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 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

 

 

 

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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.

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.

 

Warrant Liability

 

Effective January 1, 2009, we changed our method of accounting for certain common stock purchase warrants with exercise price reset features due to the adoption of a new accounting standard.   These warrants were issued in connection with our August 2008 private placement of 2,825,517 unregistered shares of common stock and 1,412,758 common stock warrants. The warrants had an original exercise price of $8.50 and expire in August 2013.  Under the new standard, these warrants previously recognized in stockholders’ equity (deficit) are now accounted for as fair value liabilities, with changes in fair value included in net earnings (loss).

 

The cumulative effect of the adoption is to present these warrants as liabilities on the date of the adoption as if they had been accounted for as liabilities since the warrants were issued.  As a result on January 1, 2009, we recognized a $1.7 million long-term warrant liability, a $2.9 million decrease in accumulated deficit and a corresponding decrease in additional paid-in capital of $4.6 million. The fair value of these warrants increased to $6.3 million as of December 31, 2009, which resulted in a $4.6 million loss from the change in fair value of warrants for the year ended December 31, 2009.

 

Since these warrants do not qualify for hedge accounting, all future changes in the fair value of the warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These warrants are not traded in an active securities market, and as such, we estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

		As of December 31, 2009				As of January 1, 2009
Expected term		3.61 years				4.61 years
Common stock market price		$	6.10			$	3.61
Risk-free interest rate			1.70	%			1.55	%
Expected volatility			76.16	%			65.71	%
Resulting fair value (per warrant)		$	3.28			$	1.20

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is clos est to the expected term of the warrant.

 

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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 an arrangement.  Revenue for these product sales is 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.  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.  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 w hen 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.  Fair values for undelivered elements are determined based on vendor-specific objective evidence as well as market participant quotes for similar services.  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.

 

Concentration of Significant Customers

 

For the year ended December 31, 2009, our sales were concentrated with three distributors and one direct customer, which in aggregate comprised 46% of our product revenue recognized for the year ended December 31, 2009.  Our Asia-Pacific, North America and Europe region sales accounted for 91% of our product revenue recognized for the year ended December 31, 2009.  Additionally, one distributor and two end customers accounted for 55% of total outstanding accounts receivable as of December 31, 2009.  We continuously monitor the creditworthiness of our distributors and believe our sales to diverse end customers and to diverse geographies further serve to mitigate our exposure to credit risk.

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 development revenues.  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 de velopment 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 funds from Olympus and Olympus-Cytori, Inc. during 2005 and 2006.   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 Celution® System device technology and certain related intellectual property, and (b) provide future development contributions related to commercializing the Celution® System platform.  The license and development services are not separable under the revenue recognition topic of the Codification.  The recognition of this deferred amount requires achievement of service related milestones, un der 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

 

 

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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.  As our research and development efforts progress, we periodically evaluate,  and modify if necessary, the milestone points in our proportional performance model to ensure that revenue recognition accurately reflects our best estimate of substantive value deliverable to the JV.  Revenue will be recognized as the above mentioned R&D milestones are completed.  Of the amounts received and deferred, we recognized development revenues of $8,840,000, $774,000 and $5,158 ,000 for the years ended December 31, 2009, 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.

 

Under a Distribution Agreement with Senko, 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 defined research and development milestones. There was no development revenue recognized during the years ended December 31, 2009 and 2008.  For the year ended December 31, 2007, we recognized $10,000 in development revenue.

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, 2009.  We 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.  The application o the goodwill impairment test involves a substantial amount of judgment.  The judgments employed may have an effect on whether a goodwill impairment loss is recognized.

 

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 involves the following steps:

·	Company assets and liabilities, including goodwill, are allocated to each reporting unit for purposes of completing the goodwill impairment test.

·	The carrying value of each reporting unit – that is, the sum of all of the net assets allocated to the reporting unit – is then compared to its fair value.

·	If the fair value of the reporting unit is lower than its carrying amount, goodwill may be impaired – additional testing is required.

The application of the goodwill impairment test involves a substantial amount of judgment.  For instance, assets and liabilities must be assigned to a reporting unit if both of the following criteria are met:

·	The asset will be employed in or the liability relates to the operations of a reporting unit.

·	The asset or liability will be considered in determining the fair value of the reporting unit.

We developed mechanisms to assign company-wide assets like shared property and equipment, as well as company-wide obligations such as borrowings under our GE loan facility, to our two reporting units.  In some cases, certain assets were not allocable to either reporting unit and were left unassigned.

 

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.

 

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 for all periods presented, the fair value of this unit exceeded its carrying value, and that none of our reported goodwill was impaired.

 

 

 

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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.

Variable Interest Entity (Olympus-Cytori Joint Venture)

A variable interest entity, or VIE, must 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:

·

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 Jo int Venture’s ongoing operations.

·

Moreover, Olympus has a contingent put option that would, in specified circumstances, require Cytori to purchase Olympus’s interests in the Joint Venture for a fixed amount of $22,000,000.  Accordingly, Olympus is protected in some circumstances from absorbing all expected losses in the Joint Venture, and as such, Olympus may not be an “at-risk” equity holder, although Olympus clearly has decision rights over the operations of the Joint Venture.

Because the Joint Venture is undercapitalized, and because one of the Joint Venture’s decision makers may be protected from losses, we have determined that the Joint Venture is a VIE.

 

As noted previously, a VIE is consolidated by its primary beneficiary.  The primary beneficiary is defined 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.   We believe that Olympus and Cytori are “de facto agents” and, together, will absorb more than 50% of the Joint Venture’s expected losses and residual returns.  Ultimately, we concluded that Olympus, and not Cytori, was the party most closely related with the joint venture and, hence, its primary beneficiary.  Our conclusion was based on the following factors:

·	The business operations of the Joint Venture will be most closely aligned to those of Olympus (i.e., the manufacture of devices).

·	Olympus controls the Board of Directors, as well as the day-to-day operations of the Joint Venture.

Had we consolidated the Joint Venture, though, there would be no effect on our net loss or shareholders’ equity at December 31, 2009 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 $63,859,000 as of December 31, 2009 to reflect the estimated amount of deferred tax assets that may not be realized. We increased our valuation allowance by approximately $1,894,000 during the year ended December 31, 2009. 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.

 

 

 

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At December 31, 2009, we had federal and state tax loss carryforwards of approximately $140,693,000 and $97,657,000 respectively.  The federal and state net operating loss carryforwards begin to expire in 2019 and 2011 respectively, if unused.  At December 31, 2009, we had federal and state tax credit carryforwards of approximately $3,657,000 and $3,526,000 respectively.  The federal credits will begin to expire in 2017, if unused, and $144,000 of the state credits will begin to expire in 2010 if unused.  The remaining state credits carry forward indefinitely.  In addition, we had a foreign tax loss carryforward of $6,546,000 in Japan, $270,000 in Italy, and $691,000 i n the United Kingdom.

 

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, 2009, 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 are fully available.

 

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

See Notes to Consolidated Financial Statements included elsewhere herein for disclosure and discussion of new accounting standards.

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.  As of December 31, 2009, all excess funds were invested in money market funds and other highly liquid investments, therefore our interest rate exposure is not considered to be material.

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, 2009, 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 forei gn 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.

 

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Item 8. Financial Statements and Supplementary Data

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2009 and 2008

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2009, 2008 and 2007

Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2009, 2008 and 2007

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

Notes to Consolidated Financial Statements

 

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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, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2009. 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 statem ents 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, 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.

 

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain warrants due to the adoption of a new accounting pronouncement in 2009.

 

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, 2009, 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 12, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

San Diego, California

March 12, 2010

 

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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, 2009, 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 reasonabl e 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 p rinciples, 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, 2009, 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, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 12, 2010, expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ KPMG LLP

San Diego, California

March 12, 2010

 

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CYTORI THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

		As of December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	12,854,000			$	12,611,000
Accounts receivable, net of allowance for doubtful accounts of $751,000 and $122,000 in 2009 and 2008, respectively			1,631,000				1,308,000
Inventories, net			2,589,000				2,143,000
Other current assets			1,024,000				1,163,000
Total current assets			18,098,000				17,225,000
Property and equipment, net			1,314,000				2,552,000
Investment in joint venture			280,000				324,000
Other assets			500,000				729,000
Intangibles, net			635,000				857,000
Goodwill			3,922,000				3,922,000
Total assets		$	24,749,000			$	25,609,000
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued expenses		$	5,478,000			$	5,088,000
Current portion of long-term obligations			2,705,000				2,047,000
Total current liabilities			8,183,000				7,135,000
Deferred revenues, related party			7,634,000				16,474,000
Deferred revenues			2,388,000				2,445,000
Warrant liability			6,272,000				—
Option liability			1,140,000				2,060,000
Long-term deferred rent			—				168,000
Long-term obligations, less current portion			2,790,000				5,044,000
Total liabilities			28,407,000				33,326,000
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; -0- shares issued and outstanding in 2009 and 2008			—				—
Common stock, $0.001 par value; 95,000,000 shares authorized; 40,039,259 and 31,176,275 shares issued and 40,039,259 and 29,303,441 shares outstanding in 2009 and 2008, respectively			40,000				31,000
Additional paid-in capital			178,806,000				161,214,000
Accumulated deficit			(182,504,000	)			(162,168,000	)
Treasury stock, at cost			—				(6,794,000	)
Total stockholders’ deficit			(3,658,000	)			(7,717,000	)
Total liabilities and stockholders’ deficit		$	24,749,000			$	25,609,000

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

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CYTORI THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

		For the Years Ended December 31,
		2009				2008				2007
Product revenues:
Related party		$	591,000			$	28,000			$	792,000
Third party			5,246,000				4,500,000				—
			5,837,000				4,528,000				792,000
Cost of product revenues			3,394,000				1,854,000				422,000
Gross profit			2,443,000				2,674,000				370,000
Development revenues:
Development, related party			8,840,000				774,000				5,158,000
Other, related party			—				1,500,000				—
Research grants and other			53,000				51,000				99,000
			8,893,000				2,325,000				5,257,000
Operating expenses:
Research and development			12,231,000				17,371,000				20,020,000
Sales and marketing			6,583,000				4,602,000				2,673,000
General and administrative			10,415,000				11,727,000				14,184,000
Change in fair value of warrants			4,574,000				—				—
Change in fair value of option liability			(920,000	)			1,060,000				100,000
Total operating expenses			32,883,000				34,760,000				36,977,000
Operating loss			(21,547,000	)			(29,761,000	)			(31,350,000	)
Other income (expense):
Gain on sale of assets			—				—				1,858,000
Interest income			20,000				230,000				1,028,000
Interest expense			(1,427,000	)			(420,000	)			(155,000	)
Other expense, net			(218,000	)			(40,000	)			(46,000	)
Equity loss from investment in joint venture			(44,000	)			(45,000	)			(7,000	)
Total other income (loss)			(1,669,000	)			(275,000	)			2,678,000
Net loss			(23,216,000	)			(30,036,000	)			(28,672,000	)
Other comprehensive loss - unrealized holding loss			—				—				(1,000	)
Comprehensive loss		$	(23,216,000	)		$	(30,036,000	)		$	(28,673,000	)
Basic and diluted net loss per common share		$	(0.65	)		$	(1.12	)		$	(1.25	)
Basic and diluted weighted average common shares			35,939,260				26,882,431				22,889,250

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

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CYTORI THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

																										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, 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-related 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	)
Cumulative effect of change in accounting  for certain warrants			—				—				(4,578,000	)			2,880,000				—				—				—				—				(1,698,000	)
Stock-based compensation expense			—				—				2,649,000				—				—				—				—				—				2,649,000
Issuance of common stock under stock option plan			203,707				—				410,000				—				—				—				—				—				410,000
Issuance of common stock under stock warrant agreement			46,154								121,000				—				—				—				—				—				121,000
Sale of common stock			8,613,123,				9,000				21,851,000				—				—				—				—				—				21,860,000
Sale of treasury stock			—				—				(2,861,000	)			—				(1,872,834	)			6,794,000				—				—				3,933,000
Net loss for the year ended December 31, 2009			—				—				—				(23,216,000	)			—				—				—				—				(23,216,000	)
Balance at December 31, 2009			40,039,259			$	40,000			$	178,806,000			$	(182,504,000	)			—			$	—			$	—			$	—			$	(3,658,000	)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

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CYTORI THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Years Ended December 31,
		2009				2008				2007
Cash flows from operating activities:
Net loss		$	(23,216,000	)		$	(30,036,000	)		$	(28,672,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,681,000				1,533,000				1,616,000
Amortization of deferred financing costs and debt discount			709,000				178,000				—
Inventory provision			—				—				70,000
Warranty provision (reversal)			(23,000	)			(44,000	)			(65,000	)
Increase (reduction) in allowance for doubtful accounts			663,000				121,000				(1,000	)
Change in fair value of warrants			4,574,000				—				—
Change in fair value of option liability			(920,000	)			1,060,000				100,000
Gain on sale of assets			—				—				(1,858,000	)
Stock-based compensation			2,649,000				2,257,000				2,310,000
Equity loss from investment in joint venture			44,000				45,000				7,000
Increases (decreases) in cash caused by changes in operating assets and liabilities:
Accounts receivable			(986,000	)			(1,420,000	)			217,000
Inventories			(446,000	)			(2,143,000	)			—
Other current assets			41,000				(147,000	)			(70,000	)
Other assets			75,000				(63,000	)			(40,000	)
Accounts payable and accrued expenses			413,000				(2,217,000	)			1,827,000
Deferred revenues, related party			(8,840,000	)			(2,274,000	)			(5,158,000	)
Deferred revenues			(57,000	)			66,000				(10,000	)
Long-term deferred rent			(168,000	)			(305,000	)			(268,000	)
Net cash used in operating activities			(23,807,000	)			(33,389,000	)			(29,995,000	)
Cash flows from investing activities:
Proceeds from the sale and maturity of short-term investments			—				5,739,000				28,007,000
Purchases of short-term investments			—				(5,739,000	)			(24,032,000	)
Proceeds from the sale of assets			—				—				3,175,000
Costs from sale of assets			—				—				(305,000	)
Purchases of property and equipment			(221,000	)			(393,000	)			(563,000	)
Investment in joint venture			—				—				(300,000	)
Net cash provided by (used in) investing activities			(221,000	)			(393,000	)			5,982,000
Cash flows from financing activities:
Principal payments on long-term obligations			(2,053,000	)			(958,000	)			(1,200,000	)
Proceeds from long-term obligations			—				7,500,000				—
Debt issuance costs			—				(513,000	)			—
Proceeds from exercise of employee stock options and warrants			531,000				795,000				1,875,000
Proceeds from sale of common stock			23,196,000				28,954,000				21,500,000
Costs from sale of common stock			(1,336,000	)			(850,000	)			(1,599,000	)
Proceeds from sale of treasury stock			3,933,000				—				6,000,000
Net cash provided by financing activities			24,271,000				34,928,000				26,576,000
Net increase in cash and cash equivalents			243,000				1,146,000				2,563,000
Cash and cash equivalents at beginning of year			12,611,000				11,465,000				8,902,000
Cash and cash equivalents at end of year		$	12,854,000			$	12,611,000			$	11,465,000

 

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		For the Years Ended December 31,
		2009				2008				2007
Supplemental disclosure of cash flows information:
Cash paid during period for:
Interest		$	739,000			$	180,000			$	160,000
Taxes			—				—				2,000
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

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

 

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CYTORI THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

1.	Organization and Operations

The Company

 

Cytori is an emerging leader in regenerative medicine, providing patients and physicians around the world with medical technologies that harness the potential of adult regenerative cells from adipose tissue. The Celution® System family of medical devices and instruments is being sold into the European and Asian cosmetic and reconstructive surgery markets but is not yet available in the United States. Our StemSource® product line is sold globally for cell banking and research applications.

 

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 that have been established primarily to support our sales and marketing activities in these regions.

 

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.

 

Liquidity and Capital Availability

 

We incurred net losses of $23,216,000, $30,036,000 and $28,672,000 for the years ended December 31, 2009, 2008 and 2007, respectively.  We have an accumulated deficit of $182,504,000 as of December 31, 2009.  Additionally, we have used net cash of $23,807,000, $33,389,000 and $29,995,000 to fund our operating activities for years ended December 31, 2009, 2008 and 2007, respectively.  To date these operating losses have been funded primarily from outside sources of invested capital.

 

During 2009, we expanded 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.  If we are to be successful, we must increase revenues or raise outside capital in the future.  If we cannot do so, we will be required to further reduce our research, development, and administrative operations, including reductions of our employee base, in order to offset the lack of available funding.

 

We are continuing to evaluate available financing opportunities as part of our normal course of business.  We have an established history of raising capital through these platforms, and we are currently involved in discussions with multiple

 

 

 

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parties.  In March 2009, we raised approximately $10,000,000 in gross proceeds from the sale to institutional investors of a total of 4,771,174 shares of our common stock and warrants to purchase up to a total of 6,679,644 additional shares of our common stock at a purchase price of $2.10 per unit, with each unit consisting of one (1) share and one and four-tenths (1.4) warrants (with an exercise price of $2.59 per share).  In May 2009, we raised approximately $4,252,000 in gross proceeds from a private placement of 1,864,783 unregistered shares of common stock and 3,263,380 common stock warrants at a purchase price of $2.28 per unit, with each unit consisting of one (1) share and one and three-fourths (1.75 ) warrants (with an exercise price of $2.62 per share) to a syndicate of investors.  Additionally, we entered into a common stock purchase agreement with Seaside 88, LP relating to the offering and sale of a total of up to 7,150,000 shares of our common stock. The agreement requires us to issue and Seaside to buy 275,000 shares of our common stock once every two weeks, subject to the satisfaction of customary closing conditions, with the offering price equal to 87% of our common stock’s volume weighted average trading price during the ten-day trading period immediately preceding each closing date. If with respect to any subsequent closing, our common stock’s ten day volume weighted average trading price is below $2.50 per share, then the closing will not occur.  We raised approximately $12,859,000 in gross proceeds from the sale of 3,850,000 shares through December 31, 2009 related to Seaside closings.

 

We expect to continue to utilize our cash and cash equivalents to fund operations through the next twelve 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.  To the extent closing conditions are met, we expect the Seaside 88, LP agreement will significantly extend our available resources and may reduce our need for alternate financing.   Subsequent to the year ended December 31, 2009, we completed five scheduled closings with Seaside 88, LP raising in aggregate approximately $8,583,000 in gross proceeds from the sale of 1,375,000 shares of our common stock.  Although there can be no assurance given, we hope to successfully complete one or more additional financing transactions or corporate partnerships in the future (including future closings of the Seaside 88, LP agreement). Without this additional capital, current working capital, cash generated from sales and containment of costs will not provide adequate funding for operations indefinitely at their current levels. If such efforts are not successful, we will need to reduce operations and this could negatively affect our ability to achieve certain corporate goals.  In this event, we would reduce certain operations to focus almost entirely on the supply of current products to existing or new distribution channels. 

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), valuing warrants, 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 $10,780,000 and $11,718,000 as of December 31, 2009 and 2008, respectively.  We maintain our cash at insured financial institutions.  The combined account balances at each institution periodically

 

 

 

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exceed FDIC insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC limits.

 

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 to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.   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, 2009 and 2008.

 

Proceeds from sales and maturity of short term investments for the years ended December 31, 2008 and 2007 were $5,739,000 and $28,007,000, respectively. There were no proceeds from sales and maturity of short term investments for the year ended December 31, 2009.  There were no gross realized losses for such sales for the years ended December 31, 2008 and 2007.

 

Inventories

 

Inventories include the cost of material, labor, and overhead, and are stated at the lower of 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 included 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.  All suc h materials were utilized and realized during the year ended December 31, 2009.

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

 

We assess certain of our long-lived assets, such as property and equipment and intangible assets other than goodwill, for potential impairment when there is a change in circumstances that indicates carrying values of assets may not be recoverable. Such long-lived assets are deemed to be impaired when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense.  We recognized no impairment losses during any of the periods presented in these financial statements.

 

Goodwill and Intangibles

 

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.

 

We are required to test goodwill 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, 2009, and concluded that no impairment existed.

 

 

 

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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 6).

 

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, 2009 and 2008, all of which related to our regenerative cell technology segment, are as follows:

		December 31, 2009
Other intangibles, net:
Beginning balance		$	857,000
Amortization			(222,000	)
Ending balance			635,000
Goodwill, net:
Beginning balance			3,922,000
Disposal of assets			—
Ending balance			3,922,000
Total goodwill and other intangibles, net		$	4,557,000
Cumulative amortization of other intangible assets		$	1,581,000

		December 31, 2008
Other intangibles, net:
Beginning balance		$	1,078,000
Amortization			(221,000	)
Ending balance			857,000
Goodwill, net:
Beginning balance			3,922,000
Disposal of assets			—
Ending balance			3,922,000
Total goodwill and other intangibles, net		$	4,779,000
Cumulative amortization of other intangible assets		$	1,359,000

As of December 31, 2009, future estimated amortization expense for these other intangible assets is expected to be as follows:

2010		222,000
2011		222,000
2012		191,000
		$	635,000

Warrant Liability

 

Effective January 1, 2009, we changed our method of accounting for certain common stock purchase warrants with exercise price reset features due to the adoption of a new accounting standard.   These warrants were issued in connection with our August 2008 private placement of 2,825,517 unregistered shares of common stock and 1,412,758 common stock warrants. The warrants had an original exercise price of $8.50 and expire in August 2013.  Under the new standard, these warrants previously recognized in stockholders’ equity (deficit) are now accounted for as fair value liabilities, with changes in fair value included in net earnings (loss).

 

The cumulative effect of the adoption is to present these warrants as liabilities on the date of the adoption as if they had been accounted for as liabilities since the warrants were issued.  As a result on January 1, 2009, we recognized a $1.7 million long-term warrant liability, a $2.9 million decrease in accumulated deficit and a corresponding decrease in additional paid-in capital of $4.6 million. The fair value of these warrants increased to $6.3 million as of December 31, 2009, which resulted in a $4.6 million loss from the change in fair value of warrants for the year ended December 31, 2009.

 

 

 

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Since these warrants do not qualify for hedge accounting, all future changes in the fair value of the warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These warrants are not traded in an active securities market, and as such, we estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

		As of December 31, 2009				As of January 1, 2009
Expected term		3.61 years				4.61 years
Common stock market price		$	6.10			$	3.61
Risk-free interest rate			1.70	%			1.55	%
Expected volatility			76.16	%			65.71	%
Resulting fair value (per warrant)		$	3.28			$	1.20

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is clos est to the expected term of the warrant.

 

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 an arrangement.  Revenue for these product sales is 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.  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.  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 w hen 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.  Fair values for undelivered elements are determined based on vendor-specific objective evidence as well as market participant quotes for similar services.  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.

 

Concentration of Significant Customers

 

For the year ended December 31, 2009, our sales were concentrated with three distributors and one direct customer, which in aggregate comprised 46% of our product revenue recognized for the year ended December 31, 2009.  Our Asia-Pacific, North America and Europe region sales accounted for 91% of our product revenue recognized for the year ended December 31, 2009.  Additionally, one distributor and two end customers accounted for 55% of total outstanding accounts receivable as of December 31, 2009.

 

 

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For the year ended December 31, 2008, our sales were concentrated with two direct customers and one distributor, which in aggregate comprised 60% of our product revenue recognized for the year ended December 31, 2008.  Our Asia-Pacific and Europe region sales accounted for 92% of our product revenue recognized for the year ended December 31, 2008.  Additionally, three direct customers accounted for 66% of total outstanding accounts receivable as of December 31, 2008.

 

We continuously monitor the creditworthiness of our distributors and believe our sales to diverse end customers and to diverse geographies further serve to mitigate our exposure to credit risk.

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 recorded as development revenues.  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 dev elopment 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 funds from Olympus and Olympus-Cytori, Inc. during 2005 and 2006.   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 Celution® System device technology and certain related intellectual property, and (b) provide future development contributions related to commercializing the Celution® System platform.  The license and development services are not separable under the revenue recognition topic of the Codification.  The recognition of this deferred amount requires achievement of service related milestones, un der 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.  As our research and development efforts progress, we periodically evaluate,  and modify if necessary, the milestone points in our proportional performance model to ensure that revenue recognition accurat ely reflects our best estimate of substantive value deliverable to the JV.  Revenue will be recognized as the above mentioned R&D milestones are completed.  Of the amounts received and deferred, we recognized development revenues of $8,840,000, $774,000 and $5,158,000 for the years ended December 31, 2009, 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.

 

Under a Distribution Agreement with Senko, 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 defined research and development milestones. There was no development revenue recognized during the year ended December 31, 2009 and 2008.  For the year ended December 31, 2007, we recognized $10,000 in development revenue.

 

Warranty

 

For the bioresorbable spine and orthopedic products, which we sold to Kensey Nash in 2007, we provided a limited warranty under our agreements with our customers for products that fail to comply with product specifications. We had previously recorded a reserve for estimated costs we may incur under our warranty program, and as of December 31, 2009, we no longer have a warranty accrual as the maximum period of time any warranty claim could occur has lapsed.

 

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 to

 

 

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help ensure that the products will be free of defects.  We believe that the rigorous nature of the testing and compliance efforts serves to minimize the likelihood of defects in material or workmanship such that recognition of a warranty obligation is not justified at this time. Accordingly, we have not recorded a warranty reserve for our Celution® 800/CRS System and StemSource® Cell Bank product line during the years ended December 31, 2009 and 2008.

 

The following summarizes the movements in our warranty obligations, which is included in accounts payable and accrued expenses, at December 31, 2009, 2008 and 2007:

		As of January 1,				Additions/ (Deductions) to expenses				Claims				As of December 31,
2009:
Warranty obligations		$	23,000			$	(23,000	)		$	—			$	—
2008:
Warranty obligations		$	67,000			$	(44,000	)		$	—			$	23,000
2007:
Warranty obligations		$	132,000			$	(65,000	)		$	—			$	67,000

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, and pre-clinical and clinical studies as well as salaries and benefits for our research and development employees.

 

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, 2009, 2008 and 2007, costs associated with the development of the device were $2,713,000, $2,546,000 and $6,293,000, respectively.

 

Our agreement with the NIH entitles us to qualifying expenditures of up to $250,000 related to research on Adipose Tissue-Derived Cells for Vascular Cell Therapy. We incurred $49,000 of direct expenses for the year ended December 31, 2009. There were no comparable expenditures in 2008 and 2007 as our work under this NIH agreement began in 2009.

 

Deferred Financing Costs and Other Debt-Related Costs

 

Deferred financing costs are capitalized and amortized to interest expense over the term of the 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.  The fair value of the warrant issued to the Lenders was calculated utilizing the Black-Scholes option-pricing model. We are accreting 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 or accretion would be accelerated.

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 our deferred tax assets.

 

 

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Stock Based Compensation

 

We recognize the fair value method of all share-based payment awards granted after January 1, 2006, in our statements of operations over the requisite vesting period of each award.  We estimate the fair value of these options using the Black-Scholes option pricing model using assumptions for expected volatility, expected term, and risk-free interest rate.  Expected volatility is based primarily on historical volatility and is computed using daily pricing observations for recent periods that correspond to the expected term of the options. The expected life is based on the expected term of the options. The risk-free interest rate is the interest rate for treasury instruments with maturities that approxima te the expected term.

 

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 year ended December 31, 2007, 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 years ended December 31, 2009 and 2008.

 

Segment Information

 

We report our financial results based on two distinct operating segments – (a) Regenerative cell technology and (b) MacroPore Biosurgery.

 

Our regenerative cell technology segment includes the development, manufacturing and sale of 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 warrant and 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, 2009.

 

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.

 

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The following tables provide information regarding the performance and assets of our operating segments:

		Years ended December 31,
		2009				2008				2007
Revenues:
Regenerative cell technology		$	14,730,000			$	6,853,000			$	5,247,000
MacroPore Biosurgery			—				—				802,000
Total revenues		$	14,730,000			$	6,853,000			$	6,049,000
Segment operating income (losses):
Regenerative cell technology		$	(7,303,000	)		$	(16,793,000	)		$	(17,075,000	)
MacroPore Biosurgery			(175,000	)			(181,000	)			9,000
General and administrative expenses			(10,415,000	)			(11,727,000	)			(14,184,000	)
Changes in fair value of warrants			(4,574,000	)			—				—
Changes in fair value of option liabilities			920,000				(1,060,000	)			(100,000	)
Total operating loss		$	(21,547,000	)		$	(29,761,000	)		$	(31,350,000	)

		As of December 31,
		2009				2008
Assets:
Regenerative cell technology		$	14,226,000			$	13,240,000
MacroPore Biosurgery			—				—
Corporate assets			10,523,000				12,369,000
Total assets		$	24,749,000			$	25,609,000

We derived our revenues from the following products, research grants, development and service activities:

		Years ended December 31,
		2009				2008				2007
Regenerative cell technology:
Product revenues:
Celution® products		$	5,837,000			$	4,528,000			$	—
Development revenues:
Milestone revenue (Olympus)			8,840,000				774,000				5,158,000
Other (Olympus)			—				1,500,000				—
Research grant (NIH)			49,000				—				—
Regenerative cell storage services			4,000				4,000				4,000
Other			—				47,000				85,000
Total regenerative cell technology			14,730,000				6,853,000				5,247,000
MacroPore Biosurgery:
Product revenues:
Spine & orthopedic products			—				—				792,000
Development revenues			—				—				10,000
Total MacroPore Biosurgery			—				—				802,000
Total revenues		$	14,730,000			$	6,853,000			$	6,049,000

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
2009		$	9,792,000			$	4,938,000			$	14,730,000
2008		$	2,290,000			$	4,563,000			$	6,853,000
2007		$	6,010,000			$	39,000			$	6,049,000

At December 31, 2009 and 2008, 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
2009		$             1,739,000		$                355,000		$             2,094,000
2008		$             3,197,000		$                408,000		$             3,605,000

Loss Per Share

 

Basic per share data is computed by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted per share data is computed by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding

 

 

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during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding as calculated using the treasury stock method. Potential common shares were related entirely to outstanding but unexercised options and warrants for all periods presented.

 

We have excluded all potentially dilutive securities from the calculation of diluted loss per share attributable to common stockholders for the years ended December 31, 2009, 2008 and 2007, as their inclusion would be antidilutive. Potentially dilutive common shares excluded from the calculations of diluted loss per share were 20,123,889, 9,393,574 and 7,880,098 for the years ended December 31, 2009, 2008 and 2007, respectively.

 

Recent Accounting Pronouncements

 

In 2009, the Financial Accounting Standards Board (FASB) authorized the FASB Accounting Standards Codification (the ASC or the Codification) as the single source of authoritative guidance for accounting principles generally accepted in the United States for nongovernmental entities.  The Codification only changes the referencing of financial accounting standards and does not change or alter existing generally accepted accounting principles.  Accordingly, we have revised references to legacy accounting standard to be consistent with the Codification.

 

On January 1, 2009, we adopted an update to the fair value measurements and disclosures topic of the Codification, which provides guidance for non-financial assets and liabilities that are measured at fair value on a non-recurring basis, such as goodwill and identifiable intangible assets. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, we adopted an update to the consolidation topic of the Codification which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This update is effective for annual periods beginning on or after December 15, 2008.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, we adopted an update to the business combinations topic of the Codification which retains the fundamental requirements of the topic 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 fi nancial effect of the business combination.  This update is effective for acquisitions made on or after the first day of annual periods beginning on or after December 15, 2008.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, we adopted an update to the collaborative arrangements topic of the Codification which 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 update is effective for fiscal years beginning after December 15, 2008.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, we adopted the provisions of derivatives and hedging topic of the Codification which applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of this adoption, the original amount of 1,412,758 of our issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants had an original exercise price of $8.50 and expire in August 2013.  As such, effective January 1, 2009, we reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in August 2008. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $2.9 million to beginning accumulated deficit and $1.7 million to a long-term warrant liability to recognize the fair value of such warrants on that date. The fair value of these warrants increased to $6.3 million as of December 31, 2009, and we recognized a $4.6 million loss from the change in fair value of warrants for the year ended December 31, 2009, respectively.

 

 

 

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On January 1, 2009, we adopted the update to the intangibles-goodwill and other topic of the Codification which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this update is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under business combinations topic of the Codification and other U.S. generally accepted accounting principles. This update is effective for our interim and annual financial statements beginning after November 15, 2008. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

On January 1, 2009, we adopted the update to the investments – equity method and joint ventures topic of the Codification which applies to all investments accounted for under the equity method.  It states that an entity shall measure its equity investment initially at cost.  An equity method investor is required to recognize other-than-temporary impairments of an equity method investment and shall account for a share issuance by an investee as if the investor had sold a proportionate share of its investment.  Any gain or loss to the investor resulting from an investee’s share issuance shall be recognized in earnings. This provision is effective in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years and shall be applied prospectively.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Effective June 30, 2009, we adopted the update to the subsequent events topic of the Codification which sets forth principles and requirements for subsequent events, specifically (i) the period during which management should evaluate events or transactions that may occur for potential recognition and disclosure, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date, and (iii) the disclosures that an entity should make about events and transactions occurring after the balance sheet date.  This topic is effective for interim reporting periods ending after June 15, 2009.  In February 2010, the FASB amended this standard by removing the requirement for public companies to disclose the date through which subsequent events have been evaluated.  The amended standard was effective upon issuance.  The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Effective September 30, 2009, we adopted the update to the fair value measurements topic of the Codification to provide further guidance on how to measure the fair value of a liability. The revised standard: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  This standard is effective for interim and annual periods beginning after August 27, 2009, and the adoption of this standard update did not have a material impact on our consolidated financial statements.

 

In June 2009, the FASB issued an update to the consolidation topic of the Codification.  This update requires an enterprise to qualitatively assess the determination of the primary beneficiary (or “consolidator”) of a variable interest entity, or VIE, based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Also, it changes the consideration of kick-out rights in determining if an entity is a VIE and requires an ongoing reconsideration of the primary beneficiary. It also amends the events tha t trigger a reassessment of whether an entity is a VIE. This update is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier adoption is prohibited. We expect to adopt this guidance on January 1, 2010, and currently are in the process of evaluating the potential effect of the adoption on our financial statements.

 

In October 2009, the FASB issued an update to the revenue recognition topic of the Codification.  The update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling pr ice method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted.  We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

 

 

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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 C ytori.  The recognition of this deferred amount is based on achievement of related milestones, under a proportional performance methodology.  As such revenues are recognized, deferred revenue is reduced (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 20 06 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 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, 2009, Olympus holds approximately 10.02% (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 Celution® System device technology 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.

 

 

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We have determined that the Joint Venture is a variable interest entity (“VIE”), 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, 2009, the carrying value of our investment in the Joint Venture is $280,000.

 

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 2009 and 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, 2009 and 2008, the fair value of the Put was $1,140,000 and $2,060,000, 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.

 

The following assumptions were employed in estimating the value of the Put:

		December 31, 2009				December 31, 2008				November 4, 2005
Expected volatility of Cytori			72.00	%			68.00	%			63.20	%
Expected volatility of the Joint Venture			72.00	%			68.00	%			69.10	%
Bankruptcy recovery rate for Cytori			19.00	%			21.00	%			21.00	%
Bankruptcy threshold for Cytori		$	11,308,000			$	16,740,000			$	10,780,000
Probability of a change of control event for Cytori			2.95	%			2.80	%			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			3.85	%			2.25	%			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 Celution® System device technology for the development, manufacture, and supply of such systems to us.  Once second generation Celution® System is developed and approved by regulatory agencies, the Joint Venture will exclusively supply us with these systems at a formula-based transfer price.  We have retained all marketing rights (subject to our various distribution arrangements) to sell the Celution® System 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 i s de minimis as of December 31, 2009.

 

 

 

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In August 2007 we entered into a License and Royalty Agreement with the Joint Venture.  This Royalty Agreement provides us the ability to commercialize the Celution® System platform earlier than we could have otherwise done so under the terms of the Joint Venture Agreements.  The Royalty Agreement enables Cytori to manufacture the Cytori systems, including Celution® 800/CRS, 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 years ended December 31, 2009 and 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 $242,000 and $157,000, respectively, 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 statement of operations.

Deferred revenues, related party

As of December 31, 2009, 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 platf orm and certain related intellectual property.

Condensed financial information for the Joint Venture

A summary of the unaudited condensed financial information for the Joint Venture as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008, and 2007 and reconciliation of net income (loss) of the joint venture to Cytori’s equity loss from investment in joint venture is as follows:

		December 31, 2009				December 31, 2008
		(Unaudited)				(Unaudited)
Balance Sheets
Assets:
Cash		$	738,000			$	646,000
Amounts due from  related party			42,000				24,000
Prepaid insurance			9,000				9,000
Computer equipment and software, net			9,000				20,000
Total assets		$	798,000			$	699,000
Liabilities and Stockholders’ Equity:
Accrued expenses		$	54,000			$	36,000
Amounts due to related party			18,000				16,000
Stockholders’ equity			726,000				647,000
Total liabilities and stockholders’ equity		$	798,000			$	699,000

 

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		Years ended December 31,
		2009				2008				2007
Statements of Operations		(Unaudited)				(Unaudited)				(Unaudited)
Revenues:
Royalty revenue		$	242,000			$	157,000			$	—
Operating expenses:
Research and development			—				—				—
General and administrative:
Accounting and other corporate services			75,000				75,000				40,000
Quality system services			63,000				64,000				36,000
Other			26,000				24,000				10,000
Operating expenses			164,000				163,000				86,000
Operating income (loss)			78,000				(6,000	)			(86,000	)
Other income (expense):
Interest income			1,000				5,000				7,000
Net income (loss)		$	79,000			$	( 1,000	)		$	(79,000	)
Reconciliation of net income (loss) to equity loss from investment in joint venture
Net income (loss)		$	79,000			$	( 1,000	)		$	(79,000	)
Intercompany eliminations			167,000				88,000				(65,000	)
Net loss after intercompany eliminations			(88,000	)			(89,000	)			(14,000	)
Cytori’s percentage of interest in joint venture			50	%			50	%			50	%
Cytori’s equity loss from investment in joint           venture		$	(44,000	)		$	(45,000	)		$	(7,000	)

 

4.       Fair Value Measurements

 

Fair value measurements are market-based measurements, not entity-specific measurements.  Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  We follow 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:

 

 

· 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.

 

 

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, 2009				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	10,780,000			$	10,780,000			$	—			$	—
Liabilities:
Put option liability		$	(1,140,000	)		$	—			$	—			$	(1,140,000	)
Warrant liability		$	(6,272,000	)		$	—			$	(6,272,000	)		$	—

 

We use quoted market prices to determine the fair value of our cash equivalents, which consist of money market funds and therefore these are classified in Level 1 of the fair value hierarchy.

 

 

We value our put option liability (see note 3) 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.

 

 

 

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The following table summarizes the change in our Level 3 put option liability value:

 

		Year ended				Year ended
Put option liability		December 31, 2009				December 31, 2008
Beginning balance		$	(2,060,000	)		$	(1,000,000	)
Increase  in fair value recognized in operating expenses			920,000				(1,060,000	)
Ending balance		$	(1,140,000	)		$	(2,060,000	)

Common stock purchase warrants issued in connection with our August 2008 private equity placement do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model in which all significant inputs are observable in active markets, such as common stock market price, volatility, and risk free rate, therefore the warrant liability is classified as Level 2 in the fair value hierarchy.  See note 2 for further discussion of fair value for these warrants.

 

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 balance sheet as of December 31, 2009.

5.      Fair Value

 

Financial Instruments

 

We disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. The disclosures of estimated fair value of financial instruments at December 31, 2009 and 2008, were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

 

The carrying amounts for cash and cash equivalents, accounts receivable, inventories, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value due to the short-term nature of these instruments.

 

We utilize quoted market prices to estimate the fair value of our fixed rate debt, when available.  If quoted market prices are not available, we calculate the fair value of our fixed rate debt based on a currently available market rate assuming the loans are outstanding through maturity and considering the collateral. In determining the current market rate for fixed rate debt, a market spread is added to the quoted yields on federal government treasury securities with similar terms to debt. 

 

At December 31, 2009 and 2008, the aggregate fair value and the carrying value of the Company’s fixed rate debt were as follows:

		December 31, 2009								December 31, 2008
		Fair Value				Carrying Value				Fair Value				Carrying Value
Fixed rate debt		$	5,508,000			$	5,460,000			$	7,178,000			$	7,052,000

Carrying value includes $366,000 and $823,000 of debt discount as of December 31, 2009 and 2008, respectively.   

Nonfinancial Assets and Liabilities

 

We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment losses related to goodwill which are accounted for pursuant to the authoritative guidance for intangibles—goodwill and other; and (2) valuing potential impairment losses related to long-lived assets which are accounted for pursuant to the authoritative guidance for property, plant and equipment.

 

 

 

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All of our goodwill is associated with our regenerative cell technology reporting unit, and we determine the fair value of this reporting unit based on a combination of inputs including the market capitalization of the company, as well as Level 3 inputs such as discounted cash flows which are not observable from the market, directly or indirectly. We conduct our goodwill impairment analysis annually as of November 30 each year, or upon the occurrence of certain triggering events. No such triggering events occurred during the year ended December 31, 2009. Historically, the fair value of our primary business reporting unit has significantly exceeded its carrying value.

 

We test for the impairment of our long-lived assets when triggering events occur and such impairment, if any, is measured at fair value. The inputs for fair value of our long lived assets would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows using market place participant assumptions. In 2009, our recurring losses coupled with economic conditions, triggered the test for impairment of our long lived assets.  The results of our testing indicated no impairment to our long lived assets as of December 31, 2009.

6.	Gain on Sale of Assets of 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 for $3,175,000 and recognized a gain of $1,858,000, net of expenses.  Excluded from the sale was our Japan Thin Film product line.

 

7.      Thin Film Japan Distribution Agreement

The Company has and 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 are responsible for the completion of the initial regulatory application to the MHLW and commercialization of the Thin Film product line 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.

During the years ended December 31, 2007, we incurred $80,000 of expenses related to this regulatory and registration process. We did not incur any expenses related to this regulatory and registration process during the years ended December 31, 2009 and 2008.  We are currently pursuing the required regulatory clearance in order to initiate commercialization.

 

The Distribution Agreement with Senko commences upon “commercialization.”  Essentially, commercialization occurs when one or more Thin Film product registrations are completed with the MHLW.  As of December 31, 2009 commercialization has not yet occurred.  Following commercialization, the Distribution Agreement has a duration of five years and is renewable for an additional five years after reaching mutually agreed minimum purchase guarantees.

 

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.  We have also earned or will be entitled to earn additional payments under the Distribution Agreement based on achieving the defined research and development milestones. We recognized no development revenue recognized during the year ended December 31, 2009 and 2008 under this agreement.  For the year ended December 31, 2007, we recognized $10,000 in development revenue.

 

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8.      Composition of Certain Financial Statement Captions

 

Inventories, net

 

As of December 31, 2009 and 2008, inventories, net, were comprised of the following:

		December 31,
		2009				2008
Raw materials		$	1,763,000			$	712,000
Work in process			387,000				347,000
Finished goods			439,000				1,084,000
		$	2,589,000			$	2,143,000

Other Current Assets

 

As of December 31, 2009 and 2008, other current assets were comprised of the following:

		December 31,
		2009				2008
Prepaid insurance		$	288,000			$	208,000
Prepaid other			350,000				390,000
Capitalized debt issuance costs, current			153,000				252,000
Other receivables			233,000				313,000
		$	1,024,000			$	1,163,000

Property and Equipment, net

As of December 31, 2009 and 2008, property and equipment, net, were comprised of the following:

		December 31,
		2009				2008
Manufacturing and development equipment		$	3,080,000			$	2,996,000
Office and computer equipment			2,049,000				2,665,000
Leasehold improvements			3,125,000				3,125,000
			8,254,000				8,786,000
Less accumulated depreciation and amortization			(6,940,000	)			(6,234,000	)
		$	1,314,000			$	2,552,000

Accounts Payable and Accrued Expenses

 

As of December 31, 2009 and 2008, accounts payable and accrued expenses were comprised of the following:

		December 31,
		2009				2008
Accrued legal fees		$	476,000			$	1,196,000
Accrued R&D studies			1,184,000				1,110,000
Accounts payable			1,145,000				464,000
Accrued vacation			716,000				774,000
Accrued bonus			974,000				—
Accrued expenses			579,000				842,000
Deferred rent			168,000				305,000
Warranty reserve			—				23,000
Accrued accounting fees			125,000				302,000
Accrued payroll			111,000				72,000
		$	5,478,000			$	5,088,000

 

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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
2010			1,098,000
2011			325,000
2012			62,000
2013			26,000
2014			9,000
Total		$	1,520,000

Rent expense, which includes common area maintenance, for the years ended December 31, 2009, 2008 and 2007 was $2,198,000, $2,015,000 and $1,992,000, respectively.

 

We have entered into agreements with various 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 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, 2009, we have pre-clinical research study obligations of $148,000 (all of which are expected to be complete within a year) and clinical research study obligations of $3,700,000 ($1,900,000 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 a minimum purchase requirements clause.  As of December 31, 2009, we have minimum purchase obligations of $1,308,000, which are expected to be paid 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 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 7 for a discussion of our commitments and contingencies related to our arrangements with Senko.

 

Refer to note 11 for a discussion of our commitments and contingencies related to our long-term obligations.

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 includes issued U.S. patent number 7,470,537, and formerly included issued U.S. patent number 6,777,231, which we refer to as the ‘231 Patent, in addition to various international patents and pending U.S. and international applications relating to adipose-derived stem cells.  In November 2002, we acquired StemSource, and the lic ense agreement was assigned to us.

 

The University of Pittsburgh filed a lawsuit in the fourth quarter of 2004 seeking a determination that its assignors, rather than UC’s assignors, are the true inventors of the ‘231 Patent.   On June 9, 2008 the United States District Court for the Central District of California (“the District Court”) concluded that the University of Pittsburgh’s assignors were the sole inventors of the ‘231 Patent.  The District Court’s decision terminated UC’s rights to the ‘231 Patent.  Shortly thereafter,

 

 

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the UC assignors appealed the District Court’s decision to the United States Court of Appeals.  On July 23, 2009, the United States Court of Appeals affirmed the decision of the District Court.  Since our current products and products under development do not practice the ‘231 Patent, our ongoing business activities and product development pipeline should not be affected by these events.

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, 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. The term loan accrues interest at a fixed rate of 10.58% per annum and is payable over a 37-month period.
60; At maturity of the term loan, we will also make a final payment equal to 5% ($375,000) of the term loan (treated 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 allocated the aggregate proceeds of the term loan between the warrants and the debt obligations based on their relative fair values.  The fair value of the warrant issued to the Lenders is calculated utilizing the Black-Scholes option-pricing model. We are accreting the resultant discount of $564,000 over the term of the loan using the effective interest method, with effective interest rate being 21.28%. As of December 31, 2009 and 2008, the unamortized balance of the aggregate debt discount is $366,000 and $823,000, respectively.  If the maturity of the debt is accelerated because of defaults or conversions, then the accretion is accelerated. We were in compliance with our financial and non-financia l covenants as of December 31, 2009.

 

Additional details relating to the above term loan that is outstanding as of December 31, 2009, 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	%		$	263,000		37 Months		$	5,451,000

________________________________________

*           Current monthly payment is inclusive of principal and interest

As of December 31, 2009, the future contractual principal and final fee payments on all of our debt and capital lease obligations are as follows:

For the Years Ending December 31,
2010			2,705,000
2011			3,121,000
Total		$	5,826,000

Reconciliation of Face Value to Book Value as of 12/31/09
Total debt and lease obligation, including final payment fee (Face Value)		$	5,861,000
Less: Debt Discount			(366,000	)
Total:			5,495,000
Less: Current Portion			(2,705,000	)
Long-Term Obligation		$	2,790,000

Our interest expense for the years ended December 31, 2009, 2008 and 2007 (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 $1,427,000, $420,000and $155,000, respectively.  For the years ended December 31, 2009 and 2008, interest expense is calculated using the effective interest method, therefore it is inclusive of non-cash amortization in the amount of $709,000 and $178,000, respectively, related to the amortization of the debt discount and capitalized loan fees.

 

 

 

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12.	Income Taxes

Due to our net losses for the years ended December 31, 2009, 2008 and 2007, 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, 2009, 2008, and 2007.

 

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, 2009, 2008 and 2007 is as follows:

		2009				2008				2007
Income tax expense (benefit) at federal statutory rate			(34.00	) %			(34.00	) %			(34.00	) %
Income tax expense (benefit) at state statutory rate			(2.61	) %			(5.21	) %			(5.70	) %
Change in State Rate			24.55	%			2.89	%			—	%
Mark to Market Permanent Adjustment			7.21	%			—	%			—	%
Stock based compensation			2.07	%			0.56	%			0.91	%
Credits			(1.50	) %			(1.67	) %			(4.83	) %
Change in federal valuation allowance			8.16	%			38.38	%			41.26	%
Equity loss on investment in Joint Venture			0.07	%			0.06	%			0.01	%
Prior year true-up			(4.79	) %			(1.23	) %			(0.38	) %
Other, net			0.84	%			0.22	%			2.73	%
			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, 2009 and 2008 are as follows:

		2009				2008
Deferred tax assets:
Allowances and reserves		$	305,000			$	84,000
Accrued expenses			379,000				452,000
Deferred revenue and gain on sale of assets			2,234,000				4,950,000
Stock based compensation			3,080,000				2,965,000
Net operating loss carryforwards			52,295,000				48,265,000
Income tax credit carryforwards			5,032,000				4,665,000
Capitalized assets and other			—				371,000
Property and equipment, principally due to differences in depreciation			856,000				549,000
			64,181,000				62,301,000
Valuation allowance			(63,859,000	)			(61,965,000	)
Total deferred tax assets, net of allowance			322,000				336,000
Deferred tax liabilities:
Intangibles			(233,000	)			(336,000	)
Capitalized Assets and other			(89,000	)			—
Total deferred tax liability			(322,000	)			(336,000	)
Net deferred tax assets (liability)		$	—			$	—

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 $63,859,000 as of December 31, 2009 to reflect the estimated amount of deferred tax assets that may not be realized. We increased our valuation allowance by approximately $1,894,000 during the year ended December 31, 2009. 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, 2009, we had federal and state tax loss carryforwards of approximately $140,693,000 and $97,657,000 respectively.  The federal and state net operating loss carryforwards begin to expire in 2019 and 2011 respectively, if unused.  

 

 

 

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At December 31, 2009, we had federal and state tax credit carryforwards of approximately $3,657,000 and $3,526,000 respectively.  The federal credits will begin to expire in 2017, if unused, and $144,000 of the state credits will begin to expire in 2010 if unused.  The remaining state credits carry forward indefinitely.  In addition, we had a foreign tax loss carryforward of $6,546,000 in Japan, $270,000 in Italy, and $691,000 in the United Kingdom.

 

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, 2009, 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. We have estimated that the pre-change net operating losses and credits are fully available as of December 31, 2009.

 

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.

 

We recognize 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.  At December 31, 2009, deferred tax assets do not include $1,044,000 of excess tax benefits from stock-based compensation.

 

We changed our accounting method of accounting for uncertain tax positions on January 1, 2007.  We had no unrecognized tax benefits as of the date of adoption.

 

Following is a tabular reconciliation of the unrecognized tax benefits activity during the years ended December 31, 2009, 2008 and 2007:

		2009				2008				2007
Unrecognized Tax Benefits – Beginning		$	952,000				716,000				—
Gross increases – tax positions in prior period			4,000				—				—
Gross decreases – tax positions in prior period			—				—				—
Gross increase – current-period tax positions			159,000				236,000				716,000
Settlements			—				—				—
Lapse of statute of limitations			—				—				—
Unrecognized Tax Benefits – Ending		$	1,115,000				952,000				716,000

None of the amount included in our liability for uncertain tax benefits 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, 2009.

 

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 liability for uncertain tax benefits 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 2009, 2008 and 2007.

 

 

 

 

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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, 2009 and 2008. 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

 

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, 2009, Green Hospital Supply, Inc., a related party, holds approximately 7.49% (unaudited) 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.  Purchase price per unit was $6.00, with each unit consisting of one (1) common stock share and a half (0.5) common stock warrant.  These warrants were not exercisable until six months after the date of issuance and will expire five years after the date the warrants are first exerc isable. The warrants issued in August 2008 as part of our private placement of common stock are classified as a warrant liability in our consolidated balance sheet.  See note 2 – Warrant Liability.

 

On March 10, 2009, we raised approximately $10,000,000 in gross proceeds from sale to institutional investors of a total of 4,771,174 shares of our common stock and warrants to purchase up to a total of 6,679,644 additional shares of our common stock at a purchase price of $2.10 per unit, with each unit consisting of one (1) share and one and four-tenths (1.4) warrants.  The warrants will not be exercisable until six months after the date of issuance and will expire five years after the date the warrants are first exercisable. The warrants will have an exercise price of $2.59 per share, which was the consolidated closing bid price of the Company's common stock on March 9, 2009, as reported by NASDAQ. The shares a nd the warrants are immediately separable and will be issued separately.  We have accounted for the warrants as a component of stockholders’ deficit.  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. 

 

On May 14, 2009, we raised approximately $4,252,000 in gross proceeds from a private placement of 1,864,783 shares of our common stock and warrants to purchase up to a total of 3,263,380 additional shares of our common stock at a purchase price of $2.28 per unit, with each unit consisting of one (1) share and one and three-fourths (1.75) warrants.  The warrants are exercisable immediately and will expire five years after the date of issuance. The warrants will have an exercise price of $2.62 per share. We have accounted for the warrants as a component of stockholders’ deficit.

 

Additionally, on June 19, 2009, we entered into a common stock purchase agreement with Seaside 88, LP relating to the offering and sale of a total of up to 7,150,000 shares of our common stock. The agreement requires us to issue and Seaside to buy 275,000 shares of our common stock once every two weeks, subject to the satisfaction of customary closing conditions.  At an initial closing, the offering price will equal 87% of our common stock’s volume weighted average trading price during the trading day immediately prior to the initial closing date and at subsequent closings on each 14th day thereafter for one year the offering price will equal 87% of our common stock’s volume weighted average trading price during the ten-day trading period immediately preceding each subsequent closing date.  We raised approximately $12,859,000 in gross proceeds from the sale of 3,850,000 shares in our scheduled closings through December 31, 2009.  We have accounted for each of the completed closings as a component of stockholders’ deficit.

 

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Warrant Adjustments

 

Our March 2009 offering of 4,771,174 shares of our common stock and warrants to purchase up to a total of 6,679,644 additional shares of our common stock with an exercise price of $2.59 per share, our May 2009 equity offering of 1,864,783 shares of our common stock and warrants to purchase up to a total of 3,263,380 additional shares of our common stock with an exercise price of $2.62 per share, and our closings with Seaside 88, LP through December 31, 2009 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, as of December 31, 2009, the common stock warrants issued on August 11, 2008, are e xercisable for 1,912,172 shares of our common stock at an exercise price of $6.28 per share.

 

Treasury Stock

 

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.

 

As part of our equity offering on March 10, 2009, we sold our remaining 1,872,834 shares of common stock from our treasury for $3,933,000 cash, or $2.10 per share.  The cost basis of the treasury stock sold was at a weighted average purchase price, or $3.63 per share, resulting in a loss of $1.53 per share, or $2,861,000 in aggregate, and was accounted for as a reduction of 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 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 (20% or more for certain shareholders) 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, 2009, there are 1,863,606 securities remaining and available for future issuances under 2004 Plan, w hich is exclusive of securities to be issued upon an exercise of outstanding options, warrants, and rights.

 

 

 

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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.

A summary of activity for the year ended December 31, 2009 is as follows:

		Options				Weighted Average Exercise Price
Balance as of January 1, 2009			5,928,707			$	5.02
Granted			1,239,124			$	4.07
Exercised			(234,957	)		$	2.51
Expired			(476,473	)		$	6.19
Cancelled/forfeited			(192,525	)		$	4.96
Balance as of December 31, 2009			6,263,876			$	4.84

		Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Balance as of December 31, 2009			6,263,876			$	4.84				5.35			$	9,762,566
Vested and expected to vest at December 31, 2009			6,154,371			$	4.84				5.29			$	9,584,216
Exercisable at December 31, 2009			4,927,044			$	4.89				4.45			$	7,585,272

The following table summarizes information about options outstanding as of December 31, 2009:

		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			44,399			$	1.01				9.3				23,566			$	0.32
$ 2.00 – 3.99			1,752,464			$	3.05				4.5				1,371,916			$	3.07
$ 4.00 – 5.99			3,105,556			$	4.75				6.1				2,272,333			$	4.66
$ 6.00 – 7.99			1,065,957			$	6.90				4.2				1,015,918			$	6.92
$ 8.00 – 9.99			198,500			$	8.66				6.0				180,686			$	8.66
More than $10.00			97,000			$	10.97				5.2				62,625			$	11.50
			6,263,876												4,927,044

The total intrinsic value of stock options exercised was $682,000, $1,849,000 and $1,758,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

 

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The fair value of each option awarded during the year ended December 31, 2009, 2008 and 2007 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,
		2009				2008				2007
Expected term		5 years				5 years				6 years
Risk-free interest rate			1.94	%			2.83	%			4.59	%
Volatility			66.80	%			59.62	%			74.61	%
Dividends			—				—				—
Resulting weighted average grant date fair value		$	2.34			$	2.77			$	3.74

Through December 31, 2007, the expected term assumption was estimated using the “simplified method”.  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, 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, 2009 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 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,
		2009				2008				2007
Total compensation cost for share-based payment arrangements recognized in the statement of operations (net of tax of $0)		$	2,649,000			$	2,257,000			$	2,310,000

As of December 31, 2009, the total compensation cost related to non-vested stock options not yet recognized for all of our plans is approximately $3,140,000. These costs are expected to be recognized over a weighted average period of 1.82 years.

 

Cash received from stock option and warrant exercises for the years ended December 31, 2009, 2008 and 2007 was approximately $531,000, $795,000 and $1,875,000, respectively.  No income tax benefits have been recorded related to the stock option exercises as the benefits have not been realized in our income tax returns.

 

To settle stock option awards that will be exercised, we will issue new shares of our common stock.  At December 31, 2009, we have an aggregate of 41,100,728 shares authorized and available to satisfy option exercises under our plans.

 

Non-Employee Stock Based Compensation

 

During the third quarter of 2009, we issued 25,000 shares of restricted common stock to a non-employee consultant.  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 $92,000 recorded in the third quarter of 2009 constitutes the entire expense related to this grant, and no future period charges will be incurred.  

 

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

 

 

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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.

18.	Subsequent Events

Subsequent to the year ended December 31, 2009, we completed five scheduled closings with Seaside 88, LP raising in aggregate approximately $8,583,000 in gross proceeds from the sale of 1,375,000 shares of our common stock in connection with the agreement we entered into with Seaside 88, LP on June 19, 2009.

 

Additionally, we received $5,736,000 in aggregate exercise purchase price for 2,208,829 of warrants that were exercised subsequent to the year ended December 31, 2009.

19.	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, 2009				June 30, 2009				September 30, 2009				December 31, 2009
Product revenues		$	1,912,000			$	1,277,000			$	1,386,000			$	1,262,000
Gross profit			825,000				501,000				604,000				513,000
Development revenues			8,000				7,264,000				5,000				1,616,000
Operating expenses			6,437,000				8,194,000				7,028,000				11,224,000
Other expense			(494,000	)			(397,000	)			(383,000	)			(395,000	)
Net loss		$	(6,098,000	)		$	(826,000	)		$	(6,802,000	)		$	(9,490,000	)
Basic and diluted net loss per share		$	(0.20	)		$	(0.02	)		$	(0.18	)		$	(0.25	)

		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 (expense)			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	)

 

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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 p rovide 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 on 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, 2009.

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 misst atements.  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.  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, 2009.

 

The effectiveness of our internal control over financial reporting as of December 31, 2009 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, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

 

None.

 

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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 2010 annual stockholders’ meeting, which will be filed with the SEC on or before April 30, 2010.

 

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 2010 annual stockholders’ meeting, which will be filed with the SEC on or before April 30, 2010.

 

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 2010 annual stockholders’ meeting, which will be filed with the SEC on or before April 30, 2010.

 

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 2010 annual stockholders’ meeting, which will be filed with the SEC on or before April 30, 2010.

 

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 2010 annual stockholders’ meeting, which will be filed with the SEC on or before April 30, 2010.

 

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PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a) (1)		Financial Statements
	Reports of KPMG LLP, Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of December 31, 2009 and 2008
	Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2009, 2008 and 2007
	Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2009, 2008 and 2007
	Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
	Notes to Consolidated Financial Statements

(a) (2)               Financial Statement Schedules

 

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

For the years ended December 31, 2009, 2008 and 2007

(in thousands of dollars)

		Balance at beginning of year				Additions/(Reductions) ((charges)/ credits to expense)				Amount Recovered				Deductions				Balance at end of year
Allowance for doubtful accounts
Year ended December 31, 2009		$	122			$	663			$	(34	)		$	—			$	751
Year ended December 31, 2008		$	1			$	121			$	—			$	—			$	122
Year ended December 31, 2007		$	2			$	1			$	—			$	(2	)		$	1

 

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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).
4.2		Form of Warrant (filed as Exhibit 4.2 to our current report on Form 8-K filed on March 10, 2009 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)
10.5+		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)
10.10#		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)
10.22		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)
10.27+		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)
10.32		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)
10.39+		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)
10.42		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 as Exhibit 10.59 to our Form 10-K Annual Report filed on March 6, 2009 and incorporated by reference herein).
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 as Exhibit 10.60 to our Form 10-K Annual Report filed on March 6, 2009 and incorporated by reference herein).
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 as Exhibit 10.61 to our Form 10-K Annual Report filed on March 6, 2009 and incorporated by reference herein).
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 as Exhibit 10.62 to our Form 10-K Annual Report filed on March 6, 2009 and incorporated by reference herein).
10.63		Form of Subscription Agreement by and between Cytori Therapeutics, Inc. and the Purchaser (as defined therein), dated as of March 9, 2009 (filed as Exhibit 10.63 to our current report on Form 8-K filed on March 10, 2009 and incorporated by reference herein).
10.64		Placement Agency Agreement, dated March 9, 2009, between Cytori Therapeutics, Inc. and Piper Jaffray & Co. (filed as Exhibit 10.64 to our current report on Form 8-K filed on March 10, 2009 and incorporated by reference herein).
10.65		Securities Purchase Agreement, dated May 7, 2009, by and among Cytori Therapeutics, Inc. and the Purchasers identified on the signature pages thereto (filed as Exhibit 10.63 to our current report on Form 8-K filed on May 8, 2009 and incorporated by reference herein).
10.66		Form of Warrant to Purchase Common Stock to be issued on or about May 11, 2009 (filed as Exhibit 10.64 to our current report on Form 8-K filed on May 8, 2009 and incorporated by reference herein).
10.67		Registration Rights Agreement, dated May 7, 2009, by and among Cytori Therapeutics, Inc. and the Purchasers identified on the signature pages thereto (filed as Exhibit 10.65 to our current report on Form 8-K filed on May 8, 2009 and incorporated by reference herein).
10.68		Form of Common Stock Purchase Agreement by and between Cytori Therapeutics, Inc. and Seaside 88, LP, dated as of June 19, 2009 (filed as Exhibit 10.68 to our current report on Form 8-K filed on June 22, 2009 and incorporated by reference herein).
14.1		Code of Ethics (filed as Exhibit 14.1 to our Annual Report on Form 10-K which was filed on March 30, 2004 and incorporated by reference herein)
23.1		Consent of KPMG LLP, Independent Registered Public Accounting Firm (filed herewith).
31.1		Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certifications Pursuant to 18 U.S.C. Section 1350/ Securities Exchange Act Rule 13a-14(b), as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (filed herewith).

_______________________________________

+      Portions of these exhibits have been omitted pursuant to a request for confidential treatment.

#      Indicates management contract or compensatory plan or arrangement.

 

85

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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 12, 2010

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 12, 2010
Ronald D. Henriksen
/s/ Christopher J. Calhoun		Chief Executive Officer, Vice-Chairman, Director (Principal Executive Officer)		March 12, 2010
Christopher J. Calhoun
/s/ Marc H. Hedrick, MD		President, Director		March 12, 2010
Marc H. Hedrick, MD
/s/ Mark E. Saad		Chief Financial Officer (Principal Financial Officer)		March 12, 2010
Mark E. Saad
/s/ John W. Townsend		Chief Accounting Officer		March 12, 2010
John W. Townsend
/s/ David M. Rickey		Director		March 12, 2010
David M. Rickey
/s/ Rick Hawkins		Director		March 12, 2010
Rick Hawkins
/s/ E. Carmack Holmes, MD		Director		March 12, 2010
E. Carmack Holmes, MD
/s/ Paul W. Hawran		Director		March 12, 2010
Paul W. Hawran

 

86

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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. 333-159912, 333-140875, 333-157023, 333-153233 and 333-134129) on Form S-3 of Cytori Therapeutics, Inc. of our reports dated March 12, 2010, with respect to the consolidated balance sheets of Cytori Therapeutics, Inc. and subsidiaries as of December 31, 2009 and 2008, 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, 2009, 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, 2009, and to the reference to our firm in Item 6, < font style="DISPLAY: inline; FONT-STYLE: italic">Selected Financial Data, which reports and reference to our firm appears in the December 31, 2009, annual report on Form 10-K of Cytori Therapeutics, Inc.

Our report on the consolidated financial statements refers to a change in the Company’s method of accounting for certain warrants due to the adoption of a new accounting pronouncement in 2009.

/s/ KPMG LLP
San Diego, California
March 12, 2010

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 12, 2010
/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 12, 2010
/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, 2009 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 12, 2010		Christopher J. Calhoun
		Chief Executive Officer
	By:	/s/ Mark E. Saad
Dated:  March 12, 2010		Mark E. Saad
		Chief Financial Officer