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Transactions with Olympus Corporation | 12 Months Ended
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Dec. 31, 2012
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). As of December 31, 2012, Olympus holds approximately 6.09% (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, 2012, the carrying value of our investment in the Joint Venture is $85,000. 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 2012 and 2011. Put Option 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, 2012 and 2011, the fair value of the Put was $2,250,000 and $1,910,000, 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. Assumptions of Joint Venture fair value and its statistical correlation to Cytori's fair value are judgmental and require consideration of factors such as future product mix and sales opportunities, strategic initiatives, and directional expectations of both Olympus and Cytori. The following assumptions were employed in estimating the value of the Put:
|  | December 31, 2012 |  |  | December 31, 2011 |  |  | November 4, 2005 |
Expected volatility of Cytori |  |  | 79.40 | % |  |  | 76.07 | % |  |  | 63.20 | %
Expected volatility of the Joint Venture |  |  | 79.40 | % |  |  | 76.07 | % |  |  | 69.10 | %
Bankruptcy recovery rate for Cytori |  |  | 28.00 | % |  |  | 28.00 | % |  |  | 21.00 | %
Bankruptcy threshold for Cytori |  | $ | 12,622,000 |  |  | $ | 8,594,000 |  |  | $ | 10,780,000 |
Probability of a change of control event for Cytori |  |  | 1.54 | % |  |  | 3.33 | % |  |  | 3.04 | %
Expected correlation between fair values of Cytori and the Joint Venture in the future |  |  | 46.00 | % |  |  | 99.00 | % |  |  | 99.00 | %
Risk free interest rate |  |  | 1.78 | % |  |  | 1.89 | % |  |  | 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. Fluctuations in the fair value of the Put are impacted by unobservable inputs, most significantly the fair value of Cytori and the Joint Venture and the bankruptcy threshold for Cytori. Generally, a change in the assumption used for the fair value of Cytori is accompanied by a directionally opposite change in the fair value of the Put, whereas a change in assumption used for the bankruptcy threshold for Cytori is accompanied by a directionally similar change in the fair value of the Put. 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. 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, 2012, 2011 and 2010, in connection with our sales of our Celution® 800/CRS System products to the European and Asia-Pacific reconstructive surgery market, we incurred approximately $232,000, $166,000 and $253,000, 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) for use in the ATHENA clinical trial. Deferred revenues, related party As of December 31, 2012, 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 (Unaudited) A summary of the unaudited condensed financial information for the Joint Venture as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 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, 2012 |  |  | December 31, 2011 |
|  | (Unaudited) |  |  | (Unaudited) |
Balance Sheets |  |  |  |  |  |
Assets: |  |  |  |  |  |
Cash |  | $ | 64,000 |  |  | $ | 69,000 |
Amounts due from related party |  |  | 160,000 |  |  |  | 104,000 |
Prepaid insurance |  |  | - |  |  |  | 19,000 |
Computer equipment and software, net |  |  | 566,000 |  |  |  | 797,000 |
Total assets |  | $ | 790,000 |  |  | $ | 989,000 |
Liabilities and Stockholders' Equity: |  |  |  |  |  |  |  |
Accrued expenses |  | $ | 9,000 |  |  | $ | 48,000 |
Amounts due to related party |  |  | 9,000 |  |  |  | 95,000 |
Stockholders' equity |  |  | 772,000 |  |  |  | 846,000 |
Total liabilities and stockholders' equity |  | $ | 790,000 |  |  | $ | 989,000 |
|  | Years ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Statements of Operations |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Product revenue |  | $ | 972,000 |  |  | $ | 90,000 |  |  | $ | 458,000 |
Cost of product revenue |  |  | 892,000 |  |  |  | 87,000 |  |  |  | 458,000 |
Gross profit |  |  | 80,000 |  |  |  | 3,000 |  |  |  | — |
Royalty revenue |  |  | 232,000 |  |  |  | 166,000 |  |  |  | 253,000 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | — |  |  |  | — |  |  |  | 14,000 |
General and administrative: |  |  |  |  |  |  |  |  |  |  |  |
Accounting and other corporate services |  |  | 96,000 |  |  |  | 164,000 |  |  |  | 88,000 |
Regulatory and quality system services |  |  | 48,000 |  |  |  | 145,000 |  |  |  | 135,000 |
Depreciation expense for tooling equipment |  |  | 231,000 |  |  |  | 230,000 |  |  |  | 130,000 |
Other |  |  | 11,000 |  |  |  | 23,000 |  |  |  | 33,000 |
Operating expenses |  |  | 386,000 |  |  |  | 562,000 |  |  |  | 400,000 |
Operating loss |  |  | (74,000 | ) |  |  | (393,000 | ) |  |  | (147,000 | )
Other income (expense): |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  |  | — |  |  |  | — |  |  |  | 1,000 |
Net loss |  | $ | (74,000 | ) |  | $ | (393,000 | ) |  | $ | (146,000 | )
Reconciliation of net loss to equity loss from investment in joint venture |  |  |  |  |  |  |  |  |  |  |  |
Net loss |  | $ | (74,000 | ) |  | $ | (393,000 | ) |  | $ | (146,000 | )
Intercompany eliminations |  |  | 256,000 |  |  |  | 25,000 |  |  |  | 156,000 |
Net loss after intercompany eliminations |  |  | (330,000 | ) |  |  | (418,000 | ) |  |  | (302,000 | )
Cytori's percentage of interest in joint venture |  |  | 50 | % |  |  | 50 | % |  |  | 50 | %
Cytori's equity loss from investment in joint venture |  | $ | (165,000 | ) |  | $ | (209,000 | ) |  | $ | (151,000 | )

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- Definition The entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39691-107864 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39622-107864 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39549-107864 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 57 -Paragraph 1-4 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39603-107864 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 850 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6457730&loc=d3e39678-107864 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(k)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 04 -Paragraph b -Article 3A Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph k -Article 4 + Details
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