Quarterly Report (10-q)

Date : 11/14/2018 @ 10:01PM
Source : Edgar (US Regulatory)
Stock : Cytori Therapeutics Inc (CYTX)
Quote : 0.2077  0.0 (0.00%) @ 1:00AM

Quarterly Report (10-q)

 

f

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 001-34375

 

CYTORI THERAPEUTICS, INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

DELAWARE

 

33-0827593

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3020 CALLAN ROAD, SAN DIEGO, CALIFORNIA

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 458-0900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company .  See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one) .

 

Large Accelerated Filer

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of October 31, 2018, there were 13,201,410 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

CYTORI THERAPEUTICS, INC.

INDEX

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets

 

3

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Operations and Comprehensive Loss

 

4

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows

 

5

 

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

 

6

 

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

23

 

 

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

24

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

24

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

27

 

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

27

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

27

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

28

 

 


PART I. FINANC IAL INFORMATION

Item 1. Financial Statements

CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and par value data)

 

 

 

As of September 30,

2018

 

 

As of December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,806

 

 

$

9,550

 

Accounts receivable, net of reserves of $185 in 2018 and $167 in 2017

 

 

440

 

 

 

145

 

Restricted cash

 

 

40

 

 

 

675

 

Inventories, net

 

 

2,814

 

 

 

3,183

 

Other current assets

 

 

654

 

 

 

1,311

 

Total current assets

 

 

10,754

 

 

 

14,864

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,648

 

 

 

3,052

 

Other assets

 

 

1,938

 

 

 

2,570

 

Intangibles, net

 

 

6,270

 

 

 

7,207

 

Goodwill

 

 

3,922

 

 

 

3,922

 

Total assets

 

$

25,532

 

 

$

31,615

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,645

 

 

$

4,790

 

Term loan obligations, net of discount

 

 

14,007

 

 

 

13,624

 

Total current liabilities

 

 

17,652

 

 

 

18,414

 

 

 

 

 

 

 

 

 

 

Deferred revenues

 

 

187

 

 

 

94

 

Long-term deferred rent and other

 

 

83

 

 

 

107

 

Warrant liability

 

 

1,472

 

 

 

 

Total liabilities

 

 

19,394

 

 

 

18,615

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; 23,500 shares

    issued; 4,624 and 2,431 shares outstanding in 2018 and 2017, respectively

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 11,691,293 and

  5,782,573 shares issued and outstanding in 2018 and 2017, respectively

 

 

67

 

 

 

58

 

Additional paid-in capital

 

 

417,036

 

 

 

413,304

 

Accumulated other comprehensive income

 

 

1,182

 

 

 

1,387

 

Accumulated deficit

 

 

(412,147

)

 

 

(401,749

)

Total stockholders’ equity

 

 

6,138

 

 

 

13,000

 

Total liabilities and stockholders’ equity

 

$

25,532

 

 

$

31,615

 

 

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

 

3


CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(in thousands, except share and per share data)

 

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Product revenues

 

$

858

 

 

$

467

 

 

$

2,249

 

 

$

2,027

 

Cost of product revenues

 

 

322

 

 

 

181

 

 

 

918

 

 

 

992

 

Amortization of intangible assets

 

 

306

 

 

 

306

 

 

 

919

 

 

 

919

 

Gross profit (loss)

 

 

230

 

 

 

(20

)

 

 

412

 

 

 

116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Development revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government contracts and other

 

 

454

 

 

 

1,306

 

 

 

2,270

 

 

 

2,856

 

 

 

 

454

 

 

 

1,306

 

 

 

2,270

 

 

 

2,856

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,916

 

 

 

3,004

 

 

 

6,366

 

 

 

9,284

 

Sales and marketing

 

 

453

 

 

 

840

 

 

 

1,656

 

 

 

3,043

 

General and administrative

 

 

1,486

 

 

 

1,785

 

 

 

5,199

 

 

 

6,012

 

Change in fair value of warrants

 

 

(1,676

)

 

 

 

 

 

(1,676

)

 

 

 

In process research and development acquired from Azaya Therapeutics

 

 

 

 

 

 

 

 

 

 

 

1,686

 

Total operating expenses

 

 

2,179

 

 

 

5,629

 

 

 

11,545

 

 

 

20,025

 

Operating loss

 

 

(1,495

)

 

 

(4,343

)

 

 

(8,863

)

 

 

(17,053

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

11

 

 

 

5

 

 

 

30

 

 

 

24

 

Interest expense

 

 

(512

)

 

 

(474

)

 

 

(1,379

)

 

 

(1,603

)

Other income (expense), net

 

 

9

 

 

 

5

 

 

 

157

 

 

 

233

 

Issuance costs of warrants

 

 

(343

)

 

 

 

 

 

(343

)

 

 

 

Total other expense

 

 

(835

)

 

 

(464

)

 

 

(1,535

)

 

 

(1,346

)

Net loss

 

$

(2,330

)

 

$

(4,807

)

 

$

(10,398

)

 

$

(18,399

)

Beneficial conversion feature for convertible preferred stock

 

 

(2,487

)

 

$

 

 

 

(2,487

)

 

$

 

Net loss allocable to common stockholders

 

$

(4,817

)

 

$

(4,807

)

 

$

(12,885

)

 

$

(18,399

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share attributable to common stockholders

 

$

(0.55

)

 

$

(1.39

)

 

$

(1.85

)

 

$

(6.22

)

Basic and diluted weighted average shares used in calculating net loss per share attributable to common stockholders

 

 

8,716,194

 

 

 

3,449,083

 

 

 

6,972,615

 

 

 

2,956,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,330

)

 

$

(4,807

)

 

$

(10,398

)

 

$

(18,399

)

Other comprehensive loss – foreign currency translation

   adjustments

 

 

(55

)

 

 

16

 

 

 

(205

)

 

 

(59

)

Comprehensive loss

 

$

(2,385

)

 

$

(4,791

)

 

$

(10,603

)

 

$

(18,458

)

 

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

 

4


CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,398

)

 

$

(18,399

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,465

 

 

 

1,618

 

Amortization of deferred financing costs and debt discount

 

 

383

 

 

 

580

 

In process research and development acquired from Azaya Therapeutics

 

 

 

 

 

1,686

 

Provision for excess inventory

 

 

433

 

 

 

413

 

Allocation of issuance costs associated with warrants

 

 

343

 

 

 

 

Change in fair value of warrants

 

 

(1,676

)

 

 

 

Share-based compensation expense

 

 

325

 

 

 

588

 

Loss on asset disposal

 

 

23

 

 

 

9

 

Increases (decreases) in cash caused by changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(316

)

 

 

991

 

Inventories

 

 

615

 

 

 

457

 

Other current assets

 

 

514

 

 

 

(284

)

Other assets

 

 

7

 

 

 

74

 

Accounts payable and accrued expenses

 

 

(1,274

)

 

 

(1,746

)

Deferred revenues

 

 

93

 

 

 

6

 

Long-term deferred rent

 

 

(24

)

 

 

103

 

Net cash used in operating activities

 

 

(9,487

)

 

 

(13,904

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(128

)

 

 

(271

)

Proceeds from sale of assets

 

 

 

 

 

10

 

Purchase of long-lived assets part of Azaya Therapeutics' acquisition

 

 

 

 

 

(1,201

)

Net cash used in investing activities

 

 

(128

)

 

 

(1,462

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payments on long-term obligations

 

 

 

 

 

(4,720

)

Proceeds from sale of common and preferred stock, net

 

 

6,246

 

 

 

12,377

 

Net cash provided by financing activities

 

 

6,246

 

 

 

7,657

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(10

)

 

 

11

 

Net decrease in cash and cash equivalents

 

 

(3,379

)

 

 

(7,698

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

10,225

 

 

 

12,910

 

Cash, cash equivalents, and restricted cash at end of period

 

$

6,846

 

 

$

5,212

 

Supplemental disclosure of cash flows information:

 

 

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

 

 

Interest

 

$

990

 

 

$

1,059

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of preferred stock into common stock

 

$

7

 

 

$

 

Common stock issued in payment for the assets acquired from Azaya Therapeutics

 

$

 

 

$

2,311

 

 

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

 

5


CYTORI THERAPEUTICS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

September 30, 2018

(UNAUDITED)

 

 

1.

Basis of Presentation and New Accounting Standards

Our accompanying unaudited consolidated condensed financial statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.  Our consolidated condensed balance sheet at December 31, 2017 has been derived from the audited financial statements at December 31, 2017, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of Cytori Therapeutics, Inc., and our subsidiaries (collectively, the “Company”) have been included.  Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These financial statements should be read in conjunction with the consolidated financial statements and notes therein included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 9, 2018.

Amendments to Certificate of Incorporation and Reverse Stock Split

On May 23, 2018, following stockholder and Board approval, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Delaware to (i) effectuate a one-for-ten (1:10) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value, and (ii) increase the number of authorized shares of the Company’s common stock from 75 million to 100 million shares (which amount is not otherwise affected by the Reverse Stock Split). The Amendment became effective on the filing date. Upon effectiveness of the Reverse Stock Split, the number of shares of the Company’s common stock (x) issued and outstanding  decreased from approximately 61.6 million shares (as of May 23, 2018) to approximately 6.2 million  shares; (y) reserved for issuance upon exercise of outstanding warrants and options decreased from approximately 23.4 million shares to approximately 2.3 million shares, and (z) reserved but unallocated under our current equity incentive plans (including the stockholder-approved share increase to the Company’s 2014 Equity Incentive Plan) decreased from approximately 9.1 million common shares to approximately 0.9 million common shares. The Company’s 5,000,000 shares of authorized Preferred Stock were not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split. Proportional adjustments for the reverse stock split were made to the Company's outstanding stock options, warrants and equity incentive plans for all periods presented.

Recently Issued and Recently Adopted Accounting Pronouncements

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases . Under this new guidance, at the commencement date, lessees will be required to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This guidance is not applicable for leases with a term of 12 months or less. The new standard is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. Although ASU 2016-02 is required to be adopted at the earliest period presented using a modified retrospective approach, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an alternative transition method of adoption by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt ASU 2016-02 on January 1, 2019 utilizing the alternative transition method allowed for under ASU 2018-11. Although the Company is in the process of evaluating the impact the adoption of ASU 2016-02 will have on its financial statements, the Company expects the most significant changes will be the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for its real estate operating lease commitments.

In February 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We are currently evaluating the impact that this standard will have on our consolidated financial statements.

6


In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments wi th Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows compani es to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round featur es may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial i nstruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features contain ing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The new standard is effective for annual reporting periods, and interim periods within those periods, beginning after December 31, 2018, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is based on the principle that revenue should be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of promised goods or services. ASU 2014-09 and all subsequent amendments (collectively, the “new standards”) may be applied using either the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have adopted the standards beginning this first quarter of 2018 using the modified retrospective method. Overall, the timing or amounts related to the revenue recognition under the new standards did not differ from our previously applied revenue recognition policy. Our product revenues are recognized at a point in time, which is when control transfers to the customer.  We have made an accounting policy election to treat shipping and handling activities that occur after the customer obtains control of the goods as fulfillment costs. There was no cumulative effect of applying the new standards as of the adoption date on January 1, 2018.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash , which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The adoption of this standard, in the first quarter of 2018, changed the presentation of our statement of cash flows to include our restricted cash balance with the non-restricted cash balances . The new guidance did not have a material impact on the Company's consolidated financial statements. Cash, cash equivalents, and restricted cash reported on the consolidated condensed statements of cash flows includes restricted cash of $0.4 million, $0.4 million, $0.7 million, and $40,000 as of December 31, 2016, September 30, 2017, December 31, 2017 and September 30, 2018, respectively.

 

2.

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.  Our most significant estimates and critical accounting policies involve recognizing revenue, reviewing goodwill and intangible assets for impairment, determining the assumptions used in measuring share-based compensation expense, valuing warrants, measuring expense related to our in-process research and development acquisition, and valuing allowances for doubtful accounts and inventory reserves.

Actual results could differ from these estimates. Management’s estimates and assumptions are reviewed regularly, and the effects of revisions are reflected in the consolidated financial statements in the periods they are determined to be necessary.

 

3.

Liquidity

We incurred net losses of $2.3 million and $10.4 million for the three and nine months ended September 30, 2018 .  We have an accumulated deficit of $412.1 million as of September 30, 2018 .  Additionally, we have used net cash of $9.5 million to fund our operating activities for the nine months ended September 30, 2018 . These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Further, the Loan and Security Agreement (defined in Note 4), with Oxford Finance, LCC (“Oxford”), as further described in Note 4, requires maintaining a minimum of $1.5 million in unrestricted cash and cash equivalents on hand to avoid an event of default under the Loan and Security Agreement and requires us to make an aggregate of $7.0 million in principal payments on or before December 31, 2018. Based on our cash and cash equivalents on hand of approximately $6.8 million at September 30, 2018 , the Company estimates that it will need to raise additional capital and/or obtain a waiver or restructure the Loan and Security Agreement in the near term to avoid defaulting under its $1.5 million minimum cash/cash equivalents covenant and to

7


make an aggregate of $7.0 million in principal payments on or before De cember 31, 2018.

To date, these operating losses have been funded primarily from outside sources of invested capital including our recently completed 2018 Rights Offering (defined in Note 3 below), our Lincoln Park Purchase Agreement (defined in Note 11) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), the 2017 Rights Offering (defined in Note 3 below), the Loan and Security Agreement and gross profits.  We have had, and we will continue to have, an ongoing need to raise additional cash from outside sources to fund our future clinical development programs and other operations. Our inability to raise additional cash would have a material and adverse impact on operations and would cause us to default on our loan.

On April 11, 2017, we entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC “Maxim”) relating to the issuance and sale of 0.9 million shares of our common stock. The price to the public in this offering was $11.00 per share. Maxim purchased the shares from us pursuant to the Underwriting Agreement at a price of $10.40 per share. The net proceeds to us from the offering were approximately $8.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The offering closed on April 17, 2017. In addition, under the terms of the Underwriting Agreement, we granted Maxim a 45-day option to purchase up to 94,400 additional shares of common stock. On May 31, 2017, Maxim exercised their overallotment option and purchased 84,900 shares at $11.00 per share. The net proceeds to us were $0.8 million, after deducting underwriting costs and offering expenses payable by us.

On September 5, 2017, we received a written notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer met the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided a period of 180 calendar days, or until March 5, 2018, in which to regain compliance.  We were granted an additional compliance period of 180 calendar days, or until September 4, 2018, in which to regain compliance after meeting the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital market, with the exception of the bid price requirement, and providing notice to Nasdaq of our intent to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must have been at least $1 per share for a minimum of ten consecutive business days during the second 180-day period. On June 8, 2018, we received written notice from Nasdaq that we had regained compliance with the Nasdaq Stock Market Listing Rule 5500(a)(2) concerning our minimum bid price per share of our common stock.

On November 28, 2017, we closed a rights offering originally filed under a Form S-1 registration statement in August 2017 (“2017 Rights Offering”). Pursuant to the 2017 Rights Offering, the Company sold an aggregate of 10,000 units consisting of a total of 10,000 shares of Series B Convertible Preferred Stock, immediately convertible into approximately 3,000,000 shares of common stock and 18,000,000 warrants, exercisable for an aggregate of 1,800,000 shares of common stock at an exercise price of $3.333 per share of common stock, resulting in total net proceeds to the Company of $8.8 million. These warrants became exercisable upon stockholder approval of an increase in the Company’s authorized shares of common stock obtained at the 2018 Annual Meeting of Stockholders.

On June 1, 2018, we entered into a Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) to sell shares of our common stock having an aggregate offering price of up to $6.5 million from time to time, through an “at the market” equity offering program (the “ATM program”) under which B. Riley FBR will act as sales agent. Through September 30, 2018, we have sold a total of 1.5 million shares for proceeds of approximately $0.8 million through the ATM program.

On July 25, 2018, we closed a rights offering originally filed under a Form S-1 registration statement in April 2018 (“2018 Rights Offering”). Pursuant to the 2018 Rights Offering, the Company sold an aggregate of 6,723 units consisting of a total of 6,723 shares of Series C Convertible Preferred Stock, immediately convertible into approximately 8.4 million shares of common stock and 7,059,150 warrants, with each warrant exercisable for one share of common stock at an exercise price of $0.7986 per share, resulting in total net proceeds to the Company of approximately $5.7 million.

On August 28, 2018, we received a written notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until February 25, 2019, in which to regain compliance.  In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must have been at least $1 per share for a minimum of ten consecutive business days during the 180-day period. In the event we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, if we provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary.

On September 21, 2018, Cytori entered into a purchase agreement and a registration rights agreement, with Lincoln Park, pursuant to which the Company has the right to sell to Lincoln Park and Lincoln Park is obligated to purchase up to $5.0 million

8


of shar es of the Company’s common stock over the 24-month period following October 15, 2018, subject to the satisfaction of certain conditions.  See Note 11 for further discussion on the Lincoln Park Agreement.

We continue to seek additional capital through product revenues, strategic transactions, including extension opportunities under our awarded U.S. Department of Health and Human Service’s Biomedical Advanced Research and Development Authority (“BARDA”) contract, and from other financing alternatives. Without additional capital, current working capital and cash generated from sales will not provide adequate funding for research, sales and marketing efforts 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 development and other operations, and this would negatively affect our ability to achieve corporate growth goals.

Should we be unable to raise additional cash from outside sources, this would have a material adverse impact on our operations.

The accompanying consolidated condensed financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

 

4.

Term Loan Obligations

On May 29, 2015, the Company entered into the Loan and Security Agreement, dated May 29, 2015, with Oxford (the “Loan and Security Agreement”), pursuant to which it funded an aggregate principal amount of $17.7 million (“Term Loan”), subject to the terms and conditions set forth in the Loan and Security Agreement. The Term Loan accrues interest at a floating rate of at least 8.95% per annum, comprised of three-month LIBOR rate with a floor of 1.00% plus 7.95%.  Pursuant to the Loan and Security Agreement, we were previously required to make interest only payments through June 1, 2016 and thereafter we were 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, we received an acknowledgement and agreement from Oxford related to the positive data on our U.S. ACT-OA clinical trial. As a result, pursuant to the Loan and Security Agreement, the period for which we are required to make interest-only payments 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, we are required to make a final payment in an aggregate amount equal to approximately $1.1 million. In connection with the Term Loan, on May 29, 2015, we issued to Oxford warrants to purchase an aggregate of 9,444 shares of our common stock at an exercise price of $103.50 per share. These warrants became exercisable as of November 30, 2015 and will expire on May 29, 2025 and, following the authoritative accounting guidance, are equity classified and its respective fair value was recorded as a discount to the debt.

On September 20, 2017, the Company entered into an amendment to the Term Loan, pursuant to which, among other things, Oxford agreed to reduce the minimum liquidity covenant level originally at $5 million to $1.5 million.  The amendment also extended the interest-only period under the Loan Agreement through August 1, 2018, as the Company successfully closed on a financing and received unrestricted net cash proceeds in excess of $5 million on or before December 29, 2017.

On June 19, 2018, the Company entered into a second amendment (the “Second Amendment”) to the Term Loan with Oxford. The Second Amendment extends the interest-only period under the Term Loan to December 1, 2018 if the Company receives unrestricted gross cash proceeds of at least $15 million from the sale and issuance of the Company’s equity securities on or before August 31, 2018. The Company agreed to pay Oxford an amendment fee of $250,000 at the earlier of maturity or acceleration of the loan.

On August 31, 2018, the Company entered into a third amendment (the “Third Amendment”) to the Term Loan with Oxford. The Third Amendment extends the interest-only period under the Term Loan to December 31, 2018 and also requires that the Company pay to Oxford, in accordance with its pro rata share of the loans, 75% of all proceeds received (i) from the issuance and sale of unsecured subordinated convertible debt, (ii) in connection with a joint venture, collaboration or other partnering transaction, (iii) in connection with any licenses, (iv) from dividends (other than non-cash dividends from wholly owned subsidiaries) and (v) from the sale of any assets (such requirement, the “Prepayment Requirement”).  The Prepayment Requirement does not apply to proceeds from the sale and issuance of the Company’s equity securities, other than convertible debt.  The Prepayment Requirement shall apply until an aggregate principle amount of $7.0 million has been paid pursuant to the Prepayment Requirement.  However, if less than $7.0 million has been paid pursuant to the Prepayment Requirement on December 31, 2018 then the Company is required to promptly make additional payments until an aggregate principal amount of $7.0 million has been paid. The Company agreed to pay Oxford an amendment fee of $50,000 at the earlier of maturity or acceleration of the loan.

The Term Loan, as amended, is collateralized by a security interest in substantially all of the Company’s existing and subsequently acquired assets, including its intellectual property assets, subject to certain exceptions set forth in the Loan and Security Agreement, as amended.   The intellectual property asset collateral will be released upon the Company achieving certain

9


liquidity level when the total principal outstanding under the Loan Agreement is less than $3 million. As of September 30, 2018 , we were in compliance with all of the debt covenants under the Loan and Security Agre ement.

Our interest expense for the three and nine months ended September 30, 2018 and 2017 was $0.5 million and $1.4 million and was $0.5 million and $1.6 million, respectively. Interest expense is calculated using the effective interest method, therefore it is inclusive of non-cash amortization in the amount of $0.2 million and $0.4 million for the three and nine months ended September 30, 2018 and $0.2 million and $0.6 million for the three and nine months ended September 30, 2017, related to the amortization of the debt discount, capitalized loan costs, and accretion of final payment.

The Term Loan Agreement contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain obligations under the Term Loan, as amended, and the occurrence of a material adverse change, which is defined as a material adverse change in our business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan. In the event of default by us or a declaration of material adverse change by our lender, under the Term Loan, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the Term Loan, which could materially harm our financial condition. As of September 30, 2018 , we were in compliance with all covenants under the Term Loan and have not received any notification or indication from Oxford to invoke the material adverse change clause. However, due to our current cash flow position and the substantial doubt about our ability to continue as a going concern, the entire principal amount of the Term Loan has been reclassified to short-term. We will continue to evaluate the debt classification on a quarterly basis and evaluate for reclassification in the future should our financial condition improve.

 

5.

Revenue Recognition

Product Sales

Our revenue is generated primarily from the sale of products. Product revenue primarily consists of sales of Celution devices and consumables for commercial and research purposes.

The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Typically, if there are multiple items included on a single order, they are delivered at the same time. Revenue is recognized at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. The sale arrangements do not include any variable consideration. Advance payments from customers are recorded as deferred revenue.

Shipping and handling activities that occur after the customer obtains control of the goods are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.

The following table represents revenue by product (in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

September 30, 2018

 

 

September 30, 2017

 

Consumable

 

$

692

 

 

$

389

 

$

1,845

 

 

$

1,338

 

Device

 

 

101

 

 

 

25

 

 

194

 

 

 

551

 

Other products

 

 

65

 

 

 

53

 

 

210

 

 

 

138

 

 

 

$

858

 

 

$

467

 

$

2,249

 

 

$

2,027

 

 

Product revenues, classified by geographic location, are as follows (in thousands):

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

 

Product

Revenues

 

 

% of

Total

 

 

Product

Revenues

 

 

% of

Total

 

 

Product

Revenues

 

 

% of

Total

 

 

Product

Revenues

 

 

% of

Total

 

 

Americas

 

$

199

 

 

 

23

%

 

$

112

 

 

 

24

%

 

$

249

 

 

 

11

%

 

$

315

 

 

 

15

%

 

Japan

 

 

535

 

 

 

62

%

 

 

279

 

 

 

60

%

 

 

1,693

 

 

 

75

%

 

 

1,434

 

 

 

71

%

 

EMEA

 

 

114

 

 

 

14

%

 

 

18

 

 

 

4

%

 

 

262

 

 

 

12

%

 

 

204

 

 

 

10

%

 

Asia Pacific

 

 

10

 

 

 

1

%

 

 

58

 

 

 

12

%

 

 

45

 

 

 

2

%

 

 

74

 

 

 

4

%

 

Total product revenues

 

$

858

 

 

 

100

%

 

$

467

 

 

 

100

%

 

$

2,249

 

 

 

100

%

 

$

2,027

 

 

 

100

%

 

10


 

Concentration of Significant Customers

Two direct customers accounted for 58% of our revenue recognized for the nine months ended September 30, 2018.  Three direct customers accounted for 72% of total outstanding accounts receivable (excluding receivables from BARDA) as of September 30, 2018.

Six direct customers comprised 61% of our revenue recognized for the nine months ended September 30, 2017.  Four direct customers accounted for 78% of total outstanding accounts receivable as of September 30, 2017.

Development Revenue

We earn revenue for performing tasks under research and development agreements with governmental agencies like BARDA which is outside of the scope of the new revenue recognition guidance. Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with government contracts are recorded as government contracts 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 statements of operations.   We recognized $0.5 million and $2.3 million in development revenue for the three and nine months ended September 30, 2018 , as compared to $1.3 million and $2.9 million for the three and nine months ended September 30, 2017 .

 

6.

Inventories

Inventories are carried at the lower of cost or net realizable value, determined on the first-in, first-out (FIFO) method.

Inventories consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Raw materials

 

$

698

 

 

$

681

 

Work in process

 

 

418

 

 

 

722

 

Finished goods

 

 

1,698

 

 

 

1,780

 

 

 

$

2,814

 

 

$

3,183

 

 

7.

Loss per Share

Basic per share data is computed by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted per share data is computed by dividing net income or loss applicable to common stockholders by the weighted average number of common shares outstanding 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 to outstanding but unexercised options, multiple series of preferred stock, and warrants for all periods presented.

We have excluded all potentially dilutive securities from the calculation of diluted loss per share attributable to common stockholders as of September 30, 2018 and 2017, as their inclusion would be antidilutive. Potentially dilutive common shares excluded from the calculations of diluted loss per share were 14.1 million as of September 30, 2018, which includes 9.2 million outstanding warrants and 0.2 million options, 4.7 million shares of preferred stock, and restricted stock awards. Potentially dilutive common shares excluded from the calculation of diluted loss per share were 0.5 million as of September 30, 2017 .

 

8.

Commitments and Contingencies

We have entered into agreements with various research organizations for pre-clinical and clinical development studies, which have provisions for cancellation. Under the terms of these agreements, the vendors provide a variety of services including conducting research, recruiting and enrolling 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 is estimated based on current study progress. As of September 30, 2018 , we have clinical research study obligations of $3.2 million, $1.7 million of which is expected to be paid within a year.  Should the timing of the clinical trials change, the timing of the payment of these obligations would also change.

On February 27, 2017, we entered into a Lease Agreement for office space for our corporate headquarters in San Diego, California (the “Lease”). The initial term of the Lease was 63 months and could have been extended upon mutual agreement. The commencement date was originally expected to take place in November 2017 and subsequently amended to January 1, 2018.  In connection with our restructuring announced in September 2017, we negotiated a buy-out of our obligations under the Lease for approximately $0.6 million, included in the general and administrative expenses.

11


On January 27, 2017, we e ntered into a Lease Agreement for office space for our office in Tokyo, Japan (the “Japan Lease”). The initial term of the Japan Lease is 61 months, and may be extended upon mutual agreement. The Japan Lease commenced on April 15, 2017.

We were party to an agreement with Roche Diagnostics Corporation (“Roche”) which required us to make certain product purchase minimums. On June 8, 2018, the Company received written notice from Roche terminating its existing supply agreement with the Company due to failure by the Company to meet minimum purchase requirements. Roche has indicated to the Company that it will agree to negotiate in good faith with the Company with respect to a new supply agreement for enzymes with specifications similar to the enzymes that Roche was previously manufacturing for the Company.

We are subject to various claims and contingencies related to legal proceedings.  Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions.  Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate.  Management believes that any liability to us that may arise as a result of currently pending legal proceedings will not have a material adverse effect on our financial condition, liquidity, or results of operations as a whole.

On April 27, 2018, Lorem Vascular (“Lorem”) filed suit against the Company in the U.S. District Court for the Southern District of California alleging the Company breached an oral agreement made in 2013 to purchase 5% of Lorem’s common stock for an aggregate amount of $5.0 million, and seeking specific performance of the alleged oral agreement and damages in an amount to be determined at trial. The Company filed a motion to dismiss all of Lorem’s claims, and on July 11, 2018 the Court granted the Company’s motion to dismiss. Lorem filed an amended complaint on August 3, 2018, advancing similar causes of action and seeking similar relief. Cytori filed a renewed motion to dismiss on August 27, 2018, and on October 1, 2018, Lorem voluntarily dismissed its amended complaint in its entirety.

On August 31, 2018, we filed a Demand for Arbitration with the American Arbitration Association in San Diego, California, against Bimini Technologies LLC (“Bimini”) for fraud and breach of a Sale and Exclusive License/Supply Agreement made in 2013 under which Bimini licensed rights to the Company’s Standalone Fat Transplantation, including the Puregraft Product Line and associated trademarks.  Our arbitration demand alleges that Bimini failed to make a $1.0 million milestone payment due to the Company after Bimini achieved $10.0 million in gross profits from the sale of the Company’s Puregraft product line, and Bimini deceived the Company about Bimini’s true gross profits figures.  Our arbitration demand seeks that $1.0 million milestone payment, as well prejudgment interest and attorneys’ fees.  On October 29, 2018 Bimini made the $1.0 million milestone payment. The parties subsequently entered into a settlement agreement resolving the claims in the Demand for Arbitration.

 

9.

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 September 30, 2018 , and as of December 31, 2017, 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, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value due to the short-term nature of these instruments. Further, based on the borrowing rates currently available for loans with similar terms, we believe the fair value of long-term debt approximates its carrying value.

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.

Warrants with exercise price reset features (down-round protection) are accounted for as liabilities, with changes in the fair value included in net income (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.

 

12


 

10.

Asset Purchase Agreement with Azaya Therapeutics

On February 15, 2017 (the “Closing Date”), t he Company completed the acquisition from Azaya Therapeutics, Inc. (“Azaya”) of certain tangible assets which consisted of a research lab, equipment and leasehold improvements and the assumption of certain of liabilities of Azaya, pursuant to an Asset Purchase Agreement (the “Agreement”). The book value of the tangible assets acquired was approximately $3.0 million at the acquisition date. The assets acquired are located in a facility rented in San Antonio, TX, by t he Company. In addition, pursuant to the Agreement, t he Company acquired intangible assets comprised of two drug candidates in process research and development (IPR&D) stage (i) ATI-0918, a generic bioequivalent formulation of Doxil®/Caelyx®, a chemotherapy drug that is a liposomal formulation of doxorubicin; and (ii) ATI-1123, a chemotherapy drug that is a liposomal formulation of docetaxel.

At the closing of the acquisition, the Company (i) issued 117,325 of shares of its common stock in Azaya’s name, (A) 87,994 of which were delivered to Azaya promptly after the Closing, and (B) 29,331 of which were deposited into a 15-month escrow pursuant to a standard escrow agreement; and (ii) assumed the obligation to pay approximately $1.8 million of Azaya’s existing payables, all of which   were paid on or prior to Dec ember 31, 2017.

T he Company accounted for the acquisition as an asset acquisition because the acquired set of assets did not meet the definition of a business. The total consideration of $4.3 million, which consists of $2.3 million related to the fair value of the common stock issued to Azaya at the acquisition date, $1.8 million in assumed liabilities and $0.2 million in acquisition costs, was allocated to the assets acquired based on their relative fair values at the time of acquisition. All other future payments were deemed contingent consideration which will be accounted for when the contingency is resolved and the consideration is paid or becomes payable. Because there was no current alternative use for the IPR&D, following the authoritative accounting guidance, the Company has expensed the total amount of $1.7 million on the Closing Date.

 

11.

Stockholders’ Equity

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, par value $0.001 per share. The Company’s 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 and 10,000 Series B Convertible Preferred Stock that had been issued at September 30, 2018 and December 31, 2017, respectively. There were no shares of Series A 3.6% Convertible Preferred Stock outstanding as of either date. There were 1,114 and 2,431 shares of Series B Convertible Preferred Stock outstanding as of September 30, 2018 and December 31, 2017, respectively.

On July 25, 2018, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Certificate of Designation”) with the Delaware Secretary of State creating a new series of its authorized preferred stock, par value $0.001 per share, designated as the Series C Convertible Preferred Stock (the “Series C Preferred Stock”). The number of shares initially constituting the Series C Preferred Stock was set at 7,000 shares. Pursuant to a registration statement on Form S-1 originally filed on April 27, 2018, as amended, and became effective on July 17, 2018, and related prospectus (as supplemented), the Company registered and distributed to holders of its common stock and Series B Convertible Preferred Stock, at no charge, non-transferable subscription rights to purchase up to an aggregate of 20,000 units each consisting of one share of Series C Preferred Stock and 1,050 warrants for $1,000 per unit. Each warrant is exercisable for one share of the Company’s common stock at an exercise price of $0.7986 per share for 30 months from the date of issuance and each share of Series C Preferred Stock is convertible into 1,253 shares of the Company's common stock. Pursuant to the 2018 Rights Offering, which closed on July 25, 2018, the Company sold an aggregate of 6,723 units, resulting in total net proceeds to the Company of approximately $5.7 million.

Based on the relevant authoritative accounting guidance, the warrants were liability classified at the issuance date. The warrants may be redeemed by the Company at $0.01 per warrant prior to their expiration if the Company’s common stock closes above $3.63 per share , subject to adjustment, for 20 consecutive trading days. The initial fair value of the liability associated with these warrants was $3.1 million, and the fair value decreased to $1.5 million as of September 30, 2018. The main driver for the change in the fair value of warrants at September 30, 2018, was related to the change in our stock price. All future changes in the fair value of the warrants will be recognized in our consolidated statements of operations until they are either exercised or expire.  The warrants are not traded in an active securities market, and as such the estimated the fair value as of September 30, 2018 was determined by using an option pricing model with the following assumptions:

 

 

 

As of September 30, 2018

 

 

 

As of July 25, 2018

(inception date)

 

Expected term

 

2.3 years

 

 

2.5 years

 

Common stock market price

 

$

0.41

 

$

0.72

 

Risk-free interest rate

 

 

2.83%

 

 

2.70%

 

Expected volatility

 

 

120%

 

 

112%

 

Resulting fair value (per warrant)

 

$

0.21

 

$

0.45

 

 

13


Expected volatility was computed using daily pricing observations of traded shares of Cytori for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the warrants. The risk-free interest rate is the U.S. Treasury bond rate as of the valuation date.

Fluctuations in the fair value of the warrants are 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 following table summarizes the change in our Level 3 warrant liability value (in thousands):

 

 

 

Nine months ended

 

Warrant liability

 

September 30, 2018

 

Beginning balance

$

3,148

 

Change in fair value

 

(1,676

)

Ending balance

$

1,472

 

 

The fair value of the common stock into which the Series C 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 deemed dividend to the preferred stockholders and, accordingly, an adjustment to net loss to arrive at net loss allocable to common stockholders.  We recorded a deemed dividend within additional paid-in capital of $2.5 million for the quarter ended September 30, 2018, related to a beneficial conversion feature included in the issuance of our Series C Convertible Preferred Stock.  There were 3,510 shares of Series C Preferred Stock outstanding as of September 30, 2018.

Common Stock

On April 11, 2017, we entered into the Underwriting Agreement with Maxim relating to the issuance and sale of 0.9 million shares of our common stock. The price to the public in the offering was $11.00 per share. Maxim purchased the shares from us pursuant to the Underwriting Agreement at a price of $10.40 per share. The net proceeds to us from the offering were approximately $8.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The offering closed on April 17, 2017 . In addition, under the terms of the Underwriting Agreement, we granted Maxim a   45-day   overallotment option to purchase up to 94,400 additional shares of common stock. On May 31, 2017, Maxim exercised their overallotment option and purchased 84,900 shares at $11.00 per share. The net proceeds to us were $0.8 million, after deducting underwriting costs and offering expenses payable by us.

On June 1, 2018, the Company entered into a Sales Agreement with B. Riley FBR to sell shares of its common stock having an aggregate offering price of up to $6.5 million through its ATM program. Through September 30, 2018, the Company sold a total of 1.5 million shares for proceeds of approximately $0.8 million through the ATM program.

On September 21, 2018 , the Company entered into a Purchase Agreement (the “Lincoln Park Purchase Agreement”) with Lincoln Park pursuant to which the Company has the right to sell to Lincoln Park and Lincoln Park is obligated to purchase up to $5.0 million of shares, of the Company’s common stock, over the 24-month period following October 15, 2018. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 250,000 shares of common stock on any business day but in no event will the amount of a single Regular Purchase (as defined in the Lincoln Park Purchase Agreement) exceed $1.0 million. The purchase price of shares of common stock related to the Regular Purchases will be based on the prevailing market prices of such shares at the time of sales. The Company’s sales of shares of common stock to Lincoln Park under the Lincoln Park Purchase Agreement are limited to the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of no more than 4.99% of the then outstanding shares of the common stock. There are no trading volume requirements or restrictions under the Lincoln Park Purchase Agreement. There is no upper limit on the price per share that Lincoln Park must pay for common stock under a Regular Purchase or an accelerated purchase and in no event under an accelerated purchase will shares be sold to Lincoln Park on a day the closing price of the Company’s common stock is less than the floor price of $0.25 per share as set forth in the Lincoln Park Purchase Agreement.

 

14


Item 2.  Manage ment’s Discussion and Analysis o f Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, includes the following sections:

 

Overview that discusses our operating results and some of the trends that affect our business.

 

Results of Operations that includes a more detailed discussion of our revenue and expenses.

 

Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our financial position and our financial commitments.

 

Significant changes since our most recent Annual Report on Form 10-K in the Critical Accounting Policies and Significant Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.

You should read this MD&A in conjunction with the financial statements and related notes in Item 1 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain statements that may be deemed “forward-looking statements” within the meaning of U.S. securities laws.  All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

These statements include, without limitation, statements about our anticipated expenditures, including research and development, sales and marketing, and general and administrative expenses; the potential size of the market for our products; future development and/or expansion of our products and therapies in our markets, our ability to generate  product or development revenues and the sources of such revenues; our ability to effectively manage our gross profit margins; our ability to obtain and maintain regulatory approvals; expectations as to our future performance; portions of the “Liquidity and Capital Resources” section of this report, including our potential need for additional financing and the availability thereof; our ability to continue as a going concern; our ability to remain listed on the Nasdaq Capital Market; our ability to repay or refinance some or all of our outstanding indebtedness and our ability to raise capital in the future; and the potential enhancement of our cash position through development, marketing, and licensing arrangements.   Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: the early stage of our product candidates and therapies, the results of our research and development activities, including uncertainties relating to the clinical trials of our product candidates and therapies; our need and ability to raise additional cash, the outcome of our partnering/licensing efforts, risks associated with laws or regulatory requirements applicable to us, market conditions, product performance, potential litigation, and competition within the regenerative medicine field, to name a few. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described under the “Risk Factors” in Item 1A of Part I below, which we encourage you to read carefully.

We encourage you to read the risks described under “Risk Factors” carefully. We caution you not to place undue reliance on the forward-looking statements contained in this report.  These statements, like all statements in this report, speak only as of the date of this report (unless an earlier date is indicated) and we undertake no obligation to update or revise the statements except as required by law.  Such forward-looking statements are not guarantees of future performance.

This Quarterly report on Form 10-Q refers to trademarks such as Cytori Cell Therapy, Habeo Cell Therapy, Celution, StemSource, Celase, Intravase, and Cytori Nanomedicine . Solely for convenience, our trademarks and tradenames referred to in this Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.

Overview

Our objective is to build a profitable and growing specialty therapeutics company.  To meet this objective, we have acquired and are developing two technology platforms that hold promise for treating millions of patients and represent significant potential for increasing shareholder value. Our current corporate activities fall substantially into advancing these platforms: Cytori Nanomedicine and Cytori Cell Therapy.

The Cytori Nanomedicine platform features a versatile nanoparticle technology for drug encapsulation and delivery that has thus far

15


provided the foundation to bring two drugs into mid/late stage clinical trials.  Nanoparticl e encapsulation is a clinically proven technology and has been shown to help improve the pharmacokinetic properties of many drugs, thus potentially enhancing the therapeutic profile and patient benefits.  Our lead oncology drug candidate, ATI-0918 is a gen eric version of Janssen’s Caelyx® pegylated liposomal encapsulated doxorubicin for the treatment of breast and ovarian cancer, multiple myeloma, and Kaposi’s sarcoma.  Pegylated liposomal encapsulated doxorubicin is a heavily relied upon chemotherapeutic u sed in many cancer types on a global basis.  We believe that data from a 60-patient European study of ATI-0918 has met the statistical criteria for bioequivalence to Janssen’s Caelyx®, the current reference listed drug in Europe.  We intend that these bioe quivalence data will serve as a basis for our planned regulatory submission to the European Medicines Agency, or EMA, for ATI-0918. We are currently evaluating our strategic options to bring ATI-0918 to the U.S., China, and other markets.  Our second oncol ogy drug candidate is ATI-1123, which is a patented, albumin-stabilized liposomal encapsulated docetaxel. Docetaxel is a well-accepted and often used chemotherapeutic drug used for many cancers.  A Phase I clinical trial of ATI-1123 has been completed and published, and we are investigating possible expansion of this trial to Phase II, potentially in conjunction with a development partner. We recently received FDA orphan drug designation for ATI-1123 for the treatment of small cell lung cancer. Finally, in connection with our acquisition of the ATI-0918 and ATI-1123 drug candidates, we have acquired know-how (including proprietary processes and techniques) and a scalable nanoparticle manufacturing plant in San Antonio, Texas from which we intend to manufactu re commercial quantities of our nanoparticle-encapsulated and -delivered drugs.

Cytori Cell Therapy, or CCT, is based on the scientific discovery that the human adipose or fat tissue compartment is a source of a unique mixed population of stem, progenitor and regenerative cells that may hold substantial promise in the treatment of numerous diseases and conditions. To bring this promise to health care providers and patients, we have developed certain novel therapies prepared and administered at the patient’s bedside with proprietary technologies that include therapy-specific reusable, automated, standardized Celution devices, single-use Celution consumable sets, Celase reagent, and Intravase reagent.   Our CCT lead product candidate, Habeo Cell Therapy, was evaluated in a Cytori-sponsored U.S. randomized, placebo-controlled, double-blind, multi-center clinical trial, STAR ( S cleroderma T reatment with Celution Processed A dipose Derived R egenerative Cells) , for the treatment of impaired hand function in patients with scleroderma.  The STAR trial enrolled and evaluated 88 patients with scleroderma, including 51 patients within the diffuse cutaneous subset and 37 with limited cutaneous scleroderma. On July 24, 2017, we announced top-line, preliminary data and presented the full data analysis on October 18, 2017. Feedback from a FDA pre-submission meeting, indicated that a clinical trial focused on more severely affected diffuse systemic sclerosis patients could be an appropriate next step given the results of the STAR clinical trial. FDA meeting minutes following the STAR trial are finalized but as of today, we are not prepared to commit, the financial and other resources required to conduct an additional clinical trial of Habeo. We will instead look to partnering or out-licensing opportunities as the primary basis for continued development. In addition, on January 22, 2018 , we announced the investigator-initiated and Cytori-supported SCLERADEC-II clinical trial in France using Habeo Cell Therapy completed its enrollment and data is anticipated in the fourth quarter of 2018. Additional CCT treatments are in various stages of development in the areas of urology, wounds, and orthopedics. Furthermore, our CCT platform is the subject of investigator-initiated trials conducted by our partners, licensees and other third parties, some of which are supported by us and/or funded by government agencies and other funding sources.  In March 2018, we announced a Japanese investigator-initiated study of ECCI-50 Cell Therapy in men with stress urinary incontinence, or SUI, following prostatic surgery for prostate cancer or benign prostatic hypertrophy, called ADRESU, completed enrollment of 45 patients. Patients will be followed up for one-year post treatment and preliminary data on the ADRESU trial is expected in early 2019. The trial costs are substantially supported by the Japan Agency for Medical Research and Development, an independent administrative agency of the Government of Japan, with additional support from Cytori. We entered into an amendment to our agreement with the U.S. Department of Health and Human Service’s Biomedical Advanced Research and Development Authority, BARDA, in May 2017 for the initiation of the RELIEF pilot clinical trial of DCCT-10 in thermal burn injury. The amendment extends the term of the BARDA Agreement and the period of performance of Option 2 of the BARDA Agreement to November 30, 2020. We have initiated the clinical trial and expect to begin enrollment of patients into the RELIEF trial within the next four months. Currently, we internally manufacture the Celution devices, outsource Celution consumables in the United States and source our Celase and Intravase reagents from a third-party supplier. We have contracted with a third-party manufacturer for the production of the Celution consumables used in the manufacturing of our products to improve scalability, reduce overhead and product costs of goods sold.  We also have obtained regulatory approval to sell some of our CCT products, including our Celution devices and consumables and associated reagents, in certain markets outside the U.S.  In those markets, we have been able to further develop and improve our core technologies, gain expanded clinical and product experience and data, and generate sales.

Results of Operations

Product revenues

Product revenues consisted of revenues primarily from the sale of Cytori Cell Therapy-related products.  

16


The following table summarizes the components for the three and nine months ended September 30, 2018 and 2017 (in th ousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Product revenues - third party

 

$

858

 

 

$

467

 

 

$

2,249

 

 

$

2,027

 

 

We experienced an increase of $0.4 million and $0.2 million in product revenue during the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. The increases in the three and nine months ended September 30, 2018 are primarily due to higher sales of Celution consumable sets in Japan.

 

The future:   We expect to continue to generate increased consumable utilization and a majority of product revenues from the sale of Cytori Cell Therapy-related products to researchers, clinicians, and distributors in all regions. In Japan and EMEA, researchers will use our technology in ongoing and new investigator-initiated and funded studies focused on, but not limited to, hand scleroderma, breast cancer-related lymphedema, Crohn’s disease, peripheral artery disease, erectile dysfunction, liver cirrhosis, and diabetic foot ulcers.  In the US, researchers will use our technology in an ongoing study focused on hip osteonecrosis.

Cost of product revenues

Cost of product revenues relate primarily to Cytori Cell Therapy-related products and includes material, manufacturing labor, and overhead costs, as well as amortization of intangible assets. The following table summarizes the components of our cost of revenues for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of product revenues (excluding amortization of intangible assets and share-based compensation)

 

$

320

 

 

$

176

 

 

$

910

 

 

$

974

 

Amortization of intangible assets

 

 

306

 

 

 

306

 

 

 

919

 

 

 

919

 

Share-based compensation

 

 

2

 

 

 

5

 

 

 

8

 

 

 

18

 

Total cost of product revenues

 

$

628

 

 

$

487

 

 

$

1,837

 

 

$

1,911

 

Total cost of product revenues as % of product revenues

 

 

73.2

%

 

 

104.3

%

 

 

81.7

%

 

 

94.3

%

 

Cost of product revenues as a percentage of product revenues was 73.2% and 81.7% for the three and nine months ended September 30, 2018 and 104.3% and 94.3% for the three and nine months ended September 30, 2017.  Fluctuation in this percentage is due to our product mix, distributor and direct sales mix, geographic mix, foreign exchange rates, idle capacity, and allocation of overhead.

The future: We expect to continue to see variation in our gross profit margin as the product mix, distributor and direct sales mix and geographic mix comprising revenues fluctuate. We are investigating various pricing options for our cellular therapeutics, which may help to increase our gross profit margins in 2018 and beyond.

Development revenues

Under our government contract with BARDA, we recognized a total of $0.5 million and $2.3 million in revenues for the three and nine months ended September 30, 2018 which included allowable fees as well as cost reimbursements.  During the three and nine months ended September 30, 2018, we incurred $0.4 million and $2.1 million in qualified expenditures, respectively. During the three and nine months ended September 30, 2017, we recognized revenue of $1.3 million and $2.9 million and incurred $1.2 million and $2.7 million in qualified expenditures, respectively. The decrease in revenues for the three and nine months ended September 30, 2018 as compared to the same periods in 2017 is primarily due to slight decrease in research and development activities related to BARDA delays experienced in enrollments.

The future: We entered into an amendment with BARDA in May 2017 for the initiation of the RELIEF pilot clinical trial of DCCT-10 in thermal burn injury. The amendment extends the term of the BARDA Agreement and the period of performance of Option 2 of the BARDA Agreement to November 30, 2020 . We expect to begin enrollment of patients into the RELIEF trial within the next four months.

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Research and development expenses

Research and development expenses relate to the development of a technology platform that involves using adipose tissue as a source of autologous regenerative cells for therapeutic applications, oncology drug program expenses, as well as the continued development efforts related to our clinical trials.

Research and development expenses include costs associated with the design, development, testing and enhancement of our products, payment of regulatory fees, laboratory supplies, pre-clinical studies and clinical studies.

The following table summarizes the components of our research and development expenses for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

General research and development

 

$

1,892

 

 

$

2,976

 

 

$

6,296

 

 

$

9,168

 

Share-based compensation

 

 

24

 

 

 

28

 

 

 

70

 

 

 

116

 

Total research and development expenses

 

$

1,916

 

 

$

3,004

 

 

$

6,366

 

 

$

9,284

 

 

The decrease in research and development expenses for the three and nine months ended September 30, 2018 as compared to the same periods in 2017 is due primarily to decreases of approximately $0.8 million and $1.6 million for the three and nine months periods in clinical study expenses as well as a decrease of $0.2 million and $1.0 million in salaries and benefits as a result of completion of enrollment in our U.S. STAR clinical trial enrolling in 2017, and decrease of $0.1 million and $0.4 million in rent expenses, offset by an increase of $0.2 million and $0.5 million for the three and nine months periods in professional services incurred as part of the RELIEF clinical trial activities.

The future:   We expect aggregate research and development expenditures remain consistent at current levels for the balance of 2018, as we work on clinical activities on the RELIEF clinical trial and our ongoing development efforts of the recently acquired ATI-0918 asset from Azaya.

Sales and marketing expenses

Sales and marketing expenses include costs of sales and marketing personnel, events and tradeshows, customer and sales representative education and training, primary and secondary market research, and product and service promotion.  The following table summarizes the components of our sales and marketing expenses for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales and marketing

 

$

442

 

 

$

812

 

 

$

1,605

 

 

$

2,952

 

Share-based compensation

 

 

11

 

 

 

28

 

 

 

51

 

 

 

91

 

Total sales and marketing expenses

 

$

453

 

 

$

840

 

 

$

1,656

 

 

$

3,043

 

 

Sales and marketing expenses decreased by $0.4 million and $1.3 million during the three and nine months ended September 30, 2018 as compared to the same periods in 2017 due primarily to decreases of $0.2 million and $0.5 million in salaries and benefits as well as of $0.1 million and $0.5 million in professional services because of the decreased efforts of our commercial activities for Habeo.

The future:   We expect sales and marketing expenditures to slightly decrease during the balance of 2018, as we decreased efforts on commercial readiness activities for Habeo in the U.S.

General and administrative expenses

General and administrative expenses include costs for administrative personnel, legal and other professional expenses, and general corporate expenses.  The following table summarizes the general and administrative expenses for the three and nine months ended September 30, 2018 and 2017 (in thousands):

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For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018