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CYTX > SEC Filings for CYTX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CYTORI THERAPEUTICS, INC.



Quarterly Report

Item 2 . Management's Discussion and Analysis of Financial Condition and Results of Operations

Our Management's Discussion and Analysis of Financial Condition and Results of Operations (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, 2011.


This report contains certain statements that may be deemed "forward-looking statements" within the meaning of United States of America 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 those related to clinical research studies 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 revenues or effectively manage our gross profit margins; our ability to obtain regulatory clearance; expectations as to our future performance; the "Liquidity and Capital Resources" section of this report, including our potential need for additional financing and the availability thereof; 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: our need and ability to raise additional cash, our joint ventures, 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 in our filings with the Securities and Exchange Commission and under the "Risk Factors" section in Part II below.

We encourage you to read the risks described under Part II, Item 1A "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 and actual results will likely differ, perhaps materially, from those suggested by such forward-looking statements.


Cytori Therapeutics, Inc. is developing cell therapies for cardiovascular disease and other soft tissue injuries around the world. Our cell therapies are based on a patient's own adipose-derived stem and regenerative cells (ADRCs) and have potential to treat a broad range of indications. These therapies are made available by our proprietary device, the Celution® System, which automates the extraction and preparation of clinical grade ADRCs at the time of the procedure.


The primary therapeutic areas within our development pipeline are cardiovascular disease, specifically acute heart attacks and refractory heart failure due to chronic myocardial ischemia, and the treatment of thermal burns. In cardiovascular disease, we are conducting our ATHENA trial for refractory heart failure in the U.S. and our ADVANCE heart attack trial in Europe.

In the U.S., we are conducting our ATHENA trial, a prospective, double blind, placebo-controlled, multi-center trial in up to 45 patients. The trial will measure several endpoints, including peak oxygen consumption (VO2 Max). Additional endpoints include perfusion defect, left ventricle end-systolic and diastolic volume and ejection fraction at six and 12 months. Enrollment is expected to be complete by mid-2013.


In our ADVANCE trial, we amended our European clinical protocol to conform to the evolving country-specific regulatory policies for good manufacturing practices and harmonize our regulatory, reimbursement and market access strategies, while simplifying the trial to a single arm pivotal design and optimizing enrollment criteria. In aggregate, these protocol amendments should accelerate country approvals and enrollment rates and increase the likelihood of success in this trial. We expect to resume enrollment in the fourth quarter of 2012.

In addition to our two ongoing clinical trials, we have completed three additional European trials, including two in cardiovascular indications. We have reported long term, 18 month data from both the PRECISE trial for chronic myocardial ischemia and the APOLLO trial for acute heart attack. Six month data from the APOLLO trial has been published in the peer review Journal of the American College of Cardiology; 18 month data from both trials are currently being prepared for publication.

Our CE Mark application for vascular claims for the Celution® system is currently under review. Barring delays or requests for further data, we anticipate a decision late this year or early next. Should we receive approval, we would target select hospital customers in the G5 countries, including ADVANCE trial sites, and likely implement a patient registry. This registry will allow us to collect further data to support reimbursement and government payors, and help expand market access.

In addition to our cardiovascular disease therapeutic pipeline, Cytori is also developing its cell therapy platform for the treatment of thermal burns combined with radiation injury. 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 the U.S. Department of Health and Human Service's Biomedical Advanced Research and Development Authority (BARDA). The initial base period includes $4.7 million over two years and covers 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.

Commercial Business

The 2012 goals for our commercial business are twofold. The first is to expand market access so that we can grow product revenue significantly over time and the second is to achieve a positive contribution margin in the near term. Market access in Europe and Asia continues to grow with expanded European approval broadly covering tissue ischemia and a full commercial operational license and Class 1 medical device clearance in Japan for our Celution® technology. The new Class 1 clearance allows us to import and sell our products through distribution channels in Japan, simplifying and expanding our ability to sell our products there. Today, our sales activities are focused on obtaining and maintaining successful early clinical adopters of our products. Looking forward, we intend to target larger market segments and grow therapeutically oriented consumable revenue. To accomplish this goal, we are focusing on driving essential market access elements such as published clinical and health economics data, physician education and indication-specific therapeutic claims.

Our most advanced therapeutic indication is breast reconstruction. In May 2012, we submitted a technology assessment application in the UK specific to our Celution® system for the RESTORE procedure as a way to both improve healthcare and lower the overall costs of breast reconstruction for women who have had a lumpectomy for breast cancer. This will help support our reimbursement efforts in the UK. In a similar fashion to the UK, we are working with other key competent authorities in Europe to expand coverage. In Japan, we are working with the Pharmaceuticals and Medical Devices Agency (PMDA), to utilize our global clinical data for Japanese approval of our technology for breast reconstruction. In other geographic markets, we intend to grow product sales where we are approved to sell.

The Celution® system is increasingly being used at academic hospitals and institutions as part of their own independent clinical studies. In recent months, we've seen a number of these translational medicine trials being approved to begin by the in-country regulatory bodies. By providing easy access to clinical-grade ADRCs, Cytori's cell therapy is an ideal platform for physicians around the world to study the use of these cells for a number of varied indications. To date, investigator-initiated clinical research using Cytori's cell therapy is being conducted in stress urinary incontinence, fistula and other wound repair, liver disease, ischemic heart failure, peripheral artery disease and scleroderma, among others.


Our corporate priorities are to expand global regulatory approvals, complete strategic development and commercialization partnerships, strengthen the balance sheet and continue to manage expenses.

One of our top priorities is to establish strategic partnerships which could accelerate core or non-core opportunities and potentially bring in significant additional capital. In the third quarter, we were awarded the contract with BARDA which has a base period of $4.7 million over a two year period. Under the terms of the contract, successful achievement of specified milestones will allow BARDA to review and, at its discretion, consider the execution of options and qualify Cytori to receive up to approximately $101 million in additional funding, if completely executed.


Due to the platform nature of our technology and products, we are able to simultaneously pursue transactions for multiple indications in core areas like cardiovascular disease and other non-core areas such as liver disease for which Astellas Pharma has acquired negotiation rights through December 2012. We continue to actively pursue a number of other ongoing, advanced partnership opportunities.

Olympus Partnership

On November 4, 2005, we entered into a strategic development and manufacturing joint venture agreement and other related agreements with Olympus. As part of the terms of these agreements, we formed a joint venture, Olympus-Cytori, Inc. (Joint Venture), to develop and manufacture future generation devices based on our Celution® System platform.

Under the Joint Venture Agreements:

? Olympus paid $30,000,000 for its 50% interest in the Joint Venture. Moreover, Olympus simultaneously entered into a License/Joint Development Agreement with the Joint Venture and us to develop a second generation commercial system and manufacturing capabilities.

? We licensed our device technology, including the Celution® System platform and certain related intellectual property, to the Joint Venture for use in future generation devices. These devices will process and purify adult stem and regenerative cells residing in adipose (fat) tissue for various therapeutic clinical applications. In exchange for this license, we received a 50% interest in the Joint Venture, as well as an initial $11,000,000 payment from the Joint Venture; the source of this payment was the $30,000,000 contributed to the Joint Venture by Olympus. Moreover, upon receipt of a CE Mark for the first generation Celution® System platform in January 2006, we received an additional $11,000,000 development milestone payment from the Joint Venture.

The Joint Venture currently has exclusive access to our Celution® System device technology for the development, manufacture, and supply of such systems to us. Once a second generation Celution® System is developed and approved by regulatory agencies, the Joint Venture will exclusively supply us with these systems at a formula-based transfer price. We have retained all marketing rights (subject to our various distribution agreements and regulatory rights) to sell the Celution® System devices for all therapeutic applications of adipose stem and regenerative cells.

We have worked closely with Olympus' team of scientists and engineers to design the future generations of the Celution® System so that it will contain certain product enhancements and that can be manufactured in a streamlined manner.

In August 2007, we entered into a License and Royalty Agreement with the Joint Venture which provides us the ability to commercially launch the Celution® System platform earlier than we could have otherwise done so under the terms of the Joint Venture Agreements. Subsequently, in November 2007, we amended the License/Commercial Agreement to substantially incorporate the terms of the Royalty Agreement (effective on the expiration of the Royalty Agreement) to continue to allow us to manufacture the Cytori-developed Celution® System platform, including the Celution® 800/CRS, until such time as the Joint Venture's products are commercially available for the same market served by the Cytori platform, subject to a reasonable royalty that will be payable to the Joint Venture for all such sales.

In 2011 Olympus experienced serious internal issues which have led to a significant change in the management structure at Olympus. In 2012 these changes have continued to develop, with a total restructuring of the Olympus board of directors, its management team, and aspects of its operations. In light of these events, we are engaged in ongoing discussions with Olympus relating to the future of the Joint Venture relationship. Throughout the discussions, both parties are committed to ensure that any changes to the Joint Venture structure that occur would be beneficial to both parties.


Results of Operations

Product revenues

Product revenues consisted of revenues primarily from our Celution® and Puregraft® Systems and StemSource® Cell Banks.

The following table summarizes the components for the three and nine months ended September 30, 2012 and 2011:

For the three months ended For the nine months September 30, ended September 30,

2012 2011 2012 2011

Third party $ 1,314,000 $ 2,134,000 $ 4,741,000 $ 5,908,000

We experienced a decrease in product revenue during the three and nine months ended September 30, 2012 as compared to the same periods in 2011, due principally to the product mix comprising revenue for each period and anticipated timing associated with larger system related sales.

The future: We expect to continue to generate product revenues from a mix of Celution ® and StemSource® System and consumables sales as well as Puregraft® orders. We will sell the products to a diverse group of customers in Europe, Asia and the U.S., who may apply the products towards reconstructive surgery, soft tissue repair, research, aesthetics, and cell and tissue banking as approved in each country.

Cost of product revenues

Cost of product revenues relate primarily to Celution® System products and StemSource® Cell Banks and includes material, manufacturing labor, and overhead costs. The following table summarizes the components of our cost of revenues for the three and nine months ended September 30, 2012 and 2011:

                                  For the three months            For the nine months
                                   ended September 30,            ended September 30,

                                   2012           2011           2012            2011

    Cost of product revenues    $   683,000     $ 926,000     $ 2,532,000     $ 2,842,000
    Share-based compensation         20,000        16,000          56,000          51,000
    Total cost of product
    revenues                    $   703,000     $ 942,000     $ 2,588,000     $ 2,893,000
    Total cost of product
    revenues as % of product
    revenues                           53.5 %        44.1 %          54.6 %          49.0 %

Cost of product revenues as a percentage of product revenues was 53.5% and 54.6% for the three and nine months ended September 30, 2012 and 44.1% and 49.0% for the three and nine months ended September 30, 2011, respectively. Fluctuation in this percentage is to be expected due to the product mix, distributor and direct sales mix, and allocation of overhead.

The future: We expect to continue to see variation in our gross profit margin as the product mix comprising revenues fluctuates.

Development revenues

The following table summarizes the components of our development revenues for the three and nine months ended September 30, 2012 and 2011:

                                  For the three months            For the nine months
                                   ended September 30,            ended September 30,

                                   2012            2011          2012            2011

     Development (Olympus)      $         -       $     -     $ 2,413,000     $ 1,231,000
     Research grant and other         2,000         5,000          21,000          19,000
     Total                      $     2,000       $ 5,000     $ 2,434,000     $ 1,250,000


We recognize deferred revenues, related party, as development revenue when certain performance obligations are met (i.e., using a proportional performance approach). During the quarter ended June 30, 2012, we recognized $2,413,000 of revenue associated with our arrangements with Olympus as a result of two remaining milestones for the APOLLO and PRECISE clinical trials that were reached upon the completion of all patient follow up procedures. During the quarter ended March 31, 2011, we recognized $1,231,000 of revenue associated with our arrangements with Olympus as a result of achieving a product development milestone related to the preproduction development of the next-generation Celution® One System.

The future: We may recognize additional development revenues during 2012, as the anticipated completion for the next revenue recognition milestone related to our Joint Venture with Olympus is in 2012. The exact timing of whether additional development revenue will be recognized and when amounts will be reported in revenue will depend on certain factors including obtaining certain regulatory clearances and/or approvals related to the Celution® System. However, the cash related to the joint venture agreements was received when these agreements were signed and no further related cash payments will be made to us even if we recognize additional development revenue related to the joint venture. To date, of the $28,311,000 originally deferred, we have recognized a total of $27,204,000 through September 30, 2012.

We may continue to recognize revenue from the Thin Film development work we are performing on behalf of Senko, based on the relative fair value of the milestones completed as compared to the total efforts expected to be necessary to obtain regulatory clearance from the MHLW. We have determined that we will need to conduct a clinical trial to receive an approval from the MHLW in order for initial commercialization to occur. We are currently working on the trial design, timeline and budget for the trial, and negotiating with Senko regarding the future of this slowly developing product line. Accordingly, if we are able to gain regulatory approval, we would expect to recognize approximately $1,129,000 (consisting of $879,000 in deferred revenues plus a non-refundable payment of $250,000 to be received upon commercialization) in revenues associated with this. Moreover, we would also expect to recognize $500,000 per year associated with deferred Senko license fees over a three-year period following commercialization, if achieved, as the refund rights associated with the license payment expire. There can be no assurance given of whether, or when, this regulatory approval might be received to allow us to proceed with commercialization.

Research and development expenses

Research and development expenses include costs associated with the design, development, testing and enhancement of our products, regulatory fees, the purchase of 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, 2012 and 2011:

                                  For the three months             For the nine months
                                   ended September 30,             ended September 30,

                                  2012            2011            2012            2011

   General research and
   development                 $ 3,353,000     $ 2,324,000     $ 8,948,000     $ 7,528,000
   Development milestone
   (Joint Venture)                  62,000         371,000         186,000       1,051,000
   Share-based compensation        140,000         135,000         481,000         369,000
   Total research and
   development expenses        $ 3,555,000     $ 2,830,000     $ 9,615,000     $ 8,948,000

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. These expenses, in conjunction with continued development efforts related to our Celution® System, result primarily from the broad expansion of our research and development efforts enabled by the funding we received from Olympus in 2005 and 2006 and from other investors during the last few years.

Research and development expenses for the three and nine months ended September 30, 2012 as compared to the same periods in 2011 increased primarily due to increase in research and development supplies of $156,000 and $126,000, and an increase in professional services of $184,000 and $305,000, respectively, as a result of increased clinical trial and regulatory support activities.

Expenditures related to the Joint Venture with Olympus, which are included in the variation analysis above, include costs that are necessary to support the commercialization of our products, including the next generation Celution® System. These development activities include performing pre-clinical and clinical studies, seeking regulatory approval, and performing product development related to therapeutic applications for adipose stem and regenerative cells for multiple large markets. The costs associated with the development of the device were comprised of labor and related benefits, consulting and other professional services, supplies and other miscellaneous expenses.

The future: We expect research and development expenditures to increase in the remainder of 2012 as we are scheduled to continue enrollment in the ADVANCE cardiac trial, continue enrollment in our US trial ATHENA, seek additional regulatory clearances and potentially seek to initiate additional trials or patient registries during 2012.


Sales and marketing expenses

Sales and marketing expenses include costs associated with sales and marketing personnel, tradeshows, physician training, and promotional activities and materials. The following table summarizes the components of our sales and marketing expenses for the three and nine months ended September 30, 2012 and 2011:

                                  For the three months             For the nine months
                                   ended September 30,             ended September 30,

                                  2012            2011            2012             2011

   Sales and marketing         $ 2,306,000     $ 3,383,000     $ 6,877,000     $  9,829,000
   Share-based compensation        144,000         235,000         529,000          731,000
   Total sales and marketing
   expenses                    $ 2,450,000     $ 3,618,000     $ 7,406,000     $ 10,560,000

The decrease in sales and marketing expense during the three and nine months ended September 30, 2012 as compared to the same periods in 2011 was mainly attributed to the decrease in salary and related benefits expense (excluding share-based compensation) of $642,000 and $1,755,000 due to a decrease in headcount, and a decrease in professional services expenses of $186,000 and $296,000, respectively, as a result of targeted reductions in staff and external costs made prior to year end in 2011 as well as subsequent reductions made in early 2012.

The future: We expect sales and marketing expenditures to remain relatively stable during remainder of 2012.

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, 2012 and 2011:

                                 For the three months              For the nine months
                                  ended September 30,              ended September 30,

                                 2012            2011             2012             2011

  General and
  administrative              $ 3,152,000     $ 3,069,000     $  9,648,000     $  9,803,000
  Share-based compensation        625,000         469,000        1,841,000        1,427,000
  Total general and
  administrative expenses     $ 3,777,000     $ 3,538,000     $ 11,489,000     $ 11,230,000

For the three and nine months ended September 30, 2012 as compared to the same periods in 2011, the general and administrative expenses (excluding share-based compensation) remained relatively consistent.

The future: We expect general and administrative expenses to remain relatively stable through the remainder of 2012.

Share-based compensation expenses

Stock-based compensation expenses include charges related to options issued to employees, directors and non-employees. We measure stock-based compensation expense based on the grant-date fair value of any awards granted to our employees. Such expense is recognized over the period of time that employees provide service to us and earn all rights to the awards.


The following table summarizes the components of our share-based compensation . . .

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