Item 1. Financial Statements
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015
1.
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Organization and Operations
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The Company
Cytori Therapeutics (NASDAQ: CYTX) develops cell therapies uniquely formulated and optimized for specific diseases and medical conditions with a primary focus on impaired hand function in scleroderma, in addition to our other pipeline areas, such as osteoarthritis of the knee, stress urinary incontinence, and full thickness thermal burns including those complicated by radiation exposure, and chronic heart failure.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and those of our subsidiaries. All significant intercompany transactions and balances have been eliminated.
We have five subsidiaries located in Japan, United Kingdom, Switzerland, India and Spain that have been established primarily to support our sales and marketing activities in these regions.
Certain Risks and Uncertainties
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.
Capital Availability
We incurred net losses of $18.7 million, $37.4 million and $26.2 million for the years ended December 31, 2015, 2014 and 2013, respectively. We have an accumulated deficit of $357.0 million as of December 31, 2015. Additionally, we have used net cash of $20.5 million, $30.3 million and $34.6 million to fund our operating activities for years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, we had $14.3 million of cash and had a Joint Venture purchase obligation of $1.8 million and our Loan and Security Agreement contains cash liquidity requirements to maintain at least $5 million of cash on hand to avoid an event of default. The combination of these facts and the balance of cash and cash equivalents at December 31, 2015 raises substantial doubt as to the Company’s ability to continue as a going concern.
To date, these operating losses have been funded primarily from outside sources of invested capital and gross profits. We have had, and we will likely continue to have, an ongoing need to raise additional cash from outside sources to fund our future operations. However, our ability to raise capital was adversely affected once FDA put a hold on our Athena trials in mid-2014, which had an adverse impact to stock price performance and our corresponding ability to restructure our debt. More recently, a continued downward trend in our stock price resulting from general economic and industry conditions as well as the market’s unfavorable view of our recent equity financings (which financings were priced at a discount to market and included 100% warrant coverage) and our Nasdaq listing deficiency, have made it more difficult to procure additional capital on terms reasonably acceptable to us. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. If we are unsuccessful in our efforts to raise outside capital in the near term, we will be required to significantly reduce our research, development, and administrative operations, including reduction of our employee base, in order to offset the lack of available funding.
We are pursuing financing opportunities in both the private and public debt and equity markets as well as through strategic corporate partnerships. We have an established history of raising capital through these platforms, and we are
60
currently involved in negotiations with multiple parties. Our efforts in 2014 to raise capital took longer than we initially anticipated. We expect to continue to utilize our cash and c
ash equivalents to fund operations at least through September of 2015, subject to minimum cash and cash liquidity requirements of the Loan and Security Agreement with the Lender, which requires that we maintain at least $5 million of cash on hand to avoid
an event of default under the Loan and Security Agreement. We continue to seek additional cash through product revenues, strategic collaborations, and future sales of equity or debt securities. Although there can be no assurance given, we hope to successfu
lly complete one or more additional financing transactions and corporate partnerships in the near-term. Without this additional capital, current working capital and cash generated from sales and containment of operating costs will not provide adequate fund
ing for research, sales and marketing efforts, clinical and preclinical trials, and product development activities at their current levels. If sufficient capital is not raised, we will at a minimum need to significantly reduce or curtail our research and d
evelopment and other operations, and this could negatively affect our ability to achieve corporate growth goals.
Specifically, we have prepared an operating plan that calls for us to reduce operations to focus almost entirely on one US clinical program and the supply of current products to existing or new distribution channels. In addition, as part of this plan, there would be minimal expenditures for ongoing scientific research, product development or clinical research. This impacts research and development headcount, external subcontractor expenditures, capital outlay and general and administrative expenditures related to the supervision of such activities. In parallel, we would significantly reduce administrative staff and salaries consistent with the overall reduction in scope of operations. In aggregate, such reductions could result in eliminations of roles for the majority of the Company’s current staff and the deferral or elimination of all ongoing development projects until such time that cash resources were available from operations or outside sources to re-establish development and growth plans. Management is currently reviewing contractual obligations related to the pre-clinical and clinical commitments along with minimum purchase requirements to include deferral of such commitments as part of this plan. While management is actively pursuing it’s near term financial and strategic alternatives it is also, in parallel, continuing to evaluate the timing of implementation of the alternative operating plan and the initiation of the identified reductions.
2.
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Summary of Significant Accounting Policies
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Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles 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. Actual results could differ from these estimates. Our most significant estimates and critical accounting policies involve recognizing revenue, estimating useful lives of long-lived assets, valuing warrants, determining the assumptions used in measuring share-based compensation expense and valuing allowances for doubtful accounts, and inventories.
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. There is no investment recorded as of December 31, 2015. Investments with original maturities of three months or less that were included with and classified as cash and cash equivalents totaled $14,338,000 and $8,144,000 as of December 31, 2015 and 2014, respectively. We maintain our cash at insured financial institutions.
Restricted Cash and Cash Equivalents
Restricted cash consists of cash and cash equivalents held in a letter of credit account pursuant to a lease agreement entered into on April 2, 2010 (amended November 4, 2011) for leasing of property at 3020 and 3030 Callan Road, San Diego, California. The lease agreement required us to execute a letter of credit for $350,000 naming the landlord as a beneficiary. It is required by the landlord that we maintain $350,000 as restricted cash for the duration of the lease, which expires October 31, 2017.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company periodically assesses the collectability of accounts receivable considering factors such as specific evaluation of collectability, historical
61
collection experienc
e, the age of accounts receivable and other currently available evidence of the collectability, and records an allowance for doubtful accounts for the estimated uncollectible amount. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote.
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.
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, if any, 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 is reviewed for impairment annually or more frequently when events or changes in circumstances indicate that fair value of the reporting unit has been reduced to less than its carrying value. We perform our impairment test annually during the fourth quarter. First the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after assessing qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If deemed necessary, a two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, there is an indication that goodwill may be impaired and the amount of the loss, if any, is measured by performing step two. Under step two, the impairment loss, if any, is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. We completed this assessment as of November 30, 2015, and concluded that no impairment existed.
Separable intangible assets that have finite useful lives continue to be amortized over their respective useful lives.
As part of the May 2013 acquisition of the Joint Venture (see Note 4), we acquired intangible assets which consisted primarily of contractual license rights that had previously enabled the Joint Venture to conduct development and manufacturing activities pertaining to certain aspects of Cytori’s Celution ® technology. The useful life of the identifiable intangible assets was estimated based on the assumed future economic benefit expected to be received from the assets. The technology was valued at $9,394,000 and is being amortized over a useful life of seven years, commensurate with the expected cash flows. We have amortized $397,000 and $166,000 as of December 31, 2015 and 2014, respectively. The estimated aggregate amortization expense will be $782,000 for 2016, $1,539,000 for 2017, $2,415,000 for 2018 and $3,864,000 thereafter.
62
The changes in the carrying amounts of other indefinite and finit
e-life intangible assets and goodwill for the years ended December 31, 2015 and 2014 are as follows:
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December 31, 2015
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Other intangibles, net:
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Beginning balance
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$
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9,415,000
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Increase
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13,000
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Amortization
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(397,000
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)
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Ending balance
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9,031,000
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Goodwill, net:
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Beginning balance
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3,922,000
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Increase (decrease)
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—
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Ending balance
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3,922,000
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Total goodwill and other intangibles, net
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$
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12,953,000
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December 31, 2014
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Other intangibles, net:
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Beginning balance
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$
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9,345,000
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Acquisition of JV Intangible
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255,000
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Amortization
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(185,000
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)
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Ending balance
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9,415,000
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Goodwill, net:
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Beginning balance
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3,922,000
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Increase (decrease)
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|
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—
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Ending balance
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3,922,000
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Total goodwill and other intangibles, net
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$
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13,337,000
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Warrant Liability
In connection with the October 2014
Securities Purchase Agreement, the Company issued common stock purchase warrants (the “October Warrants”) to certain institutional investors with certain exercise price reset features. Each warrant has an initial exercise price of $0.5771 per share, is exercisable six months and one day after the date of issuance and expires five years from the date on which it is initially exercisable. Pursuant to the second closing of the May 2015 Securities Purchase Agreement, the exercise price of these warrants was reset to $0.3263. The initial fair value of the liability associated with these warrants was $10.0 million and it decreased to $9.8 million as of December 31, 2014. The fair value of the October Warrants was $3.3 million as of December 17, 2015 on or before December 31, 2015 when these warrants were cashless exercised by all holders.
In
May 2015, the Company entered into a Securities Purchase Agreement with certain institutional investors pursuant to which the Company agreed to sell up to $25 million of units, with each unit consisting of one share of its common stock and one warrant to purchase one share of its common stock, in a registered direct offering. The May 2015 Securities Purchase Agreement contemplated two closings, the first of which occurred on May 8, 2015, the second of which occurred upon satisfaction of certain conditions precedent, including, but not limited to, receipt of required stockholder approval, on August 27, 2015. Each warrant issued at the initial closing (the “May 2015 Warrants”) has an initial exercise price of $1.02 per share, is exercisable six months and one day after the date of issuance and expires five years from the date on which it is initially exercisable. Each warrant issued at the second closing (the “August 2015 Warrants”) has an initial exercise price of $0.401 per share, and expires five years from the date of issuance. The initial fair value of the liability associated with the May 2015 Warrants was $14.3 million and it decreased to $5.0 million as of December 17, 2015, on or before such time these warrants were cashless exercised by all holders. The initial fair value of the liability associated with the August 2015 Warrants was $1.6 million, and it decreased to $1.5 million as of December 17, 2015, on or before such time these warrants were cashless exercised by all holders.
On December 17, 2015, the “Company” and the holders of October 2014 warrants agreed to amend the October 2014 Warrants pursuant to an Amendment to Common Stock Purchase Warrant (the “2014 Amendment”). Also on December 17, 2015, the Company and the holders of the May 2015 Warrants and the August 2015 Warrants (collectively the “2015 Warrants”) agreed to amend the 2015 Warrants pursuant to an Amendment to Series A-1
63
Warrant to Purchase Common Stock and Amendment to Series A-2 Warrant to Purchase Common Stock, respectively (the “2015 Amendment”
and, together with the 2014 Amendment, the “Warrant Amendments”). The Warrant Amendments provide that the holders may exercise their warrants on a “cashless exercise” basis in whole on or prior to December 31, 2015, whereby each exercising holder of the am
ended 2015 Warrants would receive 0.75 shares for each warrants share exercised and each exercising holder of the amended 2014 Warrants would 0.69 shares for each warrant share exercised. In addition, the Warrant Amendments removed certain provisions which
provided that the exercise price of the Warrants would be reset in the event of certain equity issuances by the Company for a price below the exercise price of the Warrants as of the time of such issuance. All 2014 Warrants and all 2015 Warrants were cash
less exercised on or before December 31, 2015.
The warrants were not traded in an active securities market and, as such, the estimated the fair value as of December 31, 2015 and December 31, 2014 was determined by using an option pricing model (Monte Carlo) with the following assumptions:
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As of
December 31, 2014
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October 2014 Warrants
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Expected term
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5.3 years
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Common stock market price
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$
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0.49
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Risk-free interest rate
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1.65
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%
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Expected volatility
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90.00
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%
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Resulting fair value (per warrant)
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$
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0.38
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Expected volatility was determined based on both historical and implied volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants while implied volatility was computed using publicly traded options of Cytori as well as Cytori’s peer companies. The expected life was based on the remaining contractual term of the warrants. The risk-free interest rate is the U.S. Treasury bond rate as of the valuation date. The fair value of these warrants also incorporated our assumptions about future equity issuances and their impact to the down-round protection feature.
Fluctuations in the fair value of the warrants were impacted by unobservable inputs, most significantly the assumption with regards to future equity issuances and its impact to the down-round protection feature. Significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement. The main drivers for the change in the fair value of warrants throughout 2015 were the issuance of new warrants, exercise of issued warrants and changes in our stock price.
Refer to Note 6 of the Notes to Consolidated Financial Statements for a discussion of the change in our Level 3 warrant liability value.
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 customers that have not developed a sufficient payment history with us or for whom a letter of credit is not in place at the time of the transaction, we defer revenues until collectability is reasonably assured.
For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. If the other revenue recognition criteria are met, 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 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 products. For sales where all revenue recognition criteria are not met, revenue is deferred and related inventory remains on our books.
64
For sales that include multiple deliverables, such as sales of our StemSource® Cell Bank (cell bank), we accoun
t for products or services (deliverables) separately rather than as a combined unit. Stem cell banks typically consist of a complex array of equipment, proprietary knowledge, license rights, and services, including one or more StemSource® devices, a cryog
enic freezer, measuring and monitoring equipment, and a database patient tracking system. In addition, we typically provide consulting, installation, and training services. Web hosting, technical support and maintenance services are generally provided for
a period of up to one year subsequent to the date of sale. FASB authoritative guidance requires an evaluation of these deliverables to determine the appropriate “units of accounting” for purposes of revenue recognition. Each cell bank is customized to p
rovide the best solution for the customer. Depending on customers’ needs, all or combination of the following units of accounting will apply to cell bank transactions:
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·
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initial consulting services;
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·
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license rights and standard operating procedures;
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·
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equipment and supplies;
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·
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database hosting services;
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·
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technical support services; and
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FASB authoritative guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence (“VSOE”); (b) third-party evidence (“TPE”); or (c) management estimates. This guidance requires arrangement consideration to be allocated at the inception of the arrangement to all deliverables using the relative selling price method. For our cell bank sales, we establish relative selling prices for all deliverables based on vendor-specific quotes for comparable services when available. In the absence of VSOE, we use competitors’ products or services considered largely interchangeable with our own or management’s best estimate. Revenue allocated to each unit of accounting is calculated and recognized based on the relative selling price of each deliverable. Future services such as web hosting and ongoing maintenance are deferred and recognized into income as the services are provided, generally over one year following the installation of the equipment.
Concentration of Significant Customers & Geographical Sales
For the year ended December 31, 2015, our sales were concentrated with respect to one distributor and four direct customers, which comprised 63% of our product revenue recognized. Two direct customers accounted for 73% of total outstanding accounts receivable (excluding receivables from Biomedical Advanced Research and Development Authority (BARDA)) as of December 31, 2015.
For the year ended December 31, 2014, our sales were concentrated with respect to three distributors and one direct customer, which comprised 52% of our product revenue recognized. Three distributors accounted for 92% of total outstanding accounts receivable (excluding receivables from BARDA) as of December 31, 2014.
For the year ended December 31, 2013, our sales were concentrated with respect to one distributor, which comprised 26% of our product revenue recognized. Two distributors and one direct customer accounted for 55% of total outstanding accounts receivable as of December 31, 2013.
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Product revenues, classified by geographic location, are as follows:
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Years ended
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2015
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|
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2014
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2013
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|
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Product Revenues
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% of Total
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|
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Product Revenues
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% of Total
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|
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Product Revenues
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|
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% of Total
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|
Americas
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|
$
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982,000
|
|
|
|
20
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%
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|
$
|
1,224,000
|
|
|
|
25
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%
|
|
$
|
1,152,000
|
|
|
|
16
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%
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Japan
|
|
|
2,394,000
|
|
|
|
50
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%
|
|
|
3,068,000
|
|
|
|
62
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%
|
|
|
1,450,000
|
|
|
|
21
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%
|
Europe
|
|
|
675,000
|
|
|
|
14
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%
|
|
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649,000
|
|
|
|
13
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%
|
|
|
1,948,000
|
|
|
|
27
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%
|
Asia Pacific
|
|
|
787,000
|
|
|
|
16
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%
|
|
|
12,000
|
|
|
|
0
|
%
|
|
|
2,572,000
|
|
|
|
36
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%
|
Total product revenues
|
|
$
|
4,838,000
|
|
|
|
100
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%
|
|
$
|
4,953,000
|
|
|
|
100
|
%
|
|
$
|
7,122,000
|
|
|
|
100
|
%
|
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 U.S. Department of Health and Human Service’s BARDA. Revenue earned under development agreements with commercial enterprises is classified as development revenues. Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with government contracts are recorded as government contract and other within development revenues. Government contract revenue is recorded at the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in our consolidated statements of operations.
In the third quarter of 2012, we were awarded a contract to develop a new countermeasure for thermal burns valued at up to $106 million with BARDA. The initial base period included $4.7 million tranche over two years and covered preclinical research and continued development of Cytori’s Celution® system to improve cell processing. The additional contract options, if fully executed, cover clinical development through FDA approval under a device-based PMA regulatory pathway. In August 2014, BARDA exercised Option 1 of the contract for Cytori to perform research, regulatory, clinical and other tasks required for initiation of a pilot clinical trial of the Celution System in thermal burn injury for a total cost-plus fixed fee of up to $12.1 million. In December 2014, we executed an amendment to the August 2014 contract option to fund continued investigation and development of Cytori Cell Therapy (DCCT-10) for use in thermal burn injuries, which increased the option extension to $14.1 million. Upon IDE approval by the FDA, we anticipate BARDA will increase funding to cover costs associated with execution of the clinical trial, currently estimated at approximately $8.3 million, and bringing the combined value of the first option to up to $22.4 million. This is a cost reimbursement contract, and related government contract revenue was recorded at the gross amount of reimbursement starting in the fourth quarter of 2012.
Refer to Note 8 for discussion about our arrangement with Senko.
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 the government reimbursement contract.
$6,345,000, $2,461,000, and $3,053,000 qualified expenses were incurred for the years ended December 31, 2015, 2014 and 2013, related to our government contract with BARDA.
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 using the effective interest method. If the maturity of the debt is accelerated because of default or early debt repayment, then the amortization would be accelerated.
66
Income T
axes
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 losses, a full valuation allowance has been recognized against our deferred tax assets.
Stock Based Compensation
We recognize the fair value of all share-based payment awards in our statements of operations over the requisite vesting period of each award and over the period during which the employee and non-employee director is required to provide service in exchange for the 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 approximate the expected term.
Segment Information
For the years ended December 31, 2015, 2014 and 2013, all of our financial results relate to cell therapy, therefore we report our results as a single segment.
Loss Per Share
Basic per share data is computed by dividing net income or loss allocable 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 allocable to common stockholders by the weighted average number of common shares outstanding 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, warrants, employee stock purchase plans, and restricted stock awards for all periods presented.
We have excluded all potentially dilutive securities, including unvested performance-based restricted stock and warrants, from the calculation of diluted loss per share allocable to common stockholders for the years ended December 31, 2015, 2014 and 2013, as their inclusion would be antidilutive. Potentially dilutive common shares excluded from the calculations of diluted loss per share were 12.3 million, 43.7 million and 17.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or the FASB, or other standard setting bodies that the Company adopts as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial condition or results of operations upon adoption.
In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
(Topic 606). The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated fin
ancial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest
(Subtopic 835-30). The standard requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct
67
deduction
from the debt liability. The effective date of ASU 2015-03 is for reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of ASU 2015-03 on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory – Simplifying the Measurement of Inventory
(Topic 330). The standard requires companies to measure inventory (excluding inventory measured using LIFO and retail inventory methods) at the lower of cost or net realizable value. The effective date of ASU 2015-11 is for reporting periods beginning after December 15, 2016. There is not expected to be a material impact of ASU 2015-11 on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes
(Topic 740):
Balance Sheet Classification of Deferred Taxes,
to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The effective date of ASU 2015-17 is for reporting periods beginning after December 15, 2016. The ASU 2015-17 has been early adopted on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). The new topic supersedes Topic 840,
Leases
, and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. The effective date of ASU 2016-02 is for reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.
3.
|
Agreement with Lorem Vascular
|
On October 29, 2013, we entered into an agreement with Lorem Vascular to commercialize Cytori Cell Therapy (OICH-D3) for the cardiovascular, renal and diabetes markets, in China, Hong Kong, Malaysia, Singapore and Australia (License/Supply Agreement), and a Common Stock Purchase Agreement. On January 30, 2014 we entered into the Amended and Restated License/Supply Agreement with Lorem Vascular (the “Restated Agreement”) which restated the License/Supply Agreement in its entirety and expanded the licensed field to all uses excepting alopecia (hair loss). Under the Restated Agreement, Lorem Vascular committed to pay up to $500 million in license fees in the form of revenue milestones. In addition, Lorem Vascular is required to pay us 30% of their gross profits in China, Hong Kong and Malaysia for the term of the agreement. In addition, Lorem Vascular has agreed to purchase the Cytori Celution® System and consumables under the Restated Agreement. Pursuant to the related Common Stock Purchase Agreement, Cytori sold Lorem Vascular 8.0 million shares of Cytori common stock at $3.00 per share for a total of $24.0 million. The equity purchased was closed in two equal installments, in November 2013 and January 2014.
Lorem Vascular initially purchased approximately $1.8 million in Celution® devices and consumables in December 2013. In addition to this purchase, upon achieving regulatory clearance from the Chinese Food and Drug Administration (“CFDA”), Cytori’s license agreement with Lorem Vascular obligates Lorem Vascular to purchase an opening order of 23 Celution Systems and 1,100 Celution Consumable Sets. Class I regulatory clearance was granted in April 2015. As of December 31, 2015, Lorem Vascular has partially satisfied this purchase order.
4.
|
Transactions with Olympus Corporation
|
Acquisition of Olympus’ Interest in the Joint Venture
On May 8, 2013, Cytori and Olympus agreed to terminate a Joint Venture pursuant to a Termination Agreement, and Cytori acquired the remaining 50% equity interest in the Joint Venture from Olympus. For valuation purposes, Cytori determined the acquisition date (the date on which Cytori effectively gained full control of the equity interest previously held by Olympus) to be May 27, 2013. The remeasurement of the previously held equity interest at the acquisition date resulted in a net gain of $4,892,000 that was recorded in the accompanying Consolidated Statements of Operations.
The fair value of the Joint Venture, including the identified intangible assets acquired, consideration transferred, and Cytori’s previously held equity interest, was estimated from a market participant perspective, using valuation techniques based on the income approach for measuring fair value. Specifically, an excess earnings methodology was employed using primarily Level 3 fair value inputs. The intangible assets acquired consisted primarily of contractual license rights that had previously enabled the Joint Venture to conduct development and manufacturing activities
68
pertaining to certain aspects of Cytori’s Celution ® technology. The useful life of the identifiable intangible
assets was estimated based on the assumed future economic benefit expected to be received from the assets. Inputs used in the valuation included various market participant assumptions in order to project potential future cash flows, discounted at a rate c
ommensurate with the risk involved.
|
|
Useful Life
(in years)
|
|
|
Estimated
Fair Value
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Developed technology
|
|
|
7
|
|
|
$
|
9,394,000
|
|
The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
|
|
Estimated
Fair Value
|
|
Current assets
|
|
$
|
236
|
|
Property and equipment
|
|
|
260
|
|
Intangible assets
|
|
|
9,394
|
|
Total assets acquired
|
|
|
9,890
|
|
Accrued and other current liabilities
|
|
|
(33
|
)
|
Total fair value of the Joint Venture
|
|
$
|
9,857
|
|
Acquisition-related transaction costs are not included as components of consideration transferred but have been accounted for as expenses in the period in which the costs are incurred.
The Company calculated the fair value of the purchase consideration on the acquisition date to be $4,928,000. This was determined using a weighted probability assessment of the payment options available to Cytori. Present value risk-adjusted discount rates applied to the purchase consideration ranged from 9.75% to 12.75%. The fair value calculation of the purchase consideration resulted in a discount of $1,072,000, which was being amortized to interest expense over a weighted average expected term of 1.8 years. On a quarterly basis, the Company reassesses the probabilities of the various payment options and expected term. Changes in the expected term and the remaining discount amount as a result of the reassessment will be recognized prospectively as an adjustment to interest expense. Upon final settlement of the purchase obligation, any difference between the amount paid and the carrying amount of the purchase obligation will be recorded as a gain or loss on extinguishment of the liability.
On April 30, 2015, the Company entered into Amendment One to the Joint Venture Termination Agreement (the “Amendment”) with Olympus Corporation (“Olympus”) to that certain Joint Venture Termination Agreement, dated May 8, 2013, by and between the Company and Olympus (the “Agreement”) in order to extend our payment obligations under the Agreement.
Under the original Agreement, we were required to pay Olympus a total purchase price of $6 million within two years of the date of the Agreement. The Amendment amends the payment terms of the Agreement to extend the period for payment of the remaining balance of the $6 million, or $3.2 million, with the balance of the purchase price bearing an interest rate of 6% per annum. Pursuant to the Amendment, we paid $1 million on May 8, 2015 and $0.5 million on September 30, 2015 and paid $0.5 million in early January 2016, and expect to pay $0.5 million of principal on or prior to March 31, 2016, and the remaining $0.7 million of principal and accrued interest on or prior to May 8, 2016. We may prepay the remaining principal and accrued interest at any time without penalty.
In accordance with the terms of the Agreement, if we fail to pay the full balance of any installment payment, we will be required to pay Olympus the extended purchase price of a total of $16 million on or prior to March 1, 2020, with any principal payments previously paid applied towards the extended purchase price.
5.
|
Sale and Exclusive License/Supply Agreement with Bimini Technologies
|
On July 30, 2013, we entered into a Sale and Exclusive License/Supply Agreement with Bimini Technologies LLC (“Bimini”), pursuant to which we sold to Bimini substantially all of the assets (other than certain retained rights and licenses) of our Puregraft® product line, a series of standalone fat transplantation products that were developed to
69
improve the predictability of outcomes for autologous fat grafting and aesthetic body contouring. The aggre
gate value of the consideration paid by Bimini at the execution of the agreement was $5.0 million.
The Company recorded a gain on the Puregraft divestiture of $4.5 million in the accompanying Consolidated Statements of Operations in 2013. Bimini is obligated to make certain additional milestone payments to the Company (in an aggregate amount of up to $10.0 million), contingent upon the achievement of certain milestones relating to Bimini’s gross profits from sales of the Puregraft products.
6.
|
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.
|
As of December 31, 2015, the Company did not have any assets or liabilities measured at fair value. The following table provides a summary of the recognized assets and liabilities that we measure at fair value on a recurring basis as of December 31, 2014:
|
|
Balance as of
|
|
|
Basis of Fair Value Measurements
|
|
|
|
December 31, 2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
8,144,000
|
|
|
$
|
8,144,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
9,793,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,793,000
|
|
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.
Warrants with exercise price reset features (down-round protection) are accounted for as liabilities, with changes in the fair value included in net loss for the respective periods. Because some of the inputs to our valuation model are either not observable or are not derived principally from or corroborated by observable market data by correlation or other means, the warrant liability is classified as Level 3 in the fair value hierarchy.
The following table summarizes the change in our Level 3 warrant liability value:
Warrant liability
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Beginning balance
|
|
$
|
9,793,000
|
|
|
$
|
—
|
|
Additions to warrant liability
|
|
|
15,979,000
|
|
|
|
10,162,000
|
|
Exercised warrants
|
|
|
(18,104,000
|
)
|
|
|
—
|
|
Change in fair value
|
|
|
(7,668,000
|
)
|
|
|
(369,000
|
)
|
Ending balance
|
|
$
|
—
|
|
|
$
|
9,793,000
|
|
70
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, 2015 and 2014 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 the debt.
At December 31, 2015 and 2014, the aggregate fair value and the carrying value of the Company’s fixed rate long-term debt were as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
Fixed rate long-term debt
|
|
$
|
16,844,000
|
|
|
$
|
16,681,000
|
|
|
$
|
25,206,000
|
|
|
$
|
25,373,000
|
|
The fair value of debt is classified as Level 3 in the fair value hierarchy as some of the inputs, primarily the effective interest rate, 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.
Carrying value is net of debt discount of $2,108,000 and $1,459,000 as of December 31, 2015 and 2014, respectively. The amortization of deferred financing cost and debt discount totaled $979,000, $1,220,000 and $893,000 for the years ended December 31, 2015, 2014, and 2013, 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.
8.
|
Thin Film Japan Distribution Agreement
|
In 2004, the Company 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 Ministry of Health, Labor and Welfare (MHLW) and commercialization of the Thin Film product line in Japan.
In February 2013, we entered into a mutual termination and release agreement with Senko, whereby the Distribution Agreement and all Senko rights, licenses and privileges granted under the Distribution Agreement terminated and reverted to the Company. As a result of this Termination Agreement, we were obligated to pay Senko $1,200,000 in six quarterly installment payments of $200,000 each through May 2014. At the time of the Termination Agreement, we had a balance of $2,379,000 in deferred revenues on our balance sheet relating to the payments received from Senko in the past pursuant to the Distribution Agreement. At the time of the Termination Agreement we accrued $1,200,000 of the termination fee, and recognized the remaining $1,179,000 in development revenues which reflects the Company’s efforts towards commercialization under the agreement. As of December 31, 2014, we have no remaining termination fee obligation.
71
9.
|
Composition of Certain Financial Statement Captions
|
Inventories, net
As of December 31, 2015 and 2014, inventories, net, were comprised of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Raw materials
|
|
$
|
1,009,000
|
|
|
$
|
1,715,000
|
|
Work in process
|
|
|
816,000
|
|
|
|
1,301,000
|
|
Finished goods
|
|
|
2,473,000
|
|
|
|
1,813,000
|
|
|
|
$
|
4,298,000
|
|
|
$
|
4,829,000
|
|
Other Current Assets
As of December 31, 2015 and 2014, other current assets were comprised of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Prepaid insurance
|
|
$
|
300,000
|
|
|
$
|
200,000
|
|
Prepaid supplies and other, current
|
|
|
995,000
|
|
|
|
675,000
|
|
Other receivables
|
|
|
260,000
|
|
|
|
117,000
|
|
|
|
$
|
1,555,000
|
|
|
$
|
992,000
|
|
Property and Equipment, net
As of December 31, 2015 and 2014, property and equipment, net, were comprised of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Manufacturing and development equipment
|
|
$
|
5,464,000
|
|
|
$
|
5,674,000
|
|
Office and computer equipment
|
|
|
1,939,000
|
|
|
|
2,006,000
|
|
Leasehold improvements
|
|
|
3,391,000
|
|
|
|
3,271,000
|
|
|
|
|
10,794,000
|
|
|
|
10,951,000
|
|
Less accumulated depreciation and amortization
|
|
|
(9,163,000
|
)
|
|
|
(9,368,000
|
)
|
|
|
$
|
1,631,000
|
|
|
$
|
1,583,000
|
|
Depreciation and amortization expenses totaled $696,000, $594,000 and $1,581,000 for the years ended December 31, 2015, 2014, and 2013, respectively.
Other Assets
As of December 31, 2015 and 2014, other assets were comprised of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deposits
|
|
$
|
525,000
|
|
|
$
|
540,000
|
|
Prepaid supplies, long-term
|
|
|
996,000
|
|
|
|
1,223,000
|
|
|
|
$
|
1,521,000
|
|
|
$
|
1,763,000
|
|
72
Accounts Payable and Accrued Expenses
As of December 31, 2015 and 2014, accounts payable and accrued expenses were comprised of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accrued legal fees
|
|
$
|
372,000
|
|
|
$
|
544,000
|
|
Accrued R&D studies
|
|
|
1,117,000
|
|
|
|
273,000
|
|
Accounts payable
|
|
|
1,009,000
|
|
|
|
949,000
|
|
Accrued vacation
|
|
|
573,000
|
|
|
|
577,000
|
|
Accrued payroll and bonus
|
|
|
1,058,000
|
|
|
|
876,000
|
|
Accrued expenses
|
|
|
2,022,000
|
|
|
|
2,006,000
|
|
Deferred rent
|
|
|
221,000
|
|
|
|
191,000
|
|
Accrued accounting fees
|
|
|
315,000
|
|
|
|
130,000
|
|
|
|
$
|
6,687,000
|
|
|
$
|
5,546,000
|
|
10.
|
Commitments and Contingencies
|
We have contractual obligations to make payments on leases of office and manufacturing space as follows:
Years Ending December 31,
|
|
Operating
Leases
|
|
2016
|
|
$
|
2,240,000
|
|
2017
|
|
|
1,789,000
|
|
2018
|
|
|
53,000
|
|
2019
|
|
|
27,000
|
|
Total
|
|
$
|
4,109,000
|
|
Rent expense, which includes common area maintenance, for the years ended December 31, 2015, 2014 and 2013 was $2,455,000, $3,332,000 and $3,458,000, respectively.
We have entered into minimum purchase agreement with Roche Diagnostics Corporation, and the obligations to make payments on products as follows:
Years Ending December 31,
|
|
Minimum
Purchase
Obligation
|
|
2016
|
|
$
|
1,069,000
|
|
2017
|
|
|
1,074,000
|
|
2018
|
|
|
1,074,000
|
|
2019
|
|
|
1,473,000
|
|
2020
|
|
|
1,473,000
|
|
Total
|
|
$
|
6,163,000
|
|
We have entered into agreements with various research organizations for 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 clinical studies in progress. As of December 31, 2015, we have clinical research study obligations of $6,739,000, $6,243,000 of which are expected to be complete within a year. Should the timing of the clinical trials change, the timing of the payment of these obligations would also change.
73
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, neg
otiations 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 11 for a discussion of our commitments and contingencies related to our long-term obligations.
11.
|
Long-term Obligations
|
On June 28, 2013 we entered into a Loan and Security Agreement (the “2013 Loan Agreement”) with Oxford Finance LLC and Silicon Valley Bank (together, the Lenders), pursuant to which the Lenders funded an aggregate principal amount of $27.0 million (Term Loan), subject to the terms and conditions set forth in the 2013 Loan Agreement. The Term Loan accrues interest at a fixed rate of 9.75% per annum. Pursuant to the 2013 Loan Agreement, we are required to make interest only payments through July 1, 2014 and thereafter we are required to make payments of principal and accrued interest in equal monthly installments sufficient to amortize the Term Loan through July 1, 2017, the maturity date. At maturity of the Term Loan, or the earlier repayment in full following a voluntary prepayment or upon acceleration, the Company is required to make a final payment fee in an aggregate amount equal to $1,795,000. In connection with the Term Loan, on June 28, 2013, we issued to the Lenders warrants to purchase up to an aggregate of 596,553 shares of our common stock at an exercise price of $2.26 per share. These warrants are immediately exercisable and will expire on June 28, 2020.
In connection with the funding of the 2013 Loan Agreement, we prepaid all outstanding amounts under the prior loan agreement, at which time the Company’s obligations under the prior loan agreement immediately terminated. The Company paid to the prior agent and the prior lenders approximately $18,866,000, consisting of the then outstanding principal balance due of approximately $17,325,000, accrued but unpaid interest of approximately $119,000, a final payment fee (net of fees waived or refunded by the Lenders under the new loan agreement) of approximately $1,078,000, a prepayment fee (net of fees waived or refunded by the Lenders under the new loan agreement) of approximately $312,000 and other customary lender fees and expenses.
The net proceeds of the Term Loan, after payment of lender fees and expenses and prepaying all the outstanding amounts relating to the prior loan agreement, were approximately $7.8 million.
For the continuing Lenders, we accounted for this amendment as a debt modification. Accordingly, related fees of $1,942,000 were recorded as debt discount from the prior loan, and along with the unamortized debt discount will be amortized as an adjustment of interest expense using the effective interest method. For one existing lender that did not participate in the Term Loan, the payoff of their loan was accounted for as debt extinguishment. Accordingly, a loss on debt extinguishment of $708,000 was recorded, which includes that lender’s portion of unamortized fees and discounts along with prepayment and final payment fees.
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 warrants issued to the Lenders was calculated utilizing the Black-Scholes option pricing model. We are amortizing the resulting additional discount of $949,000 to interest expense over the term of the loan using the effective interest method. The overall effective interest rate for the Term Loan is 13.86%. The Term Loan is collateralized by the tangible assets of the company, including a security interest in substantially all of its existing and after-acquired assets.
On September 19, 2014, we entered into a Letter Agreement with the Lenders pursuant to which the Lenders waived financial covenant compliance pursuant to the 2013 Loan Agreement through October 31, 2014. The 2013 Loan Agreement requires the Company to maintain certain minimum cash balances at all times during the term of the 2013 Loan Agreement. In exchange for the above waiver, the Company agreed to re-price all 596,553 outstanding warrants issued by the Company to Oxford Finance LLC and Silicon Valley Bank pursuant to the 2013 Loan Agreement, with an exercise price per share equal to the lower of (i) the closing price per share of the Company’s common stock on September 30, 2014, or (ii) the average closing price per share of the Company’s common stock for October 1, 2 and 3, 2014.
74
On September 29, 2014 we entered into a 2
nd
Amendment to the 2013 Loan Agreement with the Len
ders Pursuant to the amended 2013 Loan Agreement, and we were provided a conditional waiver of principal payments subject to meeting certain capital raise requirements, which we achieved in October. The waiver of principal payments continued through April
1, 2015 and we were then required to make payments of principal and accrued interest in equal monthly installments sufficient to amortize the Term Loan through the maturity date.
On May 29, 2015, we entered into the Loan and Security Agreement (“Loan Agreement”) with Oxford Finance LLC (“Oxford” or “Lender”), pursuant to which the Lender funded an aggregate principal amount of $17.7 million (“Term Loan”), subject to the terms and conditions set forth in the loan agreement. The Term Loan accrues interest at a floating rate of 8.95% per annum, comprised of three-month LIBOR rate with a floor of 1.00% plus 7.95%. Pursuant to the Loan Agreement, we are required to make interest only payments through June 1, 2016 and thereafter we are required to make payments of principal and accrued interest in equal monthly installments sufficient to amortize the Term loan through June 1, 2019, the maturity date. On February 23, 2016, Cytori received an acknowledgement and agreement from Oxford related to the positive data on Cytori US ACT-OA clinical trial. As a result, pursuant to the Loan Agreement, the period for which the Company is required to make interest-only payment was extended from July 1, 2016 to January 1, 2017. All unpaid principal and interest with respect to the Term Loan is due and payable in full on June 1, 2019. At maturity of the Term Loan, or earlier repayment in full following voluntary prepayment or upon acceleration, the Company is required to make a final payment fee in an aggregate amount equal to approximately $1.1 million. In connection with the Term Loan, on May 29, 2015, we issued to the Lender warrants to purchase an aggregate of 1,416,618 shares of our common stock at an exercise price of $0.69 per share. These warrants are exercisable on or after November 30, 2015 and will expire on May 29, 2025 and, following the authoritative accounting guidance, are equity classified.
In connection with the Loan Agreement, we prepaid all outstanding amounts under our prior loan agreement with Oxford and Silicon Valley Bank, at which time the Company’s obligations under the prior loan agreement immediately terminated. The Company paid to the prior agent and the prior lenders (Oxford and Silicon Valley Bank) approximately $25.4 million, consisting of the then outstanding principal balance due of approximately $23.4 million, accrued but unpaid interest of approximately $0.2 million, final payment and other agency fees of approximately $1.8 million and other customary lender fees and expenses.
For Oxford, we accounted for this Term Loan as a debt modification. The Company retired $3.1 million of the principal of the previous loan and the corresponding unamortized fees were expensed. The remaining fees of $0.8 million were recorded as debt discount, and along with the new loan fees, will be amortized as an adjustment of interest expense using the effective interest method. For Silicon Valley Bank, which did not participate in the Term Loan, the payoff of the loan was accounted for as debt extinguishment. Accordingly, a total loss on debt extinguishment of $0.3 million was recorded, which includes the unamortized fees and discounts along with final payment fees.
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 warrants issued to the Lender was calculated utilizing the Black-Scholes option pricing model. The Black-Scholes option-pricing model incorporates various and highly sensitive assumptions including expected volatility, expected term and risk-free interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period. The risk-free interest rate for period within the contractual life of the warrant is based on the U.S. Treasury yield in effect at the time of grant. We will amortize the relative fair value of the warrants as a discount of $0.8 million over the term of the loan using the effective interest method, with an effective interest rate of 14.95%. The Term Loan is collateralized by a security interest in substantially all of the Company’s existing and after-acquired assets, subject to certain exceptions set forth in the Loan Agreement and excluding its intellectual property assets, which are subject to a negative pledge.
Additional details relating to the outstanding Term Loan as of December 31, 2015 and 2014 are presented in the following table:
Year ended December 31, 2015
Origination Date
|
|
Original Loan Amount
|
|
|
Interest
Rate**
|
|
|
Current
Monthly
Payment*
|
|
|
Original Term
|
|
Remaining
Principal
(Face Value)
|
|
May 2015
|
|
$
|
17,700,000
|
|
|
|
8.95
|
%
|
|
$
|
136,413
|
|
|
48 Months
|
|
$
|
17,700,000
|
|
75
Year ended December 31, 2014
Origination Date
|
|
Original Loan Amount
|
|
|
Interest
Rate
|
|
|
Current
Monthly
Payment*
|
|
|
Original Term
|
|
Remaining
Principal
(Face Value)
|
|
June 2013
|
|
$
|
27,000,000
|
|
|
|
9.75
|
%
|
|
$
|
203,434
|
|
|
48 Months
|
|
$
|
25,038,125
|
|
*
Current monthly payment is inclusive of interest only
**
3 month LIBOR rat
e with a floor of 1% plus 7.95%
As of December 31, 2015, the future contractual principal and final fee payments on all of our debt and capital lease obligations are as follows:
Years Ending December 31,
|
|
|
|
|
2016
|
|
$
|
—
|
|
2017
|
|
|
7,080,000
|
|
2018
|
|
|
7,080,000
|
|
2019
|
|
|
4,629,000
|
|
Total
|
|
$
|
18,789,000
|
|
Reconciliation of Face Value to Book Value as of December 31, 2015
|
|
|
|
|
Total debt and lease obligations, including final payment fee (Face Value)
|
|
$
|
18,789,000
|
|
Less: Debt discount
|
|
|
(2,108,000
|
)
|
Long-term obligation
|
|
$
|
16,681,000
|
|
Our interest expense for the years ended December 31, 2015, 2014 and 2013 was $3,379,000, $4,371,000 and $3,396,000, respectively. Interest expense is calculated using the effective interest method, therefore it is inclusive of non-cash amortization in the amount of $979,000, $1,220,000 and $893,000, respectively, related to the amortization of the debt discount and capitalized loan fees.
Due to our net losses for the years ended December 31, 2015, 2014 and 2013, 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, 2015, 2014 and 2013.
76
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, 2015, 2014 and 2013 is as follows:
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income tax expense (benefit) at federal statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
Income tax expense (benefit) at state statutory rate
|
|
|
(4.40
|
)%
|
|
|
(3.52
|
)%
|
|
|
(3.54
|
)%
|
Gain on previously held equity interest in joint venture
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
(7.02
|
)%
|
Mark to market permanent adjustment
|
|
|
(13.91
|
)%
|
|
|
(0.37
|
)%
|
|
|
(2.15
|
)%
|
Change in valuation allowance
|
|
|
(7.45
|
)%
|
|
|
27.12
|
%
|
|
|
80.13
|
%
|
Change in state rate
|
|
|
(0.09
|
)%
|
|
|
0.02
|
%
|
|
|
(1.01
|
)%
|
Permanent interest adjustments
|
|
|
6.25
|
%
|
|
|
4.17
|
%
|
|
|
0.00
|
%
|
Stock compensation
|
|
|
20.43
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Transfer pricing
|
|
|
18.49
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Debt refinance permanent adjustment
|
|
|
0.00
|
%
|
|
|
3.92
|
%
|
|
|
0.00
|
%
|
Acquired NOL’s/Intangibles from joint venture
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
(33.40
|
)%
|
Research credit
|
|
|
(2.37
|
)%
|
|
|
(0.74
|
)%
|
|
|
(3.75
|
)%
|
Foreign rate differential
|
|
|
0.69
|
%
|
|
|
0.00
|
%
|
|
|
2.48
|
%
|
NOLs expiring and adjustments to NOL
|
|
|
13.92
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Other, net
|
|
|
2.44
|
%
|
|
|
3.40
|
%
|
|
|
2.26
|
%
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities as of December 31, 2015 and 2014 are as follows:
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowances and reserves
|
|
$
|
673,000
|
|
|
$
|
825,000
|
|
Accrued expenses
|
|
|
951,000
|
|
|
|
502,000
|
|
Deferred revenue and gain-on-sale
|
|
|
39,000
|
|
|
|
32,000
|
|
Stock based compensation
|
|
|
4,547,000
|
|
|
|
7,786,000
|
|
Net operating loss carryforwards
|
|
|
119,000,000
|
|
|
|
117,258,000
|
|
Income tax credit carryforwards
|
|
|
7,437,000
|
|
|
|
6,993,000
|
|
Property and equipment, principally due to differences in depreciation
|
|
|
683,000
|
|
|
|
926,000
|
|
Other,net
|
|
|
16,000
|
|
|
|
77,000
|
|
|
|
|
133,346,000
|
|
|
|
134,399,000
|
|
Valuation allowance
|
|
|
(131,187,000
|
)
|
|
|
(132,583,000
|
)
|
Total deferred tax assets, net of allowance
|
|
|
2,159,000
|
|
|
|
1,816,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(2,159,000
|
)
|
|
|
(1,816,000
|
)
|
Total deferred tax liability
|
|
|
(2,159,000
|
)
|
|
|
(1,816,000
|
)
|
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 full valuation allowance of $131,187,000 as of December 31, 2015 as we do not believe it is more likely than not our net deferred tax assets will be realized. We decreased our valuation allowance by approximately $1,396,000 during the year ended December 31, 2015.
At December 31, 2015, we had federal, and California tax loss carry forwards of approximately $323,938,000, and $166,612,000, respectively, prior to reduction for windfall tax benefits. The federal and state net operating loss carry forwards begin to expire in 2019 and 2016
respectively, if unused. At December 31, 2015, we had federal and state tax credit carry forwards of approximately $4,618,000 and $4,271,000, respectively, after reduction for uncertain tax
77
positions. The Company has not performed a formal research and development credit study with respect to these credits. The federal credits will begin to expire in 201
8, if unused, and the state credits carry forward indefinitely.
Pursuant to the Internal Revenue Code (“IRC”) of 1986, as amended, specifically IRC §382 and IRC §383, our ability to use net operating loss and R&D tax credit carry forwards (“tax attribute carry forwards”) to offset future taxable income is limited if we experience a cumulative change in ownership of more than 50% within a three-year testing period. We have not completed an ownership change analysis pursuant to IRC Section 382 for taxable years ended after December 31, 2007. If ownership changes within the meaning of IRC Section 382 are identified as having occurred subsequent to 2007, the amount of remaining tax attribute carry forwards available to offset future taxable income and income tax expense in future years may be significantly restricted or eliminated. Further, our deferred tax assets associated with such tax attributes could be significantly reduced upon realization of an ownership change within the meaning of IRC §382.
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 carry forwards resulting from windfall tax benefits. At December 31, 2015, deferred tax assets do not include $1,265,000 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, 2015, 2014 and 2013:
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Unrecognized Tax Benefits – Beginning
|
|
$
|
1,852,000
|
|
|
$
|
1,723,000
|
|
|
$
|
1,394,000
|
|
Gross increases – tax positions in prior period
|
|
|
—
|
|
|
|
—
|
|
|
|
69,000
|
|
Gross decreases – tax positions in prior period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross increase – current-period tax positions
|
|
|
135,000
|
|
|
|
129,000
|
|
|
|
260,000
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lapse of statute of limitations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Unrecognized Tax Benefits – Ending
|
|
$
|
1,987,000
|
|
|
$
|
1,852,000
|
|
|
$
|
1,723,000
|
|
The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized, none of these amounts 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 does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.
The Company did not recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses as of December 31, 2015.
The Company’s material tax jurisdictions are United States and California. To our knowledge, the Company is currently not under examination by the Internal Revenue Service or any other taxing authority.
The Company’s tax years for 1998 (federal) and 1997 (CA) and forward can be subject to examination by the United States and California tax authorities due to the carry forward of net operating losses and research development credits.
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 2015, 2014 and 2013.
78
Preferred Stock
We have authorized 5 million shares of $0.001 par value preferred stock. 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. There were 13,500 shares of Series A 3.6% Convertible Preferred Stock issued at December 31, 2015 and December 31, 2014 and 0 and 5,311 shares outstanding as of December 31, 2015 and December 31, 2014, respectively.
In October 2014, we entered into a Securities Purchase Agreement with certain institutional investors pursuant to which the Company sold a total of 13,500 units for a purchase price of $1,000 per unit, with each unit consisting of one share of the Company’s Series A 3.6% Convertible Preferred Stock, which are convertible into shares of the Company’s common stock with a conversion price of $0.52, and warrants to purchase up to a number of shares of common stock equal to 100% of the conversion shares under the shares of preferred stock, in a registered direct offering. The preferred stock and the warrants were immediately separable and were issued separately. As of December 31, 2015, all outstanding Series A 3.6% Convertible Preferred Stock had been converted into shares of common stock.
We recorded a dividend of $1.2 million for the year ended December 31, 2014, related to a beneficial conversion feature included in the issuance of our Series A 3.6% Convertible Preferred Stock. The fair value of the common stock into which the Series A 3.6% Convertible Preferred Stock was convertible on the date of issuance exceeded the proceeds allocated to the preferred stock, resulting in the beneficial conversion feature that we recognized as a dividend to the preferred shareholders and, accordingly, an adjustment to net loss to arrive at net loss allocable to common shareholders. Certain shares of Series A 3.6% Convertible Preferred Stock were not convertible until shareholder approval, which occurred in January 2015. As a result, additional dividends for the beneficial conversion feature of $0.7 million were recorded during the quarter ended March 31, 2015.
In connection with the 3.6% Convertible Preferred Stock outstanding at December 31, 2014, we declared a cash dividend of $0.07 million. The cash dividend was paid in January 2015.
Common Stock
In January 2013, the underwriter exercised this option and as a result we sold an additional 1,053,000 shares raising approximately $3,000,000 in gross proceeds before deducting underwriting discounts and commissions and other offering expenses payable by us.
In October 2013, we entered into a Common Stock Purchase Agreement with Lorem Vascular for the purchase of 8,000,000 shares at $3.00 per share. The transaction occurred in two separate closings of 4,000,000 shares each. The first closing occurred in November 2013, and the second closing occurred in January 2014. As of December 31, 2013, we received $15,000,000 of the gross proceeds, $12,000,000 for the first closing and $3,000,000 towards the second closing. The balance of $9,000,000 in gross proceeds required to complete the second closing was received in January 2014. In connection with the Common Stock Purchase Agreement, the right to a one time appointment of one member of our Board of Directors was granted to Mr. K.T. Lim, Chairman of Lorem Vascular. Mr. Lim exercised his right to appoint a member to serve on our Board of Directors in June 2014, and Mr. Lim’s appointee, Mr. Ruud Jona, subsequently resigned his appointment to the Board of Directors in July 2014.
In May 2014, we and 47 holders of warrants to purchase a total of 3,156,238 shares of the Company’s common stock, issued in a private offering in May 2009, agreed to extend the expiration date of the warrants from May 14, 2014 to May 14, 2015 and increase the exercise price of the warrants from $2.62 per share to $3.50 per share pursuant to an Amendment to Warrant to Purchase Common Stock. One holder of warrants did not agree to the Amendment, and their warrants, covering 38,500 shares of Common Stock, expired unexercised on May 14, 2014 in accordance with the original terms.
In May 2014, we entered into subscription agreements with certain institutional investors pursuant to which we sold a total of 4,048,584 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at a purchase price of $2.47 per unit, in a registered direct offering. Each warrant had an exercise price of $3.00 per share, was exercisable immediately after issuance and expires five years from the date of issuance. The transaction was completed on June 4, 2014 raising approximately $10,000,000 in gross proceeds before deducting
79
any offering expenses or fees payable by us. Under the te
rms of our Placement Agent Agreement, we granted WBB Securities, LLC warrants to purchase 202,429 shares of common stock. The placement agent warrants have the same terms as the warrants issued to the purchasers in the offering, except that such warrants h
ave an exercise price of $3.09.
In September 2014, the Company and 13 holders of warrants dated June 4, 2014 to purchase a total of 4 million shares of the Company’s common stock agreed to amend the warrants in order to reduce the exercise price from $3.00 per share to $1.00 per share and change the expiration date from June 4, 2019 to September 10, 2014. The Company received proceeds of approximately $4 million from the exercise of the warrants. In addition, pursuant to the terms of the amendment, upon each holder’s exercise of all shares for cash prior to the amended expiration date, the Company issued additional warrants for the same number of common shares to the holders. The additional warrants have an exercise price of $2.00 per share, and are exercisable during the period commencing on the date that is six months and one day from the date of issuance and expiring five years from the date of issuance. For those investors participating in the October 2014 issuance of Series A 3.6% Convertible Preferred Stock, we agreed to reduce the exercise price of 3.4 million warrants held by such investors from $2.00 per share to $0.5771 per share, conditioned upon stockholder approval which was obtained in January 2015. As of December 31, 2015, all 3.4 million warrants had been exercised, some via cash and others on a cashless basis resulting in the issuance of an aggregate of 1.8 million shares of Common Stock, and receipt by the Company of $0.1 million in net proceeds.
In October 2014, the Company entered into a Securities Purchase Agreement with certain institutional investors pursuant to which
it issued common stock purchase warrants to the institutional investors with certain exercise price reset features. Each warrant had an initial exercise price of $0.5771 per share, and is exercisable during the period commencing six months and one day after the date of issuance and expiring five years from the date on which it is initially exercisable. Pursuant to the second closing of the May 2015 Securities Purchase Agreement, the exercise price of these warrants was reset to $0.3263. During the second quarter of 2015, approximately 8.5 million of the October 2014 warrants were exercised for cash at $0.5771 per share for net proceeds of $4.9 million.
In December 2015, all the remaining outstanding October Warrants were cashless exercised.
In May 2015, the Company entered into a Securities Purchase Agreement with certain institutional investors pursuant to which the Company agreed to sell up to $25 million of units, with each unit consisting of one share of its common stock and one warrant to purchase one share of its common stock, in a registered direct offering. The purchase and sale of the units is took place in two separate closings. At the initial closing, which took place on May 8, 2015, the Company received approximately $17.4 million in net proceeds from the sale of units. The purchase price for each unit sold at the initial closing was $0.77. Each warrant issued as part of the units at the initial closing has an initial exercise price of $1.02 per share, and is exercisable during the period commencing six months and one day after the date of issuance and expiring five years from the date on which it is initially exercisable. The second closing of the purchase and sale of the units occurred on August 27, 2015 upon satisfaction of certain conditions, including, without limitation, stockholder vote, and the Company received approximately $2.1 million in net proceeds from the sale of 7,499,993 units of the 14,999,993 units available for sale at the second closing. The purchase price for each unit sold at the second closing was $0.3263 and each warrant issued has an initial exercise price of $0.401 and expire five years from the date of issuance.
On December 17, 2015, the Company and the holders of October 2014 warrants agreed to amend the October 2014 Warrants pursuant to an Amendment to Common Stock Purchase Warrant (the “2014 Amendment”). Also on December 17, 2015, the Company and the holders of the May 2015 Warrants and the August 2015 Warrants (collectively the “2015 Warrants”) agreed to amend the 2015 Warrants pursuant to an Amendment to Series A-1 Warrant to Purchase Common Stock and Amendment to Series A-2 Warrant to Purchase Common Stock, respectively (the “2015 Amendment” and, together with the 2014 Amendment, the “Warrant Amendments”). The Warrant Amendments provide that the holders may exercise their warrants on a “cashless exercise” basis in whole on or prior to December 31, 2015, whereby each exercising holder of the amended 2015 Warrants would receive 0.75 shares for each warrants share exercised and each exercising holder of the amended 2014 Warrants would 0.69 shares for each warrant share exercised. In addition, the Warrant Amendments removed certain provisions which provided that the exercise price of the Warrants would be reset in the event of certain equity issuances by the Company for a price below the exercise price of the Warrants as of the time of such issuance. All 2014 Warrants and all 2015 Warrants were cashless exercised on or before December 31, 2015.
Also on December 17, 2015, the Company entered into Amendment One to the Securities Purchase Agreement between the Company and certain institutional investors dated May 5, 2015 (the “SPA Amendment”). The SPA
80
Amendment provides that, among other things, the Company will not to conduct any offering of its equity securities, including through its “at-the-market offering” program, until February 5, 2016, subject to certain limited exceptions.
15.
|
Stock-based Compensation
|
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 in October 2007.
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. The 2004 Plan expired in August 2014.
In August 2014, we adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which provides our employees, directors and consultants the opportunity to purchase our common stock in the form of options (incentive or non-qualified), stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares, performance units, cash-based awards other stock-based awards, and deferred compensation awards. The 2014 Plan initially provides for issuance of 3,975,000 shares of our common stock.
On August 13, 2015 the Company amended the 2014 Plan to add 4,527,000 shares to its share pool. In addition, the amendment increased the number of “incentive stock options” which may be issued under the 2014 Plan by an identical amount.
On December 29, 2015, we adopted the 2015 New Employee Incentive Plan (the “2015 Plan”). Awards under the 2015 Plan may only be made to an employee who has not previously been an employee or member of the Board or any parent or subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary. The 2015 Plan provides for issuance of 1,000,000 shares, no issuance took place in 2015.
As of December 31, 2015, there are 5,576,623 shares of common stock remaining and available for future issuances under the 2014 Plan, which is exclusive of securities to be issued upon an exercise of outstanding options, warrants, and rights.
Stock Options
Generally, options issued under the 2014 Plan, 2004 Plan or the 1997 Plan are subject to four-year vesting, and have a contractual term of 10 years. Most options 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.
|
81
A summary of activity for the year ended December 31, 2015 is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Balance as of January 1, 2015
|
|
|
9,115,348
|
|
|
$
|
3.93
|
|
Granted
|
|
|
2,168,000
|
|
|
$
|
0.46
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
Expired
|
|
|
(445,151
|
)
|
|
$
|
3.85
|
|
Cancelled/forfeited
|
|
|
(2,232,292
|
)
|
|
$
|
4.23
|
|
Balance as of December 31, 2015
|
|
|
8,605,905
|
|
|
$
|
2.99
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual
Term (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance as of December 31, 2015
|
|
|
8,605,905
|
|
|
$
|
2.99
|
|
|
|
6.69
|
|
|
$
|
—
|
|
Vested and expected to vest at December 31, 2015
|
|
|
8,470,861
|
|
|
$
|
3.02
|
|
|
|
6.65
|
|
|
$
|
—
|
|
Exercisable at December 31, 2015
|
|
|
5,368,247
|
|
|
$
|
4.04
|
|
|
|
5.39
|
|
|
$
|
—
|
|
There were no stock options exercised in 2015. The total intrinsic value of stock options exercised was $200 and $3,500 for the years ended December 31, 2014 and 2013, respectively.
The fair value of each option awarded during the year ended December 31, 2015, 2014 and 2013 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,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Expected term
|
|
6.0 years
|
|
|
6.0 years
|
|
|
6.0 years
|
|
Risk-free interest rate
|
|
|
1.58
|
%
|
|
|
1.86
|
%
|
|
|
1.12
|
%
|
Volatility
|
|
|
75.07
|
%
|
|
|
77.52
|
%
|
|
|
75.27
|
%
|
Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Resulting weighted average grant date fair value
|
|
$
|
0.30
|
|
|
$
|
1.35
|
|
|
$
|
1.72
|
|
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.
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.
Restricted Stock Awards
Generally, restricted stock awards issued under the 2014 Plan and 2004 Plan are subject to a vesting period that coincides with the fulfillment of service requirements for each award and have a contractual term of 10 years. These awards are amortized to compensation expense over the estimated vesting period based upon the fair value of our common stock on the award date.
82
A summary of a
ctivity for the year ended December 31, 2015 is as follows:
|
|
Restricted
Stock Awards
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Balance as of January 1, 2015
|
|
|
199,223
|
|
|
$
|
3.09
|
|
Granted
|
|
|
541,377
|
|
|
$
|
0.68
|
|
Exercised/Released
|
|
|
(152,682
|
)
|
|
$
|
3.13
|
|
Expired
|
|
|
(108,877
|
)
|
|
$
|
0.73
|
|
Cancelled/forfeited
|
|
|
(11,100
|
)
|
|
$
|
1.84
|
|
Balance as of December 31, 2015
|
|
|
467,941
|
|
|
$
|
0.81
|
|
|
|
Restricted
Stock Awards
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Weighted
Average
Remaining Contractual
Term (years)
|
|
Balance as of December 31, 2015
|
|
|
467,941
|
|
|
$
|
0.81
|
|
|
|
0.94
|
|
Vested and expected to vest at December 31, 2015
|
|
|
279,897
|
|
|
$
|
0.90
|
|
|
|
1.21
|
|
Outstanding at December 31, 2015
|
|
|
18,241
|
|
|
$
|
3.21
|
|
|
|
6.82
|
|
The following summarizes the total compensation cost recognized for the stock options and restricted stock awards in the accompanying financial statements:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Total compensation cost for share-based payment arrangements recognized in the statement of operations (net of tax of $0)
|
|
$
|
2,041,000
|
|
|
$
|
3,101,000
|
|
|
$
|
3,608,000
|
|
As of December 31, 2015, the total compensation cost related to non-vested stock options and stock awards not yet recognized for all our plans is approximately $2,358,000, which is expected to be recognized as a result of vesting under service conditions over a weighted average period of 1.61 years.
Cash received from stock option and warrant exercises and employee stock purchase for the years ended December 31, 2015, 2014 and 2013 was approximately $4,997,000, $4,151,000 and $225,000, 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 options and restricted stock awards, we will issue new shares of our common stock. At December 31, 2015, we have an aggregate of 94,237,220 shares authorized and available to satisfy option exercises under our plans.
16.
|
Related Party Transactions
|
As of December 31, 2014 and 2013, Lorem Vascular was a beneficial owner of more than five percent of our outstanding shares of common stock. During the year ended December 31, 2013, Lorem Vascular purchased Celution® Systems and consumable sets from us for a total of $1,845,000 pursuant to the License/Supply Agreement.
In April 2015, Lorem Vascular sold a portion of our shares of common stock and is no longer a beneficial owner of more than five percent of our outstanding shares of common stock, pursuant to which it became an unrelated party.
83
17.
|
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,
2015
|
|
|
June 30,
2015
|
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
Product revenues
|
|
$
|
902,000
|
|
|
$
|
1,614,000
|
|
|
$
|
766,000
|
|
|
$
|
1,556,000
|
|
Gross profit
|
|
|
305,000
|
|
|
|
318,000
|
|
|
|
264,000
|
|
|
|
765,000
|
|
Development revenues
|
|
|
1,444,000
|
|
|
|
1,847,000
|
|
|
|
1,710,000
|
|
|
|
1,820,000
|
|
Operating expenses
|
|
|
(22,745,000
|
)
|
|
|
3,626,000
|
|
|
|
16,000
|
|
|
|
(4,656,000
|
)
|
Other income (expense)
|
|
|
(961,000
|
)
|
|
|
(1,342,000
|
)
|
|
|
(470,000
|
)
|
|
|
(685,000
|
)
|
Net income (loss)
|
|
$
|
(21,957,000
|
)
|
|
$
|
4,449,000
|
|
|
$
|
1,520,000
|
|
|
$
|
(2,756,000
|
)
|
Beneficial conversion feature for convertible preferred stock
|
|
|
(661,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) allocable to common stock holders
|
|
|
(22,618,000
|
)
|
|
|
4,449,000
|
|
|
|
1,520,000
|
|
|
|
(2,756,000
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.21
|
)
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
|
For the three months ended
|
|
|
|
March 31,
2014
|
|
|
June 30,
2014
|
|
|
September 30,
2014
|
|
|
December 31,
2014
|
|
Product revenues
|
|
$
|
1,031,000
|
|
|
$
|
935,000
|
|
|
$
|
518,000
|
|
|
$
|
2,469,000
|
|
Gross profit
|
|
|
610,000
|
|
|
|
169,000
|
|
|
|
181,000
|
|
|
|
1,053,000
|
|
Development revenues
|
|
|
403,000
|
|
|
|
356,000
|
|
|
|
585,000
|
|
|
|
1,301,000
|
|
Operating expenses
|
|
|
(10,560,000
|
)
|
|
|
(11,210,000
|
)
|
|
|
(8,656,000
|
)
|
|
|
(6,669,000
|
)
|
Other income (expense)
|
|
|
(853,000
|
)
|
|
|
(1,143,000
|
)
|
|
|
(1,495,000
|
)
|
|
|
(1,440,000
|
)
|
Net loss
|
|
$
|
(10,400,000
|
)
|
|
$
|
(11,828,000
|
)
|
|
$
|
(9,385,000
|
)
|
|
$
|
(5,755,000
|
)
|
Beneficial conversion feature for convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,169,000
|
)
|
Net loss allocable to common stock holders
|
|
|
(10,400,000
|
)
|
|
|
(11,828,000
|
)
|
|
|
(9,385,000
|
)
|
|
|
(6,924,000
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.08
|
)
|
On February 23, 2016, Cytori received an acknowledgement and agreement from Oxford related to the positive data on Cytori US ACT-OA clinical trial. As a result, pursuant to the Loan Agreement, the period for which the Company is required to make interest-only payment was extended from July 1, 2016 to January 1, 2017. The current portion of the long-term obligation was reclassified to noncurrent liability as of December 31, 2015.
84