any other law or regulation applicable to it.
7.10. Deposit Accounts and Securities
Accounts. No Loan Party shall directly or indirectly maintain
or establish any deposit account or securities account, unless Agent, the
applicable Loan Party or Loan Parties and the depository institution or
securities intermediary at which the account is or will be maintained enter into
a deposit account control agreement or securities account control agreement, as
the case may be, in form and substance satisfactory to Agent (an “Account Control
Agreement”) (which agreement shall provide, among other things, that (i)
such depository institution or securities intermediary has no rights of setoff
or recoupment or any other claim against such deposit or securities account
(except as agreed to by Agent), other than for payment of its service fees and
other charges directly related to the administration of such account and for
returned checks or other items of payment, and (ii) such depository institution
or securities intermediary shall comply with all instructions of Agent without
further consent of such Loan Party or Loan Parties, as applicable, including,
without limitation, an instruction by Agent to comply exclusively with
instructions of the Agent with respect to such account (such notice, a “Notice of Exclusive
Control”)), prior to or concurrently with the establishment of such
deposit account or securities account (or in the case of any such deposit
account or securities account maintained as of the date hereof, on or before the
Closing Date). Agent may only give a Notice of Exclusive Control with
respect to any deposit account or securities account at any time at which an
Event of Default has occurred and is continuing. Notwithstanding the
provisions of this Section 7.10, Borrower shall designate one or more dedicated
deposit accounts to be used exclusively for payroll or withholding tax purposes,
and such dedicated deposit accounts shall not be subject to any Account Control
Agreement.
7.11. Amendments to Other
Agreements. No Loan Party shall amend, modify or waive any
provision of (a) any Material Agreement or (b) any of such Loan Party’s
organizational documents, in each case, without the prior written consent of
Agent and the Requisite Lenders unless the net effect of such amendment,
modification or waiver is not adverse to any Loan Party, Agent or
Lenders.
7.12. Financial
Covenants.
(a) Borrower
shall at all times have unrestricted balance sheet cash and Cash Equivalents in
one or more deposit accounts or securities accounts over which Agent has
obtained
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control
under Section 7.10 of not less than the product of (i) negative three (-3) times
(ii) the Cash Burn Amount at such time; provided, however, that at the time of
requesting the Subsequent Term Loan and at all times after the advance of the
Subsequent Term Loan, Borrower shall at all times have unrestricted balance
sheet cash and Cash Equivalents in one or more deposit accounts or securities
accounts over which Agent has obtained control under Section 7.10 of not less
than the product of (i) negative six (-6) times (ii) the Cash Burn Amount at
such time.
(b) Borrower
shall at all times have unrestricted balance sheet cash and Cash Equivalents in
one or more deposit accounts or securities accounts maintained with Silicon
Valley Bank and over which Agent has obtained control under Section 7.10 of not
less than $1,000,000; provided, that any
funds in such deposit or securities accounts maintained with Silicon Valley Bank
under this clause (b) shall be included for purposes of determining compliance
with clause (a) above.
(c) As used
in this Agreement, “Cash Burn Amount”
means, with respect to Borrower and its consolidated Subsidiaries, as of any
date of determination and based on the financial statements most recently
delivered to Agent and the Lenders in accordance with this Agreement, the
difference between:
(1) the
product of (i) the sum of, without duplication, (A) net income (loss), plus (B)
depreciation, amortization and other non-cash charges (excluding accruals for
cash expenses made in the ordinary course of business), minus (C) non-financed
capital expenditures, minus (D) non-cash revenue, in each case of clauses (A),
(B), (C) and (D), for the immediately preceding six month period on a trailing
basis, divided
by (ii) six,
minus
(2) the
product of (i) the current portion of interest bearing liabilities due and
payable in the immediately succeeding six months divided by (ii)
six.
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8.
|
DEFAULT
AND REMEDIES.
|
8.1. Events of
Default. Loan Parties shall be in default under this Agreement
and each of the other Debt Documents if (each of the following, an “Event of
Default”):
(a) Borrower
shall fail to pay (i) any principal when due, or (ii) any interest, fees or
other Obligations (other than as specified in clause (i)) within a period of 3
days after the due date thereof (other than on any Applicable Term Loan Maturity
Date);
(b) any Loan
Party breaches any of its obligations under Section 6.1 (solely as it relates to
maintaining its existence), Section 6.2, Section 6.3, Section 6.4 or
Article 7;
(c) any Loan
Party breaches any of its other obligations under any of the Debt Documents and
fails to cure such breach within 30 days after the earlier of (i) the date on
which an executive officer (including, without limitation, a president, chief
executive officer, chief financial officer, secretary, vice president or general
counsel) of such Loan Party becomes aware, or through the exercise of reasonable
diligence should have become aware, of such failure and (ii) the date on which
notice shall have been given to Borrower from Agent;
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(d) any
warranty, representation or statement made or deemed made by or on behalf of any
Loan Party in any of the Debt Documents in connection with any of the
Obligations shall be false or misleading in any material respect when made or
deemed made;
(e) any of
the Collateral with a value, individually or in the aggregate, in excess of
$50,000 is subjected to attachment, execution, levy, seizure or confiscation in
any legal proceeding or otherwise, or if any legal or administrative proceeding
is commenced against any Loan Party or any of the Collateral, which subjects any
of the Collateral with a value, individually or in the aggregate, in excess of
$50,000 to a material risk of attachment, execution, levy, seizure or
confiscation and no bond is posted or protective order obtained to negate such
risk;
(f) one or
more judgments, orders or decrees shall be rendered against any Loan Party or
any Subsidiary of a Loan Party that exceeds by more than $100,000 any insurance
coverage applicable thereto (to the extent the relevant insurer has been
notified of such claim and has not denied coverage therefor) and either (i)
enforcement proceedings shall have been commenced by any creditor upon any such
judgment, order or decree or (ii) such judgment, order or decree shall not have
been vacated or discharged for a period of 30 consecutive days and there shall
not be in effect (by reason of a pending appeal or otherwise) any stay of
enforcement thereof;
(g) (i) any
Loan Party or any Subsidiary of a Loan Party shall generally not pay its debts
as such debts become due, shall admit in writing its inability to pay its debts
generally, shall make a general assignment for the benefit of creditors, or
shall cease doing business as a going concern, (ii) any proceeding shall be
instituted by or against any Loan Party or any Subsidiary of a Loan Party
seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, composition of
it or its debts or any similar order, in each case under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or seeking the
entry of an order for relief or the appointment of a custodian, receiver,
trustee, conservator, liquidating agent, liquidator, other similar official or
other official with similar powers, in each case for it or for any substantial
part of its property and, in the case of any such proceedings instituted against
(but not by or with the consent of) such Loan Party or such Subsidiary, either
such proceedings shall remain undismissed or unstayed for a period of
45 days or more or any action sought in such proceedings shall occur or
(iii) any Loan Party or any Subsidiary of a Loan Party shall take any corporate
or similar action or any other action to authorize any action described in clause (i) or (ii)
above;
(h) a
Material Adverse Effect shall have occurred;
(i) (i) any
provision of any Debt Document shall fail to be valid and binding on, or
enforceable against, a Loan Party party thereto, or (ii) any Debt Document
purporting to grant a security interest to secure any Obligation shall fail to
create a valid and enforceable security interest on any Collateral purported to
be covered thereby or such security interest shall fail or cease to be a
perfected Lien with the priority required in the relevant Debt Document, or any
Loan Party shall state in writing that any of the events described in clause (i) or (ii) above shall have
occurred;
(j) (i) any
Loan Party or any Subsidiary of a Loan Party defaults under any Olympus
Agreement or any other Material Agreement (after any applicable grace period
contained therein), (ii) (A) any Loan Party or any Subsidiary of a Loan Party
fails to make (after any applicable grace period) any payment when due (whether
due because of scheduled maturity, required prepayment provisions, acceleration,
demand or otherwise) on any Indebtedness (other than the Obligations) of such
Loan Party or such Subsidiary having an aggregate principal
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amount
(including undrawn committed or available amounts and including amounts owing to
all creditors under any combined or syndicated credit arrangement) of more than
$300,000 (“Material
Indebtedness”), (B) any other event shall occur or condition shall exist
under any contractual obligation relating to any such Material Indebtedness, if
the effect of such event or condition is to accelerate, or to permit the
acceleration of (without regard to any subordination terms with respect
thereto), the maturity of such Material Indebtedness or (C) any such Material
Indebtedness shall become or be declared to be due and payable, or be required
to be prepaid, redeemed, defeased or repurchased (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof, or (iii)
Borrower or any Subsidiary defaults (beyond any applicable grace period) under
any obligation for payments due under any lease agreement that meets the
criteria for the requirement of an Access Agreement under Section 6.6;
or
(k) (i) any of the chief executive officer, the
chief financial officer or the president of Borrower as of the date hereof shall
cease to be involved in the day to day operations (including, with respect to
the chief scientific officer, research development) or management of the
business of Borrower, and a successor of such officer reasonably acceptable to
the Requisite Lenders is not appointed on terms reasonably acceptable to the
Requisite Lenders within 120 days of such cessation or involvement, (ii) the
acquisition, directly or indirectly, by any person or group (as such term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934) of more
than thirty-five percent (35%) of the voting power of the voting stock of
Borrower by way of merger or consolidation or otherwise, (iii) during any period
of twelve consecutive calendar months, individuals who at the beginning of such
period constituted the board of directors of Borrower (together with any new
directors whose election by the board of directors of Borrower or whose
nomination for election by the stockholders of Borrower was approved by a vote
of at least two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason other than death or
disability to constitute a majority of the directors then in office, or (iv)
Borrower ceases to own and control, directly or indirectly, all of the economic
and voting rights associated with the outstanding voting capital stock (or other
voting equity interest) of each of its Subsidiaries, other than in connection
with a transaction expressly permitted by the terms of this Agreement;
or
(l) Any event shall occur whereby Olympus obtains
the right under Section 8.3 of the Shareholders Agreement or under any other
Olympus Agreement to require Borrower to purchase or sell any shares of
Olympus-Cytori.
8.2. Lender
Remedies. Upon the occurrence of any Event of Default, Agent
shall, at the written request of the Requisite Lenders, terminate the
Commitments with respect to further Term Loans and declare any or all of the
Obligations to be immediately due and payable, without demand or notice to any
Loan Party and the accelerated Obligations shall bear interest at the Default
Rate pursuant to Section 2.6, provided that, upon the occurrence of any Event of
Default specified in Section 8.1(g) above, the Commitments shall be
automatically terminated and the Obligations shall be automatically
accelerated. After the occurrence of an Event of Default, Agent shall
have (on behalf of itself and Lenders) all of the rights and remedies of a
secured party under the UCC, and under any other applicable law; provided, however, that Agent
shall not commence the exercise of such rights and remedies (whether arising
under this Agreement or any other Debt Document) without the prior written
request of Requisite Lenders. Upon the exercise of such rights and
remedies, Agent shall consult with and keep the Lenders informed thereof at
reasonable intervals; provided, however, that notwithstanding any such
consultations and provision of information to the Lenders, Agent shall retain
the right to make all determinations in the event of disagreements between Agent
and Lenders. Without limiting the foregoing, (1) Agent shall have the
right to, and at the written request of the Requisite Lenders shall, (a) notify
any account debtor of any
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Loan
Party or any obligor on any instrument which constitutes part of the Collateral
of the security interest of the Agent in the same (for the benefit of itself and
Lenders) and (b) with or without legal process, enter any premises where the
Collateral may be and inspect the Collateral; and (2) Agent shall, at the
written request of the Required Lenders, (x) notify any account debtor of any
Loan Party or any obligor on any instrument which constitutes part of the
Collateral to make payments to Agent (for the benefit of itself and Lenders),
(y) sell the Collateral at public or private sale, in whole or in part, and have
the right to bid and purchase at such sale, and (z) lease or otherwise dispose
of all or part of the Collateral, applying proceeds from any such disposition to
the Obligations in accordance with Section 8.4. If requested by
Agent, Loan Parties shall promptly assemble the Collateral and make it available
to Agent at a place to be designated by Agent. Agent may also render
any or all of the Collateral unusable at a Loan Party’s premises and may dispose
of such Collateral on such premises without liability for rent or
costs. Any notice that Agent is required to give to a Loan Party
under the UCC of the time and place of any public sale or the time after which
any private sale or other intended disposition of the Collateral is to be made
shall be deemed to constitute reasonable notice if such notice is given in
accordance with this Agreement at least 5 days prior to such
action. Effective only upon the occurrence and during the continuance
of an Event of Default, each Loan Party hereby irrevocably appoints Agent (and
any of Agent’s designated officers or employees) as such Loan Party’s true and
lawful attorney to: (i) take any of the actions specified above in this
paragraph; (ii) endorse such Loan Party’s name on any checks or other forms of
payment or security that may come into Agent’s possession; (iii) settle and
adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Agent determines to be reasonable; and
(iv) do such other and further acts and deeds in the name of such Loan Party
that Agent may deem necessary or desirable to enforce its rights in or to any of
the Collateral or to perfect or better perfect Agent’s security interest (on
behalf of itself and Lenders) in any of the Collateral. The
appointment of Agent as each Loan Party’s attorney in fact is a power coupled
with an interest and is irrevocable until the Termination Date. Notwithstanding
any provision of this Section 8.2 to the contrary, upon the occurrence of any
Event of Default, Agent shall have the right to exercise any and all remedies
referenced in this Section 8.2 without the written consent of Requisite Lenders
following the occurrence of an Exigent Circumstance. As used in the
immediately preceding sentence, “Exigent Circumstance” means any event or
circumstance that, in the reasonable judgment of Agent, imminently threatens the
ability of Agent to realize upon all or any material portion of the Collateral,
such as, without limitation, fraudulent removal, concealment, or abscondment
thereof, destruction or material waste thereof, or failure of any Loan Party
after reasonable demand to maintain or reinstate adequate casualty insurance
coverage, or which, in the reasonable judgment of Agent, could result in a
material diminution in value of the Collateral.
8.3. Additional Remedies. In
addition to the remedies provided in Section 8.2 above, each Loan Party hereby
grants to Agent (on behalf of itself and Lenders) and any transferee of
Collateral, solely for purposes of exercising its remedies as provided herein,
an irrevocable, nonexclusive license (exercisable without payment of royalty or
other compensation to any Loan Party) to use, license or sublicense any
Intellectual Property now owned or hereafter acquired by such Loan Party, and
wherever the same may be located, and including in such license access to all
media in which any of the licensed items may be recorded or stored and to all
computer software and programs used for the compilation or printout thereof.
Such license rights shall be exercisable only during the continuance of an Event
of Default and in any event shall terminate on the Termination
Date.
8.4. Application of
Proceeds.
(a) Proceeds
from any Transfer of the Collateral, including, without limitation, the
Intellectual Property (other than Permitted Dispositions) and all payments made
to or proceeds of Collateral received by Agent during the continuance of an
Event of Default shall be applied as follows: (a) first, to pay all
fees, costs, indemnities, reimbursements and expenses then due to Agent under
the
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Debt
Documents in its capacity as Agent under the Debt Documents, (b) second, to pay all
fees, costs, indemnities, reimbursements and expenses then due to Lenders under
the Debt Documents in accordance with their respective Pro Rata Shares, until
paid in full, (c) third, to pay all
interest on the Term Loans then due to Lenders in accordance with their
respective Pro Rata Shares, until paid in full (other than interest accrued
after the commencement of any proceeding referred to in Section 8.1(g) if a
claim for such interest is not allowable in such proceeding), (d) fourth, to pay all
principal on the Term Loans then due to Lenders in accordance with their
respective Pro Rata Shares, until paid in full, (e) fifth, to pay all
other Obligations then due to Lenders in accordance with their respective Pro
Rata Shares, until paid in full (including, without limitation, all interest
accrued after the commencement of any proceeding referred to in Section 8.1(g)
whether or not a claim for such interest is allowable in such proceeding), (f)
sixth, to
Borrower or as otherwise required by law. Borrower shall remain fully
liable for any deficiency.
(b) Notwithstanding
anything in Section 8.4(a) to the contrary, proceeds from the SVB Certificate of
Deposit shall first be retained by Silicon Valley Bank for application to the
SVB Cash Management Obligations in an amount not to exceed $250,000, and then
any remaining proceeds of the SVB Certificate of Deposit shall be delivered by
Silicon Valley Bank to Agent for application to the Obligations in the order set
forth in Section 8.4(a).
|
9.
|
THE
AGENT.
|
9.1. Appointment of
Agent.
(a) Each
Lender hereby appoints GECC (together with any successor Agent pursuant to Section 9.9) as
Agent under the Debt Documents and authorizes the Agent to (a) execute and
deliver the Debt Documents and accept delivery thereof on its behalf from Loan
Parties, (b) take such action on its behalf and to exercise all rights, powers
and remedies and perform the duties as are expressly delegated to the Agent
under such Debt Documents and (c) exercise such powers as are reasonably
incidental thereto. The provisions of this Article 9 are solely for
the benefit of Agent and Lenders and none of Loan Parties nor any other person
shall have any rights as a third party beneficiary of any of the provisions
hereof. In performing its functions and duties under this Agreement
and the other Debt Documents, Agent shall act solely as an agent of Lenders and
does not assume and shall not be deemed to have assumed any obligation toward or
relationship of agency or trust with or for any Loan Party or any other
person. Agent shall have no duties or responsibilities except for
those expressly set forth in this Agreement and the other Debt
Documents. The duties of Agent shall be mechanical and administrative
in nature and Agent shall not have, or be deemed to have, by reason of this
Agreement, any other Debt Document or otherwise a fiduciary or trustee
relationship in respect of any Lender. Except as expressly set forth
in this Agreement and the other Debt Documents, Agent shall not have any duty to
disclose, and shall not be liable for failure to disclose, any information
relating to Borrower or any of its Subsidiaries that is communicated to or
obtained by GECC or any of its affiliates in any
capacity.
(b) Without
limiting the generality of clause (a) above, Agent shall have the sole and
exclusive right and authority (to the exclusion of the Lenders), and is hereby
authorized, to (i) act as the disbursing and collecting agent for the
Lenders with respect to all payments and collections arising in connection with
the Debt Documents (including in any other bankruptcy, insolvency or similar
proceeding), and each person making any payment in connection with any Debt
Document to any Lender is hereby authorized to make such payment to Agent, (ii)
file and prove claims and file other documents necessary or desirable to allow
the claims of Agent and Lenders with respect to any Obligation in any proceeding
described in any bankruptcy, insolvency or similar proceeding (but not to vote,
consent or otherwise act on behalf of such Lender), (iii) act as collateral
agent for Agent and each Lender for purposes of the perfection of all Liens
created by
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the Debt
Documents and all other purposes stated therein, (iv) manage, supervise and
otherwise deal with the Collateral, (v) take such other action as is necessary
or desirable to maintain the perfection and priority of the Liens created or
purported to be created by the Debt Documents, (vi) except as may be otherwise
specified in any Debt Document, exercise all remedies given to Agent and the
other Lenders with respect to the Collateral, whether under the Debt Documents,
applicable law or otherwise and (vii) execute any amendment, consent or waiver
under the Debt Documents on behalf of any Lender that has consented in writing
to such amendment, consent or waiver; provided, however, that Agent
hereby appoints, authorizes and directs each Lender to act as collateral
sub-agent for Agent and the Lenders for purposes of the perfection of all Liens
with respect to the Collateral, including any deposit account maintained by a
Loan Party with, and cash and cash equivalents held by, such Lender, and may
further authorize and direct the Lenders to take further actions as collateral
sub-agents for purposes of enforcing such Liens or otherwise to transfer the
Collateral subject thereto to Agent, and each Lender hereby agrees to take such
further actions to the extent, and only to the extent, so authorized and
directed. Agent may, upon any term or condition it specifies,
delegate or exercise any of its rights, powers and remedies under, and delegate
or perform any of its duties or any other action with respect to, any Debt
Document by or through any trustee, co-agent, employee, attorney-in-fact and any
other person (including any Lender). Any such person shall benefit
from this Article 9 to the extent provided by Agent. For the avoidance of
doubt, Agent hereby acknowledges and agrees that, with respect to the UCC
Financing Statements numbered 11540256, 32447855, 32823626, 40960056, 41365453,
42812172, 60048330, 11540264 and 0156611, each naming Borrower as debtor and
previously filed by General Electric Capital Corporation in the office of the
Secretary of State of the State of Delaware, such UCC Financing Statements are
maintained by General Electric Capital Corporation in its capacity as Agent for
the perfection of the Liens granted to Agent, for the benefit of itself and
Lenders, under this Agreement.
(c) If Agent
shall request instructions from Requisite Lenders or all affected Lenders with
respect to any act or action (including failure to act) in connection with this
Agreement or any other Debt Document, then Agent shall be entitled to refrain
from such act or taking such action unless and until Agent shall have received
instructions from Requisite Lenders or all affected Lenders, as the case may be,
and Agent shall not incur liability to any person by reason of so
refraining. Agent shall be fully justified in failing or refusing to
take any action hereunder or under any other Debt Document (a) if such action
would, in the opinion of Agent, be contrary to law or any Debt Document, (b) if
such action would, in the opinion of Agent, expose Agent to any potential
liability under any law, statute or regulation or (c) if Agent shall not first
be indemnified to its satisfaction against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any such
action. Without limiting the foregoing, no Lender shall have any
right of action whatsoever against Agent as a result of Agent acting or
refraining from acting hereunder or under any other Debt Document in accordance
with the instructions of Requisite Lenders or all affected Lenders, as
applicable.
9.2. Agent’s Reliance,
Etc. Neither Agent nor any of its affiliates nor any of their
respective directors, officers, agents, employees or representatives shall be
liable for any action taken or omitted to be taken by it or them hereunder or
under any other Debt Documents, or in connection herewith or therewith, except
for damages caused by its or their own gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction. Without
limiting the generality of the foregoing, Agent: (a) may treat the
payee of any Note as the holder thereof until such Note has been assigned in
accordance with Section 10.1; (b) may consult with legal counsel, independent
public accountants and other experts, whether or not selected by it, and shall
not be liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts; (c) shall
not be responsible or otherwise incur liability for any action or omission taken
in reliance upon the instructions
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of the
Requisite Lenders, (d) makes no warranty or representation to any Lender and
shall not be responsible to any Lender for any statements, warranties or
representations made in or in connection with this Agreement or the other Debt
Documents; (e) shall not have any duty to inspect the Collateral (including the
books and records) or to ascertain or to inquire as to the performance or
observance of any provision of any Debt Document, whether any condition set
forth in any Debt Document is satisfied or waived, as to the financial condition
of any Loan Party or as to the existence or continuation or possible occurrence
or continuation of any Default or Event of Default and shall not be deemed to
have notice or knowledge of such occurrence or continuation unless it has
received a notice from Borrower or any Lender describing such Default or Event
of Default clearly labeled “notice of default”; (f) shall not be responsible to
any Lender for the due execution, legality, validity, enforceability,
effectiveness, genuineness, sufficiency or value of, or the attachment,
perfection or priority of any Lien created or purported to be created under or
in connection with, any Debt Document or any other instrument or document
furnished pursuant hereto or thereto; and (g) shall incur no liability under or
in respect of this Agreement or the other Debt Documents by acting upon any
notice, consent, certificate or other instrument or writing (which may be by
telecopy, telegram, cable or telex) believed by it to be genuine and signed or
sent or otherwise authenticated by the proper party or parties.
9.3. GECC and
Affiliates. GECC shall have the same rights and powers under
this Agreement and the other Debt Documents as any other Lender and may exercise
the same as though it were not Agent; and the term “Lender” or “Lenders” shall,
unless otherwise expressly indicated, include GECC in its individual
capacity. GECC and its affiliates may lend money to, invest in, and
generally engage in any kind of business with, Borrower, any of Borrower’s
Subsidiaries, any of their Affiliates and any person who may do business with or
own securities of Borrower, any of Borrower’s Subsidiaries or any such
Affiliate, all as if GECC were not Agent and without any duty to account
therefor to Lenders. GECC and its affiliates may accept fees and
other consideration from Borrower for services in connection with this Agreement
or otherwise without having to account for the same to Lenders. Each
Lender acknowledges the potential conflict of interest between GECC as a Lender
holding disproportionate interests in the Term Loans and GECC as Agent, and
expressly consents to, and waives, any claim based upon, such conflict of
interest.
9.4. Lender Credit
Decision. Each Lender acknowledges that it has, independently
and without reliance upon Agent or any other Lender and based on the financial
statements referred to in Section 6.3 and such other documents and information
as it has deemed appropriate, made its own credit and financial analysis of each
Loan Party and its own decision to enter into this Agreement. Each
Lender also acknowledges that it will, independently and without reliance upon
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement. Each Lender
acknowledges the potential conflict of interest of each other Lender as a result
of Lenders holding disproportionate interests in the Term Loans, and expressly
consents to, and waives, any claim based upon, such conflict of
interest.
9.5. Indemnification. Lenders
shall and do hereby indemnify Agent (to the extent not reimbursed by Loan
Parties and without limiting the obligations of Loan Parties hereunder), ratably
according to their respective Pro Rata Shares from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever that may be
imposed on, incurred by, or asserted against Agent in any way relating to or
arising out of this Agreement or any other Debt Document or any action taken or
omitted to be taken by Agent in connection therewith; provided that no
Lender shall be liable for any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from Agent’s gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction. Without limiting the foregoing,
each Lender agrees to reimburse Agent promptly upon demand for its Pro Rata
Share of any out-of-pocket expenses (including reasonable counsel fees)
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incurred
by Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement and each other Debt Document,
to the extent that Agent is not reimbursed for such expenses by Loan
Parties. The provisions of this Section 9.5 shall survive the
termination of this Agreement.
9.6. Successor
Agent. Agent may resign at any time by giving not less than 30
days’ prior written notice thereof to Lenders and Borrower. Upon any
such resignation, the Requisite Lenders shall have the right to appoint a
successor Agent. If no successor Agent shall have been so appointed
by the Requisite Lenders and shall have accepted such appointment within 30 days
after the resigning Agent’s giving notice of resignation, then the resigning
Agent may, on behalf of Lenders, appoint a successor Agent, which shall be a
Lender, if a Lender is willing to accept such appointment, or otherwise shall be
a commercial bank or financial institution or a subsidiary of a commercial bank
or financial institution if such commercial bank or financial institution is
organized under the laws of the United States of America or of any State thereof
and has a combined capital and surplus of at least $300,000,000. If
no successor Agent has been appointed pursuant to the foregoing, within 30 days
after the date such notice of resignation was given by the resigning Agent, such
resignation shall become effective and the Requisite Lenders shall thereafter
perform all the duties of Agent hereunder until such time, if any, as the
Requisite Lenders appoint a successor Agent as provided above. Upon
the acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall succeed to and become vested with all the rights, powers,
privileges and duties of the resigning Agent. Upon the earlier of the
acceptance of any appointment as Agent hereunder by a successor Agent or the
effective date of the resigning Agent’s resignation, the resigning Agent shall
be discharged from its duties and obligations under this Agreement and the other
Debt Documents, except that any indemnity rights or other rights in favor of
such resigning Agent shall continue. After any resigning Agent’s
resignation hereunder, the provisions of this Section 9 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was acting
as Agent under this Agreement and the other Debt
Documents.
9.7. Setoff and Sharing of
Payments. In addition to any rights now or hereafter granted
under applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuance of any Event of Default and subject to
Section 9.8(e), each Lender is hereby authorized at any time or from time to
time upon the direction of Agent, without notice to Borrower or any other
person, any such notice being hereby expressly waived, to offset and to
appropriate and to apply any and all balances held by it at any of its offices
for the account of Borrower (regardless of whether such balances are then due to
Borrower) and any other properties or assets at any time held or owing by that
Lender or that holder to or for the credit or for the account of Borrower
against and on account of any of the Obligations that are not paid when
due. Any Lender exercising a right of setoff or otherwise receiving
any payment on account of the Obligations in excess of its Pro Rata Share
thereof shall purchase for cash (and the other Lenders or holders shall sell)
such participations in each such other Lender’s or holder’s Pro Rata Share of
the Obligations as would be necessary to cause such Lender to share the amount
so offset or otherwise received with each other Lender or holder in accordance
with their respective Pro Rata Shares of the Obligations. Borrower
agrees, to the fullest extent permitted by law, that (a) any Lender may exercise
its right to offset with respect to amounts in excess of its Pro Rata Share of
the Obligations and may sell participations in such amounts so offset to other
Lenders and holders and (b) any Lender so purchasing a participation in the Term
Loans made or other Obligations held by other Lenders or holders may exercise
all rights of offset, bankers’ lien, counterclaim or similar rights with respect
to such participation as fully as if such Lender or holder were a direct holder
of the Term Loans and the other Obligations in the amount of such
participation. Notwithstanding the foregoing, if all or any portion
of the offset amount or payment otherwise received is thereafter recovered from
the Lender that has exercised the right of offset, the purchase of
participations by that Lender shall be rescinded and the purchase price restored
without interest. The term “Pro Rata Share”
means, with respect to any Lender at
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any time,
the percentage obtained by dividing (x) the Commitment of such Lender then in
effect (or, if such Commitment is terminated, the aggregate outstanding
principal amount of the Term Loans owing to such Lender) by (y) the Total
Commitment then in effect (or, if the Total Commitment is terminated, the
outstanding principal amount of the Term Loans owing to all
Lenders).
9.8. Advances;
Payments; Non-Funding Lenders; Information; Actions in Concert.
(a) Advances;
Payments. If Agent receives any payment for the account of
Lenders on or prior to 11:00 a.m. (New York time) on any Business Day, Agent
shall pay to each applicable Lender such Lender’s Pro Rata Share of such payment
on such Business Day. If Agent receives any payment for the account
of Lenders after 11:00 a.m. (New York time) on any Business Day, Agent
shall pay to each applicable Lender such Lender’s Pro Rata Share of such payment
on the next Business Day. To the extent that any Lender has failed to fund any
such payments and Term Loans (a “Non-Funding Lender”),
Agent shall be entitled to set off the funding short-fall against that
Non-Funding Lender’s Pro Rata Share of all payments received from
Borrower.
(b) Return of
Payments.
(i) If Agent
pays an amount to a Lender under this Agreement in the belief or expectation
that a related payment has been or will be received by Agent from a Loan Party
and such related payment is not received by Agent, then Agent will be entitled
to recover such amount (including interest accruing on such amount at the
Federal Funds Rate for the first Business Day and thereafter, at the rate
otherwise applicable to such Obligation) from such Lender on demand without
setoff, counterclaim or deduction of any kind.
(ii) If Agent
determines at any time that any amount received by Agent under this Agreement
must be returned to a Loan Party or paid to any other person pursuant to any
insolvency law or otherwise, then, notwithstanding any other term or condition
of this Agreement or any other Debt Document, Agent will not be required to
distribute any portion thereof to any Lender. In addition, each
Lender will repay to Agent on demand any portion of such amount that Agent has
distributed to such Lender, together with interest at such rate, if any, as
Agent is required to pay to a Loan Party or such other person, without setoff,
counterclaim or deduction of any kind.
(c) Non-Funding
Lenders. The failure of any Non-Funding Lender to make any
Term Loan or any payment required by it hereunder shall not relieve any other
Lender (each such other Lender, an “Other Lender”) of its
obligations to make such Term Loan, but neither any Other Lender nor Agent shall
be responsible for the failure of any Non-Funding Lender to make a Term Loan or
make any other payment required hereunder. Notwithstanding anything
set forth herein to the contrary, a Non-Funding Lender shall not have any voting
or consent rights under or with respect to any Debt Document or constitute a
“Lender” (or be included in the calculation of “Requisite Lender” hereunder) for
any voting or consent rights under or with respect to any Debt
Document. At Borrower’s request, Agent or a person reasonably
acceptable to Agent shall have the right with Agent’s consent and in Agent’s
sole discretion (but shall have no obligation) to purchase from any Non-Funding
Lender, and each Non-Funding Lender agrees that it shall, at Agent’s request,
sell and assign to Agent or such person, all of the Commitments and all of the
outstanding Term Loans of that Non-Funding Lender for an amount equal to the
principal balance of all Term Loans held by such Non-Funding Lender and all
accrued interest and fees with respect thereto through the date of sale, such
purchase and sale to be consummated pursuant to an executed Assignment Agreement
(as defined below).
-34-
(d) Dissemination of
Information. Agent shall use reasonable efforts to provide
Lenders with any notice of Default or Event of Default received by Agent from,
or delivered by Agent to Borrower, with notice of any Event of Default of which
Agent has actually become aware and with notice of any action taken by Agent
following any Event of Default; provided that Agent
shall not be liable to any Lender for any failure to do so, except to the extent
that such failure is attributable to Agent’s gross negligence or willful
misconduct as finally determined by a court of competent
jurisdiction. Lenders acknowledge that Borrower is required to
provide financial statements to Lenders in accordance with Section 6.3 hereto and agree that
Agent shall have no duty to provide the same to Lenders.
(e) Actions in
Concert. Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no Lender
shall take any action to protect or enforce its rights arising out of this
Agreement, the Notes or any other Debt Documents (including exercising any
rights of setoff) without first obtaining the prior written consent of Agent and
Requisite Lenders, it being the intent of Lenders that any such action to
protect or enforce rights under this Agreement and the Notes shall be taken in
concert and at the direction or with the consent of Agent and Requisite
Lenders.
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10.
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MISCELLANEOUS.
|
10.1.
Assignment. Subject
to the terms of this Section 10.1, any Lender may make an assignment to an
assignee of, or sell participations in, at any time or times, the Debt
Documents, its Commitment, Term Loans or any portion thereof or interest
therein, including any Lender’s rights, title, interests, remedies, powers or
duties thereunder. Any assignment by a Lender shall: (i) except in
the case of an assignment to a Qualified Assignee (as defined below), require
the consent of each Lender (which consent shall not be unreasonably withheld,
conditioned or delayed), (ii) require the execution of an assignment agreement
in form and substance reasonably satisfactory to, and acknowledged by, Agent (an
“Assignment
Agreement”); (iii) be conditioned on such assignee Lender representing to
the assigning Lender and Agent that it is purchasing the applicable Commitment
and/or Term Loans to be assigned to it for its own account, for investment
purposes and not with a view to the distribution thereof; (iv) be in an
aggregate amount of not less than $1,000,000, unless such assignment is made to
an existing Lender or an affiliate of an existing Lender or is of the assignor’s
(together with its affiliates’) entire interest of the Term Loans or is made
with the prior written consent of Agent; and (v) include a payment to Agent of
an assignment fee of $3,500. In the case of an assignment by a Lender
under this Section 10.1, the assignee shall have, to the extent of such
assignment, the same rights, benefits and obligations as all other Lenders
hereunder. The assigning Lender shall be relieved of its obligations
hereunder with respect to its Commitment and Term Loans, as applicable, or
assigned portion thereof from and after the date of such
assignment. Borrower hereby acknowledges and agrees that any
assignment shall give rise to a direct obligation of Borrower to the assignee
and that the assignee shall be considered to be a “Lender”. In the
event any Lender assigns or otherwise transfers all or any part of the
Commitments and Obligations, Agent shall so notify Borrower and Borrower shall,
upon the request of Agent, execute new Notes in exchange for the Notes, if any,
being assigned. Agent may amend Schedule A to this Agreement to
reflect assignments made in accordance with this Section.
As used
herein, “Qualified
Assignee” means (a) any Lender and any affiliate of any Lender and (b)
any commercial bank, savings and loan association or savings bank or any other
entity which is an “accredited investor” (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including insurance companies, mutual funds, lease financing companies and
commercial finance companies, in each case, which has a rating of BBB or higher
from S&P and a rating of Baa2 or higher from Moody's at the date that it
becomes a Lender and in each case of clauses (a) and (b), which, through its
applicable lending office, is capable of lending to Borrower without the
-35-
imposition
of any withholding or similar taxes; provided that (i) no
person proposed to become a Lender after the Closing Date and determined by
Agent to be acting in the capacity of a vulture fund or distressed debt
purchaser shall be a Qualified Assignee, (ii) no person or Affiliate of such
person proposed to become a Lender after the Closing Date and that holds any
subordinated debt or stock issued by Borrower shall be a Qualified Assignee and
(iii) no person proposed to become a Lender after the Closing Date and that is a
direct business competitor of a Loan Party shall be a Qualified Assignee so long
as no Default or Event of Default exists at the time of the proposed
assignment.
10.2.
Notices. All
notices, requests or other communications given in connection with this
Agreement shall be in writing, shall be addressed to the parties at their
respective addresses set forth on the signature pages hereto below such parties’
name or in the most recent Assignment Agreement executed by any Lender (unless
and until a different address may be specified in a written notice to the other
party delivered in accordance with this Section), and shall be deemed
given (a) on the date of receipt if delivered by hand, (b) on
the date of sender’s receipt of confirmation of proper transmission if sent by
facsimile transmission, (c) on the next Business Day after being sent by a
nationally-recognized overnight courier, and (d) on the fourth Business Day
after being sent by registered or certified mail, postage prepaid. As
used herein, the term “Business Day” means
and includes any day other than Saturdays, Sundays, or other days on which
commercial banks in New York, New York are required or authorized to be
closed.
10.3.
Correction of Debt
Documents. Agent may correct patent errors and fill in all
blanks in this Agreement or the Debt Documents consistent with the agreement of
the parties.
10.4.
Performance. Time
is of the essence of this Agreement. This Agreement shall be binding,
jointly and severally, upon all parties described as the “Borrower” and their
respective successors and assigns, and shall inure to the benefit of Agent,
Lenders, and their respective successors and assigns.
10.5.
Payment of Fees and
Expenses. Loan Parties agree, jointly and severally, to pay or
reimburse upon demand for all reasonable fees, costs and expenses incurred by
Agent and Lenders in connection with (a) the investigation, preparation,
negotiation, execution, administration of, or any amendment, modification,
waiver or termination of, this Agreement or any other Debt Document, (b) the
administration of the Loans and the facilities hereunder and any other
transaction contemplated hereby or under the Debt Documents and (c) the
enforcement, assertion, defense or preservation of Agent’s and Lenders’ rights
and remedies under this Agreement or any other Debt Document, in each case of
clauses (a) through (c), including, without limitation, reasonable attorney’s
fees and expenses, the allocated cost of in-house legal counsel, reasonable fees
and expenses of consultants, auditors and appraisers and UCC and other corporate
search and filing fees and wire transfer fees. Borrower further
agrees that such fees, costs and expenses shall constitute
Obligations. This provision shall survive the termination of this
Agreement.
10.6.
Indemnity. Each Loan Party
shall and does hereby jointly and severally indemnify and defend Agent, Lenders,
and their respective successors and assigns, and their respective directors,
officers, employees, consultants, attorneys, agents and affiliates (each an
“Indemnitee”)
from and against all liabilities, losses, damages, expenses, penalties, claims,
actions and suits (including, without limitation, related reasonable attorneys’
fees and the allocated costs of in-house legal counsel) of any kind whatsoever
arising, directly or indirectly, which may be imposed on, incurred by or
asserted against such Indemnitee as a result of or in connection with this
Agreement, the other Debt Documents or any of the transactions contemplated
hereby or thereby (the “Indemnified
Liabilities”); provided that, no Loan Party shall have any obligation to
any Indemnitee with respect to any Indemnified Liabilities to the extent such
Indemnified Liabilities arise from the gross negligence or willful misconduct of
such Indemnitee as
-36-
determined
by a final non-appealable judgment of a court of competent
jurisdiction. This provision shall survive the termination of this
Agreement.
10.7.
Rights
Cumulative. Agent’s and Lenders’ rights and remedies under
this Agreement or otherwise arising are cumulative and may be exercised
singularly or concurrently. Neither the failure nor any delay on the
part of Agent or any Lender to exercise any right, power or privilege under this
Agreement shall operate as a waiver, nor shall any single or partial exercise of
any right, power or privilege preclude any other or further exercise of that or
any other right, power or privilege. NONE OF AGENT OR ANY LENDER
SHALL BE DEEMED TO HAVE WAIVED ANY OF ITS RESPECTIVE RIGHTS UNDER THIS AGREEMENT
OR UNDER ANY OTHER AGREEMENT, INSTRUMENT OR PAPER SIGNED BY BORROWER UNLESS SUCH
WAIVER IS EXPRESSED IN WRITING AND SIGNED BY AGENT, REQUISITE LENDERS OR ALL
LENDERS, AS APPLICABLE. A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future
occasion.
10.8.
Entire Agreement; Amendments,
Waivers.
(a) This
Agreement and the other Debt Documents constitute the entire agreement between
the parties with respect to the subject matter hereof and thereof and supersede
all prior understandings (whether written, verbal or implied) with respect to
such subject matter. Section headings contained in this Agreement
have been included for convenience only, and shall not affect the construction
or interpretation of this Agreement.
(b) Except
for actions expressly permitted to be taken by Agent, no amendment,
modification, termination or waiver of any provision of this Agreement or any
other Debt Document, or any consent to any departure by Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Agent, Borrower and Lenders having more than (x) 50.1% of the aggregate
Commitments of all Lenders or (y) if such Commitments have expired or been
terminated, 50.1% of the aggregate outstanding principal amount of the Term
Loans (the “Requisite
Lenders”). Except as set forth in clause (c) below, all such
amendments, modifications, terminations or waivers requiring the consent of any
Lenders shall require the written consent of Requisite Lenders.
(c) No
amendment, modification, termination or waiver of any provision of this
Agreement or any other Debt Document shall, unless in writing and signed by
Borrower, Agent and each Lender directly affected thereby: (i) increase or
decrease any Commitment of any Lender or increase or decrease the Total
Commitment (which shall be deemed to affect all Lenders), (ii) reduce the
principal of or rate of interest on any Obligation or the amount of any fees
payable hereunder (other than waiving the imposition of the Default Rate), (iii)
postpone the date fixed for or waive any payment of principal of or interest on
any Term Loan, or any fees hereunder, (iv) release all or substantially all of
the Collateral, except as otherwise expressly permitted in the Debt Documents
(which shall be deemed to affect all Lenders), (v) subordinate the Lien granted
in favor of the Agent securing the Obligations (which shall be deemed to affect
all Lenders), (vi) release a Loan
Party from, or
consent to a Loan Party’s assignment or delegation of, such Loan Party’s
obligations hereunder and under the other Debt Documents or any Guarantor from
its guaranty of the Obligations (which shall be deemed
to affect all Lenders) or (vii) amend, modify, terminate or waive Section 8.4,
9.7 or 10.8(b) or (c).
(d) Notwithstanding
any provision in this Section 10.8 to the contrary, no amendment, modification,
termination or waiver affecting or modifying the rights or obligations of Agent
hereunder shall be effective unless signed by Borrower, Agent and Requisite
Lenders.
-37-
(e) Each
Lender hereby consents to the release by Agent of any Lien held by the Agent for
the benefit of itself and the Lenders in any or all of the Collateral to secure
the Obligations upon the termination of the Commitments and the payment and
satisfaction in full of the Obligations.
10.9.
Binding
Effect. This Agreement shall continue in full force and effect
until the Termination
Date; provided,
however, that the provisions of Sections 2.3(e), 9.5, 10.5 and 10.6 and the
other indemnities contained in the Debt Documents shall survive the Termination
Date. The surrender, upon payment or otherwise, of any Note or any of
the other Debt Documents evidencing any of the Obligations shall not affect the
right of Agent to retain the Collateral for such other Obligations as may then
exist or as it may be reasonably contemplated will exist in the
future. This Agreement and the grant of the security interest in the
Collateral pursuant to Section 3.1 shall automatically be reinstated if Agent or
any Lender is ever required to return or restore the payment of all or any
portion of the Obligations (all as though such payment had never been
made).
10.10. Use of Logo. Each
Loan Party authorizes Agent and the Lenders to use its name, logo and/or
trademark without notice to or consent by such Loan Party, in connection with
certain promotional materials that Agent or a Lender may disseminate to the
public. The promotional materials may include, but are not limited
to, brochures, video tape, internet website, press releases, advertising in
newspaper and/or other periodicals, lucites, and any other materials relating
the fact that Agent or a Lender has a financing relationship with Borrower and
such materials may be developed, disseminated and used without Loan Parties’
review. Nothing herein obligates Agent or any Lender to use a Loan
Party’s name, logo and/or trademark, in any promotional materials of Agent or
any Lender. Loan Parties shall not, and shall not permit any of its
respective Affiliates to, issue any press release or other public disclosure
(other than any document filed with any governmental authority relating to a
public offering of the securities of Borrower) using the name, logo or otherwise
referring to General Electric Capital Corporation, GE Healthcare Financial
Services, Inc. or of any of their affiliates, the Debt Documents or any
transaction contemplated herein or therein without at least two (2) Business
Days prior written notice to and the prior written consent of Agent unless, and
only to the extent that, Loan Parties or such Affiliate is required to do so
under applicable law and then, only after consulting with Agent prior
thereto.
10.11. Waiver of Jury
Trial. EACH OF LOAN PARTIES, AGENT AND LENDERS UNCONDITIONALLY
WAIVE ANY AND ALL RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF
THE INDEBTEDNESS SECURED HEREBY, ANY DEALINGS AMONG LOAN PARTIES, AGENT AND/OR
LENDERS RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED
TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED AMONG LOAN
PARTIES, AGENT AND/OR LENDERS. THE SCOPE OF THIS WAIVER IS INTENDED
TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT.
THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER
DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
10.12. Governing Law. THIS
AGREEMENT, THE OTHER DEBT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK
(WITHOUT REGARD TO THE CONFLICT OF
-38-
LAWS
PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, REGARDLESS OF THE LOCATION OF THE COLLATERAL; PROVIDED, HOWEVER,
THAT IF THE LAWS OF ANY JURISDICTION OTHER THAN NEW YORK SHALL GOVERN IN REGARD
TO THE VALIDITY, PERFECTION OR EFFECT OF PERFECTION OF ANY LIEN OR IN REGARD TO
PROCEDURAL MATTERS AFFECTING ENFORCEMENT OF ANY LIENS IN COLLATERAL, SUCH LAWS
OF SUCH OTHER JURISDICTIONS SHALL CONTINUE TO APPLY TO THAT
EXTENT. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR ANY OTHER DEBT
DOCUMENT IS COMMENCED BY AGENT IN THE STATE COURTS OF THE STATE OF NEW YORK IN
THE COUNTY OF NEW YORK OR IN THE U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK, EACH LOAN PARTY HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH
COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF NEW
YORK. NOTWITHSTANDING THE FOREGOING, THE AGENT AND LENDERS SHALL HAVE
THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY LOAN PARTY (OR ANY
PROPERTY) IN THE COURT OF ANY OTHER JURISDICTION THE AGENT OR THE LENDERS DEEM
NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR OTHER SECURITY
FOR THE OBLIGATIONS. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY
SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO LOAN PARTIES AT THEIR
ADDRESS DESCRIBED IN SECTION 10.2, OR IF SERVED BY ANY OTHER MEANS PERMITTED BY
APPLICABLE LAW.
10.13. Confidentiality. Agent
and each Lender agrees, as to itself, to use commercially reasonable efforts
(equivalent to the efforts Agent or such Lender, as the case may be, applies to
maintaining the confidentiality of its own confidential information) to maintain
as confidential all confidential information provided to it by Borrower, any
other Loan Party or any of their respective Subsidiaries, and designated as
confidential, except that Agent and Lenders may disclose such information (a) to
persons employed by, or professionals engaged by, Agent or a Lender (it being
understood that the persons to whom such disclosure is made will be informed of
the confidential nature of such information and instructed to keep such
information confidential); (b) to any bona fide assignee or participant or
potential assignee or participant that has agreed to comply with the covenant
contained in this Section 10.13 (and any such bona fide assignee or participant
or potential assignee or participant may disclose such information to persons
employed or engaged by them as described in clause (a) above);
(c) as required or requested by any governmental authority or reasonably
believed by Agent or any Lender to be compelled by any court decree, subpoena or
legal or administrative order or process, provided that Agent and each Lender
shall use reasonable efforts to provide prior written notice to the Loan Parties
of such disclosure, unless such notice is prohibited by applicable law or an
order of a governmental authority; (d) as, on the advice of Agent’s or such
Lender’s counsel, required by law; (e) in connection with the exercise of
any right or remedy under the Debt Documents or in connection with any
litigation to which Agent or such Lender is a party or bound that relates to
this Agreement, any other Debt Document or the transactions contemplated hereby
or thereby; or (f) that ceases to be confidential through no fault of Agent or
such Lender.
10.14. Counterparts. This
Agreement may be executed in any number of counterparts and by different parties
in separate counterparts, each of which when so executed shall be deemed to be
an original and all of which when taken together shall constitute one and the
same agreement. Delivery of an executed signature page of this
Agreement by facsimile transmission or electronic transmission shall be as
effective as delivery of a manually executed counterpart hereof.
[Signature Page Follows]
-39-
IN WITNESS WHEREOF, each Loan
Party, Agent and Lenders, intending to be legally bound hereby, have duly
executed this Agreement in one or more counterparts, each of which shall be
deemed to be an original, as of the day and year first aforesaid.
BORROWER:
CYTORI
THERAPEUTICS, INC.
By: /s/ Mark E. Saad
Name: Mark E. Saad
Title: Chief Financial
Officer
Address
For Notices For All Loan Parties:
Cytori
Therapeutics, Inc.
3020
Callan Road
San
Diego, California 92121
Attention:
Mark E. Saad
Phone:
(858) 458-0900
Facsimile:
(858) 450-4355
With a
copy to:
Cytori
Therapeutics, Inc.
3020
Callan Road
San
Diego, California 92121
Attention:
In-House Counsel
Phone:
(858) 458-0900
Facsimile:
(858) 450-4335
SIGNATURE
PAGE 1
AGENT
AND LENDER:
GENERAL
ELECTRIC CAPITAL CORPORATION
By:
/s/ Peter
Gibson
Name: Peter Gibson
Title: Duly Authorized
Signatory
Address
For Notices:
General
Electric Capital Corporation
c/o GE
Healthcare Financial Services, Inc., LSF
83
Wooster Heights Road, Fifth Floor
Danbury,
Connecticut 06810
Attention:
Senior Vice President of Risk
Phone:
(203) 205-5200
Facsimile:
(203) 205-2192
With a
copy to:
General
Electric Capital Corporation
c/o GE
Healthcare Financial Services, Inc.
Two
Bethesda Metro Center, Suite 600
Bethesda, Maryland 20814
Attention:
General Counsel
Phone:
(301) 961-1640
Facsimile: (301)
664-9866
SIGNATURE
PAGE 2
LENDER:
SILICON
VALLEY BANK
By: /s/ Andre P. Pelletier
Name: Andre P. Pelletier
Title: Senior Relationship
Manager
Address
For Notices:
4370 La
Jolla Village Drive, Ste. 860
San
Diego, CA 92122
Attention:
Sarah Larson
Phone:
858-784-3308
Facsimile:
858-622-1424
SIGNATURE
PAGE 3
Exhibit
10.60
PROMISSORY
NOTE
October
14, 2008
FOR VALUE
RECEIVED, CYTORI THERAPEUTICS, INC., a Delaware corporation, located at the
address stated below (“Borrower”), promises
to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION or any subsequent
holder hereof (each, a “Lender”), the
principal sum of SEVEN MILLION, FIVE HUNDRED THOUSAND and 0/100 Dollars
($7,500,000.00) or, if less, the aggregate unpaid principal amount of all Term
Loans made by Lender to or on behalf of Borrower pursuant to the Agreement (as
hereinafter defined). All capitalized terms, unless otherwise defined
herein, shall have the respective meanings assigned to such terms in the
Agreement.
This
Promissory Note is issued pursuant to that certain Loan and Security Agreement,
dated as of October 14, 2008, among Borrower, the guarantors from time to time
party thereto, General Electric Capital Corporation, as agent, and the other
lenders signatory thereto (as amended, restated, supplemented or otherwise
modified from time to time, the “Agreement”), is one
of the Notes referred to therein, and is entitled to the benefit and security of
the Debt Documents referred to therein, to which Agreement reference is hereby
made for a statement of all of the terms and conditions under which the loans
evidenced hereby were made.
The
principal amount of the indebtedness evidenced hereby shall be payable in the
amounts and on the dates specified in the Agreement. Interest thereon
shall be paid until such principal amount is paid in full at such interest rates
and at such times as are specified in the Agreement. The terms of the
Agreement are hereby incorporated herein by reference.
All
payments shall be applied in accordance with the Agreement. The
acceptance by Lender of any payment which is less than payment in full of all
amounts due and owing at such time shall not constitute a waiver of Lender’s
right to receive payment in full at such time or at any prior or subsequent
time.
All
amounts due hereunder and under the other Debt Documents are payable in the
lawful currency of the United States of America. Borrower hereby
expressly authorizes Lender to insert the date value as is actually given in the
blank space on the face hereof and on all related documents pertaining
hereto.
This Note
is secured as provided in the Agreement and the other Debt
Documents. Reference is hereby made to the Agreement and the other
Debt Documents for a description of the properties and assets in which a
security interest has been granted, the nature and extent of the security
interest, the terms and conditions upon which the security interest was granted
and the rights of the holder of the Note in respect thereof.
Time is
of the essence hereof. If Lender does not receive from Borrower
payment in full of any Scheduled Payment or any other sum due under this Note or
any other Debt Document within 3 days after its due date, Borrower agrees to pay
the Late Fee in accordance with the Agreement. Such Late Fee will be
immediately due and payable, and is in addition to any other costs, fees and
expenses that Borrower may owe as a result of such late payment.
This Note
may be voluntarily prepaid only as permitted under Section 2.4 of the
Agreement. After an Event of Default, this Note shall bear interest
at a rate per annum equal to the Default Rate pursuant to Section 2.6 of the
Agreement.
Borrower
and all parties now or hereafter liable with respect to this Note, hereby waive
presentment, demand for payment, notice of nonpayment, protest, notice of
protest, notice of dishonor, and all other
notices
in connection herewith, as well as filing of suit (if permitted by law) and
diligence in collecting this Note or enforcing any of the security hereof, and
agree to pay (if permitted by law) all expenses incurred in collection,
including reasonable attorneys’ fees and expenses, including without limitation,
the allocated costs of in-house counsel.
THIS
NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK.
No
variation or modification of this Note, or any waiver of any of its provisions
or conditions, shall be valid unless such variation or modification is made in
accordance with Section 10.8 of the Agreement. Any such waiver,
consent, modification or change shall be effective only in the specific instance
and for the specific purpose given.
IN WITNESS WHEREOF, Borrower
has duly executed this Note as of the date first above written.
|
CYTORI
THERAPEUTICS, INC.
By: /s/
Mark E. Saad
Name: Mark E.
Saad
Title: Chief
Financial Officer
Federal
Tax ID #: 33-0827593
Address: 3020
Callan Road
San
Diego, California 92121
|
Exhibit
10.61
NEITHER
THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUBJECT TO
SECTION 6 BELOW, NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE
WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR HOLDER, SATISFACTORY TO COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
WARRANT
TO PURCHASE 89,074 SHARES OF COMMON STOCK
| Warrant No. CSW-08-022 | October 14, 2008 |
THIS CERTIFIES THAT, for value
received, GE Capital Equity Investments, Inc. (“Holder”) is entitled
to subscribe for and purchase Eighty-Nine Thousand Seventy Four (89,074) shares
of fully paid and nonassessable Common Stock of Cytori Therapeutics Inc., a
Delaware corporation (the “Company”), at the
Warrant Price (as hereinafter defined), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the term
“Common Stock” shall mean Company’s presently authorized common stock, $0.001
par value per share, and any stock into which such common stock may hereafter be
converted or exchanged and the term “Warrant Shares” shall mean the shares of
Common Stock which Holder may acquire pursuant to this Warrant and any other
shares of stock into which such shares of Common Stock may hereafter be
converted or exchanged.
1. Warrant
Price. The “Warrant Price” shall initially be Four and 21
dollars ($4.21) per share, subject to adjustment as provided in Section 7
below.
2. Conditions to
Exercise. The purchase right represented by this Warrant may
be exercised at any time, or from time to time, in whole or in part during the
term commencing on the date hereof and ending at 5:00 P.M. Pacific time on
the tenth anniversary of the date of this Warrant (the “Expiration
Date”).
3. Method of Exercise or
Conversion; Payment; Issuance of Shares; Issuance of New
Warrant.
(a) Cash
Exercise. Subject to Section 2 hereof, the purchase right
represented by this Warrant may be exercised by Holder hereof, in whole or in
part, by the surrender of the original of this Warrant (together with a duly
executed Notice of Exercise in substantially the form attached hereto) at the
principal office of Company (as set forth in Section 19 below) and by
payment to Company, by certified or bank check, or wire transfer of immediately
available funds, of an amount equal to the then applicable Warrant Price per
share multiplied by the number of Warrant Shares then being
purchased. In the event of any exercise of the rights represented by
this Warrant, certificates for the shares of stock so purchased shall be in the
name of, and delivered to, Holder hereof, or as such
Holder
may direct (subject to the terms of transfer contained herein and upon payment
by such Holder hereof of any applicable transfer taxes). Such
delivery shall be made within 30 days after exercise of this Warrant and at
Company’s expense and, unless this Warrant has been fully exercised or expired,
a new Warrant having terms and conditions substantially identical to this
Warrant and representing the portion of the Warrant Shares, if any, with respect
to which this Warrant shall not have been exercised, shall also be issued to
Holder hereof within 30 days after exercise of this Warrant.
(b) Conversion. In
lieu of exercising this Warrant as specified in Section 3(a), Holder may from
time to time convert this Warrant, in whole or in part, into Warrant
Shares by surrender of the original of this Warrant (together with a
duly executed Notice of Exercise in substantially the form attached hereto) at
the principal office of Company, in which event Company shall issue to Holder
the number of Warrant Shares computed using the following formula:
X = Y (A-B)
A
Where:
X = the
number of Warrant Shares to be issued to Holder.
Y = the
number of Warrant Shares purchasable under this Warrant (at the date of such
calculation).
A = the
Fair Market Value of one share of Company’s Common Stock (at the date of such
calculation).
B =
Warrant Price (as adjusted to the date of such calculation).
(c) Fair Market
Value. For purposes of this Section 3, Fair Market Value
of one share of Company’s Common Stock shall mean:
(i) The
average of the closing bid and asked prices of Common Stock quoted in the
Over-The-Counter Market Summary, the last reported sale price quoted on the
Nasdaq Stock Market or on any other exchange on which the Common Stock is
listed, whichever is applicable, as published in the Western Edition of the
Wall Street
Journal for the ten (10) trading days prior to the date of
determination of Fair Market Value; or
(ii) In
the event of an exercise in connection with a merger, acquisition or other
consolidation in which Company is not the surviving entity, the per share Fair
Market Value for the Common Stock shall be the value to be received per share of
Common Stock by all holders of the Common Stock in such transaction as
determined by the Board of Directors; or
(iii) In
any other instance, the per share Fair Market Value for the Common Stock shall
be as determined in the reasonable good faith judgment of Company’s Board of
Directors.
In the
event of 3(c)(ii) or 3(c)(iii), above, Company’s Board of Directors shall
prepare a certificate, to be signed by an authorized officer of Company, setting
forth in reasonable detail the basis for and method of determination of the per
share Fair Market Value of the Common Stock. The Board of Directors
will also certify to Holder that this per share Fair Market Value will be
applicable to all holders of Company’s Common Stock. Such
certification must be made to Holder at least ten (10) business days
prior to the proposed effective date of the merger, consolidation, sale, or
other
2
triggering
event as defined in 3(c)(ii) or 3(c)(iii).
(d) Automatic
Exercise. To the extent this Warrant is not previously
exercised, it shall be deemed to have been automatically converted in accordance
with Sections 3(b) and 3(c) hereof (even if not surrendered) as of
immediately before its expiration, involuntary termination or cancellation if
the then-Fair Market Value of a Warrant Share exceeds the then-Warrant Price,
unless Holder notifies Company in writing to the contrary prior to such
automatic exercise.
(e) Treatment of Warrant Upon
Acquisition of Company.
(i) Certain
Definitions. For the purpose of this Warrant, "Acquisition"
means any sale, exclusive license, or other disposition of all or substantially
all of the assets of Company, or any reorganization, consolidation, or merger of
Company, or sale of outstanding Company securities by holders thereof, where the
holders of Company's securities before the transaction beneficially own less
than a majority of the outstanding voting securities of the successor or
surviving entity after the transaction. For purposes of this Section
3(e), “Affiliate” shall mean any person or entity that owns or controls directly
or indirectly ten percent (10%) or more of the voting capital stock of Company,
any person or entity that controls or is controlled by or is under common
control with such persons or entities, and each of such person’s or entity’s
officers, directors, joint venturers or partners, as applicable.
(ii) Cash
Acquisition. In the event of an Acquisition in which the sole
consideration is cash, Holder may either (a) exercise its conversion or
purchase right under this Warrant and such exercise will be deemed effective
immediately prior to the consummation of such Acquisition or (b) permit the
Warrant to expire automatically upon the consummation of such
Acquisition. Company shall provide Holder with written notice of any
proposed Acquisition together with such reasonable information as Holder may
request in connection with such contemplated Acquisition giving rise to such
notice, which is to be delivered to Holder not less than ten (10) business days
prior to the closing of the proposed Acquisition.
(iii) Asset
Sale. In the event of an Acquisition that is an arms length
sale of all or substantially all of Company’s assets (and only its assets) to a
third party that is not an Affiliate of Company (a “True Asset Sale”),
Holder may either (a) exercise its conversion or purchase right under this
Warrant and such exercise will be deemed effective immediately prior to the
consummation of such Acquisition or (b) permit the Warrant to continue
until the Expiration Date if Company continues as a going concern following the
closing of any such True Asset Sale. Company shall provide Holder
with written notice of any proposed asset sale together with such
reasonable information as Holder may request in connection with such asset sale
giving rise to such notice, which is to be delivered to Holder not less than ten
(10) business days prior to the closing of the proposed asset sale.
(iv) Assumption of
Warrant. Upon the closing of any Acquisition other than those
particularly described in subsections (ii) and (iii) above, the
successor entity shall assume the obligations of this Warrant, and this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Warrant Shares issuable upon exercise of the unexercised portion
of this Warrant as if such Warrant Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price and/or
number of Warrant Shares shall be adjusted accordingly.
(v) Early Termination of Warrant
in Certain Other Circumstances. Notwithstanding the
3
foregoing
provisions of Section 3(e)(iv), but subject to the terms of Section 3(d), in the
event that the acquiror in an Acquisition does not agree to assume this Warrant
at and as of the closing of such Acquisition, this Warrant, to the extent not
exercised or converted on or prior to such closing, shall terminate and be of no
further force or effect as of immediately following the closing of such
Acquisition if all of the following conditions are met: (A) the acquiror is
subject to the reporting requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), (B)
the class of stock or other security of the acquiror that would be received by
Holder in connection with such Acquisition were Holder to exercise or convert
this Warrant on or prior to the closing thereof is listed for trading on a
national securities exchange or approved for quotation on an automated
inter-dealer quotation system, and (C) the value (determined as of the
closing of such Acquisition in accordance with the definitive agreements
therefor) of the acquiror stock and/or other securities that would be received
by Holder in respect of each Warrant Share were Holder to exercise or convert
this Warrant on or prior to the closing of such Acquisition is equal to or
greater than three (3) times the then-effective Warrant Price.
4. Representations and
Warranties of Holder and Company.
(a) Representations and
Warranties by Holder. Holder represents and warrants to
Company as follows:
(i) Evaluation. Holder
has substantial experience in evaluating and investing in private placement
transactions of securities of companies similar to Company so that Holder is
capable of evaluating the merits and risks of its investment in Company and has
the capacity to protect its interests.
(ii) Resale. Except
for transfers to an affiliate of Holder, Holder is acquiring this Warrant and
the Warrant Shares issuable upon exercise of this Warrant (collectively the
“Securities”)
for investment for its own account and not with a view to, or for resale in
connection with, any distribution thereof. Holder does not presently
have any agreement, plan or understanding, directly or indirectly, with any
person to distribute or effect the distribution of any of the Securities to or
through any person. Holder understands that the Securities have not
been registered under the Securities Act of 1933, as amended (the “Act”) by reason of a
specific exemption from the registration provisions of the Act which depends
upon, among other things, the bona fide nature of the investment intent as
expressed herein.
(iii) Rule
144. Holder acknowledges that the Securities must be held
indefinitely unless subsequently registered under the Act or an exemption from
such registration is available. Holder is aware of the provisions of
Rule 144 promulgated under the Act.
(iv) Accredited
Investor. Holder is an “accredited investor” within the
meaning of Regulation D promulgated under the Act.
(v) Opportunity To
Discuss. Holder has had an opportunity to discuss Company’s
business, management and financial affairs with its management and an
opportunity to review Company’s facilities. Holder understands that
such discussions, as well as the written information issued by Company, were
intended to describe the aspects of Company’s business and prospects which
Company believes to be material but were not necessarily a thorough or
exhaustive description.
(b) Representations and
Warranties by Company. Company hereby represents and
warrants to
4
Holder
that the statements in the following paragraphs of this Section 4(b) are true
and correct as of the date hereof.
(i) Corporate Organization and
Authority. Company (a) is a corporation duly organized,
validly existing, and in good standing in its jurisdiction of incorporation; (b)
has the corporate power and authority to own and operate its properties and to
carry on its business as now conducted and as currently proposed to be
conducted; and (c) is qualified as a foreign corporation in all jurisdictions
where such qualification is required.
(ii) Corporate
Power. Company has all requisite corporate power and authority
to execute, issue and deliver this Warrant, to issue the Warrant Shares issuable
upon exercise or conversion of this Warrant, and to carry out and perform its
obligations under this Warrant and any related agreements.
(iii) Authorization;
Enforceability. All corporate action on the part of Company,
its officers, directors and shareholders necessary for the authorization,
execution, delivery and performance of its obligations under this Warrant and
for the authorization, issuance and delivery of this Warrant and the Warrant
Shares issuable upon exercise of this Warrant has been taken and this Warrant
constitutes the legally binding and valid obligation of Company enforceable in
accordance with its terms.
(iv) Valid Issuance of Warrant
and Warrant Shares. This Warrant has been validly issued and
is free of restrictions on transfer other than restrictions on transfer set
forth herein and under applicable state and federal securities laws. The Warrant
Shares issuable upon conversion of this Warrant, when issued, sold and delivered
in accordance with the terms of this Warrant for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable, and will
be free of restrictions on transfer other than restrictions on transfer under
this Warrant and under applicable state and federal securities
laws. Subject to applicable restrictions on transfer, the issuance
and delivery of this Warrant and the Warrant Shares issuable upon exercise or
conversion of this Warrant are not subject to any preemptive or other similar
rights or any liens or encumbrances except as specifically set forth in
Company’s Certificate of Incorporation or this Warrant. Assuming the
truth and accuracy of Holder’s representations and warranties set forth in
Section 4(a), no registration under the Act is required for the offer and sale
of this Warrant or the issuance of the Warrant Shares, pursuant to the terms of
this Warrant and neither Company nor any authorized agent acting on its behalf
has or will take any action hereafter that would cause the loss of such
exemption.
(v) No
Conflict. The execution, delivery, and performance of this
Warrant will not result in (a) any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice (1) any provision of Company’s Certificate of Incorporation or by-laws;
(2) any provision of any judgment, decree, or order to which Company is a party,
by which it is bound, or to which any of its material assets are subject; (3)
any contract, obligation, or commitment to which Company is a party or by which
it is bound; or (4) any statute, rule, or governmental regulation applicable to
Company, or (b) the creation of any lien, charge or encumbrance upon any assets
of Company.
5
(vi) Reports. Company has
previously furnished or made available to Holder complete and accurate copies,
as amended or supplemented, of its (a) Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, as filed with the Securities and
Exchange Commission (the “SEC”), and
(b) all other reports filed by Company under Section 13 or
subsections (a) or (c) of Section 14 of the Securities Exchange Act of 1934
(as amended, the “Exchange
Act”) with the SEC since December 31, 2007 (such reports are
collectively referred to herein as the “Company
Reports”). The Company Reports constitute all of the
documents required to be filed by Company under Section 13 or subsections
(a) or (c) of Section 14 of the Exchange Act with the SEC from December
31, 2007 through the date of this Warrant. The Company
Reports complied in all material respects with the requirements of the Exchange
Act and the rules and regulations thereunder when filed. As of their
respective dates of filing with the SEC, the Company Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
5. Legends.
(a) Legend. Each
certificate representing the Warrant Shares shall be endorsed with substantially
the following legend:
THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT
BE TRANSFERRED (UNLESS SUCH TRANSFER IS TO AN AFFILIATE OF HOLDER) UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A “NO ACTION”
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES
AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY COMPANY) AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS
EXEMPT FROM SUCH REGISTRATION.
Company
need not enter into its stock records a transfer of Warrant Shares unless the
conditions specified in the foregoing legend are satisfied. Company
may also instruct its transfer agent not to allow the transfer of any of the
Warrant Shares unless the conditions specified in the foregoing legend are
satisfied.
(b) Removal of Legend and
Transfer Restrictions. The legend relating to the Act endorsed
on a certificate pursuant to paragraph 5(a) of this Warrant shall be removed and
Company shall issue a certificate without such legend to Holder if (i) the
Securities are registered under the Act and a prospectus meeting the
requirements of Section 10 of the Act is available or (ii) Holder provides
to Company an opinion of counsel for Holder reasonably satisfactory to Company,
a no-action letter or interpretive opinion of the staff of the SEC reasonably
satisfactory to Company, or other evidence reasonably satisfactory to Company,
to the effect that public sale, transfer or assignment of the Securities may be
made without registration and without compliance with any restriction such as
Rule 144.
6. Condition of Transfer or
Exercise of Warrant. It shall be a condition to any transfer
or exercise of this Warrant that at the time of such transfer or exercise,
Holder shall provide Company with a representation
6
in
writing that Holder or transferee is acquiring this Warrant and the shares of
Common Stock to be issued upon exercise for investment purposes only and not
with a view to any sale or distribution, or will provide Company with a
statement of pertinent facts covering any proposed distribution. As a
further condition to any transfer of this Warrant or any or all of the shares of
Common Stock issuable upon exercise of this Warrant, other than a transfer
registered under the Act, Company may request a legal opinion, in form and
substance satisfactory to Company and its counsel, reciting the pertinent
circumstances surrounding the proposed transfer and stating that such transfer
is exempt from the registration and prospectus delivery requirements of the
Act. Company shall not require Holder to provide an opinion of
counsel if the transfer is to an affiliate of Holder, provided that any such
transferee is an “accredited investor” within the meaning of Regulation D under
the Act. As further condition to each transfer, at the request of
Company, Holder shall surrender this Warrant to Company and the transferee shall
receive and accept a Warrant, of like tenor and date, executed by
Company.
7. Adjustment for Certain
Events. The number and kind of securities purchasable upon the exercise
of this Warrant and the Warrant Price shall be subject to adjustment from time
to time upon the occurrence of certain events, as follows:
(a) Reclassification or
Merger. In case of (i) any reclassification or change of
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), (ii) any merger of
Company with or into another corporation (other than a merger with another
corporation in which Company is the acquiring and the surviving corporation and
which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or (iii) any sale of
all or substantially all of the assets of Company, subject to the provisions of
Section 3(e) hereof, Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and deliver to Holder a new Warrant (in form
and substance satisfactory to Holder of this Warrant), or Company shall make
appropriate provision without the issuance of a new Warrant, so that Holder
shall have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and in
lieu of the Warrant Shares theretofore issuable upon exercise or conversion of
this Warrant, the kind and amount of shares of stock, other securities, money
and property receivable upon such reclassification, change, merger or sale by a
holder of the number of shares of Common Stock then purchasable under this
Warrant, or in the case of such a merger or sale in which the consideration paid
consists all or in part of assets other than securities of the successor or
purchasing corporation, at the option of Holder, the securities of the successor
or purchasing corporation having a value at the time of the transaction
equivalent to the value of the Warrant Shares purchasable upon exercise of this
Warrant at the time of the transaction. Any new Warrant shall provide
for adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 7. The provisions of
this subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers and transfers.
(b) Subdivision or Combination
of Shares. If Company at any time while this Warrant remains
outstanding and unexpired shall subdivide or combine its outstanding shares of
Common Stock, the Warrant Price shall be proportionately decreased and the
number of Warrant Shares issuable hereunder shall be proportionately increased
in the case of a subdivision and the Warrant Price shall be proportionately
increased and the number of Warrant Shares issuable hereunder shall be
proportionately decreased in the case of a combination.
(c) Stock Dividends and Other
Distributions. If Company at any time while this Warrant is
outstanding and unexpired shall (i) pay a dividend with respect to Common
Stock payable in
7
Common
Stock, then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Warrant Price in effect immediately
prior to such date of determination by a fraction (A) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (B) the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution; or (ii) make any other
distribution with respect to Common Stock (except any distribution specifically
provided for in Sections 7(a) and 7(b)), then, in each such case, provision
shall be made by Company such that Holder shall receive upon exercise of this
Warrant a proportionate share of any such dividend or distribution as though it
were Holder of the Warrant Shares as of the record date fixed for the
determination of the shareholders of Company entitled to receive such dividend
or distribution.
(d) Adjustment of Number of
Shares. Upon each adjustment in the Warrant Price pursuant to
clause (i) of Section 7(c), the number of Warrant Shares purchasable hereunder
shall be adjusted, to the nearest whole share, to the product obtained by
multiplying the number of Warrant Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter.
8. Notice of
Adjustments. Whenever any Warrant Price or the kind or number
of securities issuable under this Warrant shall be adjusted pursuant to Section
7 hereof, Company shall prepare a certificate signed by an officer of Company
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Warrant Price and number or kind of shares issuable upon exercise of
this Warrant after giving effect to such adjustment, and shall cause copies of
such certificate to be mailed (by certified or registered mail, return receipt
required, postage prepaid) within thirty (30) days of such adjustment
to Holder as set forth in Section 19 hereof.
9. Financial and Other
Reports. If at any time prior to the earlier of the Expiration
Date and the complete exercise of this Warrant, Company is no longer subject to
the reporting requirements of Section 13 or Section 15(d) of the Exchange Act,
Company shall furnish to Holder (a) quarterly unaudited consolidated and, if
available, consolidating balance sheets, statements of operations and cash flow
statements within 45 days of each fiscal quarter end, in a form acceptable to
Holder and certified by Company’s president or chief financial officer, and (b)
annual audited consolidated and, if available, consolidating balance sheets,
statements of operations and cash flow statements certified by an independent
certified public accountant selected by Company and reasonably satisfactory to
Holder within 120 days of the fiscal year end or, if sooner, promptly after such
time as Company’s Board of Directors receives the audit; provided, however, that
Holder execute and deliver to Company a nondisclosure agreement in a form
reasonably acceptable to Company prior to receipt of any such
reports.
10. Transferability of
Warrant. This Warrant is transferable on the books of Company
at its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with Section 6 and
applicable federal and state securities laws. Company shall issue and
deliver to the transferee a new Warrant representing the Warrant so
transferred. Upon any partial transfer, Company will issue and
deliver to Holder a new Warrant with respect to the portion of the Warrant not
so transferred. Holder shall not have any right to transfer any
portion of this Warrant to any direct competitor of Company.
11. Reserved.
8
12. No Fractional
Shares. No fractional share of Common Stock will be issued in
connection with any exercise or conversion hereunder, but in lieu of such
fractional share Company shall make a cash payment therefor upon the basis of
the Warrant Price then in effect.
13. Charges, Taxes and
Expenses. Issuance of certificates for shares of Common Stock
upon the exercise or conversion of this Warrant shall be made without charge to
Holder for any United States or state of the United States documentary stamp tax
or other incidental expense with respect to the issuance of such certificate,
all of which taxes and expenses shall be paid by Company, and such certificates
shall be issued in the name of Holder.
14. No Shareholder Rights Until
Exercise. Except as expressly provided herein, this Warrant
does not entitle Holder to any voting rights or other rights as a shareholder of
Company prior to the exercise hereof.
15. Registry of
Warrant. Company shall maintain a registry showing the name
and address of the registered Holder of this Warrant. This Warrant
may be surrendered for exchange or exercise, in accordance with its terms, at
such office or agency of Company, and Company and Holder shall be entitled to
rely in all respects, prior to written notice to the contrary, upon such
registry.
16. Loss, Theft, Destruction or
Mutilation of Warrant. Upon receipt by Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of loss, theft, or destruction, on delivery of an
indemnity reasonably satisfactory to Company in form and amount, and, if
mutilated, upon surrender and cancellation of this Warrant, Company will execute
and deliver a new Warrant, having terms and conditions substantially identical
to this Warrant, in lieu hereof.
17. Miscellaneous.
(a) Issue
Date. The provisions of this Warrant shall be construed and
shall be given effect in all respect as if it had been issued and delivered by
Company on the date hereof.
(b) Successors. This
Warrant shall be binding upon any successors or assigns of Company.
(c) Headings. The
headings used in this Warrant are used for convenience only and are not to be
considered in construing or interpreting this Warrant.
(d) Saturdays,
Sundays, Holidays. If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall be
a Saturday or a Sunday or shall be a legal holiday in the State of New York,
then such action may be taken or such right may be exercised on the next
succeeding day not a legal holiday.
(e) Attorney’s
Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney’s fees.
18. No
Impairment. Company will not, by amendment of its Certificate
of Incorporation or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of Holder hereof against impairment;
9
provided,
however, that notwithstanding the foregoing, nothing in this Warrant shall
restrict or impair Company’s right to effect changes to the rights, preferences,
and privileges associated with the Warrant Shares with the requisite consent of
the stockholders as may be required to amend its Certificate of Incorporation
from time to time so long as such amendment affects the rights, preferences, and
privileges granted to Holder associated with the Warrant Shares in the same
manner as the other holders of outstanding shares of the same
class.
19. Addresses. Any
notice required or permitted hereunder shall be in writing and shall be mailed
by overnight courier, registered or certified mail, return receipt requested,
and postage prepaid, or otherwise delivered by hand or by messenger, addressed
as set forth below, or at such other address as Company or Holder hereof shall
have furnished to the other party in accordance with the delivery instructions
set forth in this Section 19.
|
If
to Company:
|
Cytori
Therapeutics Inc.
|
|
|
3020
Callan Road
|
|
|
San
Diego, California 92121
|
| Phone: (858) 458-0900 | |
| Facsimile: (858) 450-4335 | |
| Attn: Chief Financial Officer |
|
|
With
a copy to:
|
Cytori
Therapeutics Inc.
|
|
|
3020
Callan Road
|
|
|
San
Diego, California 92121
|
| Phone: (858) 458-0900 | |
| Facsimile: (858) 450-4335 | |
| Attn: In-House Counsel |
|
|
If
to Holder:
|
GE
Capital Equity Investments, Inc.
|
| 201 Merritt 7, 1st Floor | ||
| P.O. Box 5201 | ||
| Norwalk, Connecticut 06851 | ||
| Facsimile: (203) 205-2192 | ||
| Attn: General Counsel | ||
|
|
With
copies to:
|
General
Electric Capital Corporation
|
|
|
c/o
GE Healthcare Financial Services,
Inc.
|
|
|
83
Wooster Heights Road, Fifth Floor
|
| Danbury, Connecticut 06810 | |
| Facsimile: (203) 205-2192 | |
| Attn: Senior Managing Director and | |
| Senior Vice President of Risk |
If mailed
by registered or certified mail, return receipt requested, and postage prepaid,
notice shall be deemed to be given five (5) days after being sent, and if sent
by overnight courier, by hand or by messenger, notice shall be deemed to be
given when delivered (if on a business day, and if not, on the next business
day), and if sent by facsimile transmission to the facsimile number provided in
this Section 19, on the date of transmission, provided that the sender receives
a machine-generated confirmation of successful transmission completed before
5:00 p.m. Pacific time (if on a business day, and if not, on the next business
day).
10
20. Notice of Certain
Events. If the Company proposes at any time (a) to declare any
dividend or distribution upon any of its stock, whether in cash, property,
stock, or other securities and whether or not a regular cash dividend; (b) to
offer for sale any shares of the Company's capital stock (or other securities
convertible into such capital stock), other than (i) pursuant to the Company's
stock option or other compensatory plans, (ii) in connection with commercial
credit arrangements or equipment financings, (iii) in connection with strategic
transactions for purposes other than capital raising, or (iv) the issuance of
any shares of the Company’s capital stock upon the exercise of any warrants
outstanding as of the date hereof; (c) to effect any reclassification or
recapitalization of any of its stock; or (d) to merge or consolidate
with or into any other corporation, or sell, lease, license, or convey all or
substantially all of its assets, or to liquidate, dissolve or wind up, then, in
connection with each such event, the Company shall give Holder: (1) at least 10
days prior written notice of the date on which a record will be taken for such
dividend, distribution, or subscription rights (and specifying the date on which
the holders of common stock will be entitled thereto) or for determining rights
to vote, if any, in respect of the matters referred to in (a) and (b) above; and
(2) in the case of the matters referred to in (c) and (d) above at least 10 days
prior written notice of the date when the same will take place (and specifying
the date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such event). Company will also provide information requested by
Holder reasonably necessary to enable Holder to comply with Holder’s accounting
or reporting requirements; provided, however, that Holder execute and deliver to
Company a nondisclosure agreement in a form reasonably acceptable to Company
prior to receipt of any such information.
21. WAIVER OF JURY
TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS WARRANT OR THE WARRANT SHARES.
22. GOVERNING
LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
[Remainder
of page intentionally blank; signature page follows]
11
IN
WITNESS WHEREOF, Company has caused this Warrant
to be executed by its officer thereunto duly authorized.
CYTORI
THERAPEUTICS INC.
By: /s/ Mark E. Saad
Name: Mark
E. Saad
Title: Chief
Financial Officer
Dated as
of October 14, 2008.
ACCEPTED
AND AGREED TO:
GE
CAPITAL EQUITY INVESTMENTS, INC.
By: /s/ Peter Gibson
Name: Peter
Gibson
Title: Duly
Authorized Signatory
Dated as
of October 14, 2008.
NOTICE OF
EXERCISE
To:
Cytori
Therapeutics Inc.
3020
Callan Road
San
Diego, California 92121
Phone:
(858) 458-0900
Facsimile:
(858) 450-4335
Attn:
Chief Financial Officer
|
1.
|
The
undersigned Warrantholder (“Holder”) elects to acquire shares of the
Common Stock (the “Common Stock”) of Cytori Therapeutics Inc. (the
“Company”), pursuant to the terms of the Stock Purchase Warrant dated
October 14, 2008 (the “Warrant”).
|
|
2.
|
Holder
exercises its rights under the Warrant as set forth below (check
one):
|
|
|
( )
|
Holder
elects to purchase _____________ shares of Common Stock as provided in
Section 3(a) and tenders herewith a check in the amount of
$___________ as payment of the purchase
price.
|
|
|
( )
|
Holder
elects to convert the purchase rights into shares of Common Stock as
provided in Section 3(b) of the
Warrant.
|
|
3.
|
Holder
surrenders the Warrant with this Notice of
Exercise.
|
Holder
represents that it is acquiring the aforesaid shares of Common Stock for
investment and not with a view to or for resale in connection with distribution
and that Holder has no present intention of distributing or reselling the
shares.
Please
issue a certificate representing the shares of the Common Stock in the name of
Holder or in such other name as is specified below:
Name: ______________________________
Address: ______________________________
Taxpayer
I.D.:
______________________________
[NAME OF
HOLDER]
By:
Name:
Title:
Date: _______
___, 200___
Exhibit
10.62
NEITHER
THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUBJECT TO
SECTION 6 BELOW, NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE
WITH RULE 144 UNDER SAID ACT OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR HOLDER, SATISFACTORY TO COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
WARRANT
TO PURCHASE 89,074 SHARES OF COMMON STOCK
| Warrant No. CSW-08-023 | October 14, 2008 |
THIS CERTIFIES THAT, for value
received, Silicon Valley Bank (“Holder”) is entitled
to subscribe for and purchase Eighty-Nine Thousand Seventy Four (89,074) shares
of fully paid and nonassessable Common Stock of Cytori Therapeutics Inc., a
Delaware corporation (the “Company”), at the
Warrant Price (as hereinafter defined), subject to the provisions and upon the
terms and conditions hereinafter set forth. As used herein, the term
“Common Stock” shall mean Company’s presently authorized common stock, $0.001
par value per share, and any stock into which such common stock may hereafter be
converted or exchanged and the term “Warrant Shares” shall mean the shares of
Common Stock which Holder may acquire pursuant to this Warrant and any other
shares of stock into which such shares of Common Stock may hereafter be
converted or exchanged.
1. Warrant
Price. The “Warrant Price” shall initially be Four and 21
dollars ($4.21) per share, subject to adjustment as provided in Section 7
below.
2. Conditions to
Exercise. The purchase right represented by this Warrant may
be exercised at any time, or from time to time, in whole or in part during the
term commencing on the date hereof and ending at 5:00 P.M. Pacific time on
the tenth anniversary of the date of this Warrant (the “Expiration
Date”).
3. Method of Exercise or
Conversion; Payment; Issuance of Shares; Issuance of New
Warrant.
(a) Cash
Exercise. Subject to Section 2 hereof, the purchase right
represented by this Warrant may be exercised by Holder hereof, in whole or in
part, by the surrender of the original of this Warrant (together with a duly
executed Notice of Exercise in substantially the form attached hereto) at the
principal office of Company (as set forth in Section 19 below) and by
payment to Company, by certified or bank check, or wire transfer of immediately
available
funds, of
an amount equal to the then applicable Warrant Price per share multiplied by the
number of Warrant Shares then being purchased. In the event of any
exercise of the rights represented by this Warrant, certificates for the shares
of stock so purchased shall be in the name of, and delivered to, Holder hereof,
or as such Holder
may direct (subject to the terms of transfer contained herein and upon payment
by such Holder hereof of any applicable transfer taxes). Such
delivery shall be made within 30 days after exercise of this Warrant and at
Company’s expense and, unless this Warrant has been fully exercised or expired,
a new Warrant having terms and conditions substantially identical to this
Warrant and representing the portion of the Warrant Shares, if any, with respect
to which this Warrant shall not have been exercised, shall also be issued to
Holder hereof within 30 days after exercise of this Warrant.
(b) Conversion. In
lieu of exercising this Warrant as specified in Section 3(a), Holder may from
time to time convert this Warrant, in whole or in part, into Warrant
Shares by surrender of the original of this Warrant (together with a
duly executed Notice of Exercise in substantially the form attached hereto) at
the principal office of Company, in which event Company shall issue to Holder
the number of Warrant Shares computed using the following formula:
X = Y (A-B)
A
Where:
X = the
number of Warrant Shares to be issued to Holder.
Y = the
number of Warrant Shares purchasable under this Warrant (at the date of such
calculation).
A = the
Fair Market Value of one share of Company’s Common Stock (at the date of such
calculation).
B =
Warrant Price (as adjusted to the date of such calculation).
(c) Fair Market
Value. For purposes of this Section 3, Fair Market Value
of one share of Company’s Common Stock shall mean:
(i) The
average of the closing bid and asked prices of Common Stock quoted in the
Over-The-Counter Market Summary, the last reported sale price quoted on the
Nasdaq Stock Market or on any other exchange on which the Common Stock is
listed, whichever is applicable, as published in the Western Edition of the
Wall Street
Journal for the ten (10) trading days prior to the date of
determination of Fair Market Value; or
(ii) In
the event of an exercise in connection with a merger, acquisition or other
consolidation in which Company is not the surviving entity, the per share Fair
Market Value for the Common Stock shall be the value to be received per share of
Common Stock by all holders of the Common Stock in such transaction as
determined by the Board of Directors; or
(iii) In
any other instance, the per share Fair Market Value for the Common Stock shall
be as determined in the reasonable good faith judgment of Company’s Board of
Directors.
In the
event of 3(c)(ii) or 3(c)(iii), above, Company’s Board of Directors shall
prepare a certificate, to be signed by an authorized officer of Company, setting
forth in reasonable detail the basis for and method of determination of the per
share Fair Market Value of the Common Stock. The Board of Directors
will also certify to Holder that this per share Fair Market Value will be
applicable to all holders of Company’s Common Stock. Such
certification must be made to Holder at least ten (10) business days
prior to the proposed effective date of the merger, consolidation, sale, or
other triggering
event as defined in 3(c)(ii) or 3(c)(iii).
(d) Automatic
Exercise. To the extent this Warrant is not previously
exercised, it shall be deemed to have been automatically converted in accordance
with Sections 3(b) and 3(c) hereof (even if not surrendered) as of
immediately before its expiration, involuntary termination or cancellation if
the then-Fair Market Value of a Warrant Share exceeds the then-Warrant Price,
unless Holder notifies Company in writing to the contrary prior to such
automatic exercise.
(e) Treatment of Warrant Upon
Acquisition of Company.
(i) Certain
Definitions. For the purpose of this Warrant, "Acquisition"
means any sale, exclusive license, or other disposition of all or substantially
all of the assets of Company, or any reorganization, consolidation, or merger of
Company, or sale of outstanding Company securities by holders thereof, where the
holders of Company's securities before the transaction beneficially own less
than a majority of the outstanding voting securities of the successor or
surviving entity after the transaction. For purposes of this Section
3(e), “Affiliate” shall mean any person or entity that owns or controls directly
or indirectly ten percent (10%) or more of the voting capital stock of Company,
any person or entity that controls or is controlled by or is under common
control with such persons or entities, and each of such person’s or entity’s
officers, directors, joint venturers or partners, as applicable.
(ii) Cash
Acquisition. In the event of an Acquisition in which the sole
consideration is cash, Holder may either (a) exercise its conversion or
purchase right under this Warrant and such exercise will be deemed effective
immediately prior to the consummation of such Acquisition or (b) permit the
Warrant to expire automatically upon the consummation of such
Acquisition. Company shall provide Holder with written notice of any
proposed Acquisition together with such reasonable information as Holder may
request in connection with such contemplated Acquisition giving rise to such
notice, which is to be delivered to Holder not less than ten (10) business days
prior to the closing of the proposed Acquisition.
(iii) Asset
Sale. In the event of an Acquisition that is an arms length
sale of all or substantially all of Company’s assets (and only its assets) to a
third party that is not an Affiliate of Company (a “True Asset Sale”),
Holder may either (a) exercise its conversion or purchase right under this
Warrant and such exercise will be deemed effective immediately prior to the
consummation of such Acquisition or (b) permit the Warrant to continue
until the Expiration Date if Company continues as a going concern following the
closing of any such True Asset Sale. Company shall provide Holder
with written notice of any proposed asset sale together with such
reasonable information as Holder may request in connection with such asset sale
giving rise to such notice, which
is to be
delivered to Holder not less than ten (10) business days prior to the closing of
the proposed asset sale.
(iv) Assumption of
Warrant. Upon the closing of any Acquisition other than those
particularly described in subsections (ii) and (iii) above, the
successor entity shall assume the obligations of this Warrant, and this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Warrant Shares issuable upon exercise of the unexercised portion
of this Warrant as if such Warrant Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price and/or
number of Warrant Shares shall be adjusted accordingly.
(v) Early Termination of Warrant
in Certain Other Circumstances. Notwithstanding the
foregoing
provisions of Section 3(e)(iv), but subject to the terms of Section 3(d), in the
event that the acquiror in an Acquisition does not agree to assume this Warrant
at and as of the closing of such Acquisition, this Warrant, to the extent not
exercised or converted on or prior to such closing, shall terminate and be of no
further force or effect as of immediately following the closing of such
Acquisition if all of the following conditions are met: (A) the acquiror is
subject to the reporting requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), (B)
the class of stock or other security of the acquiror that would be received by
Holder in connection with such Acquisition were Holder to exercise or convert
this Warrant on or prior to the closing thereof is listed for trading on a
national securities exchange or approved for quotation on an automated
inter-dealer quotation system, and (C) the value (determined as of the
closing of such Acquisition in accordance with the definitive agreements
therefor) of the acquiror stock and/or other securities that would be received
by Holder in respect of each Warrant Share were Holder to exercise or convert
this Warrant on or prior to the closing of such Acquisition is equal to or
greater than three (3) times the then-effective Warrant Price.
4. Representations and
Warranties of Holder and Company.
(a) Representations and
Warranties by Holder. Holder represents and warrants to
Company as follows:
(i) Evaluation. Holder
has substantial experience in evaluating and investing in private placement
transactions of securities of companies similar to Company so that Holder is
capable of evaluating the merits and risks of its investment in Company and has
the capacity to protect its interests.
(ii) Resale. Except
for transfers to an affiliate of Holder, Holder is acquiring this Warrant and
the Warrant Shares issuable upon exercise of this Warrant (collectively the
“Securities”)
for investment for its own account and not with a view to, or for resale in
connection with, any distribution thereof. Holder does not presently
have any agreement, plan or understanding, directly or indirectly, with any
person to distribute or effect the distribution of any of the Securities to or
through any person. Holder understands that the Securities have not
been registered under the Securities Act of 1933, as amended (the “Act”) by reason of a
specific exemption from the registration provisions of the Act which depends
upon, among other things, the bona fide nature of the investment intent as
expressed herein.
(iii) Rule
144. Holder acknowledges that the Securities must be held
indefinitely unless subsequently registered under the Act or an exemption from
such registration is available. Holder is aware of the provisions of
Rule 144 promulgated under the Act.
(iv) Accredited
Investor. Holder is an “accredited investor” within the
meaning of Regulation D promulgated under the Act.
(v) Opportunity To
Discuss. Holder has had an opportunity to discuss Company’s
business, management and financial affairs with its management and an
opportunity to review Company’s facilities. Holder understands that
such discussions, as well as the written information issued by Company, were
intended to describe the aspects of Company’s business and prospects which
Company believes to be material but were not necessarily a thorough or
exhaustive description.
(b) Representations and
Warranties by Company. Company hereby represents and
warrants to Holder
that the statements in the following paragraphs of this Section 4(b) are true
and correct as of the date hereof.
(i) Corporate Organization and
Authority. Company (a) is a corporation duly organized,
validly existing, and in good standing in its jurisdiction of incorporation; (b)
has the corporate power and authority to own and operate its properties and to
carry on its business as now conducted and as currently proposed to be
conducted; and (c) is qualified as a foreign corporation in all jurisdictions
where such qualification is required.
(ii) Corporate
Power. Company has all requisite corporate power and authority
to execute, issue and deliver this Warrant, to issue the Warrant Shares issuable
upon exercise or conversion of this Warrant, and to carry out and perform its
obligations under this Warrant and any related agreements.
(iii) Authorization;
Enforceability. All corporate action on the part of Company,
its officers, directors and shareholders necessary for the authorization,
execution, delivery and performance of its obligations under this Warrant and
for the authorization, issuance and delivery of this Warrant and the Warrant
Shares issuable upon exercise of this Warrant has been taken and this Warrant
constitutes the legally binding and valid obligation of Company enforceable in
accordance with its terms.
(iv) Valid Issuance of Warrant
and Warrant Shares. This Warrant has been validly issued and
is free of restrictions on transfer other than restrictions on transfer set
forth herein and under applicable state and federal securities laws. The Warrant
Shares issuable upon conversion of this Warrant, when issued, sold and delivered
in accordance with the terms of this Warrant for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable, and will
be free of restrictions on transfer other than restrictions on transfer under
this Warrant and under applicable state and federal securities
laws. Subject to applicable restrictions on transfer, the issuance
and delivery of this Warrant and the Warrant Shares issuable upon exercise or
conversion
of this Warrant are not subject to any preemptive or other similar rights or any
liens or encumbrances except as specifically set forth in Company’s Certificate
of Incorporation or this Warrant. Assuming the truth and accuracy of
Holder’s representations and warranties set forth in Section 4(a), no
registration under the Act is required for the offer and sale of this Warrant or
the issuance of the Warrant Shares, pursuant to the terms of this Warrant and
neither Company nor any authorized agent acting on its behalf has or will take
any action hereafter that would cause the loss of such exemption.
(v) No
Conflict. The execution, delivery, and performance of this
Warrant will not result in (a) any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice (1) any provision of Company’s Certificate of Incorporation or by-laws;
(2) any provision of any judgment, decree, or order to which Company is a party,
by which it is bound, or to which any of its material assets are subject; (3)
any contract, obligation, or commitment to which Company is a party or by which
it is bound; or (4) any statute, rule, or governmental regulation applicable to
Company, or (b) the creation of any lien, charge or encumbrance upon any assets
of Company.
(vi) Reports. Company has
previously furnished or made available to Holder complete and accurate copies,
as amended or supplemented, of its (a) Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, as filed with the Securities and
Exchange Commission (the “SEC”), and
(b) all other reports filed by Company under Section 13 or
subsections (a) or (c) of Section 14 of the Securities Exchange Act of 1934
(as amended, the “Exchange
Act”) with the SEC since December 31, 2007 (such reports are
collectively referred to herein as the “Company
Reports”). The Company Reports constitute all of the
documents required to be filed by Company under Section 13 or subsections
(a) or (c) of Section 14 of the Exchange Act with the SEC from December
31, 2007 through the date of this Warrant. The Company
Reports complied in all material respects with the requirements of the Exchange
Act and the rules and regulations thereunder when filed. As of their
respective dates of filing with the SEC, the Company Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading.
5. Legends.
(a) Legend. Each
certificate representing the Warrant Shares shall be endorsed with substantially
the following legend:
THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT
BE TRANSFERRED (UNLESS SUCH TRANSFER IS TO AN AFFILIATE OF HOLDER) UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A “NO ACTION”
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
WITH
RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144
OF THE SECURITIES AND EXCHANGE COMMISSION, OR (IF REASONABLY REQUIRED BY
COMPANY) AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
Company
need not enter into its stock records a transfer of Warrant Shares unless the
conditions specified in the foregoing legend are satisfied. Company
may also instruct its transfer agent not to allow the transfer of any of the
Warrant Shares unless the conditions specified in the foregoing legend are
satisfied.
(b) Removal of Legend and
Transfer Restrictions. The legend relating to the Act endorsed
on a certificate pursuant to paragraph 5(a) of this Warrant shall be removed and
Company shall issue a certificate without such legend to Holder if (i) the
Securities are registered under the Act and a prospectus meeting the
requirements of Section 10 of the Act is available or (ii) Holder provides
to Company an opinion of counsel for Holder reasonably satisfactory to Company,
a no-action letter or interpretive opinion of the staff of the SEC reasonably
satisfactory to Company, or other evidence reasonably satisfactory to Company,
to the effect that public sale, transfer or assignment of the Securities may be
made without registration and without compliance with any restriction such as
Rule 144.
6. Condition of Transfer or
Exercise of Warrant. Upon receipt by Holder of the executed
Warrant, Holder will transfer all of this Warrant to Holder’s parent company,
SVB Financial Group, by execution of an Assignment substantially in the form of
Appendix A. It shall be a condition to any transfer or exercise of this
Warrant that at the time of such transfer or exercise, Holder shall provide
Company with a representation in
writing that Holder or transferee is acquiring this Warrant and the shares of
Common Stock to be issued upon exercise for investment purposes only and not
with a view to any sale or distribution, or will provide Company with a
statement of pertinent facts covering any proposed distribution. As a
further condition to any transfer of this Warrant or any or all of the shares of
Common Stock issuable upon exercise of this Warrant, other than a transfer
registered under the Act, Company may request a legal opinion, in form and
substance satisfactory to Company and its counsel, reciting the pertinent
circumstances surrounding the proposed transfer and stating that such transfer
is exempt from the registration and prospectus delivery requirements of the
Act. Company shall not require Holder to provide an opinion of
counsel if the transfer is to an affiliate of Holder, provided that any such
transferee is an “accredited investor” within the meaning of Regulation D under
the Act. As further condition to each transfer, at the request of
Company, Holder shall surrender this Warrant to Company and the transferee shall
receive and accept a Warrant, of like tenor and date, executed by
Company.
7. Adjustment for Certain
Events. The number and kind of securities purchasable upon the exercise
of this Warrant and the Warrant Price shall be subject to adjustment from time
to time upon the occurrence of certain events, as follows:
(a) Reclassification or
Merger. In case of (i) any reclassification or change of
securities of the class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), (ii) any merger of
Company with or into another corporation (other than a merger with another
corporation in which Company is the acquiring and the surviving
corporation
and which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or (iii) any sale of
all or substantially all of the assets of Company, subject to the provisions of
Section 3(e) hereof, Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and deliver to Holder a new Warrant (in form
and substance satisfactory to Holder of this Warrant), or Company shall make
appropriate provision without the issuance of a new Warrant, so that Holder
shall have the right to receive, at a total purchase price not to exceed that
payable upon the exercise of the unexercised portion of this Warrant, and in
lieu of the Warrant Shares theretofore issuable upon exercise or conversion of
this Warrant, the kind and amount of shares of stock, other securities, money
and property receivable upon such reclassification, change, merger or sale by a
holder of the number of shares of Common Stock then purchasable under this
Warrant, or in the case of such a merger or sale in which the consideration paid
consists all or in part of assets other than securities of the successor or
purchasing corporation, at the option of Holder, the securities of the successor
or purchasing corporation having a value at the time of the transaction
equivalent to the value of the Warrant Shares purchasable upon exercise of this
Warrant at the time of the transaction. Any new Warrant shall provide
for adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 7. The provisions of
this subparagraph (a) shall similarly apply to successive reclassifications,
changes, mergers and transfers.
(b) Subdivision or Combination
of Shares. If Company at any time while this Warrant remains
outstanding and unexpired shall subdivide or combine its outstanding shares of
Common Stock, the Warrant Price shall be proportionately decreased and the
number of Warrant Shares issuable hereunder shall be proportionately increased
in the case of a subdivision and the Warrant Price shall be proportionately
increased and the number of Warrant Shares issuable hereunder shall be
proportionately decreased in the case of a combination.
(c) Stock Dividends and Other
Distributions. If Company at any time while this Warrant is
outstanding and unexpired shall (i) pay a dividend with respect to Common
Stock payable in Common
Stock, then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Warrant Price in effect immediately
prior to such date of determination by a fraction (A) the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to such dividend or distribution, and (B) the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution; or (ii) make any other
distribution with respect to Common Stock (except any distribution specifically
provided for in Sections 7(a) and 7(b)), then, in each such case, provision
shall be made by Company such that Holder shall receive upon exercise of this
Warrant a proportionate share of any such dividend or distribution as though it
were Holder of the Warrant Shares as of the record date fixed for the
determination of the shareholders of Company entitled to receive such dividend
or distribution.
(d) Adjustment of Number of
Shares. Upon each adjustment in the Warrant Price pursuant to
clause (i) of Section 7(c), the number of Warrant Shares purchasable hereunder
shall be adjusted, to the nearest whole share, to the product obtained by
multiplying the number of Warrant Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such
adjustment
and the denominator of which shall be the Warrant Price immediately
thereafter.
8. Notice of
Adjustments. Whenever any Warrant Price or the kind or number
of securities issuable under this Warrant shall be adjusted pursuant to Section
7 hereof, Company shall prepare a certificate signed by an officer of Company
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Warrant Price and number or kind of shares issuable upon exercise of
this Warrant after giving effect to such adjustment, and shall cause copies of
such certificate to be mailed (by certified or registered mail, return receipt
required, postage prepaid) within thirty (30) days of such adjustment
to Holder as set forth in Section 19 hereof.
9. Financial and Other
Reports. If at any time prior to the earlier of the Expiration
Date and the complete exercise of this Warrant, Company is no longer subject to
the reporting requirements of Section 13 or Section 15(d) of the Exchange Act,
Company shall furnish to Holder (a) quarterly unaudited consolidated and, if
available, consolidating balance sheets, statements of operations and cash flow
statements within 45 days of each fiscal quarter end, in a form acceptable to
Holder and certified by Company’s president or chief financial officer, and (b)
annual audited consolidated and, if available, consolidating balance sheets,
statements of operations and cash flow statements certified by an independent
certified public accountant selected by Company and reasonably satisfactory to
Holder within 120 days of the fiscal year end or, if sooner, promptly after such
time as Company’s Board of Directors receives the audit; provided, however, that
Holder execute and deliver to Company a nondisclosure agreement in a form
reasonably acceptable to Company prior to receipt of any such
reports.
10. Transferability of
Warrant. This Warrant is transferable on the books of Company
at its principal office by the registered Holder hereof upon surrender of this
Warrant properly endorsed, subject to compliance with Section 6 and
applicable federal and state securities laws. Company shall issue and
deliver to the transferee a new Warrant representing the Warrant so
transferred. Upon any partial transfer, Company will issue and
deliver to Holder a new Warrant with respect to the portion of the Warrant not
so transferred. Holder shall not have any right to transfer any
portion of this Warrant to any direct competitor of Company.
11. Reserved.
12. No Fractional
Shares. No fractional share of Common Stock will be issued in
connection with any exercise or conversion hereunder, but in lieu of such
fractional share Company shall make a cash payment therefor upon the basis of
the Warrant Price then in effect.
13. Charges, Taxes and
Expenses. Issuance of certificates for shares of Common Stock
upon the exercise or conversion of this Warrant shall be made without charge to
Holder for any United States or state of the United States documentary stamp tax
or other incidental expense with respect to the issuance of such certificate,
all of which taxes and expenses shall be paid by Company, and such certificates
shall be issued in the name of Holder.
14. No Shareholder Rights Until
Exercise. Except as expressly provided herein, this Warrant
does not entitle Holder to any voting rights or other rights as a shareholder of
Company prior to the exercise hereof.
15. Registry of
Warrant. Company shall maintain a registry showing the name
and address of the registered Holder of this Warrant. This Warrant
may be surrendered for exchange or exercise, in
accordance
with its terms, at such office or agency of Company, and Company and Holder
shall be entitled to rely in all respects, prior to written notice to the
contrary, upon such registry.
16. Loss, Theft, Destruction or
Mutilation of Warrant. Upon receipt by Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of loss, theft, or destruction, on delivery of an
indemnity reasonably satisfactory to Company in form and amount, and, if
mutilated, upon surrender and cancellation of this Warrant, Company will execute
and deliver a new Warrant, having terms and conditions substantially identical
to this Warrant, in lieu hereof.
17. Miscellaneous.
(a) Issue
Date. The provisions of this Warrant shall be construed and
shall be given effect in all respect as if it had been issued and delivered by
Company on the date hereof.
(b) Successors. This
Warrant shall be binding upon any successors or assigns of Company.
(c) Headings. The
headings used in this Warrant are used for convenience only and are not to be
considered in construing or interpreting this Warrant.
(d) Saturdays,
Sundays, Holidays. If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall be
a Saturday or a Sunday or shall be a legal holiday in the State of California,
then such action may be taken or such right may be exercised on the next
succeeding day not a legal holiday.
(e) Attorney’s
Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney’s fees.
18. No
Impairment. Company will not, by amendment of its Certificate
of Incorporation or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of Holder hereof against impairment; provided,
however, that notwithstanding the foregoing, nothing in this Warrant shall
restrict or impair Company’s right to effect changes to the rights, preferences,
and privileges associated with the Warrant Shares with the requisite consent of
the stockholders as may be required to amend its Certificate of Incorporation
from time to time so long as such amendment affects the rights, preferences, and
privileges granted to Holder associated with the Warrant Shares in the same
manner as the other holders of outstanding shares of the same
class.
19. Addresses. Any
notice required or permitted hereunder shall be in writing and shall be mailed
by overnight courier, registered or certified mail, return receipt requested,
and postage prepaid, or otherwise delivered by hand or by messenger, addressed
as set forth below, or at such other address as Company or Holder hereof shall
have furnished to the other party in accordance with the delivery instructions
set forth in this Section 19.
|
If
to Company:
|
Cytori
Therapeutics Inc.
|
|
|
3020
Callan Road
|
|
|
San
Diego, California 92121
|
| Phone: (858) 458-0900 | |
| Facsimile: (858) 450-4335 | |
| Attn: Chief Financial Officer |
|
|
With
a copy to:
|
Cytori
Therapeutics, Inc.
|
|
|
3020
Callan Road
|
|
|
San
Diego, California 92121
|
| Phone: (858) 458-0900 | |
| Facsimile: (858) 450-4335 | |
| Attn: In-House Counsel |
|
|
If
to Holder:
|
Silicon
Valley Bank
|
| 3003 Tasman Drive (HA-200) | ||
| Santa Clara, CA 9505 | ||
| Facsimile: 408-496-2405 | ||
| Phone: 408-654-7400 | ||
| Attn: Treasury Department | ||
If mailed
by registered or certified mail, return receipt requested, and postage prepaid,
notice shall be deemed to be given five (5) days after being sent, and if sent
by overnight courier, by hand or by messenger, notice shall be deemed to be
given when delivered (if on a business day, and if not, on the next business
day), and if sent by facsimile transmission to the facsimile number provided in
this Section 19, on the date of transmission, provided that the sender receives
a machine-generated confirmation of successful transmission completed before
5:00 p.m. Pacific time (if on a business day, and if not, on the next business
day).
20. Notice of Certain
Events. If the Company proposes at any time (a) to declare any
dividend or distribution upon any of its stock, whether in cash, property,
stock, or other securities and whether or not a regular cash dividend; (b) to
offer for sale any shares of the Company's capital stock (or other securities
convertible into such capital stock), other than (i) pursuant to the Company's
stock option or other compensatory plans, (ii) in connection with commercial
credit arrangements or equipment financings, (iii) in connection with strategic
transactions for purposes other than capital raising, or (iv) the issuance of
any shares of the Company’s capital stock upon the exercise of any warrants
outstanding as of the date hereof; (c) to effect any reclassification or
recapitalization of any of its stock; or (d) to merge or consolidate
with or into any other corporation, or sell, lease, license, or convey all or
substantially all of its assets, or to liquidate, dissolve or wind up, then, in
connection with each such event, the Company shall give Holder: (1) at least 10
days prior written notice of the date on which a record will be taken for such
dividend, distribution, or subscription rights (and specifying the date on which
the holders of common stock will be entitled thereto) or for determining rights
to vote, if any, in respect of the matters referred to in (a) and (b) above; and
(2) in the case of the matters referred to in (c) and (d) above at least 10 days
prior written notice of the date when the same will take place (and specifying
the date on which the holders of common stock will be entitled to exchange their
common stock for securities or other property deliverable upon the occurrence of
such
event). Company
will also provide information requested by Holder reasonably necessary to enable
Holder to comply with Holder’s accounting or reporting requirements; provided,
however, that Holder execute and deliver to Company a nondisclosure agreement in
a form reasonably acceptable to Company prior to receipt of any such
information.
21. WAIVER OF JURY
TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS WARRANT OR THE WARRANT SHARES.
22. GOVERNING
LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
[Remainder
of page intentionally blank; signature page follows]
IN
WITNESS WHEREOF, Company has caused this Warrant
to be executed by its officer thereunto duly authorized.
CYTORI
THERAPEUTICS, INC.
By: /s/ Mark Saad
Name: Mark
Saad
Title: Chief
Financial Officer
Dated as
of October 14, 2008.
ACCEPTED
AND AGREED TO:
SILICON
VALLEY BANK
By: /s/ Andre P.
Pelletier
Name: Andre
P. Pelletier
Title: Senior
Relationship Manager
Dated as
of October 14, 2008.
NOTICE OF
EXERCISE
To:
Cytori
Therapeutics, Inc.
3020
Callan Road
San
Diego, California 92121
Phone:
(858) 458-0900
Facsimile:
(858) 450-4335
Attn:
Chief Financial Officer
|
1.
|
The
undersigned Warrantholder (“Holder”) elects to acquire shares of the
Common Stock (the “Common Stock”) of Cytori Therapeutics Inc. (the
“Company”), pursuant to the terms of the Stock Purchase Warrant dated
October 14, 2008 (the “Warrant”).
|
|
2.
|
Holder
exercises its rights under the Warrant as set forth below (check
one):
|
|
|
( )
|
Holder
elects to purchase _____________ shares of Common Stock as provided in
Section 3(a) and tenders herewith a check in the amount of
$___________ as payment of the purchase
price.
|
|
|
( )
|
Holder
elects to convert the purchase rights into shares of Common Stock as
provided in Section 3(b) of the
Warrant.
|
|
3.
|
Holder
surrenders the Warrant with this Notice of
Exercise.
|
Holder
represents that it is acquiring the aforesaid shares of Common Stock for
investment and not with a view to or for resale in connection with distribution
and that Holder has no present intention of distributing or reselling the
shares.
Please
issue a certificate representing the shares of the Common Stock in the name of
Holder or in such other name as is specified below:
Name: ______________________________
Address: ______________________________
Taxpayer
I.D.:
______________________________
[NAME OF
HOLDER]
By:
Name:
Title:
Date: _______
___, 200___
APPENDIX
A
ASSIGNMENT
For value
received, Silicon Valley Bank hereby sells, assigns and transfers
unto
Name: SVB Financial
Group
Address: 3003 Tasman Drive
(HA-200)
Santa
Clara, CA 95054
Tax
ID: XX-XXXXXXX
that
certain Warrant to Purchase Stock issued by Cytori Therapeutics, Inc. (the
“Company”), on October 14, 2008 (the “Warrant”) together with all rights, title
and interest therein.
SILICON
VALLEY BANK
By:
Name:
Title:
By its
execution below, and for the benefit of the Company, SVB Financial Group makes
each of the representations and warranties set forth in Article 4 of the Warrant
and agrees to all other provisions of the Warrant as of the date
hereof.
SVB
FINANCIAL GROUP
By:
Name:
Title:
|
|
EXHIBIT
23.1
|
Consent
of Independent Registered Public Accounting Firm
The Board
of Directors
Cytori
Therapeutics, Inc.:
We
consent to the incorporation by reference in the registration statement (Nos.
333-82074 and 333-122691) on Form S-8 and (Nos. 333-140875, 333-157023,
333-153233 and 333-134129) on Form S-3 of Cytori Therapeutics, Inc. of our
reports dated March 6, 2009, with respect to the consolidated balance sheets of
Cytori Therapeutics, Inc. and subsidiaries as of December 31, 2008 and
2007, and the related consolidated statements of operations and comprehensive
loss, stockholders' equity (deficit), and cash flows for each of the years in
the three-year period ended December 31, 2008, the accompanying schedule of
valuation and qualifying accounts, and the effectiveness of internal control
over financial reporting of Cytori Therapeutics, Inc. and subsidiaries as of
December 31, 2008, and to the reference to our firm in Item 6, Selected Financial Data,
which reports appear in the December 31, 2008, annual report on Form 10-K of
Cytori Therapeutics, Inc.
|
/s/
KPMG LLP
|
|
|
San
Diego, California
|
|
|
March
6, 2009
|
|
EXHIBIT
31.1
Certification
of Principal Executive Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a)
As
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Christopher J. Calhoun, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Cytori Therapeutics,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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)
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
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
(d)
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 (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
(a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
March 6, 2009
|
|
|
/s/
Christopher J. Calhoun
|
|
|
Christopher
J. Calhoun,
|
|
|
Chief
Executive Officer
|
|
EXHIBIT
31.2
Certification
of Principal Financial Officer Pursuant to
Securities
Exchange Act Rule 13a-14(a)
As
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I, Mark
E. Saad, certify that:
|
1.
|
I
have reviewed this annual report on Form 10-K of Cytori Therapeutics,
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) 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
(d)
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 (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
(a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
March 6, 2009
|
|
|
/s/
Mark E. Saad
|
|
|
Mark
E. Saad,
|
|
|
Chief
Financial Officer
|
|
EXHIBIT
32.1
CERTIFICATIONS
PURSUANT TO 18 U.S.C. SECTION 1350/ SECURITIES EXCHANGE ACT RULE 13a-14(b),
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES – OXLEY ACT OF
2002
In
connection with the Annual Report on Form 10-K of Cytori Therapeutics, Inc. for
the year ended December 31, 2008 as filed with the Securities and Exchange
Commission on the date hereof, Christopher J. Calhoun, as Chief Executive
Officer of Cytori Therapeutics, Inc., and Mark E. Saad, as Chief Financial
Officer of Cytori Therapeutics, Inc., each hereby certifies, respectively,
that:
|
1.
|
The
Form 10-K report of Cytori Therapeutics, Inc. that this certification
accompanies fully complies with the requirements of section 13(a) of
the Securities Exchange Act of
1934.
|
|
2.
|
The
information contained in the Form 10-K report of Cytori Therapeutics, Inc.
that this certification accompanies fairly presents, in all material
respects, the financial condition and results of operations of Cytori
Therapeutics, Inc.
|
|
By:
|
/s/
Christopher J. Calhoun
|
|
|
Dated:
March 6, 2009
|
Christopher
J. Calhoun
|
|
|
Chief
Executive Officer
|
||
|
By:
|
/s/
Mark E. Saad
|
|
|
Dated:
March 6, 2009
|
Mark
E. Saad
|
|
|
Chief
Financial Officer
|