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Transactions with Olympus Corporation | 12 Months Ended
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Dec. 31, 2011
Transactions with Olympus Corporation [Abstract] |
Transactions with Olympus Corporation |
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 consolidated balance sheets. This difference was recorded as deferred revenue since, conceptually, the excess proceeds represent a prepayment for future contributions and obligations of Cytori for the benefit of the Joint Venture (see below), rather than an additional equity investment in Cytori. The recognition of this deferred amount is based on achievement of related milestones, under a proportional performance methodology. 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 2006 and recorded as deferred revenues, related party. Accordingly, on December 31, 2008, we recognized $1,500,000 as other development revenue and reduced our deferred revenues, related party balance for the same amount. In 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, 2011, Olympus holds approximately 7.09% (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.
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, 2011, the carrying value of our investment in the Joint Venture is $250,000. We are under no obligation to provide additional funding to the Joint Venture, but may choose to do so. We contributed $330,000 during 2010. The Company made no contributions during 2011 and 2009. 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, 2011 and 2010, the fair value of the Put was $1,910,000 and $1,170,000, 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, 2011 |  |  | December 31, 2010 |  |  | November 4, 2005 |
Expected volatility of Cytori |  |  | 76.07 | % |  |  | 73.00 | % |  |  | 63.20 | %
Expected volatility of the Joint Venture |  |  | 76.07 | % |  |  | 73.00 | % |  |  | 69.10 | %
Bankruptcy recovery rate for Cytori |  |  | 28.00 | % |  |  | 28.00 | % |  |  | 21.00 | %
Bankruptcy threshold for Cytori |  | $ | 8,594,000 |  |  | $ | 5,842,000 |  |  | $ | 10,780,000 |
Probability of a change of control event for Cytori |  |  | 3.33 | % |  |  | 3.43 | % |  |  | 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 |  |  | 1.89 | % |  |  | 3.30 | % |  |  | 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 the 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, we estimate that the fair value of this guarantee is de minimis as of December 31, 2011. 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. In November 2007, we amended our License/Commercial Agreement with the Joint Venture to provide the continuance of our right to early commercialization on substantially the same terms after the three year term of the License and Royalty agreement. During the years ended December 31, 2011, 2010 and 2009, in connection with our sales of our Celution® 800/CRS System products to the European and Asia-Pacific reconstructive surgery market, we incurred approximately $166,000, $253,000 and $242,000, 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 statements of operations. During the fourth quarter of 2010, partial development was completed on the Joint Venture's Celution® System to be used for research purposes only. Although not yet available for commercial sale, the Joint Venture sold systems to Cytori (see product revenue and cost of product revenue below) are for use in an upcoming clinical trial. Deferred revenues, related party As of December 31, 2011, the deferred revenues, related party account primarily consists of the consideration we have received in exchange for contributions and obligations that we have agreed to on behalf of Olympus and the Joint Venture (less any amounts that we have recognized as revenues in accordance with our revenue recognition policies set out in note 2). These contributions include product development, regulatory approvals, and generally associated pre-clinical and clinical trials to support the commercialization of the Celution® System platform. Our obligations also include maintaining the exclusive and perpetual license to our device technology, including the Celution® System platform and certain related intellectual property. Condensed financial information for the Joint Venture A summary of the unaudited condensed financial information for the Joint Venture as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 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, 2011 |  |  | December 31, 2010 |
|  | (Unaudited) |  |  | (Unaudited) |
Balance Sheets |  |  |  |  |  |
Assets: |  |  |  |  |  |
Cash |  | $ | 69,000 |  |  | $ | 183,000 |
Amounts due from related party |  |  | 104,000 |  |  |  | 632,000 |
Prepaid insurance |  |  | 19,000 |  |  |  | 16,000 |
Computer equipment and software, net |  |  | 797,000 |  |  |  | 995,000 |
Total assets |  | $ | 989,000 |  |  | $ | 1,826,000 |
Liabilities and Stockholders' Equity: |  |  |  |  |  |  |  |
Accrued expenses |  | $ | 48,000 |  |  | $ | 77,000 |
Amounts due to related party |  |  | 95,000 |  |  |  | 509,000 |
Stockholders' equity |  |  | 846,000 |  |  |  | 1,240,000 |
Total liabilities and stockholders' equity |  | $ | 989,000 |  |  | $ | 1,826,000 |
|  | Years ended December 31, |
|  | 2011 |  |  | 2010 |  |  | 2009 |
Statements of Operations |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Product revenue |  | $ | 90,000 |  |  | $ | 458,000 |  |  | $ | - |
Cost of product revenue |  |  | 87,000 |  |  |  | 458,000 |  |  |  | - |
Gross profit |  |  | 3,000 |  |  |  | - |  |  |  | - |
Royalty revenue |  |  | 166,000 |  |  |  | 253,000 |  |  |  | 242,000 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | - |  |  |  | 14,000 |  |  |  | - |
General and administrative: |  |  |  |  |  |  |  |  |  |  |  |
Accounting and other corporate services |  |  | 164,000 |  |  |  | 88,000 |  |  |  | 75,000 |
Quality system services |  |  | 145,000 |  |  |  | 135,000 |  |  |  | 63,000 |
Depreciation expense for tooling equipment |  |  | 230,000 |  |  |  | 130,000 |  |  |  | - |
Other |  |  | 23,000 |  |  |  | 33,000 |  |  |  | 26,000 |
Operating expenses |  |  | 562,000 |  |  |  | 400,000 |  |  |  | 164,000 |
Operating income (loss) |  |  | (393,000 | ) |  |  | (147,000 | ) |  |  | 78,000 |
Other income (expense): |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  |  | - |  |  |  | 1,000 |  |  |  | 1,000 |
Net income (loss) |  | $ | (393,000 | ) |  | $ | (146,000 | ) |  | $ | 79,000 |
Reconciliation of net income (loss) to equity loss from investment in joint venture |  |  |  |  |  |  |  |  |  |  |  |
Net income (loss) |  | $ | (393,000 | ) |  | $ | (146,000 | ) |  | $ | 79,000 |
Intercompany eliminations |  |  | 25,000 |  |  |  | 156,000 |  |  |  | 167,000 |
Net loss after intercompany eliminations |  |  | (418,000 | ) |  |  | (302,000 | ) |  |  | (88,000 | )
Cytori's percentage of interest in joint venture |  |  | 50 | % |  |  | 50 | % |  |  | 50 | %
Cytori's equity loss from investment in joint venture |  | $ | (209,000 | ) |  | $ | (151,000 | ) |  | $ | (44,000 | )

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