XML 36 R20.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Transactions with Olympus Corporation
 6 Months Ended
Jun. 30, 2010
Transactions with Olympus Corporation [Abstract]  
Transactions with Olympus Corporation
15.  Transactions with Olympus Corporation

Initial Investment by Olympus Corporation in Cytori

In 2005, we entered into a common stock purchase agreement with Olympus in which we received $11,000,000 in cash proceeds.  We received an additional $11,000,000 from Olympus in August 2006 for the issuance of approximately 1,900,000 shares of our common stock at $5.75 per share.  We received an additional $6,000,000 from Olympus in August 2008 for the issuance of 1,000,000 unregistered shares of our common stock at $6.00 per share and 500,000 common stock warrants (with an original exercise price of $8.50 per share) under a private placement offering.

As of June 30, 2011, Olympus holds approximately 7.65% 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

In 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.  We have determined that the Joint Venture is a variable interest entity or 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 exert significant influence over the Joint Venture's operations.  At June 30, 2011, the carrying value of our investment in the Joint Venture is $357,000.  We are under no obligation to provide additional funding to the Joint Venture, but may choose to do so.  We made no cash contributions to the Joint Venture during the three and six months ended June 30, 2011.  We contributed $330,000 during the three and six months ended June 30, 2010.

Put/Calls and Guarantees

The Shareholders' Agreement between Cytori and Olympus provides that in certain specified circumstances of our 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 (the “Put”) at the higher of (a) $22,000,000 or (b) the Put's fair value.
 
At June 30, 2011 and December 31, 2010, the estimated fair value of the Put was $1,280,000 and $1,170,000, respectively.  Fluctuations in the Put value are recorded in the consolidated condensed statements of operations as a component of change in fair value of option liabilities. The estimated fair value of the Put has been recorded as a long-term liability in the caption option liability in our consolidated condensed 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:

   
June 30,
2011
   
December 31,
2010
 
           
Expected volatility of Cytori
   
73.40
%
   
73.00
%
Expected volatility of the Joint Venture
   
73.40
%
   
73.00
%
Bankruptcy recovery rate for Cytori
   
28.00
%
   
28.00
%
Bankruptcy threshold for Cytori
 
$
7,801,000
   
$
5,842,000
 
Probability of a change of control event for Cytori
   
3.28
%
   
3.43
%
Expected correlation between fair values of Cytori and the Joint Venture in the future
   
99.00
%
   
99.00
%
Risk free interest rate
   
3.18
%
   
3.30
%

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.