| 2017 annual report
TO MY FELLOW STOCKHOLDERS:
First of all, thank you for your continued support for Cytori and its mission. Despite the
disappointing results of our U.S. STAR trial for Habeo Cell Therapy in mid-2017, a number
of key milestones were achieved during the year and 2018 promises to be a likewise
eventful year as we work to move our oncology and cell therapy products closer to full
market approval.
In early, 2017, we acquired assets of Azaya Therapeutics, its nanoparticle technology and
its Texas-based manufacturing facility. Later this year, this facility will begin manufacturing
at commercial scale, our lead product, ATI-0918. This drug is a nanoparticle, encapsulated
generic formulation of liposomal doxorubicin; a chemotherapeutic agent used commonly
to treat breast and ovarian cancer. ATI-0918 has been shown to be bioequivalent to the
European reference drug and we intend to file for approval in Europe and in certain
secondary markets, once key manufacturing, quality and regulatory milestones are met.
The market for liposomal doxorubicin is anticipated to continue to grow on a global basis,
despite the introduction of newer oncology products. Our intention is to commercialize
this drug via collaboration with partners.
Marc Hedrick, MD
President and Chief Executive Officer
has shown safety and signs of potential efficacy in Phase I. Our plan is to partner this drug and initially seek further clinical data for
relapsing small cell lung cancer.
Our oncology pipeline includes a proprietary drug, ATI-1123, a nanoparticle docetaxel that
With respect to our cell therapy program, our U.S. STAR trial for HabeoTM Cell Therapy in patients with scleroderma did not meet its
primary endpoint, but showed that it was safe and potentially effective in the subset of patients with diffuse scleroderma. Cytori is
currently working with the FDA to develop a clinical plan for approval for this indication. Furthermore, the European sister trial to
STAR, SCLERADEC-II was fully enrolled in early 2018; we anticipate data later in the year.
Our Japanese investigator-initiated ADRESU approval trial using Cytori Cell Therapy for male stress urinary incontinence following
prostate surgery completed enrollment in March 2018. If results are positive, we intend to file for approval for this indication in
Japan. Our BARDA-funded thermal burn clinical trial should begin enrollment later this year.
Finally, we continue to commercialize our cell therapy technology under relevant provisions of the Regenerative Medicine Law in
Japan. In 2017, we continued to generate double digit consumable sales growth and anticipate that trend to continue in 2018, as an
increasing number of hospitals and clinics implement our technology to treat patients with aesthetic, breast and orthopedic
conditions.
In conclusion, I want to recognize the employees of Cytori for their dedication to the company and its mission. The many
achievements of 2017 are because of them. Due to their hard work and dedication, as well the support of our various stakeholders
and the medical providers and patients that trust us; we have many more promising opportunities to which we can look forward in
2018. Thank you once again for your support!
Sincerely,
Marc H. Hedrick, MD
President and Chief Executive Officer
April 6, 2018
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
(State or Other Jurisdiction of
Incorporation or Organization)
3020 CALLAN ROAD, SAN DIEGO, CALIFORNIA
(Address of principal executive offices)
33-0827593
(I.R.S. Employer
Identification No.)
92121
(Zip Code)
Registrant’s telephone number, including area code: (858) 458-0900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $0.001
Name of each exchange on which registered
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☒
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” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one).
Large Accelerated Filer
Non-Accelerated Filer
Emerging growth company
☐
☐ (Do not check if a smaller reporting company)
☐
Accelerated Filer
Smaller reporting 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 financial 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 ☒
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on June 30, 2017, the last business day of
the registrant’s most recently completed second fiscal quarter, was $36.4 million based on the closing sales price of the registrant’s common stock on
June 30, 2017 as reported on the Nasdaq Capital Market, of $1.10 per share.
As of January 31, 2018, there were 59,819,615 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
PART I
Item 1.
Business………………………………………………………………………………………………….…………
Item 1A. Risk Factors……………..…………………………………………………………………………………….……
Item 1B. Unresolved Staff Comments………………………………………………………………………………….……
Properties……………………………………………………………………………………………………..…….
Item 2.
Legal Proceedings…..………………………………………………………………………………………….…..
Item 3.
Mine Safety Disclosures………..………………………………………………………………………………..…
Item 4.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...
Item 5.
Selected Financial Data………………………………………………………………………………………….…
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations……………………...
Item 7A. Quantitative and Qualitative Disclosures About Market Risk………………………………………………….….
Financial Statements and Supplementary Data………………………………………………………………….…
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure……………………...
Item 9A. Controls and Procedures…………………………………………………………………………………………....
Item 9B. Other Information…………………………………………………………………………………………………..
PART III
Page
3
15
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51
51
51
52
54
55
63
64
89
89
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Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance…………………………………………………………
Executive Compensation…………………………………………………………………………………………...
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters………….
Certain Relationships and Related Transactions, and Director Independence……………………………………..
Principal Accounting Fees and Services…………………….……………………………………………………..
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PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules…………………………………………………………………………..
Form 10-K Summary…………………..………………………………………………….…………………….…
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PART I
Item 1. Business
References to “Cytori,” “we,” “us” and “our” refer to Cytori Therapeutics, Inc. and its consolidated subsidiaries. References to
“Notes” refer to the Notes to Consolidated Financial Statements included herein (refer to Item 8).
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 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; 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; 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 under the “Risk Factors” in
Item 1A of Part I above, 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 and actual results will likely differ, perhaps
materially, from those suggested by such forward-looking statements.
This Annual report on Form 10-K refers to trademarks such as Cytori Cell Therapy, Habeo Cell Therapy, Celution, Celase, Intravase,
Puregraft and StemSource. Solely for convenience, our trademarks and tradenames referred to in this Form 10-K 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.
General
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 liposomal nanoparticle technology for drug encapsulation that has thus far
provided the foundation to bring two promising drugs into mid/late stage clinical trials. Nanoparticle encapsulation is promising
because it can help improve the delivery and metabolism of many drugs, thus potentially enhancing the therapeutic profile and patient
benefits. Our lead drug candidate, ATI-0918 is a generic version of pegylated liposomal encapsulated doxorubicin. Pegylated
liposomal encapsulated doxorubicin is a heavily relied upon chemotherapeutic used 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 bioequivalence 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 nanomedicine drug candidate is ATI-1123, a novel and new
chemical entity which is a nanoparticle-encapsulated form of docetaxel, also a workhorse 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
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trial to Phase II, most likely in conjunction with a development partner. 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 manufacture commercial quantities of our
nanoparticle 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 providers and their patients, we are developing 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 lead product candidate, Habeo™
Cell Therapy, was evaluated in a Cytori-sponsored U.S. randomized, placebo-controlled, double-blind, multi-center clinical trial,
STAR (Scleroderma Treatment with Celution Processed Adipose Derived Regenerative Cells), for the treatment of impaired hand
function in patients with scleroderma. On July 24, 2017, we announced top-line, preliminary data and presented the full data analysis
on October 18, 2017. The STAR trial enrolled and evaluated 88 patients with scleroderma, including 51 patients within the diffuse
cutaneous subset and 37 with limited cutaneous scleroderma. While the primary and secondary endpoints did not reach statistical
significance at 24 or 48 weeks, the trial data reported clinically meaningful improvement in the primary and secondary endpoints of
both hand function and scleroderma-associated functional disability, for Habeo treated patients compared to placebo, in the pre-
specified subgroup of patients with diffuse cutaneous scleroderma. Further, 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 second half of 2018. Additional CCT treatments are in various stages of development in the areas of urology,
wounds, and orthopedics. Further, 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, detailed
in an announcement on November 13, 2017. Currently, we internally manufacture the Celution devices and consumables in the
United States and the United Kingdom and source our Celase and Intravase reagents from a third-party supplier. We are exploring
contract manufacturing organization options for the Celution System to 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.
Development Pipeline
Cytori Nanomedicine
In February 2017, we completed our acquisition of the assets of Azaya Therapeutics, Inc., or Azaya, pursuant to the terms of an Asset
Purchase Agreement, dated January 26, 2017. Pursuant to the terms of the agreement, we acquired equipment and certain intellectual
property, including a portfolio of investigational therapies and related assets, and assumed certain liabilities, from Azaya in exchange
for the issuance of 1,173,241 of shares of our common stock in the amount of $2.3 million, assumption of approximately $1.8 million
in Azaya’s payables, and the obligation to pay Azaya future milestones, earn-outs and licensing fees. The acquisition of Azaya
brought two additional product candidates, ATI-0918 and ATI-1123, into the Cytori pipeline and we intend to develop and potentially
commercialize both, most likely in conjunction with a commercial partner.
ATI-0918 is a complex generic formulation of the widely used oncology drug, Doxil®/Caelyx®, which is a pegylated liposomal
encapsulation of doxorubicin and approved in the U.S. for ovarian cancer, multiple myeloma, and Kaposi’s Sarcoma; and in the
European Union for breast cancer, ovarian cancer, multiple myeloma, and Kaposi’s Sarcoma. The current approval pathway for ATI-
0918 is to leverage existing bioequivalence data to Caelyx® for approval in the European Union and to demonstrate bioequivalence to
Sun Pharma’s Lipodox®, the reference standard, in the U.S. A study to demonstrate ATI-0918’s bioequivalence to Caelyx®, for
purposes of EMA approval, has been completed and we intend for these data to serve as the basis for our submission of a marketing
authorization application for ATI-0918 to the EMA. We are also making plans to perform a bioequivalence study of ATI-0918
compared against Lipodox® to serve as the basis for submission of an abbreviated new drug application, or ANDA, for U.S. FDA
approval. We currently anticipate that any U.S. bioequivalence trial for ATI-0918 would be funded by a development partner or
licensee.
ATI-1123 is a novel liposomal formulation of docetaxel. Generic forms of docetaxel are currently FDA approved and marketed for
non-small cell lung cancer, breast cancer, squamous cell carcinoma of the head and neck cancer, gastric adenocarcinoma, and
hormone refractory prostate cancer. Its side effects include hair loss, bone marrow suppression, and allergic reactions. There is
currently no form of liposomal docetaxel approved or commercially available. There is a protein (albumin) bound form of a similar
chemotherapeutic drug, paclitaxel known as Abraxane®, which demonstrated some clinical advantages to paclitaxel. ATI-1123 has
shown promising results in preclinical animal models that suggest it may have superior qualities to docetaxel, including actions
against some tumor types that are not amenable to treatment by docetaxel. A Phase I study of ATI-1123 has been completed and
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published (Cancer Chemother Pharmacol (2014) 74:1241–1250), in late stage refractory patients and has shown some activity in
several tumor types (mostly stable disease). We are currently evaluating opportunities to bring ATI-1123 into Phase II studies in
several indications, including small cell lung cancer, via potential development partner or licensee.
Cytori Cell Therapy
The primary near-term goal is for Habeo Cell Therapy to be the first cell therapy product approved for the treatment of impaired hand
function in patients with scleroderma, through Cytori-sponsored and supported clinical development efforts.
In the U.S., the STAR clinical trial evaluated the safety and efficacy of a single administration of Habeo Cell Therapy for impaired
hand function in patients with scleroderma. The first sites for our STAR trial were initiated in July 2015 and final enrollment of 88
patients was completed in June 2016. As noted above, preliminary assessment of unblinded top-line data show that treatment of
ADRC’s was safe and while not meeting the primary endpoint for all scleroderma patients, subjects with diffuse scleroderma appeared
to exhibit clinically meaningful improvement in several parameters of both hand function and scleroderma-associated functional
disability, for Habeo™ treated patients compared to placebo. In Europe, the investigator-initiated and Cytori-supported
SCLERADEC-II (Subcutaneous Injection of Autologous Adipose Tissue-derived Stromal Vascular Fraction into the Fingers of
Patients with Systemic Sclerosis) clinical trial is evaluating the safety and efficacy of a single administration of Habeo Cell Therapy
for impaired hand function in patients with scleroderma. The first sites were initiated in October 2015 and final enrollment of 40
patients was completed in January 2018. Data is anticipated in the second half of 2018.
In Japan, Cytori held an informal consultation meeting with the Pharmaceuticals and Medical Devices Agency, or PMDA, to discuss
the feasibility of potential Habeo development strategies and clinical trial designs for a single approval trial based on the results from
the U.S. STAR clinical trial. Cytori believes that a single arm 20 patient clinical trial of Habeo Cell Therapy for diffuse scleroderma
will be required to obtain approval.
With respect to the remainder of our current CCT clinical pipeline:
In July 2015, 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, received
approval to begin enrollment from the Japanese Ministry of Health, Labor and Welfare, or MHLW. Details of the
ADRESU trial protocol were published in 2017. The basis for initiating ADRESU was a previously completed pilot
trial, with short-term results of 11 patients published in 2014 and long-term results of 14 patients presented in 2017. In
February 2018, the ADRESU trial had over 90% enrolled. The Japan Agency for Medical Research and Development,
or AMED, has provided partial funding for the ADRESU trial.
We are developing DCCT-10 Cell Therapy for thermal burns under a contract from the Biomedical Advanced Research
Development Authority, or BARDA, a division of the U.S. Department of Health and Human Services. In April 2017,
we received approval of an Investigational Device Exemption, or IDE, from the U.S. Food and Drug Administration, or
FDA, to conduct a pilot clinical trial, RELIEF (Safety and Feasibility of Adipose Derived Regenerative Cells (ADRCs)
in the Treatment of Deep Partial Thickness and Full Thickness Thermal Wounds), of DCCT-10 administered
intravenously in up to 30 patients with thermal burn injuries at up to 10 U.S. institutions. In May 2017, we announced
BARDA’s exercise of Option 2 of up to approximately $13.4 million to fund RELIEF. We initiated RELIEF in 2017
and anticipate that the first patient will be treated in the first half of 2018.
In addition to our targeted therapeutic development, we have continued to commercialize our CCT technology under select medical
device approvals, clearances and registrations to customers in Asia-Pacific, Europe, Japan and other regions. These customers are a
mix of research customers evaluating new therapeutic applications of CCT and commercial customers, including our licensing
partners, distributors, and end user hospitals, clinics and physicians, that use our Celution System mostly for treatment of patients in
private pay procedures. In Japan, our largest commercial market, we gained increased utilization of our products in the private pay
marketplace due to several factors, including increased clarity around the November 2014 Regenerative Medicine Law (implemented
in November 2015 as it relates to regenerative medicine products like CCT) and we project that our sales of Celution consumable sets
and market presence in Japan will continue to grow in 2018. The sale of Celution devices and consumable sets, reagents, and
ancillary products contribute a margin that partially offsets our operating expenses and will continue to play a role in fostering
familiarity within the medical community with our technology. It also provides us with valuable product and customer feedback.
Scleroderma
Scleroderma is a rare and chronic connective tissue disease generally classified as an autoimmune rheumatic disorder. An estimated
300,000 Americans have scleroderma, about one-third of whom have the systemic form of the disease, known as systemic sclerosis, or
SSc. SSc is further sub-classified as diffuse cutaneous and limited cutaneous SSc. Diffuse subset tends to produce more severe
manifestations with significant hand dysfunction and internal organ involvement. Diffuse scleroderma accounts for between one third
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and one half of all cases of systemic sclerosis. Women are affected four times more frequently than men and the condition is typically
detected between the ages of 30 and 50. More than 90% of scleroderma patients are afflicted with hand involvement that is typically
progressive and can result in chronic pain, blood flow changes and severe dysfunction. A small number of treatments are occasionally
used off-label for hand scleroderma, but they do little to modify disease progression or substantially improve symptoms with some
challenging side-effects. Current treatment options are directed at protecting the hands from injury and detrimental environmental
conditions as well as the use of vasodilators. When the disease is advanced, prostanoids, Endothelin-1 receptor antagonists, and
immunosuppressants may be used but are often accompanied by side effects. If these medications are unsuccessful, health providers
may perform a sympathectomy to remove nerves to increase blood flow and decrease long-term pain.
Some of the first scleroderma patients treated with Cytori Cell Therapy was through SCLERADEC I, a completed, investigator-
initiated, 12-patient, open-label, Phase I pilot trial sponsored by Assistance Publique-Hôpitaux de Marseille, or AP-HM, in Marseille,
France. The SCLERADEC-I trial received partial support from Cytori. The six-month results were published in the Annals of the
Rheumatic Diseases in May 2014 and demonstrated approximately a 50 percent improvement at six months across four important and
validated endpoints used to assess the clinical status in patients with scleroderma with impaired hand function. Two-year follow up
data in the SCLERADEC I trial was presented at the Systemic Sclerosis World Congress in February 2016 and published in the
journal Current Research in Translational Medicine in November 2016 and demonstrated sustained improvement in the following
four key endpoints: the Cochin Hand Function Scale, or CHFS, the Scleroderma Health Assessment Questionnaire, Raynaud’s
Condition Score, and hand pain, as assessed by a standard visual analogue scale. Further, on December 5, 2016, we released topline
results for three-year follow-up data showing sustained benefits materially consistent with those shown in two-year data.
In 2014, Drs. Guy Magalon and Brigitte Granel, under the sponsorship of AP-HM, submitted a study for review for a follow-up
randomized, double-blind, placebo-controlled trial in France using Cytori Cell Therapy, partially supported by Cytori. The trial,
named SCLERADEC II, received approval from the French government in April 2015. Enrollment of this trial commenced in October
and the last patient treated was in January 2018. We anticipate data in the second half of 2018. Patients will be followed at six-month
post-treatment and compared with placebo treated patients. The SCLERADEC II trial includes an open-label crossover arm in which
patients originally randomized to the placebo arm may be eligible to be treated with their cryopreserved cells after the aforementioned
six-month data have been analyzed and reviewed by an independent monitoring committee. Eligible patients electing to receive
treatment with these cryopreserved cells will be followed for both safety and efficacy for six months.
Based on the results of SCLERADEC I, we initiated the STAR trial, a 48-week, randomized, double blind, placebo-controlled pivotal
clinical trial of 88 patients at 19 sites in the U.S. to evaluate the safety and efficacy of Habeo Cell Therapy for scleroderma patients
with impaired hand function. The STAR trial used the CHFS, a validated measure of hand function, as the primary endpoint measured
at 24 weeks and 48 weeks (approximately 6 and 12 months) after a single administration of Habeo Cell Therapy or placebo. Of the 88
patients enrolled in STAR, 51 had diffuse cutaneous scleroderma while 37 had the limited form of the disease.
On July 24, 2017, we announced top-line, preliminary data from the STAR trial. The results from the STAR Trial showed that that
treatment of ADRC’s was safe and while not meeting the primary endpoint for all SSc patients, subjects with diffuse SSc appeared to
exhibit clinically meaningful improvement in several hand parameters of both hand function and scleroderma-associated functional
disability, for Habeo™ treated patients compared to placebo. We recently released a more detailed assessment of STAR Trial data at
the World Scleroderma Congress this past February. Further, we anticipate feedback from our FDA pre-submission meeting later this
quarter, which will provide us with a clearer picture of the optimal path forward with this therapy in the U.S.
In November 2016, the US FDA Office of Orphan Products Development granted Cytori an orphan drug designation for
cryopreserved or centrally processed Habeo for scleroderma. In April 2016, the European Commission, acting on the positive
recommendation from the European Medicines Agency Committee for Orphan Medicinal Products, issued orphan drug designation to
a broad range of Cytori Cell Therapy formulations when used for the treatment of systemic sclerosis under Community Register of
Orphan Medicinal Products number EU/3/16/1643.
Stress Urinary Incontinence
Another therapeutic target under evaluation by Cytori, led by the University of Nagoya and three other sites and partially supported by
the Japanese MHLW, is stress urinary incontinence in men following surgical removal of the prostate gland, which is based on
positive data reported in a peer reviewed journal resulting from the use of ADRCs prepared by our Celution System. The ADRESU
trial is a 45 patient, investigator-initiated, open-label, multi-center, single arm trial that was approved by the Japanese MHLW in July
2015 and is being led by both Momokazu Gotoh, MD, Ph.D., Professor and Chairman of the Department of Urology and Tokunori
Yamamoto, MD, Ph.D., Associate Professor Department of Urology at University of Nagoya Graduate School of Medicine. ADRESU
is based on promising pilot trial data published in the International Journal of Urology in 2014 and presented at the International
Continence Society in 2017. The primary endpoint for the ADRESU trial will be the number of patients who experience reduction of
urinary leakage volume (as measured by the weight of diaper pads used over 24 hours) 52 weeks after treatment. If the endpoint is
successfully achieved, the data will be used to seek approval of Cytori Cell Therapy for this indication. Trial enrollment began in
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September 2015, and in February 2018, the trial is over 90% enrolled. Full enrollment is expected by the second quarter of 2018 with
top-line results available in late 2018 or 2019. This clinical trial is primarily sponsored and funded by the Japanese government,
including a grant provided by AMED.
Cutaneous and Soft Tissue Thermal and Radiation Injuries
We are also developing Cytori Cell Therapy, or DCCT-10, for the treatment of thermal burns. In the third quarter of 2012, we were
awarded a contract by BARDA valued at up to $106 million to develop a medical countermeasure for thermal burns. The total award
under the BARDA contract has been intended to support all clinical, preclinical, regulatory and technology development activities
needed to complete the FDA approval process for use of DCCT-10 in thermal burn injury under a device-based pre-market
authorization, or PMA, regulatory pathway and to provide preclinical data in burn complicated by radiation exposure.
Pursuant to this contract, BARDA initially awarded us approximately $4.7 million over the initial two-year base period to fund
preclinical research and continued development of our Celution System to improve cell processing. In August 2014, BARDA
determined that Cytori had completed the objectives of the initial phase of the contract, and exercised its first contract option in the
amount of approximately $12 million. In December 2014 and September 2016, BARDA exercised additional contract options
pursuant to which it provided us with $2.0 million and $2.5 million in supplemental funds, respectively. These additional funds
supported continuation of our research, regulatory, clinical and other activities required for submission of an IDE request to the FDA
for RELIEF, a pilot clinical trial using DCCT-10 for the treatment of thermal burns. In April 2017, we received approval of an IDE
from the FDA to conduct a pilot clinical trial of CCT in patients with thermal burn injuries. This trial is referred to as the RELIEF
clinical trial. In May 2017, we announced BARDA’s exercise of Option 2 of up to approximately $13.4 million to fund RELIEF. We
initiated RELIEF in 2017 through amendments to our contract with BARDA, or the Amendments. We anticipate that the first patient
will be treated in the first half of 2018.
In accordance with the terms of the Amendments, BARDA will provide us with reimbursement of costs incurred, plus payment of a
fixed fee, in the aggregate amount of up to approximately $13.4 million, or the Funding Amount. We are responsible for further costs
in excess of the Funding Amount, if any, to meet the objectives of the Pilot Trial. The Amendments also extend the term of the
BARDA Agreement and the period of performance of Option 2 of the BARDA Agreement to November 30, 2020.
Sales, Marketing and Service
Cytori Nanomedicine™
Our Cytori Nanomedicine pipeline includes both early and late stage nanomedicine product candidates, patented liposomal
encapsulated docetaxel (ATI-1123) and generic pegylated liposomal encapsulated doxorubicin (ATI-0918), respectively. We are
actively seeking regional and global partnerships with either leading pharmaceutical companies or wholesale distributors for both of
these product candidates, with priority on ATI-0918 in Europe where a generic form of liposomal doxorubicin is neither approved nor
available.
Cytori Cell Therapy
We sell Celution cell processing systems, or Celution Systems, StemSource cell and tissue banking systems, or StemSource Systems,
and surgical accessories and instrumentation to hospitals, clinics, physicians, researchers and other customers for commercial and
research purposes, including performance of investigator-initiated studies. Our proprietary enzymatic reagents, which we market and
sell under the brand names Celase and Intravase, are sold as part of our Celution Systems and StemSource Systems (with respect to
Celase), or under certain circumstances, are sold separately.
We sell our Celution and StemSource Systems through a combination of a direct sales force, third-party distributors, independent sales
representatives, and licensees. Our strategy is to grow and leverage our installed base of Celution and StemSource devices at cell
processing facilities, clinics, hospitals and research labs to drive recurring sales of our proprietary consumable sets and gain valuable
customer feedback. To increase product familiarity and usage among current customers, we launch product enhancements, expand the
approved indications for use, perform clinical and technical training, provide on-site case support, and facilitate facility-level licensing
with regional and/or national regulatory bodies.
In Japan, we sell our products through our wholly owned subsidiary, Cytori Therapeutics, K.K., which has a direct sales
capability. We currently intend to increase our direct sales personnel in Japan over time. In the Bahamas, Chile, Europe, South
Korea, Russia and Vietnam, we sell our full product portfolio either directly to customers or through numerous third-party
distributors. In the U.S., we are limited to selling only research reagents and surgical accessories and instrumentation directly to
7
customers. Bimini Technologies, LLC, through its wholly owned subsidiary Kerastem Technologies, LLC, has a global exclusive
license to sell our Celution cell processing systems for hair applications. Lorem Vascular has an exclusive license to sell our full
product portfolio in all fields of use, excluding hair applications, in Australia, China, Hong Kong, Malaysia and Singapore. We also
have engaged with partners to potentially leverage Managed Access Programs (also known as early access program or named patient
programs) in various locations.
As of December 31, 2017, we had two individuals in our global marketing team responsible for market assessments and business
plans, competitive intelligence, distribution strategy, product management, social media and websites, forecasting, pricing and
reimbursement, customer communication, relationship management, events and trade shows, and service. We create awareness of and
demand for our products among physicians and researchers through digital advertising, e-marketing campaigns, webinars, pre-clinical
and clinical publications, patient advocacy group partnerships, sales collateral, and industry and medical society meetings.
As of December 31, 2017, we had two Cytori employees/contractors in our field service team responsible for providing Celution and
StemSource installations, maintenance, training, troubleshooting, and hardware and software update/upgrade services to new and
existing customers. This team also initiates and closes sites participating in Cytori-sponsored clinical trials.
For the year ended December 31, 2017, our sales were concentrated with respect to five direct customers, which comprised 68% of
our product revenue recognized. One licensee and one direct customer accounted for 77% of total outstanding accounts receivable
(excluding receivables from BARDA) as of December 31, 2016.
Customers and Partners
In Japan, Europe, the Middle East, the Asia-Pacific region and Latin America, we offer our Cytori Systems and StemSource Systems
through direct sales representatives, distributors and licensing partners, to hospitals, clinics and researchers, including for purposes of
performing investigator-initiated and funded studies.
Pursuant to our Sale and Exclusive License/Supply Agreement with Bimini Technologies, LLC, or Bimini Agreement, we granted
Bimini a global exclusive license to our Cytori Cell Therapy devices and consumable products for hair applications only, excluding
systemic or intravascular delivery of adipose-derived regenerative cells, or ADRCs. Hair loss affects more than 40 million men and
21 million women in the U.S. alone. The global hair loss treatment market generates more than $7 billion annually and currently has
limited options for men (grades I-III) and women (grades I-II) with early stage hair loss. Through Kerastem, its wholly owned
subsidiary, Bimini completed a FDA-approved Phase II multi-center, randomized, single-blinded, and controlled clinical trial in the
U.S., called STYLE (A Trial of Cell Enriched Adipose For Androgenetic Alopecia), to study the safety and feasibility of Kerastem’s
therapy for female and male pattern baldness. The Kerastem therapy is a one-time treatment that utilizes adipose (fat) derived
regenerative cells combined with purified fat delivered to the affected area of scalp. In September 2016, Bimini announced
completion of its STYLE trial enrollment of 70 patients at four clinical trial sites within the U.S. In December 2017, Bimini
announced six-month top-line data from STYLE. The low dose ADRC plus Puregraft fat treatment group achieved a statistically
significant increase in mean terminal hair count, when compared to control, in men with early stage hair loss (Norwood Grades I-III).
An average increase of 29 terminal hairs per cm2 of scalp was observed, corresponding to a 17% increase (p < 0.05) from baseline.
All treatment arms of STYLE were safe with no serious adverse events reported. Outside of the United States, Bimini is engaged in
market development efforts in Europe and Japan for the hair market. The Kerastem Hair Therapy is CE mark approved in the EU for
sales to patients with alopecia, or hair loss. Under the Bimini Agreement, Bimini is required, among other things, to pay an eight
percent (8%) royalty on its net sales of our products for contemplated hair applications.
Pursuant to our Amended and Restated License/Supply Agreement, or Lorem Agreement, with Lorem Vascular Pte. Ltd., or Lorem
Vascular, we granted Lorem Vascular an exclusive license in all fields of use (excluding hair applications subject to Bimini’s license)
to our Cytori Cell Therapy products for sale into China, Hong Kong, Malaysia, Singapore and Australia. In April 2015, Cytori and
Lorem Vascular announced that China Food and Drug Administration had granted regulatory clearance to the Celution System.
Under the Lorem Agreement, Lorem Vascular committed to pay up to $500 million in license fees in the form of revenue milestones.
In addition, Lorem Vascular is required to pay Cytori 30% of their gross profits in China, Hong Kong and Malaysia for the term of the
Lorem Agreement. Lorem Vascular has certain minimum product purchase obligations, including purchase obligations triggered by
achievement of applicable regulatory clearance for our products in China, which regulatory clearance was achieved as of April 2015.
Lorem Vascular has partially satisfied these related product purchase obligations, and as a result, we are currently in discussions with
Lorem Vascular regarding restructuring of its obligations and our rights under the Lorem agreement. We cannot guarantee that our
restructuring discussions with Lorem Vascular will be successful. Should we be unable to conclude these negotiations to our
satisfaction, a dispute may ensue. See, also, our discussions of the regulatory landscape in China for our products as well as
discussions regarding our relationship with Lorem Vascular in the “Risk Factors” section and in the “Competition” and
“Governmental Regulation” sections of this “Business” section below.
Refer to Note 2 of the Notes to Consolidated Financial Statements for a discussion of geographical concentration of sales.
8
Manufacturing
Cytori Nanomedicine
We are in the process of obtaining facility validations at our recently acquired nanoparticle manufacturing facility located in San
Antonio, Texas. Once validation is complete, the facility and processes are designed to comply with cGMP per FDA and EMA
regulations to manufacture drug candidates for clinical, research, development and commercial use. Upon approval of our drug
candidates, our manufacturing capabilities will include validated manufacturing processes for drug product as well as a quality
assurance product release process with the ability to ultimately scale-up the process to meet increasing market demands. We believe
our strategic investments in the analytical and manufacturing capabilities, including personnel from drug discovery through drug
development, will allow us to advance our product candidates more quickly. Expertise gained in manufacturing ATI-0918 may be
applied to other formulations in the future, further leveraging our capabilities. Our San Antonio facility enables us to produce drug
substance in a cost-effective manner while retaining control over the process and timing. As needed, the use of a qualified Clinical
Manufacturing Organization may be utilized to perform various manufacturing processes as we deem appropriate to meet our
operational objectives.
Our current principal suppliers for our Cytori Nanomedicine business are LGM Pharma, which supplies our active pharmaceutical
ingredient, or API (doxorubicin HC1), as well as Lipoid, LLC and Dishman Netherlands, B.V., which supply us with other raw
materials used in the manufacture of our ATI-0918 and ATI-1123 drug candidates. Each of these suppliers is currently a sole source
supplier.
Cytori Cell Therapy
We currently manufacture Celution Systems in our headquarters in San Diego, California. As a part of our September 2017 corporate
restructuring, we are in the process of consolidating manufacturing of our disposable systems to a single third party manufacturer. We
have sufficient inventory on hand to meet global demand while we execute and complete our outsourcing plan. As a manufacturer, our
products are subject to periodic inspection by regulatory authorities and distribution partners. Manufacturers of devices and products
for human use are subject to regulation and inspection from time to time by the FDA for compliance with the FDA’s Quality System
Regulation, or QSR, requirements, as well as equivalent requirements and inspections by state and non-U.S. regulatory authorities,
such as Notified Bodies in Europe and the California Food and Drug Branch.
Raw materials for the Celution device, Celution consumable kit and other products are sourced from a variety of suppliers. Most of
these components are available from multiple vendors either as off-the-shelf items or as custom fabrication. However, we purchase
our Celase and Intravase regents exclusively from Roche Diagnostics Corporation, or Roche. While we have significant inventory of
these reagents in inventory, we do not have a second source to provide us with these reagents should our supply arrangement with
Roche terminate or be suspended, or should Roche be unable to meet its supply obligations thereunder.
Competition
We compete primarily on the basis of the safety and efficacy of our therapies across a broad range of clinical indications to address
significant unmet medical and market needs, supported by our brand name, pricing, products, published clinical data, regulatory
approvals, and reimbursement. We believe that our continued success depends on our ability to:
Develop and innovate our product and technology platforms;
Initiate new and advance existing clinical development programs;
Secure and maintain regulatory agency approvals;
Build and expand our commercial footprint;
Produce high quality products per our specifications and in line with customer expectations
Achieve improved economies of scale and scope;
Generate and protect intellectual property;
Hire and retain key talent; and
Successfully execute acquisition, licensing, and partnership activities.
Cytori Nanomedicine
ATI-0918, our generic pegylated liposomal encapsulated doxorubicin product candidate is expected to face competition from both
patented and generic nanomedicine products for the treatment of breast cancer (BC), ovarian cancer (OC), multiple myeloma (MM),
and/or Kaposi’s Sarcoma (KS) in all geographies. New nanoparticle-doxorubicin monotherapies and drug combination therapies
9
represent next generation approaches intended to be safer and more effective than today’s patented and generic pegylated liposomal
doxorubicin (PLD).
Product
DOXIL
Lipodox
Doxorubicin HCl Liposome
Doxorubicin Liposome
U.S.
Company
JNJ Janssen
Sun
Dr. Reddy’s
Ipsen
Fudan Zhangjiang Libod
Doxorubicin HCl Liposome
Tolmar
Panacea Biotech Doxorubicin HCl Liposome
Doxorubicin HCl Liposome
Emcure
Doxorubicin HCl Liposome
Cadila
Doxorubicin HCl Liposome
Cipla
Auromedics
Doxorubicin HCl Liposome
Europe
Company
JNJ Janssen
Product
CAELYX
Formulation Stage
PLD
PLD
PLD
PLD
PLD
PLD
PLD
PLD
PLD
PLD
PLD
Commercial
Commercial
Commercial
ANDA Submitted
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
BE Study vs Sun Lipodox
Indications
BC, OC, MM, KS
BC, OC, MM, KS
BC, OC, MM, KS
BC, OC, MM, KS
OC
OC
OC
OC
OC
OC
OC
Teva
Myocet
Non-PLD
Formulation Stage
PLD
Commercial
Commercial
Indications
BC, OC, KS
Breast (with
cyclophosphamide)
BC, OC
MAA Submitted
BE Study vs Janssen CAELYX BC, OC
BE Study vs Janssen CAELYX BC, OC
BE Study vs Janssen CAELYX BC, OC
PLD
Lipodox
PLD
Doxorubicin HCl Liposome PLD
Doxorubicin HCl Liposome PLD
Company
Fudan Zhangjiang
CSPC
Changzhou Jinyuan
Taiwan Liposome Co Doxisome
Sun Pharma
Dr. Reddy’s
Teva
Rest of World
Country
China
China
China
Hong Kong NAL Pharma
Intas Pharma
India
Alkem Labs
India
Celon Labs
India
Cipla
India
Natco Pharma
India
SRS Pharma
India
Parenteral Drugs
India
Zuventus
India
Zydus Cadila
India
JNJ Janssen
Japan
Philippines
Sri Lanka
Taiwan
Thailand
Vietnam
Philippines
Sri Lanka
Taiwan
Thailand
Vietnam
TTY Biopharm
TTY Biopharm
Indications
BC, OC, KS
BC, OC, KS, MM, lymphoma
Formulation Stage
Product
PLD
Libod
PLD
Duomeisu
PLD
Lixing
PLD
NAL1872
PLD
Pegadria
PLD
Lipisol
PLD
Lippod
PLD
Oncodox PEG
Natdox-LP
PLD
Dox HCl Liposome PLD
PLD
Doxopar
PLD
Rubilong
PLD
Nudoxa
PLD
DOXIL
Commercial
Commercial
Commercial
Preclinical
BC, OC, KS
BE Study vs DOXIL BC, OC, KS
Commercial
Commercial
Commercial
Commercial
Commercial
Commercial
Commercial
Commercial
Commercial
BC, OC, MM, KS
BC, OC, MM, KS
OC
BC, OC, KS
BC, OC, KS
BC, OC, KS
BC, OC, KS
OC, KS
Lipo-dox
PLD
Commercial
BC, OC, MM, KS
CAELYX II
PLD
Development
BC, OC, MM, KS
Russia
Oasmia
Doxophos
Commercial
BC, OC, MM, others
Nanoparticle
doxorubicin
10
Our ATI-1123 product candidate is expected to face competition from both Sanofi’s Taxotere, which is approved for 11 indications
and available in 90 countries with a majority of sales from China, Japan, Korea, and Taiwan, and generic docetaxel which is available
from major suppliers in the U.S., Europe and Japan including, but not limited to, Accord, Actavis, Dr. Reddy’s Labs, GLS Pharma,
Hospira, Sun Pharma, Teva, and Winthrop. Further competition may result from advances made by companies currently developing
nanoparticle-docetaxel products including, but not limited to, Adocia, Cristal Therapeutics, Merrimack, and Oasmia Pharmaceutical.
Cytori Cell Therapy
According to the Alliance for Regenerative Medicine, there over 700 companies worldwide and 801 clinical trials underway within
the global regenerative medicine market. Per Allied Market Research, this market is projected to reach $30.2 billion by 2022 and to
be dominated by the cell therapy segment.
Today, we compete directly against companies within the autologous adipose-derived cell therapy segment offering manual, semi-
automated, or full automated cell processing and/or banking systems used with or without tissue dissociation reagents. Our primary
competitors include, but are not limited to, Adisave, Biosafe Group, GID Group, Healeon Medical, Human Med AG, InGeneron,
Medikan International, PNC International, SERVA Electrophoresis GmbH, and Tissue Genesis. None of these companies are
conducting clinical trials for the treatment of hand dysfunction in scleroderma patients. However, they are engaged in a number of
clinical trials around the world.
Company
Adisave
GID Group
GID Group
GID Group
Healeon Medical
Healeon Medical
Healeon Medical
Healeon Medical
Healeon Medical
Healeon Medical
Human Med AG
InGeneron
InGeneron
Tissue Genesis
Tissue Genesis
Clinical Trial
Affiliation
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Sponsor
Co-Collaborator
Sponsor
Sponsor
Sponsor
Collaborator
Indication
Wounds and Soft Tissue Defects
Alopecia
Erectile Dysfunction
Knee Osteoarthritis
Alopecia
Chronic Obstructive Pulmonary Disease
Inflammatory Bowel Disease
Neurological Disorders and Disease
Systemic Pain Conditions
Location
Canada
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
U.S., Honduras Multiple Sclerosis
France
U.S.
U.S.
U.S.
U.S.
Knee Osteoarthritis
Rotator Cuf Tears
Chronic Venous Leg Ulcers
Critical Limb Ischemia
Rotator Cuff Tears
A study published in 2016 reported that there were 570 medical clinics in the U.S. advertising and offering stem cell treatments,
including those derived from adipose tissue, directly to patients. It is unclear whether the FDA will allow these clinics to continue to
operate in this fashion and whether they will pose a threat to our business if and at such time that we obtain PMA approval to
commercialize Habeo Cell Therapy in the U.S.
In the future, we also anticipate encountering competition from companies developing and offering drugs for the treatment of
scleroderma including, but not limited to, Actelion Pharmaceuticals, Allergan, Apricus Biosciences, Bayer, Corbus Pharmaceuticals,
Covis Pharma, CSL Behring, Genentech, and United Therapeutics. No companies today have approved drugs indicated for improving
hand function in scleroderma patients while only Tracleer® (Bosentan) is approved in Europe for the prevention of new digital ulcers
in scleroderma patients. Habeo Cell Therapy is expected to compete with or be used in conjunction with second and/or third line
therapies including, but not limited to, phosphodiesterase inhibitors, botulinum toxin A, angiotensin II receptor blockers, ACE
inhibitors, alpha blockers, selective serotonin reuptake inhibitors, topical nitrates, IV prostanoids, endothelin receptor antagonists,
immunosuppressants, and surgical interventions.
Research and Development
Research and development expenses were $11.7 million and $16.2 million for the years ended December 31, 2017 and 2016,
respectively. These expenses have supported the basic research, product development and clinical activities necessary to bring our
products to market.
11
Our research and development efforts in 2017 focused predominantly on the following areas:
Completion of enrollment in the STAR (hand manifestation of scleroderma) trial and data analysis and trial close out costs
related to our previous conducted Phase IIACT-OA (knee osteoarthritis) trial;
Support of ongoing preclinical and other research activities towards BARDA contract milestones;
Support of the investigator initiated trials ADRESU in Japan and SCLERADEC-II in France;
Planning and development of next generation Celution Cell Therapy products, including detailed product roadmaps for the
device, consumables and accessories;
Development of new configurations and expanded functionality of our Celution platform to address the current Japanese
regulatory approval as a medical device (Japan Class I) and other markets;
Conduct ADRC viability and transport studies in support of clinical trial requirements;
Conduct presentation and publishing of research efforts related to ADRC characterization and potency to further establish
scientific leadership in the field; and
Continued optimization and development of the Celution System family of products and next-generation devices, single-use
consumables and related instrumentation.
Intellectual Property
Our success depends in large part on our ability to protect our proprietary technology, including the Celution System product platform,
and to operate without infringing on the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright
and trademark laws, as well as confidentiality agreements, licensing agreements and other agreements, to establish and protect our
proprietary rights. Our success also depends, in part, on our ability to avoid infringing patents issued to others. If we were judicially
determined to be infringing on any third-party patent, we could be required to pay damages, alter our products or processes, obtain
licenses or cease certain activities.
To protect our proprietary medical technologies, including the Celution System platform and other scientific discoveries, we have a
portfolio of over 100 issued patents worldwide. We currently have 34 issued U.S. patents and 68 issued international patents. Of the
34 issued U.S. patents, eight were issued in 2017. Of the 68 issued international patents, seven were issued in 2017. In addition, we
have over 45 patent applications pending worldwide related to our Cytori Cell Therapy and Nanomedicine technologies. We are
seeking additional patents on methods and systems for processing adipose-derived stem and regenerative cells, on the use of adipose-
derived stem and regenerative cells for a variety of therapeutic indications, including their mechanisms of action, on compositions of
matter that include adipose-derived stem and regenerative cells, and on other scientific discoveries. Regarding our Cytori
Nanomedicine program, as part of our asset acquisition transaction with Azaya Therapeutics, we acquired Azaya Therapeutics’ patent
portfolio consisting of two issued patents, one pending patent application and valuable proprietary liposome manufacturing know-
how. Since the Azaya asset acquisition, we have filed one patent application relating to Cytori Nanomedicine, and intend to actively
continue to enhance our nanomedicine portfolio.
We cannot assure that any of our pending patent applications will be issued, that we will develop additional proprietary products that
are patentable, that any patents issued to us will provide us with competitive advantages or will not be challenged by any third parties
or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore, we cannot
assure that others will not independently develop similar products, duplicate any of our products or design around our patents. U.S.
patent applications are not immediately made public, so we might be surprised by the grant to someone else of a patent on a
technology we are actively using.
There is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties
and declared invalid or infringing of third party claims. For many of our pending applications, patent interference proceedings may be
instituted with the U.S. Patent and Trademark Office, or the USPTO, when more than one person files a patent application covering
the same technology, or if someone wishes to challenge the validity of an issued patent. At the completion of the interference
proceeding, the USPTO will determine which competing applicant is entitled to the patent, or whether an issued patent is valid. Patent
interference proceedings are complex, highly contested legal proceedings, and the USPTO’s decision is subject to appeal. This means
that if an interference proceeding arises with respect to any of our patent applications, we may experience significant expenses and
delay in obtaining a patent, and if the outcome of the proceeding is unfavorable to us, the patent could be issued to a competitor rather
than to us. Third parties can file post-grant proceedings in the USPTO, seeking to have issued patent invalidated, within nine months
of issuance. This means that patents undergoing post-grant proceedings may be lost, or some or all claims may require amendment or
cancellation, if the outcome of the proceedings is unfavorable to us. Post-grant proceedings are complex and could result in a
reduction or loss of patent rights. The institution of post-grant proceedings against our patents could also result in significant expenses.
12
Patent law outside the United States is uncertain and in many countries, is currently undergoing review and revisions. The laws of
some countries may not protect our proprietary rights to the same extent as the laws of the United States. Third parties may attempt to
oppose the issuance of patents to us in foreign countries by initiating opposition proceedings. Opposition proceedings against any of
our patent filings in a foreign country could have an adverse effect on our corresponding patents that are issued or pending in the
United States. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our
competitors’ patents that have been issued in countries other than the United States. This could result in substantial costs, divert our
efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and
financial condition. We currently have pending patent applications or issued patents in Europe, Brazil, Mexico, India, Russia,
Australia, Japan, Canada, China, Korea and Singapore, among others.
In addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. We cannot assure you that
others will not independently develop or otherwise acquire substantially equivalent techniques, somehow gain access to our trade
secrets and proprietary technological expertise or disclose such trade secrets, or that we can ultimately protect our rights to such
unpatented trade secrets and proprietary technological expertise. We rely, in part, on confidentiality agreements with our marketing
partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise. We cannot
assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that our unpatented trade
secrets and proprietary technological expertise will not otherwise become known or be independently discovered by competitors.
Government Regulation – Nanoparticle Oncology Drugs
Our nanoparticle oncology drug products must receive regulatory approvals from the EMA and the FDA and from other applicable
governments prior to their sale.
Our current and future nanoparticle oncology drugs are, or will be, subject to stringent government regulation in the United States by
the FDA under the Federal Food, Drug and Cosmetic Act. The FDA regulates the design/development process, clinical testing,
manufacture, safety, labeling, sale, distribution, and promotion of oncology drugs. Included among these regulations are drug approval
requirements and the current Good Manufacturing Practices, cGMP. Other statutory and regulatory requirements govern, among other
things, cGMP inspection, prohibitions against misbranding and adulteration, labeling and post-market reporting. The recent CURES
Act legislation regarding drugs in the United States has yet to be implemented and may yield additional regulatory requirements on
therapeutic drugs while providing some relief in selected regulatory burdens. The FDA’s interpretation and implementation of the
CURES Act has yet to be published.
Our nanoparticle oncology drugs must also comply with the government regulations of each individual country in which the products
are to be distributed and sold. These regulations vary in complexity and can be as stringent, and on occasion even more stringent, than
FDA regulations in the United States. International government regulations vary from country to country and region to region. For
instance, our ATI-0918 drug candidate relies on an expedited approval process referred to as ‘bioequivalence’ or BE approved under
an ANDA. ANDA and BE products require a ‘reference drug’, ‘reference standard’, or RS, and/or ‘reference listed drug’, or RLD, to
with which to show equivalence. The reference drug may not be the same in all territories or countries, which could require different
and unique BE clinical studies for some territories. Furthermore, the level of complexity and stringency is not always precisely
understood today for each country, creating greater uncertainty for the international regulatory process. Additionally, government
regulations can change with little to no notice and may result in the elimination of the BE regulatory pathway in some regions,
creating increased regulatory burden.
Worldwide, the regulatory process can be lengthy, expensive, and uncertain with no guarantee of approval. Before any new drugs may
be introduced to the U.S. market, the manufacturer generally must obtain FDA approval through either ANDA process for generic
drugs off patent that allow for bioequivalence to and existing reference listed drug, or the lengthier new drug approval (NDA) process,
which typically requires multiple successful Phase III clinical trials to generate clinical data supportive of safety and efficacy along
with extensive pharmacodynamic and pharmacokinetic preclinical testing to demonstrate safety. Approval of an ANDA could take
four or more years from the time the development process is initiated due to the requirement for clinical trials. NDA drugs could take
significantly longer due to the additional preclinical requirements along with the typical requirement for two successful Phase III
clinical trials.
Our lead ATI-0918 drug candidate is eligible for the ANDA regulatory pathway in the U.S., while our ATI-1123 drug candidate is
subject to the significantly lengthier NDA process. Changes to the RS and RLD for drugs eligible for the ANDA process can result in
significant delays in the regulatory process as BE clinical studies may need to be repeated for regions / countries that no longer
recognize the RS or RLD utilized in BE clinical studies. Failure to comply with applicable requirements can result in application
integrity proceedings, fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production,
withdrawals of existing product approvals, refusals to approve new applications or notifications, and criminal prosecution.
13
Drugs are also subject to post-market reporting requirements for deaths or serious injuries when the drug may have caused or
contributed to the death or serious injury, or serious adverse events. If safety or effectiveness problems occur after the drug reaches
the market, the FDA may take steps to prevent or limit further marketing of the drug. Additionally, the FDA actively enforces
regulations prohibiting marketing and promotion of drugs for indications or uses that have not been approved by the FDA.
We must comply with extensive regulations from foreign jurisdictions regarding safety, manufacturing processes and quality. These
regulations, including the requirements for marketing and authorization, may differ from the FDA regulatory scheme in the United
States.
Government Regulation – Medical Devices
As a specialty therapeutics company, we operate under stringent regulations and our companies and products are subject to a variety
of distinct regulations around the world that are subject to modification or change.
Cytori Cell Therapy
Cytori Cell Therapy technology is regulated through a variety or agencies and approaches around the world. Our products must
receive regulatory clearances or approvals from regulatory bodies such as the EMA in the European Union, the FDA in the U.S.,
PMDA and MHLW in Japan, and the China Food and Drug Administration in China and from other applicable governments prior to
their sale or in some cases prior to clinical trials. This technology platform incorporates multiple elements including devices, reagents
and software that in combination yield an autologous cellular product. As a result of the complex nature of our products and differing
regulations through the world, there is no single unified of global set of regulatory requirements or common approach to regulation
and is therefore region specific.
Cytori Cell Therapy technology is, and will be, subject to stringent government regulation in the United States by the FDA under the
Federal Food, Drug and Cosmetic Act. The FDA regulates the design/development process, clinical testing, manufacture, safety,
labeling, sale, distribution and promotion of medical devices and drugs. Included among these regulations are pre-market clearance
and pre-market approval requirements, design control requirements, and the requirements to comply with Quality System
Regulations/Good Manufacturing Practices. Other statutory and regulatory requirements govern, among other things, registration and
inspection, medical device listing, prohibitions against misbranding and adulteration, labeling and post-market reporting. In the U.S.,
we must currently obtain FDA clearance or approval through the PMA application process, which requires clinical trials to generate
clinical data supportive of safety and efficacy. Approval of a PMA could take four or more years from the time the process is initiated
due to the requirement for clinical trials. Failure to comply with applicable requirements can result in application integrity
proceedings, fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production, withdrawals
of existing product approvals or clearances, refusals to approve or clear new applications or notifications, and criminal prosecution.
Recently, the U.S. government enacted the 21st Century Cures Act, or the CURES Act, in the United States that has many provisions
that could be favorable for us. However, the provisions of the CURES Act are broad and lack enough detail currently to determine its
effect on our regulatory pathway. Further interpretation and implementation of the CURES Act must occur before any definitive
assessments can be made.
Outside the U.S., the Cytori Cell Therapy family of products must also comply with the government regulations of each individual
country in which the products are to be distributed and sold. These regulations vary in complexity and can be as stringent, and on
occasion even more stringent, than FDA regulations in the United States. International government regulations vary from country to
country and region to region. For example, regulations in some parts of the world only require product registration while other
regions/countries require a complex product approval process. Due to the fact that there are new and emerging cell therapy and cell
banking regulations that have recently been drafted and/or implemented in various countries around the world, the application and
subsequent implementation of these new and emerging regulations have little to no precedent. Furthermore, the level of complexity
and stringency is not always precisely understood today for each country, creating greater uncertainty for the international regulatory
process. Furthermore, government regulations can change with little to no notice and may result in up-regulation of our products,
thereby, creating a greater regulatory burden for our cell processing and cell banking technology products.
In Europe, Cytori Cell Therapy is CE Mark approved as the Celution device and consumable product and is sold for commercial and
research use. Expansion of use of Cytori Cell Therapy in Europe will likely require an expansion of our regulatory claims that would
likely include disease-specific claims obtained through the completion of clinical trials. It is possible that Cytori Cell Therapy may be
regulated as a device, similar to its regulatory pathway in the U.S., or as an advanced tissue medicinal product or ATMP, or some
combination of the two in Europe. Cytori is currently working with both European authorities and country-specific competent
authorities to clarify the proper path for Cytori’s Habeo Cell Therapy in Europe.
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Regulations in the Asia-Pacific and Japan regions are currently evolving for cell therapy products. For example, the Japan Diet
enacted a regenerative medicine law in November of 2014 following sweeping changes in Japan’s medical device regulations in 2014.
In China, the regulatory landscape for cell therapies such as ours is subject to increasing regulation, and success in this market will
depend heavily on a firm understanding of applicable regulations and a commitment to pursuing appropriate regulatory approvals,
including any required approvals from the National Health and Family Planning Commission of the People’s Republic of China, and
other governmental entities. These regulatory uncertainties further complicate the regulatory process in the Asia-Pacific region and
may lengthen approval timelines and/or market entrance or penetration.
Regulatory Developments
EU Orphan Designation
In April 2015, the European Commission, acting on the positive recommendation from the European Medicines Agency Committee
for Orphan Medicinal Products, granted an orphan drug designation to Assistance Publique Hopitaux du Marseille (France), the
sponsor institution for the SCLERADEC I and SCLERADEC II trials using Cytori Cell Therapy, for the treatment of systemic
sclerosis.
In April 2016, the European Commission, acting on the positive recommendation from the European Medicines Agency Committee
for Orphan Medicinal Products, granted orphan drug designation to a broad range of Cytori Cell Therapy formulations when used for
the treatment of systemic sclerosis under Community Register of Orphan Medicinal Products number EU/3/16/1643.
In November 2016, the U.S. FDA Office of Orphan Products Development granted Cytori an orphan drug designation for
cryopreserved or centrally processed ECCS-50 Habeo for scleroderma.
Employees
As of December 31, 2017, we had 37 full-time employees. Of these full-time employees, three were engaged in manufacturing, 13
were engaged in research and development, seven were engaged in sales and marketing and eight were engaged in management,
finance and administration. From time to time, we also employ independent contractors to support our operations. Our employees are
not represented by any collective bargaining agreements and we have never experienced an organized work stoppage.
Corporate Information and Web Site Access to SEC Filings
We were initially formed as a California general partnership in July 1996, and incorporated in the State of Delaware in May 1997. We
were formerly known as MacroPore Biosurgery, Inc., and before that as MacroPore, Inc. Our corporate offices are located at 3020
Callan Road, San Diego, CA 92121. Our telephone number is (858) 458-0900. We maintain a website at www.cytori.com. Through
this site, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the
Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and
Exchange Commission, or the SEC. In addition, we publish on our website all reports filed under Section 16(a) of the Exchange Act
by our directors, officers and stockholders owning more than 10% of our outstanding common stock. These materials are accessible
via the Investor Relations—Reports and Filings section of our website within the “SEC Filings” link. Some of the information is
stored directly on our website, while other information can be accessed by selecting the provided link to the section on the SEC
website, which contains filings for our company and its insiders.
The public can also obtain any documents that we file with the SEC at http://www.sec.gov. The public may read and copy any
materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. Risk Factors
In analyzing our company, you should consider carefully the following risk factors together with all of the other information included
in this Annual Report on Form 10-K, including our audited Consolidated Financial Statements and the related notes and
“Management’s Discussion and Analysis of Financial Conditions and Results of Operations”. If any of the risks described below
occur, our business, operating results, and financial condition could be adversely affected and the value of our common stock could
decline.
Risks Related to our Financial Position and Capital Requirements
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The statements in this section, as well as statements described elsewhere in this annual report, or in other SEC filings,
describe risks that could materially and adversely affect our business, financial condition and results of operations, which could also
cause the trading price of our equity securities to decline. These risks are not the only risks that we face. Our business, financial
condition and results of operations could also be affected by additional factors that are not presently known to us or that we currently
consider to be immaterial to our operations
We have incurred losses since inception, we expect to incur significant net losses in the foreseeable future and we may never
become profitable.
We have almost always had negative cash flows from operations and have incurred net operating losses each year since we
started business. For the years ended December 31, 2017 and 2016, we incurred net loss of $22.7 million and $22.0 million,
respectively, our net cash used in operating activities was $18.1 million and $19.5 million, respectively, and, at December 31, 2017,
our accumulated deficit was $401.7 million. We expect to continue to incur net losses and negative cash flow from operating activities
for at least the next year. As our focus on development of Cytori Cell Therapy, Cytori Nanomedicine, and the development of
therapeutic applications has increased, losses have resulted primarily from expenses associated with research and development and
clinical trial-related activities, as well as general and administrative expenses. While we have implemented and continue to implement
cost reduction measures where possible, we nonetheless expect to continue operating in a loss position on a consolidated basis and
expect that recurring operating expenses will be at even higher levels for at least the next year to perform clinical trial and other
development activities for our Cytori Cell Therapy and Cytori Nanomedicine products and product candidates, including additional
pre-clinical research, clinical trial-related activities, pre-commercialization activities (including regulatory and reimbursement analysis
and market research), and marketing.
Our ability to generate sufficient revenues from any of our products, product candidates or technologies to achieve
profitability will depend on a number of factors including, but not limited to:
• our ability to manufacture, test and validate our product candidates in compliance with applicable laws and as required
for submission to applicable regulatory bodies, including manufacturing, testing and validation of our ATI-0918 drug
candidate;
• our or our partners’ ability to successfully complete clinical trials of our product candidates;
• our ability to obtain necessary regulatory approvals for our product candidates;
• our or our partners’ ability to negotiate and receive favorable reimbursement for our product candidates, including for
our product candidates that have been granted or may be granted orphan drug status or otherwise command currently
anticipated pricing levels;
• our ability to negotiate favorable arrangements with third parties to help finance the development of, and market and
distribute, our products and product candidates; and
•
the degree to which our approved products are accepted in the marketplace.
Because of the numerous risks and uncertainties associated with our commercialization and product development efforts, we
are unable to predict the extent of our future losses or when or if we will become profitable and it is possible we will never become
profitable. If we do not generate significant sales from any of our product candidates that may receive regulatory approval, there
would likely be a material adverse effect on our business, results of operations, financial condition and prospects which could result in
our inability to continue operations.
We will need substantial additional funding to develop our products and for our future operations. If we are unable to obtain the
funds necessary to do so, we may be required to delay, scale back or eliminate our product development activities or may be unable
to continue our business.
We have had, and we will continue to have, an ongoing need to raise additional cash from outside sources to continue
funding our operations to profitability, including our continuing substantial research and development expenses. We do not currently
believe that our cash balance and the revenues from our operations will be sufficient to fund the development and marketing efforts
required to reach profitability without raising additional capital from accessible sources of financing in the near future. Although it is
difficult to predict future liquidity requirements, we believe that our $9.6 million in cash and cash equivalents on hand as of December
31, 2017 will be sufficient to fund our currently contemplated operations at least through the third quarter of 2018. Our future capital
requirements will depend on many factors, including:
• our ability to raise capital to fund our operations on terms acceptable to us, or at all;
• our perceived capital needs with respect to development of our CCT and Cytori Nanomedicine development programs,
and any delays in, adverse events of, and excessive costs of such programs beyond what we currently anticipate;
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• our ability to establish and maintain collaborative and other arrangements with third parties to assist in bringing our
products to market and the cost of such arrangements at the time;
•
•
•
•
•
costs associated with the integration and operation of our newly acquired Cytori Nanomedicine business, including
hiring of as many as 20 or more new employees to operate the Cytori Nanomedicine business, and costs of validation,
requalification and recommencement of the Cytori Nanomedicine manufacturing operations at our San Antonio, Texas
facility;
the cost of manufacturing our product candidates, including compliance with good manufacturing practices, or GMP,
applicable to our product candidates;
expenses related to the establishment of sales and marketing capabilities for product candidates awaiting approval or
products that have been approved;
the level of our sales and marketing expenses;
competing technological and market developments; and
• our ability to introduce and sell new products.
We have secured capital historically from grant revenues, collaboration proceeds, and debt and equity offerings. We will
need to secure substantial additional capital to fund our future operations. We cannot be certain that additional capital will be available
on terms acceptable to us, or at all. Our ability to raise capital was adversely affected when the FDA put a hold on our ATHENA
cardiac trials in mid-2014, which had an adverse impact to stock price performance and our corresponding ability to restructure our
debt. Subsequently, a continued downward trend in our stock price resulting from a number of factors, including (i) general economic
and industry conditions, (ii) challenges faced by the regenerative medicine industry as a whole, (iii) the market’s unfavorable view of
certain of our recent equity financings conducted in 2014 and 2015 (which financings were priced at a discount to market and included
100% warrant coverage), (iv) market concerns regarding our continued need for capital (and the effects of any future capital raising
transactions we may consummate), (v) market perceptions of our ATHENA and ACT-OA clinical trial data, and (vi) our recent
Nasdaq listing deficiency issues and resultant 1-for-15 reverse stock split, made it more difficult to procure additional capital on terms
reasonably acceptable to us. Most recently, the release in July 2017 of the top-line data from our STAR trial, in which we announced
the failure to achieve the trial’s primary and secondary endpoints, resulted in a further substantial decrease in our stock price. Though
our recent acquisition of the Cytori Nanomedicine business from Azaya Therapeutics, including our ATI-0918 and ATI-1123 drug
candidates, appear to have been viewed favorably by our investors and the marketplace, we cannot assure you that this acquisition will
not ultimately be viewed negatively and thus further hamper our efforts to attract additional capital. If we are unsuccessful in our
efforts to raise any such additional capital, we may be required to take actions that could materially and adversely harm our business,
including a possible significant reduction in our research, development and administrative operations (including reduction of our
employee base), surrendering of our rights to some technologies or product opportunities, delaying of our clinical trials or regulatory
and reimbursement efforts, or curtailing of or even ceasing operations.
Our financing plans include pursuing additional cash through use of offering programs, strategic corporate partnerships,
licensing and sales of equity. In November 2017, we completed a public offering in which we distributed to holders of our common
stock, at no charge, non-transferable subscription rights to purchase up to 10,000 units, each consisting of one share of our Series B
Convertible Preferred Stock and 1,800 warrants to purchase one share of our common stock, at a subscription price of $1,000 per unit,
or the 2017 Rights Offering, raising a total of $10 million in gross proceeds. Each share of Series B Convertible Preferred Stock is
convertible into approximately 3,000 shares of our common stock, subject to adjustment. We sold a total of 10,000 units as part of the
2017 Rights Offering, under our registration statement on Form S-1, filed on August 14, 2017, as amended.
In addition, in December 2016, we entered into a purchase agreement, or the Lincoln Park Purchase Agreement, with Lincoln
Park Capital Fund, LLC, or Lincoln Park, pursuant to which we may direct Lincoln Park to purchase up to $20.0 million in shares of
our common stock from time to time over the 30-month period following March 31, 2017, subject to the satisfaction of certain
conditions. There is no guarantee that adequate funds will be available when needed from additional debt or equity financing,
development and commercialization partnerships or from other sources or on terms acceptable to us. In addition, under current SEC
regulations, at any time during which the aggregate market value of our common stock held by non-affiliates, or public float, is less
than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf
registration statements, including sales under our ATM offering program, is limited to an aggregate of one-third of our public float. As
of December 31, 2017, our public float was 57.6 million shares, the value of which was $17.4 million based upon the closing price of
our common stock of $0.3016 on such date. The value of one-third of our public float calculated on the same basis was approximately
$5.8 million.
Further, our Loan and Security Agreement with Oxford Finance, LLC, or Oxford, as amended, requires us to maintain 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. Based on our cash and cash equivalents on hand of approximately $9.6 million at December 31, 2017, we estimate that we
will need to raise additional capital and/or obtain a waiver or restructure the Loan and Security Agreement in the near term to avoid
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defaulting under our $1.5 million minimum cash/cash equivalents covenant. If we are unable to avoid an event of default under the
Loan and Security Agreement, our business could be severely harmed.
In addition to the funding sources previously mentioned, we continue to seek additional capital through product revenues and state and
federal development programs, including additional funding opportunities though our current BARDA contract.
Our level of indebtedness, and covenant restrictions under such indebtedness, could adversely affect our operations and liquidity.
Under our Loan and Security Agreement with Oxford, as collateral agent and lender, Oxford made a term loan to us in an
aggregate principal amount of $17,700,000, or the Term Loan, subject to the terms and conditions set forth in the Loan and Security
Agreement. The outstanding principal balance of the Term Loan is $13 million as of December 31, 2017.
The Term Loan accrues interest at a floating rate equal to the three-month LIBOR rate (with a floor of 1.00%) plus 7.95% per
annum. However, from January 2017 through August 2017, we were required to make payments of principal (in the amount of
$590,000 per month) and accrued interest in equal monthly installments of approximately $725,000. On September 20, 2017, we and
Oxford amended the Loan and Security Agreement to extend the interest-only period to August 1, 2018 (as we satisfied a requirement
to raise unrestricted net cash proceeds of at least $5 million on or before December 29, 2017), beginning September 2018, we will be
required to make payments of principal (in the amount of approximately $1.3 million per month) and accrued interest in equal
monthly installments of approximately $1.4 million to amortize the Term Loan through June 1, 2019, the maturity date.
As security for our obligations under the Loan and Security Agreement, we granted a security interest in substantially all of
our existing and after-acquired assets, subject to certain exceptions set forth in the Loan and Security Agreement. If we are unable to
discharge these obligations, Oxford could foreclose on these assets, which would, at a minimum, have a severe material effect on our
ability to operate our business.
Our indebtedness to Oxford could adversely affect our operations and liquidity, by, among other things:
•
causing us to use a larger portion of our cash flow to fund interest and principal payments, reducing the availability of
cash to fund working capital and capital expenditures and other business activities;
• making it more difficult for us to take advantage of significant business opportunities, such as acquisition
opportunities, and to react to changes in market or industry conditions; and
•
limiting our ability to borrow additional monies in the future to fund working capital and capital expenditures and for
other general corporate purposes.
The Loan and Security Agreement, as amended, requires us to maintain at least $1.5 million in unrestricted cash and/or cash
equivalents and includes certain reporting and other covenants, that, among other things, restrict our ability to (i) dispose of assets, (ii)
change the business we conduct, (iii) make acquisitions, (iv) engage in mergers or consolidations, (v) incur additional indebtedness,
(vi) create liens on assets, (vii) maintain any collateral account, (viii) pay dividends, (ix) make investments, loans or advances, (x)
engage in certain transactions with affiliates, and (xi) prepay certain other indebtedness or amend other financing arrangements. If we
fail to comply with any of these covenants or restrictions, such failure may result in an event of default, which if not cured or waived,
could result in Oxford causing the outstanding loan amount ($13 million as of December 31, 2017) to become immediately due and
payable. If the maturity of our indebtedness is accelerated, we may not have, or be able to timely procure, sufficient cash resources to
satisfy our debt obligations, and such acceleration would adversely affect our business and financial condition.
In addition, our indebtedness under the Loan and Security Agreement is secured by a security interest in substantially all of
our existing and after-acquired assets, excluding our intellectual property assets (which are subject to a negative pledge), and
therefore, if we are unable to repay such indebtedness, Oxford could foreclose on these assets, which would, at a minimum, have a
severe material effect on our ability to operate our business.
The report of our independent registered public accounting firm contains an emphasis paragraph regarding the substantial doubt
about our ability to continue as a “going concern.”
The audit report of our independent registered public accounting firm covering the December 31, 2017 consolidated financial
statements contains an explanatory paragraph that states that our recurring losses from operations, liquidity position, and debt service
requirements raises substantial doubt about our ability to continue as a going concern. This going concern opinion could materially
limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our
financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern. To date, our
operating losses have been funded primarily from outside sources of invested capital and gross profits. We have had, and we will
likely continue to have, an ongoing need to raise additional cash from outside sources to fund our future operations. However, no
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assurance can be given that additional capital will be available when required or on terms acceptable to us. If we are unsuccessful in
our efforts to raise any such additional capital, we would be required to take actions that could materially and adversely affect our
business, including significant reductions in our research, development and administrative operations (including reduction of our
employee base), possible surrender or other disposition of our rights to some technologies or product opportunities, delaying of our
clinical trials or curtailing or ceasing operations. We also cannot give assurance that we will achieve sufficient revenues in the future
to achieve profitability and cash flow positive operations to allow us to continue as a going concern. The perception that we may not
be able to continue as a going concern may cause third parties to choose not to deal with us due to concerns about our ability to meet
our contractual obligations, which could have a material adverse effect on our business.
We may not be able to access the full amounts available under the Lincoln Park Purchase Agreement, which could prevent us
from accessing the capital we need to continue our operations, which could have an adverse effect on our business.
In December 2016, we entered into the Lincoln Park Purchase Agreement, pursuant to which we may direct Lincoln Park to
purchase up to $20.0 million of shares of our common stock from time to time over the 30-month period following March 31, 2017,
subject to the satisfaction of certain conditions. Thereafter, on any trading day selected by us, we may sell shares of common stock to
Lincoln Park in amounts up to 100,000 shares per regular sale (such purchases, Regular Purchases) up to the aggregate commitment of
$20.0 million. If the market price of our common stock is not below $2.00 per share on the purchase date, then the Regular Purchase
amount may be increased to 150,000 shares. If the market price is not below $3.00 per share on the purchase date, then the Regular
Purchase amount may be increased to 300,000 shares. Although there are no upper limits on the per share price Lincoln Park may pay
to purchase our common stock, we may not sell more than $1.0 million in shares of common stock to Lincoln Park per any individual
Regular Purchase. The purchase price of Regular Purchases will be based on the prevailing market prices of shares of our common
stock, which shall be equal to the lesser of the lowest sale price of the common shares during the purchase date and the average of the
three lowest closing sale prices of the common shares during the ten business days prior to the purchase date.
In addition to Regular Purchases, we may in our sole discretion direct Lincoln Park on each purchase date to make
accelerated purchases on the following business day up to the lesser of (i) three times the number of shares purchased pursuant to such
Regular Purchase or (ii) 30% of the trading volume on the accelerated purchase date at a purchase price equal to the lesser of (i) the
closing sale price on the accelerated purchase date and (ii) 97% of the accelerated purchase date’s volume weighted average price
(such purchases, Accelerated Purchases). We cannot submit an Accelerated Purchase notice if the market price of our common stock
is below $1.00.
In addition to Regular Purchases and Accelerated Purchases described above, we may also direct Lincoln Park, on any
business day that the closing price of our common stock is not below $1.00, to purchase additional amounts of our common stock,
which we refer to as an Additional Purchase whereby, pursuant to each Additional Purchase we may sell up to $1.0 million of
common stock in each Additional Purchase notice, provided, however, that (i) we may not deliver to Lincoln Park more than two
separate Additional Purchase notices and (ii) at least 30 business days must pass between our delivery of the first Additional Purchase
notice to Lincoln Park and our delivery of the second Additional Purchase notice. The purchase price for each such Additional
Purchase shall be equal to the lower of (i) 97% of the purchase price under a Regular Purchase on the date we give notice for the
related Additional Purchase, or (ii) $2.00 per share.
Depending on the prevailing market price of our common stock, we may not be able to sell shares to Lincoln Park for the
maximum $20.0 million over the term of the Lincoln Park Purchase Agreement. For example, under the rules of the Nasdaq Capital
Market, in no event may we issue more than 19.99% of our shares outstanding (which is approximately 4,315,814 shares based on
21,579,071 shares outstanding prior to the signing of the Lincoln Park Purchase Agreement) under the Lincoln Park Purchase
Agreement unless we obtain stockholder approval or an exception pursuant to the rules of the Nasdaq Capital Market is obtained to
issue more than 19.99%. This limitation will not apply if, at any time the exchange cap is reached and at all times thereafter, the
average price paid for all shares issued and sold under the Lincoln Park Purchase Agreement is equal to or greater than $1.6674, which
was the consolidated closing bid price of our common stock on December 22, 2016 including an increment for the commitment shares
we issued and may issue to Lincoln Park. We are not required or permitted to issue any shares of common stock under the Purchase
Agreement if such issuance would breach our obligations under the rules or regulations of the Nasdaq Capital Market. In addition,
Lincoln Park will not be required to purchase any shares of our common stock if such sale would result in Lincoln Park’s beneficial
ownership exceeding 9.99% of the then outstanding shares of our common stock. Our inability to access a portion or the full amount
available under the Lincoln Park Purchase Agreement, in the absence of any other financing sources, could have a material adverse
effect on our business.
The sale or issuance of our common stock to Lincoln Park may cause dilution and the sale of the shares of common stock acquired
by Lincoln Park, or the perception that such sales may occur, could cause the price of our common stock to fall.
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In December 2016, we entered into the Lincoln Park Purchase Agreement, pursuant to which Lincoln Park has committed to
purchase up to $20.0 million of our common stock. Concurrently with the execution of the Lincoln Park Purchase Agreement, we
issued 127,419 shares of our common stock to Lincoln Park as an initial fee for its commitment to purchase shares of our common
stock under the Lincoln Park Purchase Agreement. Further, for each additional purchase by Lincoln Park, we will issue additional
commitment shares in commensurate amounts up to a total of 382,258 shares based upon the relative proportion of the aggregate
amount of $20.0 million purchased by Lincoln Park. The purchase shares that may be sold pursuant to the Lincoln Park Purchase
Agreement may be sold by us to Lincoln Park at our discretion from time to time over the 30-month period following March 31, 2017,
subject to the satisfaction of certain conditions. The purchase price for the shares that we may sell to Lincoln Park under the Lincoln
Park Purchase Agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of
such shares may cause the trading price of our common stock to fall.
We generally have the right to control the timing and amount of any sales of our shares to Lincoln Park. Additional sales of
our common stock, if any, to Lincoln Park will depend upon market conditions and other factors to be determined by us. Lincoln Park
may ultimately purchase all, some or none of the shares of our common stock that may be sold pursuant to the Lincoln Park Purchase
Agreement and, after it has acquired shares, Lincoln Park may sell all, some or none of those shares. Therefore, sales to Lincoln Park
by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial
number of shares of our common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell
equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
Material weaknesses in our internal control over financial reporting have occurred in the past and could occur in the future.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other
things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material
weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent
registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting.
We identified a material weakness in our internal control over financial reporting for the year ended December 31, 2013,
which may have adversely affected investor confidence in us and, as a result, the value of our common stock. While no such material
weakness was identified for the years ended December 31, 2017 or December 31, 2016, we cannot assure you that additional material
weaknesses will not be identified in the future.
If we are unable to effectively remediate any material weaknesses in a timely manner, or if we identify one or more
additional material weaknesses in the future, investors could lose confidence in the accuracy and completeness of our financial reports,
which could have a material adverse effect on the price of our common stock.
We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.
Our budgeted expense levels are based in part on our expectations concerning future revenues from sales as well our
assessment of the future investments needed to expand our commercial organization and support research and development activities.
We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected events or a shortfall in revenue.
Accordingly, a shortfall in demand for our products or other unexpected events could have an immediate and material impact on our
business and financial condition.
Our operating results have been and will likely continue to be volatile.
Our prospects must be evaluated in light of the risks and difficulties frequently encountered by emerging companies and
particularly by such companies in rapidly evolving and technologically advanced biotech, pharmaceutical and medical device fields.
From time to time, we have tried to update our investors’ expectations as to our operating results by periodically announcing financial
guidance. However, we have in the past been forced to revise or withdraw such guidance due to lack of visibility and predictability of
product demand.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change”
(generally defined as a greater than 50% change, by value, in its equity ownership over a three year period), the corporation’s ability
to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change taxable income and
taxes may be limited. We may have experienced, or may in the future experience, “ownership changes” as a result of shifts in stock
ownership. Any such ownership changes could limit our ability to use net operating loss carryforwards and other pre-change tax
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attributes. Furthermore, under recently enacted U.S. tax legislation, although the treatment of tax losses generated before December
31, 2017 has generally not changed, tax losses generated in calendar year 2018 and beyond may be used to offset only 80% of taxable
income. This change may require us to pay federal income taxes in future years despite generating a loss for federal income tax
purposes in prior years.
Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations,
including by reducing the U.S. corporate income tax rate, and revising the rules governing net operating losses and foreign tax credits.
Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The
legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as
interpretations and implementing regulations by the Treasury and Internal Revenue Service, or IRS, any of which could lessen or
increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state
and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While our
analysis and interpretation of this legislation is ongoing, based on our current evaluation, we have reflected a $45.8 million write-
down of our federal deferred income tax assets (including the value of our net operating loss carryforwards and our tax credit
carryforwards) due to the reduction of the U.S. corporate income tax rate. This amount may be subject to further adjustment in
subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there
may be material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the
tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial
on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact on us of the recent tax
legislation. We urge our investors to consult with their legal and tax advisors with respect to such legislation.
Risks Related to Our Business and Industry
Our success depends in large part upon the successful development and commercialization of our cellular therapeutics, especially
Habeo Cell Therapy for hand impairment in patients with scleroderma. The U.S. STAR clinical trial assessed the safety and
efficacy of Habeo Cell Therapy and failed to achieve its primary and secondary endpoints. We completed the analysis of the data
from the trial, and recently provided a pre-submission meeting briefing document focused on PMA content and format review for
Celution System and scleroderma to the FDA required in advance of an in-person meeting with the FDA scheduled for later in
March 2018, whereas depending on the outcome of such meeting, we may be unable to identify a viable path forward for continued
development of this product candidate, which in turn could materially and adversely affect our business and operations.
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Our success in large part is dependent upon our ability to develop our CCT products, and in particular, our lead product
candidate, Habeo Cell Therapy, or Habeo. In July 2017, we announced top-line results from our U.S. STAR clinical trial that
evaluated the safety and efficacy of Habeo for hand impairment in patients with scleroderma. In this trial, Habeo did not achieve its
primary endpoint of improvement in hand dysfunction, compared to placebo, as measured by the Cochin Hand Function Score, or
CHFS, at twenty-four (24) and forty-eight (48) weeks, nor did it achieve its secondary endpoints of improvement in the Raynaud’s
Condition Score and the Scleroderma Health Assessment Questionnaire at forty-eight (48) weeks, compared to placebo.
Analysis of the STAR data indicated that within a pre-specified subgroup analysis, Habeo-treated patients within the diffuse
cutaneous scleroderma subset indicated improvements in the CHFS and the Health Assessment Questionnaire-Disability Index (a
measure of functional disability), that met or exceeded the published criteria for minimally important clinical differences in these
measures as compared to STAR patients with diffuse cutaneous scleroderma within the placebo group. However, these differences
may not be deemed sufficient to continue development of Habeo. Thorough analysis of our STAR data may result in the determination
that there is not a viable plan for continued development of Habeo. Further, anticipated discussions with the FDA and with other
regulatory authorities regarding our STAR data and Habeo may be unsuccessful or may result in imposition of onerous requirements
should we pursue further development of this therapy. Even if we desire to design further trials and continue to pursue a path toward
potential regulatory approval of Habeo, any such development will likely require significant financial and personnel resources. We
may be unable to obtain sufficient capital to fund such further trials, and any such trials, if funded, may fail to yield positive results.
Further, the failure to achieve our primary or secondary endpoints in the STAR trial will likely have an adverse effect on our current
commercial sales of our cellular therapeutics, on the development and implementation of our EMEA managed access program, our
and our partners’ efforts to develop, commercialize and sell our cellular therapeutics, and on our efforts to find additional partners to
develop and commercialize our cellular therapeutic product candidates.
There can be no assurance that we will be able to further develop Habeo. Our continuing analyses of data from the STAR
trial may produce negative or inconclusive results, or may be inconsistent with our previously announced data results. Because our
cell therapy business is in substantial part dependent on the success of Habeo, if we are unable to identify, fund and ultimately execute
an alternative development strategy for this product candidate or our other cell therapy candidates, we may be required to reduce or
curtail our cell therapy activities, which would materially and adversely affect our business and operations, and could require us to
liquidate, dissolve or otherwise wind down our operations. Further, if we decide to sell or otherwise dispose of our cell therapy
platform, we may be unable to identify a suitable acquirer, or may be unable to negotiate and consummate a transaction on terms
acceptable to us.
Our future success is in large part dependent upon our ability to successfully integrate and develop our Cytori Nanomedicine
platform and commercialize our newly acquired ATI-0918 drug candidate, and any failure to do so could significantly harm our
business and prospects.
In February 2017, we acquired substantially all of the assets of Azaya Therapeutics Inc, or Azaya, including Azaya’s two
drug candidates, ATI-0918 and ATI-1123, and related manufacturing equipment and inventory. Our ability to successfully integrate,
develop and commercialize these assets is subject to a number of risks, including the following:
• Azaya suspended its business, including its research and development efforts, at the end of 2015, so we must
recommence the business, including (i) recalibration, revalidation and requalification of the acquired drug
manufacturing equipment and manufacturing facility located in San Antonio, Texas; and (ii) hiring of substantial
numbers of new employees to operate the Cytori Nanomedicine business. We may encounter unexpected issues and
expenses in recommencing this business;
• We do not have substantive drug development, manufacturing, and commercialization experience, and thus we may be
required to hire and rely on significant numbers of scientific, quality, regulatory and other technical personnel with the
experience and expertise necessary to develop, manufacture, and commercialize our Cytori Nanomedicine drug
candidates. We may be unable to identify, hire and retain personnel with the requisite experience to conduct the
operations necessary to obtain regulatory approval and commercialize our ATI-0918 and ATI-1123 product
candidates, in which case our business would be materially harmed;
• ATI-0918, a complex generic pegylated liposomal formulation of doxorubicin, is very difficult to manufacture, and we
can offer no assurances that we will (i) be able to manufacture this drug in accordance with all applicable laws and
regulations; or (ii) demonstrate bioequivalence to Lipodox® (Sun Pharma) in the United States; or Caelyx® (Janssen,
a Johnson & Johnson company) in Europe as required to obtain regulatory approvals within our currently anticipated
timeframes, or at all;
• We intend to find a commercialization partner to share or assume responsibility for marketing, sales, and distribution
activities and related costs and expenses for our ATI-0918 and ATI-1123 drug candidates. We do not currently have
the financial resources to perform an ATI-0918 bioequivalence study against Lipodox required to submit an ANDA to
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FDA or develop our ATI-1123 drug candidate internally, nor do we currently have the financial or human resources to
market, sell, and distribute ATI-0918 or ATI-1123 if and when approved by regulatory agencies, so if we are unable to
find a suitable partner to share in these activities and costs, we may be forced to delay or suspend our development and
commercialization activities, or procure additional capital to continue development of these drug candidates ourselves.
There can be no assurance that we would obtain sufficient capital to fund the development, manufacturing, and
commercialization of our Cytori Nanomedicine program ourselves, or if we do obtain such capital, that our
development, manufacturing, and commercialization efforts would be successful;
• Conduct of this newly acquired business will require significant capital, and to the extent that we incur unanticipated
expenses or revenue downturns in our business, are unable to timely obtain sufficient additional capital on terms
acceptable to us (or at all) to fund this business, our ability to commercialize our ATI-0918 drug candidate could be
materially and adversely impacted;
• New competitive products become commercially available before we launch ATI-0918;
•
It is possible that the EMA could change the reference drug for ATI-0918 in Europe from Caelyx. Though we deem
this possibility to be unlikely, if the EMA were to change the reference drug, we could be required to conduct a
bioequivalence trial to establish bioequivalence with the new reference drug, which would adversely affect our
business and operations; and
• We are not experienced in acquiring and integrating new businesses.
If we are unable to successfully partner with other companies to commercialize our product candidates, our business could
materially suffer.
A key part of our business strategy is to leverage strategic partnerships/collaborations to commercialize our product
candidates. We do not have the financial, human or other resources necessary to develop, commercialize, launch or sell our
therapeutic offerings in all of the geographies that we are targeting, and thus it is important that we identify and partner with third
parties who possess the necessary resources to bring our products to market. We expect that any such partners will provide regulatory
and reimbursement/pricing expertise, sales and marketing resources, and other expertise and resources vital to the success of our
product offerings in their territories. We further expect, but cannot guarantee, that any such partnering arrangements will include
upfront cash payments to us in return for the rights to develop, manufacture, and/or sell our products in specified territories, as well as
downstream revenues in the form of milestone payments and royalties.
We are currently prioritizing our efforts to find a strategic partner for Habeo, among other assets. For various reasons,
including the data from our STAR clinical trial and the novelty of our cellular therapeutic approach, the regulatory and reimbursement
environments for Habeo in certain markets, including Europe and the Asia-Pacific region, are complex and uncertain. There can be no
assurance that regulatory agencies or authorities in the U.S., Europe, the Asia-Pacific region or elsewhere will grant conditional or full
regulatory approval for Habeo on the timeframes we anticipate, or at all, nor can we guarantee that government or commercial payers
will grant us favorable reimbursement for use of Habeo. In fact, we anticipate that our STAR data will result in delays in our
regulatory approval efforts for Habeo, or cause us to abandon or materially alter our regulatory approval strategies for Habeo. Further,
even if we receive regulatory approval and favorable reimbursement, there is no guarantee that a market will develop for Habeo at our
intended price points, or at all. These commercialization risks could affect prospective partners’ or collaborators’ willingness to enter
into partnering arrangements on terms acceptable to us, or at all. Prospective partners may be unwilling to enter into Habeo
collaboration/partnering agreements with us in light of our STAR clinical trial data. We anticipate that it will be difficult to find a
commercialization partner for Habeo on favorable terms, if at all. Further, if data from the recently enrolled French investigator-
initiated and Cytori-supported SCLERADEC-II trial are not positive, or if the trial is discontinued prior to receipt of data, the
regulatory and commercial hurdles for Habeo will further increase, especially in the EU.
We are also prioritizing our efforts to find a strategic partner to help commercialize and sell our ATI-0918 drug candidate,
initially in Europe, the U.S., and China, and secondarily, to fund development and commercialization of our ATI-1123 product
candidate. We do not currently have the commercial resources to market and sell either ATI-0918 or ATI-1123. There can be no
assurance that we will enter into partnering agreements for either ATI-0918 or ATI-1123 with suitable partners on terms acceptable to
us, or at all. At present, we do not intend to expend significant resources on development of ATI-1123. However, regardless of
whether we enter into a partnering agreement for ATI-0918, we may still incur significant costs and expenses related to
manufacturing, testing validation, and regulatory and clinical work necessary to support a generic drug application submission to
EMA. If we cannot find a suitable partner for our ATI-0918 product candidate, our business could be significantly harmed.
We may also solicit partnering interest in our ECCO-50 Cell Therapy for use in knee osteoarthritis, but we anticipate that our
partnering efforts with respect to this indication will be subordinate to our Habeo Cell Therapy and ATI-0918 partnering efforts.
Further, while consistent trends were observed in most secondary endpoints relative to the placebo group in our ACT-OA knee
osteoarthritis trial, the 12-week endpoint of single pain on walking question did not achieve statistical significance, so there can be no
assurance that our partnering efforts for our ECCO-50 therapeutics will be successful.
23
In addition, we may seek development and/or commercial partners for the other therapeutic indications set forth in our
clinical pipeline, including use of ECCI-50 Cell Therapy in stress urinary incontinence, or SUI, in men following surgical removal of
the prostate gland (this therapeutic indication is currently the subject of an investigator-initiated trial in Japan, called ADRESU).
There can be no assurance that this male SUI pipeline indication will be attractive to prospective partners. The male SUI
market is small (approximately $45.0 million) in Japan. We anticipate that the failure to achieve the primary and secondary endpoints
in our STAR trial could materially hamper our efforts to identify prospective cell therapy partners or to negotiate cell therapy
partnering transactions on terms favorable to us, or at all.
Even if we succeed in securing partners for our lead or other product candidates, our partners may fail to develop or
effectively commercialize our product candidates. Partnerships and collaborations involving our products and product candidates pose
a number of risks, including the following:
• partners may not have sufficient resources or may decide not to devote the necessary resources due to internal
constraints such as budget limitations, lack of human resources, or a change in strategic focus;
• partners may believe our intellectual property is not valid or is unenforceable or unprotectable, or the product or
product candidate infringes on the intellectual property rights of others;
• partners may dispute their responsibility to conduct development and commercialization activities pursuant to the
applicable collaboration, including the payment of related costs or the division of any revenues;
• partners may decide to pursue a competitive product developed outside of the partnering arrangement;
• partners may not be able to obtain, or believe they cannot obtain, the necessary regulatory approvals or reimbursement
rates for the product candidates; and
• partners may decide to terminate or not to renew their agreement with us for these reasons or other reasons.
As a result, partnering agreements may not lead to development or commercialization of our lead product candidates or other
product candidates in the most efficient manner or at all.
Our current business strategy is high-risk.
Our current business strategy is to aggressively develop and commercialize our Cytori Cell Therapy and Cytori
Nanomedicine platforms, while simultaneously controlling expenses and preserving and growing our existing contract and
commercial product revenues. We also believe that there are synergies between our existing cellular therapeutic technologies and our
oncology drug assets that we can exploit and commercialize in the long-term with significant investment.
Our current business strategy is a high-risk strategy for a number of reasons including the following:
•
•
current and anticipated clinical trials using Cytori Cell Therapy, including our current STAR clinical trial, the
investigator-initiated and Cytori-supported SCLERADEC II trial, and investigator-initiated ADRESU trial, may not
yield positive results;
research and development and commercialization of our cellular therapeutics and our oncology drug assets will
require significant amounts of additional capital, and we cannot assure you that we will have access to sufficient
capital, or find partners to provide capital, necessary to develop and bring our products to market;
• our business model may be challenging for prospective business partners, as our therapeutic approach involves:
o multiple procedures - liposuction followed by preparation and same-day administration of the autologous
cellular therapeutic – for which there may not be existing reimbursement codes (or which reimbursement
codes and payment levels may not be deemed adequate by prospective partners); and
o processing of cells via our Celution System (which to date has been regulated as a medical device by the
FDA, BSI, and MHLW), followed by administration of our Cytori Cell Therapy, which is considered to be an
ATMP by EMA and other regulatory agencies.
• our current installed base of Celution devices may pose potential risks to us if the operators of these devices (i) harm a
patient during the course of treating the patient with Cytori Cell therapy; or (ii) treat patients “off label” in a manner
that is competitive with us, creates channel conflict with us, or otherwise negatively impacts our business;
• our Celution platform is a novel technology that may never receive marketing authorization for our intended
therapeutic indications;
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• we may incur material costs and expenses in executing our business strategy that are not currently contemplated and
that could cause our operating expenses to materially increase beyond current projections;
• our Celution technology is potentially subject to different regulatory regimes in different territories, and we are not
experienced in obtaining regulatory approvals for therapeutic indications, such as hand impairment in scleroderma
patients, of our Cytori Cell Therapy products;
• we do not have an operating history as a drug company, or prior experience with obtaining regulatory, reimbursement
or other approvals for product candidates such as ATI-0918 and ATI-1123;
• our ATI-0918 and ATI-1123 drug candidates, if commercialized, will compete against established competitive drugs
that are marketed and sold by large companies with significant human, technical and financial resources;
• we are not experienced in acquiring and integrating new assets, such as those acquired from Azaya;
•
an intense and rapidly evolving competitive landscape for our Cytori Nanomedicine product candidates, and as such
key assumptions regarding market entry, pricing, and revenue/unit share may not be realized;
• our product candidates may never become commercially viable;
• we may not be able to prevent other companies from depriving us of market share and profit margins by selling
products based on our intellectual property and developments; and
•
the regenerative medicine industry is very risky and this has adversely affect our ability to attract investment capital
and collaborators for our Cytori Cell Therapy.
Our business is sensitive to general economic, business and industry conditions.
We are exposed to general economic, business and industry conditions, both in the United States and globally. Adverse
global economic and financial conditions are difficult to predict and mitigate against, and therefore the potential impact is difficult to
estimate. Negative trends in the economy, including trends resulting from an actual or perceived recession, tightening credit markets,
such as significant reductions in available capital and liquidity from banks and other credit providers, substantial volatility in equity
and currency values worldwide, prolonged recessionary or slow growth periods, increased cost of commodities, including oil, actual
or threatened military action by the United States, and threats of terrorist attacks in the United States and abroad, could cause a
reduction of investment in and available funding for companies in certain industries, including ours and those of our customers. Thus,
our business operations and ability to raise capital has been, and may in the future, be adversely affected by downturns in current
credit conditions, financial markets and the global economy.
We face intense competition, and if our competitors market and/or develop products that are marketed more effectively, approved
more quickly than our product candidates or demonstrated to be safer or more effective than our products, our commercial
opportunities could be reduced or eliminated.
The life science industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on
proprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our
products or product candidates, including small and large, domestic and multinational, medical device, biotechnology and
pharmaceutical companies, academic institutions, government agencies and private and public research institutions, many of which
have greater financial resources, sales and marketing capabilities, including larger, well-established sales forces, manufacturing
capabilities, experience in obtaining regulatory approvals for product candidates and other resources than we do.
We expect that product candidates in our pipeline, if approved, to compete on the basis of, among other things, product
efficacy and safety, time to market, price, coverage and reimbursement by third-party payers, extent of adverse side effects and
convenience of treatment procedures. One or more of our competitors may develop other products that compete with ours, obtain
necessary approvals for such products from the FDA, EMA, MHLW or other agencies, if required, more rapidly than we do or
develop alternative products or therapies that are safer, more effective and/or more cost effective than any products developed by us.
The competition that we encounter with respect to any of our product candidates that receive the requisite regulatory approval and
classification and are marketed may have an effect on our product prices, market share and results of operations. We may not be able
to differentiate any products that we are able to market from those of our competitors, successfully develop or introduce new products
that are less costly or offer better results than those of our competitors, or offer purchasers of our products payment and other
commercial terms as favorable as those offered by our competitors. In addition, competitors may seek to develop alternative
formulations of or technological approaches to our product candidates and/or alternative cell therapy or drug delivery technologies
that address our targeted indications.
Cytori Cell Therapy: Cytori Cell Therapy may face competition from cell therapies derived from autologous or allogeneic
tissue sources such as adipose tissue, bone marrow and cord blood, and processed using alternative approaches, methods and
25
technologies such as cryopreserved, cultured, expanded, manual, non-enzymatic, selectively isolated cell therapies, and other
therapeutic approaches including those administered using oral, subcutaneous, topical and intravenous routes. If approved for the
treatment of hand dysfunction in scleroderma patients, Habeo Cell Therapy will likely compete against other products and product
candidates. GlaxoSmithKline is sponsoring a U.S. Phase 2 multi-center clinical trial to evaluate GSK2330811 in patients with
systemic sclerosis. Corbus Pharmaceuticals is conducting the international multicenter Phase 3 RESOLVE-1 study, a double-blind,
randomized, placebo-controlled study assessing the efficacy and safety of lenabasum for the treatment of systemic sclerosis. The
study will enroll approximately 354 subjects at 70 sites in North America, Europe, Israel, Japan, South Korea, and Australia. The
planned duration of treatment with study drug is 52 weeks. Subjects will be randomized 1:1:1 to receive lenabasum 5 mg twice per
day, lenabasum 20 mg twice per day, or placebo twice per day. The primary efficacy outcome of the RESOLVE-1 will be change
from baseline in modified Rodnan Skin Score, a measure of skin fibrosis and a standard clinical trial outcome in systemic sclerosis
University of Pittsburgh, in collaboration with the National Institute of Arthritis and Musculoskeletal and Skin Diseases, is conducting
a Phase II clinical trial evaluating Lipitor’s (atorvastatin) effect on blood vessel function and Raynaud symptoms in patients with early
diffuse systemic sclerosis. The University of Michigan, in collaboration with Pfizer, is performing a Phase 1/2 clinical study to
evaluate tofacitinb treatment in subjects with diffuse cutaneous systemic scleroderma. Bayer is a collaborator in a Phase 2 clinical
trial evaluating Adempas (riociguat) in patients with scleroderma-associated digital ulcers. Bristol-Myers Squibb and National
Institute of Allergy and Infectious Diseases are collaborators in a Phase 2 clinical trial evaluating Abatacept in patients with diffuse
cutaneous systemic sclerosis. Invtiva Pharma is sponsoring a Phase 2 clinical trial evaluating IVA337 in patients with diffuse
cutaneous systemic sclerosis. Seoul St. Mary’s Hospital is involved in clinical trials evaluating autologous stromal vascular fraction
injected into the fingers of patients with systemic sclerosis. Sanofi is sponsoring a Phase 2 clinical trial evaluating SAR156597 in
patients with diffuse systemic sclerosis. Hoffman-La Roche is sponsoring Phase 3 clinical trials evaluating Actemra (tocilizumab) in
patients with systemic sclerosis. UMC Utrecht is conducting the Phase 1/2 MANUS trial which aims to examine the safety, feasibility
and potential efficacy of intramuscularly injected allogeneic mesenchymal stromal cells as treatment of digital ulcers of systemic
sclerosis. Many of these studies use the primary and secondary outcome measures as used in our STAR clinical trial.
Our Cytori Cell Therapy may also face competition from lower priced, alternative therapies, including manually processed, or
“home brewed” ADRCs or fat grafts that are harvested and used to treat patients for a wide range of indications. There are hundreds of
stromal vascular fraction clinics within the United States alone that purport to offer cell therapy treatments for ailments ranging from
facial rejuvenation to stroke. Though the FDA has indicated that it intends to regulate this “home brew” industry, if it fails to do so,
then companies without FDA approvals may continue to offer cell therapy treatments on an “off-label,” unapproved basis at
substantially lower prices then we intend to command. Similar clinics exist in every other market in which we currently or intend to
compete.
Cytori Nanomedicine: We may face competition for our ATI-0918 asset (which is intended for the treatment of breast and
ovarian cancers, multiple myeloma, and Kaposi’s sarcoma) from multiple drug classes including antiretrovirals, chemotherapies,
corticosteroids, histone deacetaylase inhibitors, hormone therapies, immunotherapies, and targeted therapies, as well as companies
seeking approvals in Europe or the United States for their pegylated liposomal doxorubicin products. In particular, if a competitor is
first to the European market with an EMA-approved generic pegylated liposomal doxorubicin that is bioequivalent to Caelyx, our
projections and market assumptions for our ATI-0918 would have to be materially altered and our business could be harmed. Taiwan
Liposome Company has reported that they filed a Marketing Authorization Application, or MAA, with the EMA in the first half of
2017 for its generic TLC177 product, which is ahead of our schedule for submitting our MAA for ATI-0918. Further, Dr. Reddy’s,
Sun Pharma, and Teva are performing bioequivalence studies against Caelyx, data from which they may use to support EMA MAAs
as well. In the United States, we may face competition for ATI-0918 from multiple generic formulations of pegylated liposomal
doxorubicin. Sun Pharma’s Lipodox and Dr. Reddy’s DOXOrubicin HCl Liposome products are currently approved in the United
States and Actavis has reported that it has filed an ANDA with the FDA. Further, Watson, Tolmar, Panacea Biotec, Emcure, Cadila,
Cipla, and Aurobindo are performing bioequivalence studies against Lipodox, data from which they may to use to support FDA
ANDAs.
Companies that currently have or have had development programs for nanoparticle-docetaxel products and may be future
competitors for our ATI-1123 asset include:
•
Intas / Accord and INSYS / NeoPharm which previously completed clinical studies of liposomal docetaxel for breast
cancer, metastatic pancreatic cancer, metastatic prostate cancer, and solid tumors.
• Adocia’s DriveIn nanoparticle-docetaxel product candidate, which is in the preclinical stage;
• Cristal Therapeutics’ CriPac nanoparticle-docetaxel, which is currently being evaluated in a Phase 1a/1b clinical trial
for the treatment of solid tumors and which was recently awarded with a Horizon 2020 grant to advance through Phase
2 trials; and
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• Oasmia’s Docecal, a formulation of docetaxel combined with a patented nanoparticle-based technology, XR17, which
is currently being evaluated in a Phase 1 clinical trial.
• NanOlogy is evaluating NanoDoce, a sterile nanoparticle docetaxel, in preclinical studies
•
Jazz Pharma acquired Celator Pharmaceuticals’ preclinical stage product candidate, CPX-8, a hydrophobic docetaxel
prodrug nanoparticle formulation being studied by the NCI’s Nanotechnology Characterization Laboratory
• Merrimack Pharmaceuticals’ MM-310, a liposomal formulation of docetaxel, is being evaluated in a Phase 1 open-
label study in patients with solid tumors.
Competitors may have greater experience in developing drugs or devices, conducting clinical trials, obtaining regulatory
clearances or approvals, manufacturing and commercialization. It is possible that competitors may obtain patent protection, approval,
or clearance from the FDA or achieve commercialization earlier than we can, any of which could have a substantial negative effect on
our business. Compared to us, many of our potential competitors have substantially greater:
•
•
capital resources;
research and development resources and experience, including personnel and experience;
• product development, clinical trial and regulatory resources and experience;
•
sales and marketing resources and experience;
• manufacturing and distribution resources and experience;
• name, brand and product recognition; and
•
resources, experience and expertise in prosecution and enforcement of intellectual property rights.
As a result of these factors, our competitors may obtain regulatory approval of their products more quickly than we are able to
or may obtain patent protection or other intellectual property rights that limit or block us from developing or commercializing our
product candidates. Our competitors may also develop products that are more effective, more useful, better tolerated, subject to fewer
or less severe side effects, more widely prescribed or accepted or less costly than ours and may also be more successful than we are in
manufacturing and marketing their products. If we are unable to compete effectively with the marketed therapeutics of our competitors
or if such competitors are successful in developing products that compete with any of our product candidates that are approved, our
business, results of operations, financial condition and prospects may be materially adversely affected.
Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy for Habeo Cell Therapy or any of our other
product candidates, which could prevent or significantly delay their regulatory approval and commercialization, which would have
a material and adverse impact on our business.
Clinical testing of our products is a long, expensive and uncertain process, and the failure or delay of a clinical trial can occur
at any stage. Many factors, currently known and unknown, can adversely affect clinical trials and the ability to evaluate a product
candidate’s efficacy. During the course of treatment, patients can die or suffer other adverse events for reasons that may or may not be
related to the proposed product being tested. Even if initial results of preclinical and nonclinical studies or clinical trial results are
promising, we may obtain different results in subsequent trials or studies that fail to show the desired levels of safety and efficacy, or
we may not obtain applicable regulatory approval for a variety of other reasons. For instance, the investigator-initiated 12-patient,
open-label SCLERADEC I trial investigating use of Habeo Cell Therapy for hand complications of scleroderma, sponsored by the
Assistance Publique Hôpitaux de Marseille, or AP-HM, located in Marseille, France, has reported strong clinical data suggesting
safety and efficacy of a single treatment of Habeo Cell Therapyout to three years after treatment. However, the six and 12 month
results of the STAR trial failed to demonstrate statistical significance of the primary and secondary endpoints. Therefore, there can be
no assurances that AP-HM’s current SCLERADEC II clinical trial will be successful. This trial is testing broader human use of Habeo
Cell Therapy in blinded, randomized, placebo-controlled trial settings, as opposed to SCLERADEC I’s open-label, single arm,
uncontrolled, unblinded format. In addition, we recently released a more detailed assessment of STAR Trial data at the World
Scleroderma Congress this past February, and in late 2017, submitted a request for a a pre-submission meeting with FDA, which shall
happen later this quarter, and shall provide us with a clearer picture of the optimal path forward with Habeo Cell therapy in the U.S.
Many companies in our industry have suffered significant setbacks in advanced clinical trials, despite promising results in earlier
trials. If the results of our FDA pre-submission meeting are not favorable, or if our Cytori-supported SCLERADEC II clinical trial do
not meet their primary endpoints, we will likely be unable to obtain regulatory approval for our Habeo Cell Therapy, and may be
forced to abandon our scleroderma development program, which would severely affect our business.
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Further, with respect to the conduct and results of clinical trials generally, in the United States, Europe, Japan and other
jurisdictions, the conduct and results of clinical trials can be delayed, limited suspended, or otherwise adversely affected for many
reasons, including, among others:
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•
•
•
•
•
•
•
•
•
•
•
•
•
clinical results may not meet prescribed endpoints for the studies or otherwise provide sufficient data to support the
efficacy of our product candidates;
clinical and nonclinical test results may reveal side effects, adverse events or unexpected safety issues associated with
the use of our product candidates;
lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment
delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our
contract research organizations, or CROs, and other third parties;
inability to design appropriate clinical trial protocols;
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
regulatory review may not find a product safe or effective enough to merit either continued testing or final approval;
regulatory review may not find that the data from preclinical testing and clinical trials justifies approval;
regulatory authorities may require that we change our studies or conduct additional studies which may significantly
delay or make continued pursuit of approval commercially unattractive;
a regulatory agency may reject our trial data or disagree with our interpretations of either clinical trial data or
applicable regulations;
the cost of clinical trials required for product approval may be greater than what we originally anticipate, and we may
decide to not pursue regulatory approval for such a product;
a regulatory agency may identify problems or other deficiencies in our existing manufacturing processes or facilities
or the existing processes or facilities of our collaborators, our contract manufacturers or our raw material suppliers;
a regulatory agency may change its formal or informal approval requirements and policies, act contrary to previous
guidance, adopt new regulations or raise new issues or concerns late in the approval process;
a product candidate may be approved only for indications that are narrow or under conditions that place the product at
a competitive disadvantage, which may limit the sales and marketing activities for such products or otherwise
adversely impact the commercial potential of a product; and
a regulatory agency may ask us to put a clinical study on hold pending additional safety data; (and there can be no
assurance that we will be able to satisfy the regulator agencies’ requests in a timely manner, which can lead to
significant uncertainty in the completion of a clinical study).
In addition, Cytori Cell Therapy is currently the subject of a number of investigator-initiated trials, including the
SCLERADEC II clinical trial in France and the ADRESU clinical trial in Japan. While these investigator-initiated trials are useful to
help enhance awareness and use of our cell therapy technologies and products, and to identify potential therapeutic targets, there are
also associated risks. We do not control the design and conduct of these trials, thus any data integrity issues or patient safety arising
out of any of these trials would be beyond our control, yet could adversely affect our reputation and damage the clinical and
commercial prospects for our Cytori Cell Therapy product candidates.
We also face clinical trial-related risks with regard to our reliance on other third parties in the performance of many of the
clinical trial functions, including CROs, that help execute our clinical trials, the hospitals and clinics at which our trials are conducted,
the clinical investigators at the trial sites, and other third-party service providers. Failure of any third-party service provider to adhere
to applicable trial protocols, laws and regulations in the conduct of one of our clinical trials could adversely affect the conduct and
results of such trial (including possible data integrity issues), which could seriously harm our business.
Our success depends in substantial part on our ability to obtain regulatory approvals for Habeo Cell Therapy and ATI-1123.
However, we cannot be certain that we will receive regulatory approval for these product candidates or our other product
candidates.
We have only a limited number of product candidates in development, and our business depends substantially on their
successful development and commercialization. Our product candidates will require development, regulatory review and approval in
multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing
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efforts before we can generate any revenues from sales of our product candidates. The research, testing, manufacturing, labeling,
approval, sale, marketing and distribution of drug products are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries, whose regulations differ from country to country.
We are not permitted to market our product candidates in the United States until we receive approval from the FDA, or in any
foreign countries until we receive the requisite approval from the regulatory authorities of such countries (including centralized
marketing authorization from the European Medicines Agency), and we may never receive such regulatory approvals. Obtaining
regulatory approval for a product candidate is a lengthy, expensive and uncertain process, and may not be obtained. Any failure to
obtain regulatory approval of any of our product candidates would limit our ability to generate future revenues (and any failure to
obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenue), would
potentially harm the development prospects of our product candidates and would have a material and adverse impact on our business.
Even if we successfully obtain regulatory approvals to market our product candidates, our revenues will be dependent, in
part, on our ability to commercialize such products as well as the size of the markets in the territories for which we gain regulatory
approval. If the markets for our product candidates are not as significant as we estimate, our business and prospects will be harmed
Regarding to our two current lead commercialization candidates, Habeo Cell Therapy and ATI-0918:
• Though we believe that Habeo Cell Therapy will be regulated as an Advanced Therapeutic Medicinal Product, or
ATMP, in Europe, it is possible that the EMA instead provides a medical device classification for Habeo Cell
Therapy, in which case we will be unable to avail ourselves of the orphan drug designation granted to us covering use
of Cytori Cell Therapy for systemic sclerosis, and will instead compete with other medical device manufacturers
purporting to offer cellular therapeutics competitive with ours (and possibly at much lower price points than we
currently contemplate for our therapy). Any classification of Cytori Cell Therapy as a medical device could make it
difficult for us to identify pharmaceuticals companies willing to help us commercialize this product offering in
Europe, and could also deter medical device companies from partnering with us given potential pricing and
competitive concerns.
•
If Habeo Cell Therapy is classified as an ATMP in Europe, then we may be required to comply with applicable cGMP
requirements, as interpreted and implemented at the national level in each country, which would take longer and cost
more to get to market than if Habeo Cell Therapy were classified as a medical device, and would in turn increase the
costs of commercializing Habeo Cell Therapy in these countries. Further, potential pharmaceutical partners may be
wary of the medical device component of our cell therapy. These commercialization hurdles could increase the
difficulties in finding suitable partners to help us commercialize this product offering in Europe.
• The EMA has approved nine ATMPs in Europe to date, of which only five are still on the market with three being
withdrawn and one suspended, with application review periods ranging from approximately thirteen to thirty-five
months. This wide range in review periods makes it difficult to predict whether and on what timeframe our Habeo
Cell Therapy would receive EMA approval, if at all.
• Given the novelty of our cellular therapeutics technology, we anticipate that we may face regulatory hurdles in other
jurisdictions outside of the United States and Europe that could delay regulatory approval and commercial launch of
Habeo Cell Therapy.
• The reference drugs for ATI-0918, which are currently Lipodox® in the United States and Caelyx® in Europe, may
change and we could be required to conduct a bioequivalence trial to establish bioequivalence with the new reference
drugs, which would adversely affect our business and operations.
• Though Azaya previously completed a European ATI-0918 60-patient bioequivalence trial, the EMA has not
confirmed the adequacy of the trial for purposes of determining bioequivalence of ATI-0918 to Caelyx®. It is possible
that the EMA could require us to conduct another bioequivalency trial for ATI-0918, which would cause us to incur
significant delays and additional costs and expense and would materially and adversely affect our business.
• Though it is our intent to expeditiously pursue regulatory review of ATI-0918 in Europe through submission of a
marketing authorization application, or MAA, to the EMA, prior to submission of this application we must first
conduct and complete certain activities, including chemistry, manufacturing and controls, or CMC, activities, for
inclusion in the application, and we cannot guarantee that we will successfully complete these activities.
• We may decide to seek scientific advice from the EMA regarding required elements of the MAA before we submit the
MAA, and if the EMA’s scientific advice requires us to conduct substantive additional work (including possible
provision of substantial additional data or information), our submission of the MAA could be materially delayed,
which in turn would materially push back our anticipated launch date for ATI-0918 in Europe.
29
•
If we are unable to satisfy the EMA’s requirements to issuance of the marketing authorization for ATI-0918, we will
not be able to launch ATI-0918 in Europe, and our business would be materially harmed.
If a product candidate is not approved in a timely fashion on commercially viable terms, or if development of any product
candidate is terminated due to difficulties or delays encountered in the regulatory approval process, it could have a material adverse
effect on our business, and we may become more dependent on the development of other proprietary products and/or our ability to
successfully acquire other products and technologies. There can be no assurance that any product candidate will receive regulatory
approval in a timely manner, or at all.
If our products candidate and technologies receive regulatory approval but do not achieve broad market acceptance, especially by
physicians, the revenues that we generate will be limited.
The commercial success of any of our approved products or technologies will depend upon the acceptance of these products
and technologies by physicians, patients and the medical community. The degree of market acceptance of these products and
technologies will depend on a number of factors, including, among others:
•
•
•
•
acceptance by physicians and patients of the product as a safe and effective treatment;
any negative publicity or political action related to our or our competitors’ products or technologies;
the relative convenience and ease of administration;
the prevalence and severity of adverse side effects;
• demonstration to authorities of the pharmacoeconomic benefits;
• demonstration to authorities of the improvement in burden of illness;
•
limitations or warnings contained in a product’s approved labeling;
• payers’ level of restrictions and/or barriers to coverage;
•
•
•
the clinical indications for which a product is approved;
availability and perceived advantages of alternative treatments;
the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies; and
• pricing and cost effectiveness.
Our Celution technology and products compete against cell-based therapies derived from alternate sources, such as bone
marrow, umbilical cord blood and, potentially, embryos. Some of our competitors with products based on these other cell-based
therapies have substantially greater financial, human and technical resources than we do. In addition, some of them have approved
products with therapeutic claims, established revenues and broad market recognition. Physicians historically are slow to adopt new
technologies like ours regardless of the perceived merits when older technologies, as the current standard of care, continue to be
supported by established providers. Overcoming such inertia often requires significant marketing expenditures or definitive product
performance and/or pricing superiority.
We face similar competitive pressures with our Cytori Nanomedicine product candidates. As a generic pegylated liposomal
encapsulation of doxorubicin, ATI-0918, if approved and launched commercially, will potentially compete against Caelyx in Europe
and Doxil, Lipodox®, and DOXOrubicin HCl Liposome in the United States. These existing competitive liposomal doxorubicin
products have been on the market for many years, have gained widespread physician acceptance and are marketed by competitors with
substantially greater resources than we have. Further, our ATI-1123 product candidate, if developed and commercialized, would
compete against a number of established docetaxel drugs, including Taxotere® (Sanofi S.A.) and numerous existing generic docetaxel
products, as well as other potential liposomal docetaxel products being developed and commercialized by competitors.
We expect physicians’ inertia and skepticism to also be a significant barrier as we attempt to gain market penetration with our
future products. We believe we will continue to need to finance lengthy time-consuming clinical studies to provide evidence of the
medical benefit of our products and resulting therapies in order to overcome this inertia and skepticism.
Overall, our efforts to educate the medical community on the benefits of any of our products or technologies for which we
obtain marketing approval from the FDA or other regulatory authorities and gain broad market acceptance may require significant
resources and may never be successful. If our products and technologies do not achieve an adequate level of acceptance by physicians,
pharmacists and patients, we may not generate sufficient revenue from these products to become or remain profitable.
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Many potential applications of our product candidates are pre-commercial, which subjects us to development and marketing risks.
Our products candidates are at various stages of development. Successful development and market acceptance of our
products is subject to developmental risks, including risk of negative clinical data from current and anticipated trials, failure of
inventive imagination, ineffectiveness, lack of safety, unreliability, manufacturing hurdles, failure to receive necessary regulatory
clearances or approvals, high commercial cost, preclusion or obsolescence resulting from third parties’ proprietary rights or superior
or equivalent products, competition from copycat products and general economic conditions affecting purchasing patterns. There can
be no assurance that we or our partners will successfully develop and commercialize our product candidates, or that our competitors
will not develop competing technologies that are less expensive or superior. Failure to successfully develop and market our product
candidates would have a substantial negative effect on our results of operations and financial condition.
Regarding our cell therapy products, we believe that our long-term viability and growth will depend in large part on our
ability to establish the safety and efficacy of our cell therapies through clinical trials and studies. Though we generate revenues from
commercial sales of our Celution products, there is no proven path for commercializing Cytori Cell Therapy in a way to earn a durable
profit commensurate with the medical benefit. We have been engaged for a number of years in commercial sales of our Celution
devices and consumable kits in Japan, Europe, and certain Asia Pacific markets, and our cell banking products in Japan, but we have
not achieved significant growth due in significant part to our inability thus far to obtain therapeutic, on-label use that is reimbursed by
payers. Thus, we do not expect the market for our products to appreciably increase until we have positive clinical data from a
validated, Phase III, controlled, randomized trial that reports safety and efficacy of our cellular therapeutic in a discrete disease state or
condition. However, there can be no assurance that one or more clinical trials of our cell therapy product candidates will yield
positive results.
Regarding our Cytori Nanomedicine program, our ATI-0918 generic drug candidate is pre-commercial. Our ATI-0918
bioequivalence trial results and accompanying manufacturing and other data are subject to review and feedback by the EMA prior to
our submission of our marketing authorization application, or MAA, to the EMA. There can be no assurances that the EMA will view
the results of the bioequivalence trial favorably. Further, we are required to complete certain manufacturing, drug stability and other
activities before we submit our MAA to the EMA. There can be no assurance that the EMA will deem our MAA sufficient grant us
marketing authorization within the timelines we currently project, or at all.
Our ATI-1123 drug candidate is in early clinical stages and is subject to all of the attendant risks of an early-stage drug.
Should we wish to commercialize ATI-0918 in the United States, we believe we will need to conduct a clinical trial to demonstrate
bioequivalence to the then-current reference drug in the United States (currently Lipodox®). Any such bioequivalency trial would be
time and resource intensive and could ultimately fail to demonstrate ATI-0918’s bioequivalence to the reference drug. Also, we intend
to find a partner to develop our ATI-1123 drug candidate, but and if we are unsuccessful in doing so, our ATI-1123 development
program could be delayed or suspended.
If we or any party to a key collaboration, licensing, development, acquisition or similar arrangement fails to perform material
obligations under such arrangement, or any arrangement is terminated for any reason, there could be an adverse effect on our
business.
We are currently party to certain licensing, collaboration and acquisition agreements under which we may make or receive
future payments in the form of milestone payments, maintenance fees, royalties and/or minimum product purchases. We are dependent
on our collaborators to commercialize Cytori Cell Therapy in certain countries and in certain indications for us to realize any financial
benefits from these collaborations. Our collaborators may not devote the attention and resources to such efforts to be successful. In
addition, in the event that a party fails to perform under a key collaboration agreement, or if a key collaboration agreement is
terminated, the reduction in anticipated revenues could delay or suspend our commercialization efforts in certain countries.
Specifically, the termination of a key collaboration agreement by one of our collaborators could materially impact our ability to enter
into additional collaboration agreements with new collaborators on favorable terms.
Risks relating to our current material collaborations (excluding our BARDA partnership, which is discussed below in these
“Risk Factors”) include the following:
• Under our asset purchase agreement with Azaya, we are required to use commercial reasonable efforts to develop our
ATI-0918 and ATI-1123 drug candidates, and we have future milestone, earn-out and other payments to Azaya tied to
our commercialization and sale activities for these drug candidates. If we are unsuccessful in our efforts to develop our
ATI-0918 and ATI-1223 drug assets, or if Azaya and we were to enter into a dispute over the terms of our agreement,
then our business could be seriously harmed.
• Lorem Vascular, is our exclusive licensee for our Cytori Cell Therapy products in all fields of use in China, Hong
Kong, Singapore, Malaysia and Australia under the terms of the Lorem Agreement. Lorem Vascular is responsible for
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commercializing our Cytori Cell Therapy products in these territories. Lorem Vascular is relatively new company
with limited operating history, and has yet to generate meaningful revenues in its licensed territories. There can be no
assurance that Lorem Vascular will be able to generate meaningful revenues in its licensed territories in the future.
We are in ongoing discussions with Lorem Vascular regarding the terms of our collaboration, including the structure
of the Lorem Agreement. If we are unable to agree with Lorem Vascular on revised terms to our collaboration, our
relationship with them could suffer. A dispute may arise between us and Lorem Vascular that could lead to arbitration
or other adversarial proceedings. Any such proceedings could cause significant diversion of management time and
attention, cause us significant expense, and could potentially result in an outcome adverse to us. Further, any such
dispute could negatively affect our ability to realize any sales or royalty revenues from Lorem Vascular’s commercial
activities in the territories under its exclusive license. Even if we successfully restructure or otherwise revise our
agreement with Lorem Vascular, there can be no assurance that Lorem Vascular will be able to successfully
commercialize our Celution products in China or in the other territories subject to its license. Further, if Lorem
Vascular fails to comply with any regulations applicable to its development, marketing and sale of our products, there
can be no assurance that regulators would not try to hold us responsible for such activities.
• Pursuant to the Bimini Agreement, we have, among other things, granted Bimini an exclusive, worldwide license to
use and sell our Cytori Cell Therapy products in the alopecia (hair loss) field. Cytori and Bimini granted certain
licenses to each other, and have certain license, royalty and other payment obligations under the Bimini agreement, as
well as certain supply, development and non-competition obligations. If we and Bimini were to enter into a dispute
regarding the terms of our agreement, our business could be harmed.
If we or our distributors or collaborators fail to comply with regulatory requirements applicable to the development,
manufacturing, and marketing of our products, regulatory agencies may take action against us or them, which could significantly
harm our business.
Our products and product candidates, along with the clinical development process, the manufacturing processes, post-
approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and
review by the FDA and state and foreign regulatory bodies. Regulatory authorities subject a marketed product, its manufacturer and
the manufacturing facilities to continual review and periodic inspections. We, our distributors and collaborators, and our and their
respective contractors, suppliers and vendors, will be subject to ongoing regulatory requirements, including complying with
regulations and laws regarding advertising, promotion and sales of products, required submissions of safety and other post-market
information and reports, registration requirements, Clinical Good Manufacturing Practices (cGMP) regulations (including
requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and
documentation), and the requirements regarding the distribution of samples to physicians and recordkeeping requirements. Regulatory
agencies may change existing requirements or adopt new requirements or policies. We, our distributors and collaborators, and our and
their respective contractors, suppliers and vendors, may be slow to adapt or may not be able to adapt to these changes or new
requirements.
Failure to comply with regulatory requirements may result in any of the following:
•
restrictions on our products or manufacturing processes;
• warning letters;
• withdrawal of the products from the market;
• voluntary or mandatory recall;
•
•
•
•
•
fines;
suspension or withdrawal of regulatory approvals;
suspension or termination of any of our ongoing clinical trials;
refusal to permit the import or export of our products;
refusal to approve pending applications or supplements to approved applications that we submit;
• product seizure;
•
•
injunctions; or
imposition of civil or criminal penalties.
To the extent any of our customers fail to use our products in compliance with applicable regulations, regulators could try to hold
us responsible if they believe we facilitated or were otherwise somehow responsible for our customer's non-compliance.
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We currently sell our Celution-based Cell Therapy products in numerous markets outside of the United States for research
and commercial use. These markets have different, and in some cases, less burdensome, regulatory schemes applicable to our products
than in the United States. To the extent any of our customers, whether inside or outside the United States, use or further market our
products in their home market or in other markets in a way that does not comply with applicable local regulations, regulators could try
to hold us responsible if they believe we facilitated or were otherwise responsible for the customer’s actions. While we take measures
in an effort to protect us against these types of risks, we cannot ensure you that such measures would prevent us from becoming
subject to any such claims.
We and our products are subject to extensive regulation, and the requirements to obtain regulatory approvals in the United States
and other jurisdictions can be costly, time-consuming and unpredictable. If we or our partners are unable to obtain timely
regulatory approval for our product candidates, our business may be substantially harmed.
Cytori Cell Therapy: Our Celution system family of products and components of the Stemsource cell banks, must receive
regulatory clearances or approvals from the FDA and from foreign regulatory bodies prior to commercial sale in those jurisdictions.
Our Cytori Cell Therapy platform, including the Celution device, Celase and Intravase reagents, and consumable kits, is subject to
stringent government regulation in the United States by the FDA under the Federal Food, Drug and Cosmetic Act, and by the EMA
and other regulatory agencies outside of the United States under their respective regulatory regimes.
The regulatory process for our cell therapy products can be lengthy, expensive, and uncertain. Before any new medical device
may be introduced to the U.S. market, the manufacturer generally must obtain FDA clearance or approval through either the 510(k)
pre-market notification process or the lengthier pre-market approval, or PMA, process. It generally takes from three to 12 months from
submission to obtain 510(k) pre-market clearance, although it may take longer. Approval of a PMA could take four or more years
from the time the process is initiated. The 510(k) and PMA processes can be expensive, uncertain, and lengthy, and there can be no
assurance of ultimate clearance or approval. Our Celution products under development today and in the foreseeable future will be
subject to the lengthier PMA process. Securing FDA clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA. Failure to comply with applicable requirements can result in application integrity proceedings,
fines, recalls or seizures of products, injunctions, civil penalties, total or partial suspensions of production, withdrawals of existing
product approvals or clearances, refusals to approve or clear new applications or notifications, and criminal prosecution.
For us to market our products in Europe, Canada, Japan and certain other non-U.S. jurisdictions, we need to obtain and
maintain required regulatory approvals or clearances and must comply with extensive regulations regarding safety, manufacturing
processes and quality. These regulations, including the requirements for approvals or clearances to market, may differ from the FDA
regulatory scheme. International sales also may be limited or disrupted by political instability, price controls, trade restrictions and
changes in tariffs. Additionally, fluctuations in currency exchange rates may adversely affect demand for our products by increasing
the price of our products in the currency of the countries in which the products are sold.
Medical devices are also subject to post-market reporting requirements for deaths or serious injuries when the device may
have caused or contributed to the death or serious injury, as well as for certain device malfunctions that would be likely to cause or
contribute to a death or serious injury if the malfunction were to recur. If safety or effectiveness problems occur after the product
reaches the market, the FDA may take steps to prevent or limit further marketing of the product. Additionally, the FDA actively
enforces regulations prohibiting marketing and promotion of devices for indications or uses that have not been cleared or approved by
the FDA. While we believe that our current activities are in compliance with FDA regulations relating to marketing and promotion, if
regulators were to determine that our commercialization efforts, or those of our distributors, collaborators or customers, involve
improper marketing and promotion of our products in violation of FDA regulations, our business could be substantially negatively
affected.
There can be no assurance that we will be able to obtain the necessary 510(k) clearances or PMA approvals to market and
manufacture our other products in the United States for their intended use on a timely basis, if at all. Delays in receipt of or failure to
receive such clearances or approvals, the loss of previously received clearances or approvals or failure to comply with existing or
future regulatory requirements could have a substantial negative effect on our results of operations and financial condition. In addition,
there can be no assurance that we will obtain regulatory approvals or clearances in all of the other countries where we intend to market
our products, or that we will not incur significant costs in obtaining or maintaining foreign regulatory approvals or clearances, or that
we will be able to successfully commercialize current or future products in various foreign markets. Delays in receipt of approvals or
clearances to market our products in foreign countries, failure to receive such approvals or clearances or the future loss of previously
received approvals or clearances could have a substantial negative effect on our results of operations and financial condition.
Cytori Nanomedicine: The worldwide regulatory process for our Cytori Nanomedicine drug candidates can be lengthy and
expensive, with no guarantee of approval.
Before any new drugs may be introduced to the U.S. market, the manufacturer generally must obtain FDA approval through
either an abbreviated new drug application, or ANDA, process for generic drugs off patent that allow for bioequivalence to an existing
reference listed drug, or RLD, or the lengthier new drug approval, or NDA, process, which typically requires multiple successful and
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successive clinical trials to generate clinical data supportive of safety and efficacy along with extensive pharmacodynamic and
pharmacokinetic preclinical testing to demonstrate safety. Our lead drug product under development (ATI-0918) is eligible ANDA
process, while our ATI-1123 drug candidate is subject to the significantly lengthier NDA process. Approval of an ANDA could take
four or more years from the time the process is initiated due to the requirement for clinical trials. NDA drugs could take significantly
longer due to the additional preclinical requirements along with the typical requirement for two successful Phase III clinical studies.
In Europe, as in the United States, there are two regulatory steps to complete before a drug candidate is approved to be
marketed in the European Union. These two steps are clinical trial application and marketing authorization application. Clinical trial
applications are approved at the member state level, whereas marketing authorization applications are approved at both the member
state and centralized levels. Both ATI-0918 and ATI-1123 may follow the centralized procedure for EMA regulatory approval. The
centralized procedure allows the applicant to obtain a marketing authorization that is valid throughout the EU. Similar to the FDA
process, the EMA centralized process requires bioequivalence data for generic drug candidates such as ATI-0918, and robust clinical
data for non-generic drug candidates like ATI-1123 similar to clinical data required for NDA drug candidates.
There are numerous risks arising out of the regulation of our ATI-0918 and ATI-1123 drug candidates include the following:
• We can provide no assurances that our current and future oncology drugs will meet all of the stringent government
regulation in the United States, by the FDA under the Federal Food, Drug and Cosmetic Act, and/or in international
markets such as Europe, by the EMA under its Medicinal Products Directive.
• We intend to seek regulatory of our ATI-0918 drug candidate via abbreviated approval processes referred to as
bioequivalence or BE, approved under an abbreviated new drug application, or ANDA. There are no assurances that
these abbreviated processes are or will be available in markets outside of the United States, or where available, that we
will successfully obtain regulatory approvals via such abbreviated processes.
•
It is required for ANDA and BE drug candidates that there is a RLD, with which the drug candidate must demonstrate
equivalence. There are no assurances that the reference drug for ATI-0918 will be the same in all territories or
countries, which could require different and unique BE clinical studies for some territories where we currently intend
to commercialize ATI-0918. Changes in the RLD may result in the nullification of BE clinical studies and can result in
significant delays in the regulatory process as BE clinical studies may need to be repeated for jurisdictions that no
longer recognize the reference drug utilized in BE clinical studies.
• Our Cytori Nanomedicine drug candidates, if approved, will still be subject to post-market reporting requirements for
deaths or serious injuries when the drug may have caused or contributed to the death or serious injury, or serious
adverse events. There are no assurances that our drug products will not have safety or effectiveness problems
occurring after the drugs reach the market. There are no assurances that regulatory authorities will not take steps to
prevent or limit further marketing of the drug due to safety concerns.
•
It is possible that the new legislation in our priority markets, such as the newly enacted CURES Act in the United
States, will yield additional regulatory requirements for therapeutic drugs for our Cytori Nanomedicine drug
candidates (the FDA’s interpretation and implementation of the CURES Act has yet to be published).
Changing, new and/or emerging government regulations may adversely affect us.
Cytori Cell Therapy: Government regulations can change without notice. Given the fact that we operate in various
international markets, our access to such markets could change with little to no warning due to a change in government regulations
that suddenly up-regulate our product(s) and create greater regulatory burden for our cell therapy and cell banking technology
products.
Our ability to receive regulatory approvals for our Cytori Cell Therapy products and to sell into foreign markets is complex,
due in part to by the nature of our Celution platform and manufacturing process. The platform consists of our Celution device that
processes the patient’s own adipose (fat) tissue to create a heterogeneous mixture of regenerative cells. In the United States, this
heterogeneous mixture of cells is subject to classification as a drug, but the FDA has made the determination that our Cytori Cell
Therapy will be regulated as a Class III PMA medical device. However, foreign regulatory bodies must assess our particular platform
and manufacturing process to make their own determination whether our Cytori Cell Therapy product candidates should receive
medical device or drug classifications. For example, the European Commission has granted orphan drug designation for the use of
Cytori Cell Therapy (currently branded as Habeo Cell Therapy) in treatment of system sclerosis. The EMA has not made a
determination whether it would classify Habeo Cell Therapy as an ATMP or a medical device. Though we believe that Habeo Cell
Therapy will be classified by the EMA as an ATMP, we cannot guarantee that the EMA will not arrive at a different determination at
such time that we ask a determination to be made. Regardless of the EMA’s ultimate determination, we will also be required to
comply with the particular regulatory requirements of each of the member states of the European Economic Area (comprised of 28
European Union, or EU, member states plus Iceland, Liechtenstein, and Norway) with respect to our cell therapy offerings, a process
which we anticipate will require considerable time, effort and expense. We expect that regulatory bodies in other jurisdictions will
engage in similar analyses of our Cytori Cell Therapy, and we cannot predict then outcomes of these analyses.
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In Japan, the Japanese Diet passed the Act regarding Ensuring of Safety of Regenerative Medicine, or the Regenerative
Medicine Law, and the revisions to the Pharmaceutical Affairs Law as applied to drugs, medical devices and regenerative medicine.
The Regenerative Medicine Law initially caused some confusion for regenerative companies operating in Japan, but we believe that
this law, as currently implemented, benefits Cytori and its customers by allowing an expedited path for our customers in Japan to
obtain licenses under the Regenerative Medicine Law to treat patients with Cytori Cell Therapy. However, we cannot be certain that
the Regenerative Medicine Law will not be repealed or that current interpretations and implementation of the Regenerative Medicine
Law will not change in a manner adverse to our business. Further, we currently import and sell our products in Japan under Class I
notifications that we obtained several years ago. However, at the request of Japanese regulators, we are in the process of obtaining
Class III approvals for our Celution device and consumable kits. Though we are pursuing these Class III approvals process without
any anticipated interruption to our commercial activities, it is possible that other jurisdictions in which we currently sell may require
similar heightened regulatory approvals but with potential restrictions on our ability to market and sell our Cytori Cell Therapy
products in such territories during the application process and review period for the required regulatory approvals.
Any regulatory review committees and advisory groups and any contemplated new guidelines may lengthen the regulatory
review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and
interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval
limitations or restrictions. As we advance our product candidates, we may be required to consult with these regulatory and advisory
groups, and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of our
product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a product
candidate to market could decrease our ability to generate sufficient revenue to maintain our business. Divergence in regulatory
criteria for different regulatory agencies around the globe could result in the repeat of clinical studies and/or preclinical studies to
satisfy local territory requirements, resulting in the repeating of studies and/or delays in the regulatory process. Some territories may
require clinical data in their indigenous population, resulting in the repeat of clinical studies in whole or in part. Some territories may
object to the formulation ingredients in the final finished product and may require reformulation to modify or remove objectionable
components; resulting in delays in regulatory approvals. Such objectionable reformulations include, but are not limited to, human or
animal components, BSE/TSE risks, banned packaging components, prohibited chemicals, banned substances, etc. There can be no
assurances that FDA or foreign regulatory authorities will accept our pre-clinical and/or clinical data.
Due to the fact that there are new and emerging cell therapy and cell banking regulations that have recently been drafted
and/or implemented in various countries around the world, the application and subsequent implementation of these new and emerging
regulations have little to no precedence. Therefore, the level of complexity and stringency is not known and may vary from country to
country, creating greater uncertainty for the international regulatory process.
Anticipated or unanticipated changes in the way or manner in which the FDA or other regulators regulate products or
classes/groups of products can delay, further burden, or alleviate regulatory pathways that were once available to other products.
There are no guarantees that such changes in the FDA’s or other regulators’ approach to the regulatory process will not deleteriously
affect some or all of our products or product applications.
Cytori Nanomedicine: Our nanoparticle technology is also subject to government regulations that are subject to change. Our
lead drug product, ATI-0918 is regulated under bioequivalence rules that rely on a reference listed drug, or RLD, for equivalence in
the United States and other jurisdictions. Government agencies can change the reference listed drug or reference drug without notice.
These changes in the RLD could invalidate clinical studies and require the initiation of new clinical studies for determining
equivalence to a newly assigned RLD. Furthermore, bioequivalence studies may need to be repeated in certain foreign entities as
some governments may require additional confirmatory studies in their patient populations. These additional requirements could
result in additional clinical studies or delays in the regulatory process. Other risks with the RLD criteria are in the criteria for
demonstrating bioequivalence. Bioequivalence criteria may not be identical in all geographical regions, resulting in the requirement
for new bioequivalence studies to demonstrate equivalence to a more stringent standard. Additionally, bioequivalence criteria rely on
the products being “off patent” in the territory. Patent expiration dates may vary in different regions which may result in
bioequivalence regulatory pathways being delayed in some territories. Current regulatory pathways such as the abbreviated new drug
application, or ANDA, pathway, of we are currently relying on, are subject to change and may cease to be viable regulatory pathways
in the future.
Our pipeline oncology products, such as ATI-1123, are being developed under existing government criteria, which are
subject to change in the future. Clinical and/or pre-clinical criteria in addition to cGMP manufacturing requirements may change and
impose additional regulatory burdens. Clinical requirements are subject to change which may result in delays in completing the
regulatory process. Divergence in regulatory criteria for different regulatory agencies around the globe could result in the repeat of
clinical studies and/or preclinical studies to satisfy local jurisdictional requirements, which would significantly lengthen the regulatory
process and increase uncertainty of outcome. Some jurisdictions may require clinical data in their indigenous population, resulting in
the repeat of clinical studies in whole or in part. Some jurisdictions may object to the formulation ingredients in the final finished
product and may require reformulation to modify or remove objectionable components; resulting in delays in regulatory approvals.
Such objectionable reformulations include, but are not limited to, human or animal components, bovine spongiform encephalopathy/
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transmissible spongiform encephalopathy risks, banned packaging components, prohibited chemicals, banned substances, etc. There
can be no assurance that the FDA or foreign regulatory authorities will accept our pre-clinical and/or clinical data.
We may have difficulty obtaining appropriate and sufficient pricing and reimbursement for our cell therapy products.
New and emerging cell therapy and cell banking technologies, such as those provided by the Cytori Cell Therapy family of
products, may have difficulty or encounter significant delays in obtaining health care reimbursement in some or all countries around
the world due to the novelty of our cell therapy and cell banking technology and subsequent lack of existing reimbursement
schemes/pathways. Therefore, the creation of new reimbursement pathways may be complex and lengthy with no assurances that such
reimbursements will be successful. The lack of health insurance reimbursement or reduced or minimal reimbursement pricing may
have a significant impact on our ability to successfully sell our cell therapy and cell banking technology products into a county or
region at pricing that is profitable and that adequately compensates Cytori for its development costs, which would negatively impact
our operating results.
Our European managed access program for Habeo Cell Therapy may not be successful, which in turn could adversely affect our
Habeo Cell Therapy commercialization efforts.
Our managed access program, or MAP (also known as early access program or named patient program), is intended to
provide access in select countries across Europe, the Middle East and Africa, and Latin America to our Habeo Cell Therapy for
patients with impaired hand function due to scleroderma in advance of anticipated commercialization of Habeo Cell Therapy. Our
MAP has faced and may continue to face numerous challenges, including the following:
•
In most countries, patient access to Habeo Cell therapy will be provided on an ‘individual’ patient basis where
physicians will make an application to their competent authority in each country on a patient-by-patient basis. This
imposes a significant administrative burden on participating physicians, and requires them to navigate a process with
which they are oftentimes unfamiliar.
•
In certain countries, hospitals and/or patients will be required to pay a portion of our procedure fees under our MAP.
This payment obligation may limit the number of hospitals and patients who can afford to participate in our MAP.
• Because Cytori is targeting an orphan indication in scleroderma where there is an established need for effective
therapies, regulators in Europe have been willing to allow an approval trial based on limited data from the 12-patient,
investigator initiated SCLERADEC I pilot trial. The lack of robust Phase 2/3 clinical data has also proven to be a
hurdle to MAP acceptance. We believe that positive results from future clinical trials will help drive interest in our
MAP, but there is no guarantee that these trials will achieve positive results.
Orphan drug designation may not ensure that we will enjoy market exclusivity in a particular market, and if we fail to obtain or
maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, our competitive position
would be harmed.
A product candidate that receives orphan drug designation can benefit from potential commercial benefits following
approval. Under the U.S. Orphan Drug Act, the FDA may designate a product candidate as an orphan drug if it is intended to treat a
rare disease or condition, defined as affecting a patient population of fewer than 200,000 in the United States, or a patient population
greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be
recovered from sales in the United States. In the European Union, or EU, the EMA’s Committee for Orphan Medicinal Products, or
COMP, grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or
treatment of a life-threatening or chronically debilitating condition affecting not more than 10,000 persons in the EU. Currently, this
designation provides market exclusivity in the U.S. and the European Union for seven years and ten years, respectively, if a product is
the first such product approved for such orphan indication. This market exclusivity does not, however, pertain to indications other than
those for which the drug was specifically designated in the approval, nor does it prevent other types of drugs from receiving orphan
designations or approvals in these same indications. Further, even after an orphan drug is approved, the FDA can subsequently
approve a drug with similar chemical structure for the same condition if the FDA concludes that the new drug is clinically superior to
the orphan product or a market shortage occurs. In the EU, orphan exclusivity may be reduced to six years if the drug no longer
satisfies the original designation criteria or can be lost altogether if the marketing authorization holder consents to a second orphan
drug application or cannot supply enough drug, or when a second applicant demonstrates its drug is “clinically superior” to the
original orphan drug.
36
In April 2016, the European Commission, acting on the positive recommendation from the COMP, issued orphan drug
designation to a broad range of Cytori Cell Therapy formulations when used for the treatment of systemic sclerosis. In November
2016, the U.S. FDA Office of Orphan Products Development granted us an orphan drug designation for cryopreserved or centrally
processed ECCS-50 (Habeo) for scleroderma. Either or both of such orphan drug designations may fail to result in or maintain orphan
drug exclusivity upon approval, which would harm our competitive position.
We generate 71% of our sales revenues from Japan, with 83% of those revenues generated by sales to four customers. This
concentration of sales in one territory, and to one small group of customers in Japan, makes us vulnerable to the loss of our key
customers and to adverse changes in the Japanese market.
In 2017, we generated approximately $1.9 million in sales revenues in Japan, representing 71% of our overall global sales
revenues. 83% of the Japan sales revenues were from four key customers. We expect a relatively small number of customers to
account for a majority of our revenues for the foreseeable future. This concentration of sales in one country, and in a small subset of
customers within such country, represents a risk to our business. Our existing business in Japan, and our prospects for further growth
of product sales in Japan, are subject to a number of risks, including the following:
• Existing laws and regulations pertaining to our business, including the Act regarding Ensuring of Safety of
Regenerative Medicine, or the Regenerative Medicine Law, passed in 2013, may be repealed, or implemented,
amended or superseded, in a manner that is adverse to our business;
• Macroeconomic conditions in Japan may deteriorate, thus weakening demand for our cell therapy products, which are
used in self-pay procedures in Japan;
•
Japanese regulatory authorities may take unexpected actions with respect to our cell therapy products, including with
respect to required regulatory clearances and approvals in Japan, that could cause us to suspend or curtail our cell
therapy sales operations in Japan;
• Quality issues could arise, requiring product recalls or other actions that could cause us reputational damage and lost
sales;
• One or more of our key customers in Japan may decide to acquire competitive products, adopt other technological or
therapeutics approaches to the conditions they treat, or otherwise reduce or cease their purchases of our products;
• Our Cytori Cell Therapy product trials may not achieve statistical significance and thus could diminish the perceived
value and efficacy of our technology; and
• Our relatively small team in Japan may not be able to manage the needs of a growing business, and we may not able to
hire and retain existing or new employees necessary to maintain and expand our business in Japan.
Further, a loss of one or more of our key customers, a dispute or disagreement with one of these key customers, a significant
deterioration in the financial condition of one of these key customers, or a significant reduction in the amount of our products ordered
by any key customer could adversely affect our revenue, results of operations and cash flows.
If we experience an interruption in supply from a material sole source supplier, our business may be harmed
We acquire some our components and other raw materials from sole source suppliers. If there is an interruption in supply of
our raw materials from a sole source supplier, there can be no assurance that we will be able to obtain adequate quantities of the raw
materials within a reasonable time or at commercially reasonable prices. Interruptions in supplies due to pricing, timing, availability or
other issues with our sole source suppliers could have a negative impact on our ability to manufacture products and product
candidates, which in turn could adversely affect commercial sales of our commercially available Cytori Cell Therapy products, delay
our development and commercialization efforts and cause us to potentially breach our supply or other obligations under our
agreements with certain other counterparties.
We source our Celase and Intravase reagents, which are used to process patients’ autologous adipose (fat) tissue, under an
exclusive manufacturing arrangement with Roche Diagnostics Corporation, or Roche. We do not have a second qualified supplier to
manufacture these reagents, and we estimate that it would take approximately two years to qualify another manufacturing source for
our reagents. If our agreement with Roche were to terminate or if Roche were otherwise unable to manufacture sufficient volumes of
the reagents to meet our customer demand, our business could be materially and adversely affected.
We are dependent on sole source suppliers to manufacture the API (active pharmaceutical ingredient) and certain other
components of our Cytori Nanomedicine drug candidates. There are no assurances that these sole source suppliers will enter into
supply agreements with us to provide contractual assurance to us around supply and pricing. Regardless whether a sole source supplier
enters into a written supply arrangement with us, such supplier could still delay, suspend or terminate supply of raw materials to us for
37
a number of reasons, including manufacturing or quality issues, payment disputes with us, bankruptcy or insolvency, or other
occurrences.
If a sole source supplier ceases supply of raw materials necessary there is no guarantee that we will find an alternative
supplier for the necessary raw materials on terms acceptable to us, or at all. Further the qualification process for a new vendor could
take months or even years, and any such day in qualification could significantly harm our business.
We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions
to our management.
From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-
licensing or in-licensing of products, product candidates or technologies. For example, in February 2017, we acquired intellectual
property and a portfolio of investigational oncology therapies from Azaya Therapeutics. This acquisition materially impacted our
liquidity and will materially increase our expenses (including a substantial increase in employee headcount). Further, growth of the
Cytori Nanomedicine business will require significant management time and attention. Additional potential transactions that we may
consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings,
divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may
increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business,
which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational
and financial risks, including:
•
exposure to unknown liabilities;
• disruption of our business and diversion of our management’s time and attention in order to develop acquired
products, product candidates or technologies;
•
incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;
• higher than expected acquisition and integration costs;
• write-downs of assets or goodwill or impairment charges;
•
increased amortization expenses;
• difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and
personnel;
•
impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management
and ownership; and
•
inability to retain key employees of any acquired businesses.
Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions
of the nature described above, any additional transactions that we do complete could have a material adverse effect on our business,
results of operations, financial condition and prospects.
We are exposed to risks related to our international operations, and failure to manage these risks may adversely affect our
operating results and financial condition.
We have operations in several regions around the world, including the United States, Japan, the Asia-Pacific region and
Europe. Our global operations may be subject to risks that limit our ability to operate our business. We sell our products globally,
which exposes us to a number of risks that can arise from international trade transactions, local business practices and cultural
considerations, including, among others:
• political unrest, terrorism and economic or financial instability;
• unexpected changes and uncertainty in regulatory requirements;
• nationalization programs that may be implemented by foreign governments;
•
import-export regulations;
• difficulties in enforcing agreements and collecting receivables;
• difficulties in ensuring compliance with the laws and regulations of multiple jurisdictions;
•
•
changes in labor practices, including wage inflation, labor unrest and unionization policies;
longer payment cycles by international customers;
38
•
currency exchange fluctuations;
• disruptions of service from utilities or telecommunications providers, including electricity shortages;
• difficulties in staffing foreign branches and subsidiaries and in managing an expatriate workforce, and differing
employment practices and labor issues; and
• potentially adverse tax consequences.
We also face risks associated with currency exchange and convertibility, inflation and repatriation of earnings as a result of
our foreign operations. We are also vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. Although
we have significant operations in Asia, a substantial portion of transactions are denominated in U.S. dollars. As appreciation against
the U.S. dollar increases, it will result in an increase in the cost of our business expenses abroad. Conversely, downward fluctuations
in the value of foreign currencies relative to the U.S. dollar may make our products less price competitive than local solutions. From
time to time, we may engage in currency hedging activities, but such activities may not be able to limit the risks of currency
fluctuations.
We must maintain quality assurance certification and manufacturing approvals.
The manufacture of our products is, and the manufacture of any future drug and/or cell-related therapeutic products would be,
subject to periodic inspection by regulatory authorities and distribution partners. The manufacture of drugs and devices products for
human use is subject to regulation and inspection from time to time by the FDA for compliance with the FDA’s cGMP (current good
manufacturing practices), Quality System Regulation, or QSR requirements, as well as equivalent requirements and inspections by
state and non-U.S. regulatory authorities. There can be no assurance that the FDA or other authorities will not, during the course of an
inspection of existing or new facilities, identify what they consider to be deficiencies in our compliance with QSRs or other
requirements and request, or seek remedial action.
Failure to comply with such regulations or a potential delay in attaining compliance may adversely affect our manufacturing
activities and could result in, among other things, injunctions, civil penalties, FDA refusal to grant pre-market approvals or clearances
of future or pending product submissions, fines, recalls or seizures of products, total or partial suspensions of production and criminal
prosecution. There can be no assurance that after such occurrences that we will be able to obtain additional necessary regulatory
approvals or clearances on a timely basis, if at all. Delays in receipt of or failure to receive such approvals or clearances, or the loss of
previously received approvals or clearances could have a substantial negative effect on our results of operations and financial
condition.
BARDA may terminate or suspend its agreement with us, or suspend, delay or reduce its funding of our development hereunder,
which could delay and/or adversely affect our business and our ability to further develop DCCT-10.
In September 2012, we were awarded a contract, or the BARDA Agreement, with the Biomedical Advanced Research and
Development Authority, or BARDA, a division of the U.S. Department of Health and Human Services. The objective of the BARDA
Agreement is to develop our cell therapy technology for use as a new countermeasure for a combined injury involving thermal burn
and radiation exposure that would be employed following a mass-casualty event. The original total value of the cost-plus-fixed-fee
BARDA Agreement was up to an aggregate of $106 million, which aggregate potential value has decreased somewhat as we and
BARDA have gained more insight into anticipated and actual budgets for different phases of our development work.
We have received over $23.5 million in cost-plus-fixed-fee funding from BARDA to fund our preclinical research,
development, and clinical research to conduct a pilot clinical trial, referred to as RELIEF clinical trial, of Cytori Cell Therapy for
thermal burn, or DCCT-10, and to fund development of our Celution cell processing system. There are additional contract options
under the BARDA Agreement to provide over $60 million in additional funds to:
•
•
conduct a pivotal clinical trial, and related clinical, regulatory, and other activities, with the objective of obtaining
FDA approval for intravenous use of DCCT-10 in thermal burn injury; and
conduct of clinical, regulatory and other tasks required to develop and obtain FDA clearance for other characteristics
suitable for use in thermal burn injury following a mass casualty event.
In April 2017, we received approval of an Investigational Device Exemption, or IDE, from the FDA to conduct a pilot clinical trial of
CCT in patients with thermal burn injuries. In May 2017, we announced BARDA’s exercise of Option 2 of up to approximately $13.4
million to fund RELIEF. We initiated RELIEF in 2017 and expect to enroll first patients into this trial in 2018. But there can be no
assurance that BARDA will agree to fund the entire cost of the trial. If BARDA declines to fund the full costs of the trial, we may be
required to terminate our DCCT-10 development program.
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BARDA may suspend or terminate the BARDA Agreement, or decline to enter into a new agreement upon termination of the
BARDA Agreement, for a number of reasons, including our failure to achieve key objectives or milestones or failure to comply with
the operating procedures and processes approved by BARDA and its audit agency, the Defense Contract Audit Agency. There can be
no assurance that we will be able to comply with BARDA’s operating procedures and processes, achieve the necessary clinical
milestones or whether we will be able to successfully develop our DCCT-10 product candidate under the contract.
The BARDA contract has certain contracting requirements that allow the U.S. Government to unilaterally control its contracts. If
the U.S. Government suspends, cancels, or otherwise terminates our contract with them, we could experience significant revenue
shortfalls, and our financial condition and business may be adversely affected.
Contracts with U.S. Government agencies typically contain termination provisions unfavorable to the other party, and are
subject to audit and modification by the U.S. Government at its sole discretion, which will subject us to additional risks. These risks
include the ability of the U.S. Government to unilaterally:
•
•
•
•
•
•
audit or object to our contract-related costs and fees, and require us to reimburse all such costs and fees;
suspend or prevent us for a set period of time from receiving new contracts or extending our existing contracts based
on violations or suspected violations of laws or regulations;
cancel, terminate or suspend our contracts based on violations or suspected violations of laws or regulations;
terminate our contracts if in the Government’s best interest, including if funds become unavailable to the applicable
governmental agency;
reduce the scope and value of our contracts; and
change certain terms and conditions in our contracts.
BARDA is able to terminate its contracts with us, either for its best interests or if we default by failing to perform in
accordance with or to achieve the milestones set forth in the contract schedules and terms. Termination-for-convenience provisions
generally enable us to recover only our costs incurred or committed and settlement expenses on the work completed prior to
termination. Changes to, or an unexpected termination of, this contract could result in significant revenue shortfalls. If revenue
shortfalls occur and are not offset by corresponding reductions in expenses, our business could be adversely affected. We cannot
anticipate if, when or to what extent BARDA might revise, alter or terminate its contract with us in the future.
Under our contract with BARDA, our operations, and those of our contractors, are subject to audit by the U.S. Government, a
negative outcome to which could adversely affect our financial conditions and business operations.
U.S. Government agencies, such as the Department of Health and Human Services, or DHHS, and the Defense Contract
Audit Agency, or the DCAA, routinely audit and investigate government contractors and recipients of federal grants. These agencies
evaluate a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.
The DHHS and the DCAA also review the adequacy of, and a contractor’s compliance with, its internal control systems and
policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs
found to be improperly allocated to a contract will not be reimbursed, while such costs already reimbursed must generally be repaid. If
an audit identifies improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions,
including, but not limited to:
•
•
•
•
•
termination of contracts;
forfeiture of profits;
suspension of payments;
fines; and
suspension or prohibition from conducting business with the U.S. Government.
If we are unable to identify, hire and/or retain key personnel, we may not be able to sustain or grow our business.
Our ability to operate successfully and manage our potential future growth depends significantly upon our ability to attract,
retain, and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial
personnel. We compete for talent with numerous companies, as well as universities and non-profit research organizations. In the near
term, we intend to hire a significant number of scientists, quality and regulatory personnel, and other technical staff with the requisite
expertise to support and expand our Cytori Nanomedicine business. The manufacturing of these oncology drug assets is a highly
complex process that requires significant experience and know-how. If we are unable to attract personnel with the necessary skills and
40
experience to reestablish and expand our Cytori Nanomedicine business, which is currently conducted out of our San Antonio, Texas
facility, our business could be harmed.
Our future success also depends on the personal efforts and abilities of the principal members of our senior management and
scientific staff to provide strategic direction, manage our operations, and maintain a cohesive and stable environment. In particular, we
are highly dependent on our executive officers, especially Marc Hedrick, M.D., our Chief Executive Officer, and Tiago Girão, our
Chief Financial Officer. Given their leadership, extensive technical, scientific and financial expertise and management and
operational experience, these individuals would be difficult to replace. Consequently, the loss of services of one or more of these
named individuals could result in product development delays or the failure of our collaborations with current and future
collaborators, which, in turn, may hurt our ability to develop and commercialize products and generate revenues. We have not entered
into any employment agreements with our executive officers or key personnel, nor do we maintain key man life insurance on the lives
of any of the members of our senior management. Although we have a stock option plan pursuant to which we provide our executive
officers with various economic incentives to remain employed with us, these incentives may not be sufficient to retain them. The loss
of key personnel for any reason or our inability to hire, retain, and motivate additional qualified personnel in the future could prevent
us from sustaining or growing our business.
Our restructuring activities may not be successful, and our restructuring activities may cause uncertainty regarding the future of
our business and may adversely impact employee hiring and retention, our stock price and our results of operations and financial
condition.
On September 1, 2017, we announced a corporate restructuring intended to significantly reduce expenses. The restructuring
reduced our workforce by approximately 50%. The restructuring plan also includes renegotiating certain of our material contracts,
such as the termination of a lease to move our headquarters announced on February 23, 2018, and reassessing certain other
obligations.
Our ability to achieve the anticipated benefits, including the anticipated cost savings, of our restructuring activities within
expected timeframes is subject to many estimates, assumptions and uncertainties. Additional restructuring or reorganization activities
may also be required in the future, which could further increase the risks associated with these activities. There is no assurance that we
will successfully implement, or fully realize the anticipated impact of, our restructuring or execute successfully on our restructuring
plan, in the timeframes we desire or at all. If we fail to realize the anticipated benefits from these measures, or if we incur charges or
costs in amounts that are greater than anticipated, our financial condition and operating results may be adversely affected.
Additionally, our restructuring efforts, including a significant reduction in our employee headcount, may disrupt our staff and our
business, and we may not be successful, or as successful, in advancing our existing Cytori Cell Therapy and Cytori Nanomedicine
candidates, or in discovering or developing new Cytori Cell Therapy and Cytori Nanomedicine candidates as a result of lower staffing
levels and potential reductions in our spending on these programs due to the restructuring.
The changes and potential changes to our operations and the workforce reduction measures as a result of the restructuring,
may introduce uncertainty regarding our prospects and may result in disruption of our business. As a result of these actions, we
incurred significant expenses and charges, including the approximately $570,000 charge incurred as a result of restructuring and
cancelation of our San Diego headquarters lease announced on February 2018, and we may incur additional expenses and charges
related to these actions. In addition, these changes and measures could distract our employees, decrease employee morale and make it
more difficult to retain and hire new talent, and harm our reputation. These changes and activities caused our stock price to decline,
and may cause it to further decline in the future. As a result of these or other similar risks, our business, results of operations and
financial condition may be adversely affected.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability if
our insurance coverage for those claims is inadequate.
The commercial use of our products and clinical use of our products and product candidates expose us to the risk of product
liability claims. This risk exists even if a product or product candidate is approved for commercial sale by applicable regulatory
authorities and manufactured in facilities regulated by such authorities. Our products and product candidates are designed to affect
important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or
our product candidates could result in injury to a patient or even death. For example, ATI-0918 is cytotoxic, or toxic to living cells,
and, if incorrectly or defectively manufactured or labeled, or incorrectly dosed or otherwise used in a manner not contemplated by its
label, could result in patient harm and even death. In addition, a liability claim may be brought against us even if our products or
product candidates merely appear to have caused an injury.
Product liability claims may be brought against us by consumers, health care providers, pharmaceutical companies or others
selling or otherwise coming into contact with our products or product candidates, if approved, among others. If we cannot successfully
41
defend ourselves against product liability claims, we will incur substantial liabilities. In addition, regardless of merit or eventual
outcome, product liability claims may result in:
•
the inability to commercialize our product candidates;
• decreased demand for our product candidates, if approved;
•
impairment of our business reputation;
• product recall or withdrawal from the market;
• withdrawal of clinical trial participants;
•
costs of related litigation;
• distraction of management’s attention from our primary business;
•
•
substantial monetary awards to patients or other claimants; or
loss of revenues.
We have obtained product liability insurance coverage for commercial product sales and clinical trials with a $10 million per
occurrence and annual aggregate coverage limit. Our insurance coverage may not be sufficient to cover all of our product liability
related expenses or losses and may not cover us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming
increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost, in sufficient
amounts or upon adequate terms to protect us against losses due to product liability. If we determine that it is prudent to increase our
product liability coverage, we may be unable to obtain this increased product liability insurance on commercially reasonable terms or
at all. Large judgments have been awarded in class action or individual lawsuits based on drugs that had unanticipated side effects. A
successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed
our insurance coverage, could decrease our cash and have a material adverse effect on our business, results of operations, financial
condition and prospects.
Our employees, principal investigators, consultants and collaboration partners may engage in misconduct or other improper
activities, including noncompliance with laws and regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include failures to
comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have
established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data
accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices.
These laws and regulations restrict or prohibit a wide range of activity relating to pricing, discounting, marketing and promotion, sales
commissions, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper
use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation, or, given we are a listed company the United States, breach of insider trading laws. It is not always possible to identify and
deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming
from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful
in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition
of significant fines or other sanctions.
Our operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery
Act, and other anticorruption laws that apply in countries where we do business.
Anti-corruption laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other
prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We
participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under these anti-
corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international
operations might be subject or the manner in which existing laws might be administered or interpreted.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws
or other laws including trade related laws. If we are not in compliance with these laws, we may be subject to criminal and civil
penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our
business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of these laws
42
by respective government bodies could also have an adverse impact on our reputation, our business, results of operations and financial
condition.
A failure to adequately protect private health information could result in severe harm to our reputation and subject us to
significant liabilities, each of which could have a material adverse effect on our business.
Throughout the clinical trial process, we may obtain the private health information of our trial subjects. There are a number
of state, federal and international laws protecting the privacy and security of health information and personal data. As part of the
American Recovery and Reinvestment Act 2009, or ARRA, Congress amended the privacy and security provisions of the Healthcare
Information Portability and Accountability Act, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s
healthcare information by healthcare providers conducting certain electronic transactions, healthcare clearinghouses, and health
insurance plans, collectively referred to as covered entities. The HIPAA amendments also impose compliance obligations and
corresponding penalties for non-compliance on certain individuals and entities that provide services to or perform certain functions on
behalf of healthcare providers and other covered entities involving the use or disclosure of individually identifiable health information,
collectively referred to as business associates. ARRA also made significant increases in the penalties for improper use or disclosure of
an individual’s health information under HIPAA and extended enforcement authority to state attorneys general. The amendments also
create notification requirements to federal regulators, and in some cases local and national media, for individuals whose health
information has been inappropriately accessed or disclosed. Notification is not required under HIPAA if the health information that is
improperly used or disclosed is deemed secured in accordance with certain encryption or other standards developed by the U.S.
Department of Health and Human Services, or HHS. Most states have laws requiring notification of affected individuals and state
regulators in the event of a breach of personal information, which is a broader class of information than the health information
protected by HIPAA. Many state laws impose significant data security requirements, such as encryption or mandatory contractual
terms to ensure ongoing protection of personal information. Activities outside of the U.S. implicate local and national data protection
standards, impose additional compliance requirements and generate additional risks of enforcement for non-compliance. The EU’s
Data Protection Directive, Canada’s Personal Information Protection and Electronic Documents Act and other data protection, privacy
and similar national, state/provincial and local laws may also restrict the access, use and disclosure of patient health information
abroad. We may be required to expend significant capital and other resources to ensure ongoing compliance with applicable privacy
and data security laws, to protect against security breaches and hackers or to alleviate problems caused by such breaches.
We and our collaborators must comply with environmental laws and regulations, including those pertaining to use of hazardous
and biological materials in our business, and failure to comply with these laws and regulations could expose us to significant
liabilities.
We and our collaborators are subject to various federal, state and local environmental laws, rules and regulations, including
those relating to discharge of materials into the air, water and ground, those relating to manufacturing, storage, use, transportation and
disposal of hazardous and biological materials, and those relating to the health and safety of employees with respect to laboratory
activities required for the development of our products and activities. In particular, our Cytori Nanomedicine products and processes
involve the controlled storage, use and disposal of certain cytotoxic, or toxic to living cells, materials. Even if we and these suppliers
and collaborators comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from
hazardous materials, or other violations of applicable environmental laws, rules or regulations cannot be completely eliminated. In the
event of any violation of such laws, rules or regulations, we could be held liable for any damages that result, and any liability could
exceed the limits or fall outside the coverage of any insurance we may obtain and could exceed our financial resources. We may not
be able to maintain insurance on acceptable terms, or at all. We may incur significant costs in complying with environmental laws,
rules and regulations.
Increased information technology security threats and more sophisticated and targeted computer crime could pose a risk to our
systems, networks, and products.
Increased global information technology security threats and more sophisticated and targeted computer crime pose a risk to
the security of our systems and networks and the confidentiality, availability and integrity of our data and communications. While we
attempt to mitigate these risks by employing a number of measures, including employee refreshers, monitoring of our networks and
systems, and maintenance of backup and protective systems, our systems, networks and products remain potentially vulnerable to
advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to the compromising of
confidential information and communications, improper use of our systems and networks, manipulation and destruction of data,
defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation,
competitiveness and results of operations.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global
economic conditions, financial markets and our business.
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In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national
referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least
two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has
created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with
respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or
replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union
member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may
continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may
significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets.
Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on
our business, financial condition and results of operations and reduce the price of our securities.
Risks Relating to Our Intellectual Property
Our success depends in part on our ability to protect our intellectual property. It is difficult and costly to protect our proprietary
rights and technology, and we may not be able to ensure their protection.
Our success depends in part on our ability to obtain and maintain patent, trademark and trade secret protection of our
platform technology and current product candidates, including but not limited to our Cytori Cell Therapy and Cytori Nanomedicine
products and product candidates, including Habeo Cell Therapy, ATI-0918 and ATI-1123, as well as successfully defending our
intellectual property against third-party challenges. Our ability to stop unauthorized third parties from making using selling, offering
to sell or importing our platform technology and/or our product candidates is dependent upon the extent to which we have rights under
valid and enforceable patents or trade secrets that cover these activities.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and
may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
• we, or Azaya Therapeutics, as the case may be, might not have been the first to file patent applications for the covered
inventions;
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it is possible that our pending patent applications will not result in issued patents;
it is possible that there are dominating patents to our products of which we are not aware;
it is possible that there are prior public disclosures that could invalidate our patents, of which we are not aware;
it is possible that others may circumvent our patents;
it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue
with claims covering our products or technology similar to ours;
the claims of our patents or patent applications, if and when issued, may not cover our system or products, or our
system or product candidates;
• our owned or in-licensed issued patents may not provide us with any competitive advantages, or may be narrowed in
scope, be held invalid or unenforceable as a result of legal administrative challenges by third parties;
• others may be able to make or use compounds that are the same or similar to the ATI-1123 product but that are not
covered by the claims of our patents;
• we may not be able to detect infringement against our patents, which may be especially difficult for manufacturing
processes or formulation patents, such as the patents/applications related to ATI-1123;
•
the API in ATI-0918 is commercially available in generic drug products;
• we may not develop additional proprietary technologies for which we can obtain patent protection; or
•
the patents of others may have an adverse effect on our business.
The patent positions of pharmaceutical, biopharmaceutical and medical device companies can be highly uncertain and
involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding
the breadth of claims allowed in patents in these fields has emerged to date in the United States. There have been recent changes
regarding how patent laws are interpreted, and both the U.S. Patent and Trademark Office, or PTO, and Congress have recently made
significant changes to the patent system. There have been three U.S. Supreme Court decisions that now show a trend of the Supreme
Court which is distinctly negative on patents. The trend of these decisions along with resulting changes in patentability requirements
being implemented by the U.S. Patent and Trademark Office could make it increasingly difficult for us to obtain and maintain patents
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on our products. We cannot accurately predict future changes in the interpretation of patent laws or changes to patent laws which
might be enacted into law. Those changes may materially affect our patents, our ability to obtain patents and/or the patents and
applications of our collaborators and licensors. The patent situation in these fields outside the United States is even more uncertain.
Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of
our intellectual property or narrow the scope of our patent protection. Accordingly, we cannot predict the breadth of claims that may
be allowed or enforced in the patents we own or to which we have a license or third-party patents.
Intellectual property law outside the United States is uncertain and in many countries is currently undergoing review and
revisions. The laws of some countries do not protect our patent and other intellectual property rights to the same extent as United
States laws. Third parties may attempt to oppose the issuance of patents to us in foreign countries by initiating opposition proceedings.
Opposition proceedings against any of our patent filings in a foreign country could have an adverse effect on our corresponding
patents that are issued or pending in the United States. It may be necessary or useful for us to participate in proceedings to determine
the validity of our patents or our competitors’ patents that have been issued in countries other than the United States. This could result
in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse effect on our
results of operations and financial condition. We currently have pending patent applications in Europe, Australia, Japan, Canada,
China, South Korea, Brazil, South Africa, among other jurisdictions.
Our intellectual property related to Cytori Nanomedicine was acquired from Azaya. As ATI-0918 is a generic drug, we did
not acquire any patents related to ATI-0918. We acquired two issued patents and one patent application related to ATI-1123 from
Azaya, and intend to file additional patent applications around our ATI-1123 drug candidate. There is no guaranty that any patent
applications we file on ATI-1123 will issue, or if issued, that we will be to use and enforce these patents as an effective component of
our intellectual property strategy.
Failure to obtain or maintain patent protection or protect trade secrets, for any reason (or third-party claims against our
patents, trade secrets, or proprietary rights, or our involvement in disputes over our patents, trade secrets, or proprietary rights,
including involvement in litigation), could have a substantial negative effect on our results of operations and financial condition.
We may not be able to protect our trade secrets.
We may rely on trade secrets to protect our technology, especially with respect to the Cytori Nanomedicine products, as well
as in areas where we do not believe patent protection is appropriate or obtainable. Trade secrets are difficult to protect, and we have
limited control over the protection of trade secrets used by our collaborators and suppliers. Although we use reasonable efforts to
protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may
unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using
any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, state laws in the Unites States
vary, and their courts as well as courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge, methods and know-how. If our confidential or proprietary information
is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace will be harmed and
our ability to successfully penetrate our target markets could be severely compromised.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the device, biotechnology and pharmaceutical industries, we employ individuals who were previously
employed at other device, biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although
no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise
used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend
against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a
distraction to management, which would adversely affect our financial condition.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property
rights, and we may be unable to protect our rights to our products and technology.
Litigation may be necessary to enforce or confirm the ownership of any patents issued or licensed to us, or to determine the
scope and validity of third-party proprietary rights, which would result in substantial costs to us and diversion of effort on our part. If
our competitors claim technology also claimed by us and prepare and file patent applications in the United States, we may have to
participate in interference proceedings declared by the USPTO or a foreign patent office to determine priority of invention, which
could result in substantial costs to and diversion of effort, even if the eventual outcome is favorable to us. Any such litigation or
interference proceeding, regardless of outcome, could be expensive and time-consuming.
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Successful challenges to our patents through oppositions, reexamination proceedings or interference proceedings could result
in a loss of patent rights in the relevant jurisdiction. If we are unsuccessful in actions we bring against the patents of other parties, and
it is determined that we infringe the patents of third-parties, we may be subject to litigation, prevented from commercializing potential
products in the relevant jurisdiction and/or may be required to obtain licenses to those patents or develop or obtain alternative
technologies, any of which could harm our business. Furthermore, if such challenges to our patent rights are not resolved in our favor,
we could be delayed or prevented from entering into new collaborations or from commercializing certain products, which could
adversely affect our business and results of operations.
Competitors or third parties may infringe on or upon our patents. We may be required to file patent infringement claims,
which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is
not valid or is unenforceable or that the third party’s technology does not in fact infringe upon our patents. An adverse determination
of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and
could put our related pending patent applications at risk of not issuing. Litigation may fail and, even if successful, may result in
substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our proprietary rights,
particularly in countries outside the United States where patent rights may be more difficult to enforce. Further, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there
could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts
or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because
they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the funds necessary to continue our operations or otherwise have a material
adverse effect on our business, results of operations, financial condition and prospects.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable
outcome in that litigation would have a material adverse effect on our business.
Our commercial success will also depend, in part, on our ability to avoid infringing on patents issued by others. There may be
issued patents of third parties of which we are currently unaware, that are infringed or are alleged to be infringed by our product
candidate or proprietary technologies. Because some patent applications in the United States may be maintained in secrecy until the
patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen
months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others
have not filed patent applications for technology covered by our owned and in-licensed issued patents or our pending applications, or
that we or, if applicable, a licensor were the first to invent the technology. Our competitors may have filed, and may in the future file,
patent applications covering our product candidates or technology similar to ours. Any such patent application may have priority over
our patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies.
We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights
alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are
costly and could adversely affect our results of operations and divert the attention of managerial and technical personnel. There is a
risk that a court would decide that we or our commercialization partners are infringing the third party's patents and would order us or
our partners to stop the activities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the
other party damages for having violated the other party's patents.
If a third-party's patent was found to cover our products, proprietary technologies or their uses, we could be enjoined by a
court and required to pay damages and could be unable to commercialize our product candidates or use our proprietary technologies
unless we or they obtained a license to the patent. A license may not be available to us on acceptable terms, if at all. In addition,
during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us from making,
using or selling our products, technologies or methods pending a trial on the merits, which could be years away.
Risks Relating to the Securities Markets and an Investment in Our Stock
The market price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for
stockholders.
The market price of our common stock has been, and may continue to be, subject to significant fluctuations. Among the
factors that may cause the market price of our common stock to fluctuate are the risks described in this “Risk Factors” section and
other factors, including:
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fluctuations in our operating results or the operating results of our competitors;
the outcome of clinical trials involving the use of our products, including our sponsored trials;
changes in estimates of our financial results or recommendations by securities analysts;
• variance in our financial performance from the expectations of securities analysts;
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changes in the estimates of the future size and growth rate of our markets;
changes in accounting principles or changes in interpretations of existing principles, which could affect our financial
results;
conditions and trends in the markets we currently serve or which we intend to target with our product candidates;
changes in general economic, industry and market conditions;
success of competitive products and services;
changes in market valuations or earnings of our competitors;
announcements of significant new products, contracts, acquisitions or strategic alliances by us or our competitors;
• our continuing ability to list our securities on an established market or exchange;
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the timing and outcome of regulatory reviews and approvals of our products;
the commencement or outcome of litigation involving our company, our general industry or both;
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
actual or expected sales of our common stock by the holders of our common stock; and
the trading volume of our common stock.
In addition, the stock market in general, the Nasdaq markets and the market for cell therapy development companies in
particular may experience a loss of investor confidence. A loss of investor confidence may result in extreme price and volume
fluctuations in our common stock that are unrelated or disproportionate to the operating performance of our business, our financial
condition or results of operations, which may materially harm the market price of our common stock and result in substantial losses
for stockholders.
Future sales of our common stock may depress our share price.
As of December 31, 2017, we had 57,825,729 shares of our common stock outstanding. Sales of a number of shares of
common stock in the public market, including pursuant to the Lincoln Park Purchase Agreement, or our ATM program, or the
expectation of such sales, could cause the market price of our common stock to decline. We may also sell additional common stock or
securities convertible into or exercisable or exchangeable for common stock in subsequent public or private offerings or other
transactions, which may adversely affect the market price of our common stock.
We have granted demand registration rights for the resale of certain shares of our common stock to each of Astellas Pharma
Inc. and Green Hospital Supply, Inc. pursuant to common stock purchase agreements previously entered into with each of these
stockholders. An aggregate of approximately 300,000 shares of our common stock are subject to these demand registration rights. If
we receive a written request from any of these stockholders to file a registration statement under the Securities Act of 1933, as
amended, or the Securities Act, covering its shares of unregistered common stock, we are required to use reasonable efforts to prepare
and file with the SEC within 30 business days of such request a registration statement covering the resale of the shares for an offering
to be made on a continuous basis pursuant to Rule 415 under the Securities Act.
Our stockholders may experience substantial dilution in the value of their investment if we issue additional shares of our capital
stock.
Our charter allows us to issue up to 75,000,000 shares of our common stock and to issue and designate the rights of, without
stockholder approval, up to 5,000,000 shares of preferred stock. To raise additional capital, we may in the future sell additional shares
of our common stock or other securities convertible into or exchangeable for our common stock at prices that are lower than the prices
paid by existing stockholders, and investors purchasing shares or other securities in the future could have rights superior to existing
stockholders, which could result in substantial dilution to the interests of existing stockholders.
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We could be delisted from Nasdaq, which could seriously harm the liquidity of our stock and our ability to raise capital.
Following notice from Nasdaq staff in June 2015 and December 2015, we had a hearing in January 2016 relating to our
noncompliance with the $1.00 minimum bid price per share requirement. The Nasdaq Hearing Panel granted us until May 31, 2016 to
come into compliance with the minimum bid price requirement, including requirements relating to obtaining stockholders approval of
a reverse stock split that would bring our stock price above $1.00 per share for a minimum of 10 consecutive trading days. We
transferred the listing of our common stock from the Nasdaq Global Market to the Nasdaq Capital Market in February 2016. In May
2016, we consummated a 1-for-15 reverse stock split pursuant to which the minimum bid price per share of our common stock rose
above $1.00. Pursuant to a letter dated May 26, 2016, the Nasdaq staff delivered notice to us that we had regained compliance with
Nasdaq’s minimum bid price rule.
On September 5, 2017, we received notice from Nasdaq staff relating to our noncompliance with the $1.00 minimum bid
price per share requirement. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we were granted a 180 calendar day compliance period,
or until March 5, 2018, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of
our shares of common stock must meet or exceed $1.00 per share for at least 10 consecutive business days during the 180 calendar day
compliance period. We requested an additional 180 calendar day compliance period, or until September 4, 2018, to regain compliance
and was granted such extension on March 6, 2018. During the additional compliance period, our shares of common stock will
continue to be listed and traded on Nasdaq.
In our request for an additional 180 calendar day compliance period we notified Nasdaq of our intention to cure the minimum
bid price deficiency by effecting a reverse stock split, if necessary. However, if we are notable to cure the deficiency, or if we are
otherwise not eligible, Nasdaq would notify us that our securities would be subject to delisting. In the event of such a notification, we
may appeal the Nasdaq staff’s determination to delist our securities, but there can be no assurance the Nasdaq staff would grant our
request for continued listing.
If we cease to be eligible to trade on the Nasdaq Capital Market:
• We may have to pursue trading on a less recognized or accepted market, such as the OTC Bulletin Board or the “pink
sheets.”
• The trading price of our common stock could suffer, including an increased spread between the “bid” and “asked”
prices quoted by market makers.
• Shares of our common stock could be less liquid and marketable, thereby reducing the ability of stockholders to
purchase or sell our shares as quickly and as inexpensively as they have done historically. If our stock is traded as a
“penny stock,” transactions in our stock would be more difficult and cumbersome.
• We may be unable to access capital on favorable terms or at all, as companies trading on alternative markets may be
viewed as less attractive investments with higher associated risks, such that existing or prospective institutional
investors may be less interested in, or prohibited from, investing in our common stock. This may also cause the
market price of our common stock to decline.
We may be or become the target of securities litigation, which is costly and time-consuming to defend.
In the past, following periods of market volatility in the price of a company’s securities, the reporting of unfavorable news or
continued decline in a company’s stock price, security holders have often instituted class action litigation. The market value of our
securities has steadily declined over the past several years for a variety of reasons, including the announcement of the results of our
STAR clinical trial in July 2017, and for other reasons discussed elsewhere in this “Risk Factors” section, which heightens our
litigation risk. If we face such litigation, we could incur substantial legal costs and our management’s attention could be diverted from
the operation of our business, causing our business to suffer. Any adverse determination in any such litigation or any amounts paid to
settle any such actual or threatened litigation could require that we make significant payments.
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common
stock as to distributions and in liquidation, which could negatively affect the value of our common stock.
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured
or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or
unsecured commercial paper, medium-term notes, senior notes, subordinated notes, guarantees, preferred stock, hybrid securities, or
securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and
preferred securities would receive distributions of our available assets before distributions to the holders of our common stock.
Because our decision to incur debt and issue securities in future offerings may be influenced by market conditions and other factors
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beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or debt financings. Further,
market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
If you hold warrants issued pursuant to our rights offerings, you may be limited in your ability to engage in certain hedging
transactions that could provide you with financial benefits.
In June 2016, we closed our 2016 rights offering to subscribe for units at a subscription price of $2.55 per unit, or the 2016
Rights Offering. Pursuant to the 2016 Rights Offering, we sold to our stockholders of record (as of May 20, 2016) an aggregate of
6,704,852 units consisting of 6,704,852 shares of common stock and 3,352,306 warrants, or CYTXW Warrants, with each CYTXW
Warrant exercisable for one share of common stock at an exercise price of $3.06 per share.
In November 2017, we closed our 2017 rights offering to subscribe for units at a subscription price of $1,000 per unit, or the
2017 Rights Offering (together with the 2016 Rights Offering, the Rights Offerings). Pursuant to the 2017 Rights Offering, we sold to
our stockholders of record (as of October 27, 2017) an aggregate of 10 million units consisting of 10,000 shares of Series B
Convertible Preferred stock and 18,000,000 warrants, or CYTXS Warrants (together with the CYTXW Warrants the, Warrants), with
each CYTXS Warrant exercisable for one share of common stock at an exercise price of $0.3333 per share. Holders of Warrants and
CYTXS Warrants were required to represent to us that they will not enter into any short sale or similar transaction with respect to our
common stock for so long as they continue to hold Warrants or CYTXS Warrants. These requirements prevent our Warrant holders
from pursuing certain investment strategies that could provide them greater financial benefits than they might have realized had they
not been required to make this representation.
Absence of a public trading market for the CYTXW Warrants may limit the ability to resell the CYTXW Warrants.
The CYTXW Warrants are listed for trading on Nasdaq under the symbol “CYTXW,” but there can be no assurance that a
robust market will exist for the CYTXW Warrants. Even if a market for the CYTXW Warrants does develop, the price of the CYTXW
Warrants may fluctuate and liquidity may be limited. If the CYTXW Warrants cease to be eligible for continued listing on Nasdaq, or
if the market for the CYTXW Warrants does not fully develop (or subsequently weakens), then purchasers of the CYTXW Warrants
may be unable to resell the CYTXW Warrants or sell them only at an unfavorable price for an extended period of time, if at all. Future
trading prices of the CYTXW Warrants will depend on many factors, including:
• our operating performance and financial condition;
• our ability to continue the effectiveness of the registration statement covering the CYTXW Warrants and the common
stock issuable upon exercise of the CYTXW Warrants;
the interest of securities dealers in making and maintaining a market; and
the market for similar securities.
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•
Absence of a public trading market for the CYTXS Warrants may limit your ability to resell the Warrants.
There is no established trading market for the CYTXS Warrants issued pursuant to this 2017 Rights Offering, and the CYTXS
Warrants may not be widely distributed. We have applied to list the CYTXS Warrants for trading on Nasdaq under the symbol
“CYTXS,” but there can be no assurance that the CYTXS Warrants will meet minimum listing criteria to be accepted for listing on
Nasdaq or that a market will develop for the CYTXS Warrants. Even if a market for the CYTXS Warrants does develop, the price of
the CYTXS Warrants may fluctuate and liquidity may be limited. If the CYTXS Warrants are not accepted for listing on Nasdaq or if
a market for the CYTXS Warrants does not develop, then purchasers of these warrants may be unable to resell them or sell them only
at an unfavorable price for an extended period of time, if at all. Future trading prices of the CYTXS Warrants will depend on many
factors, including:
our operating performance and financial condition;
our ability to continue the effectiveness of the registration statement, of which this prospectus is a part, covering the CYTXS
Warrants and the common stock issuable upon exercise of the CYTXS Warrants;
the interest of securities dealers in making a market; and
the market for similar securities.
The market price of our common stock may fall below or never exceed the exercise price of the Warrants issued in connection with
the Rights Offerings.
The CYTXW Warrants issued pursuant to the 2016 Rights Offering became exercisable upon issuance and will expire thirty
(30) months from the date of issuance. The market price of our common stock may never exceed the exercise price of the CYTXW
Warrants prior to their date of expiration. The CYTXS Warrants issued pursuant to the 2017 Rights Offering become exercisable
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upon approval of the increase in authorized shares by our stockholders and will expire thirty (30) months thereafter. The market price
of our common stock may fall below the exercise price of the CYTXS Warrants prior to their date of expiration and before holders
have exercised the CYTXS Warrants. Any Warrants not exercised by their date of expiration will expire worthless and we will be
under no further obligation to the Warrant holder.
The Warrants contain features that may reduce Warrant holders’ economic benefit from owning them.
The Warrants contain features that allow us to redeem the Warrants and that prohibit Warrant holders from engaging in
certain investment strategies. We may redeem the CYTXW Warrants for $0.01 per CYTXW Warrant once the closing price of our
common stock has equaled or exceeded $7.65 per share, subject to adjustment, for ten consecutive trading days, provided that we may
do so only upon not less than thirty (30) days’ prior written notice of redemption. We may redeem the CYTXS Warrants for $0.01 per
CYTXS Warrant once the closing price of our common stock has equaled or exceeded $0.8333 per share, subject to adjustment, for
ten consecutive trading days, provided that we may not do so prior to the first anniversary of closing of the 2017 Rights Offering, and
only upon not less than thirty (30) days’ prior written notice of redemption. If we give notice of redemption, applicable Warrant
holders will be forced to sell or exercise their Warrants or accept the redemption price. The notice of redemption could come at a time
when it is not advisable or possible for Warrant holders to exercise the Warrants. As a result, Warrant holders may be unable to
benefit from owning the Warrants being redeemed. In addition, for so long as Warrant holders continue to hold Warrants, they will not
be permitted to enter into any short sale or similar transaction with respect to our common stock. This could prevent Warrant holders
from pursuing investment strategies that could provide them greater financial benefits from owning the Warrants.
Since the Warrants are executory contracts, they may have no value in a bankruptcy or reorganization proceeding.
In the event a bankruptcy or reorganization proceeding is commenced by or against us, a bankruptcy court may hold that any
unexercised Warrants are executory contracts that are subject to rejection by us with the approval of the bankruptcy court. As a result,
holders of the Warrants may, even if we have sufficient funds, not be entitled to receive any consideration for their Warrants or may
receive an amount less than they would be entitled to if they had exercised their Warrants prior to the commencement of any such
bankruptcy or reorganization proceeding.
Our charter documents contain anti-takeover provisions.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws could
discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable. These
provisions could also prevent or frustrate attempts by our stockholders to replace or remove members of our Board of Directors.
Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions:
•
•
•
authorize our Board of Directors to issue without stockholder approval up to 5,000,000 shares of preferred stock, the
rights of which will be determined at the discretion of the Board of Directors;
require that stockholder actions must be effected at a duly called stockholder meeting and cannot be taken by written
consent;
establish advance notice requirements for stockholder nominations to our Board of Directors or for stockholder
proposals that can be acted on at stockholder meetings; and
•
limit who may call stockholder meetings.
We are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain
criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from
merging or combining with us for a prescribed period of time.
We presently do not intend to pay cash dividends on our common stock.
50
We have never paid cash dividends in the past, and we currently anticipate that no cash dividends will be paid on the
common stock in the foreseeable future. Furthermore, our Loan and Security Agreement with Oxford currently prohibits our issuance
of cash dividends. This could make an investment in our common stock inappropriate for some investors, and may serve to narrow our
potential sources of additional capital. While our dividend policy will be based on the operating results and capital needs of the
business, it is anticipated that all earnings, if any, will be retained to finance the future expansion of our business.
If securities and/or industry analysts fail to continue publishing research about our business, if they change their
recommendations adversely, or if our results of operations do not meet their expectations, our stock price and trading volume
could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts
publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In
addition, it is likely that in some future period our operating results will be below the expectations of securities analysts or investors. If
one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our stock
price could decline.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease 17,535 square feet at 3020 and 3030 Callan Road, San Diego, California that we use for our corporate headquarters and
manufacturing facilities. The related lease agreement, as amended, provides for a monthly rent that commenced at a rate of $1.50 per
square foot. The lease term is on a month-to-month basis, commenced on November 1, 2017 and expires on December 31, 2018.
We also entered into two lease agreements for our San Antonio, Texas locations. We pay an aggregate of approximately $12,000 in
rent per month for these properties. The leases for these properties will expire in June 2022.
Additionally, we entered into several lease agreements for international office locations. For these properties, we pay an aggregate of
approximately $35,000 in rent per month. The lease for the property in Japan will expire in April 2022 and the lease for the property
in the United Kingdom will expire in June 2019.
Item 3. Legal Proceedings
From time to time, we have been involved in routine litigation incidental to the conduct of our business. As of December 31, 2017, we
were not a party to any material legal proceeding.
Item 4. Mine Safety Disclosures
Not applicable.
51
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Prices
From August 2000 (our initial public offering in Germany) until September 2007, our common stock was quoted on the Frankfurt
Stock Exchange under the symbol “XMPA” (formerly XMP). In September 2007, our stock closed trading on the Frankfurt Stock
Exchange. In December 2005, our common stock commenced trading on the Nasdaq Capital Market under the symbol “CYTX.”
From December 2005 until February 2006, our common stock traded on the Nasdaq Capital Market, from February 2006 until
February 2016, it traded on the Nasdaq Global Market, and since February 2016, it has traded on the Nasdaq Capital Market. Our
common stock has, from time to time, traded on a limited, sporadic and volatile basis. The following tables show the high and low
sales prices for our common stock for the periods indicated, as reported on the Nasdaq Global Market or the Nasdaq Capital Market,
as applicable. These prices do not include retail markups, markdowns or commissions.
Common Stock
2016
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Quarter ended December 31, 2016
2017
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Quarter ended December 31, 2017
High
Low
$
$
$
$
$
$
$
$
3.30 $
5.25 $
2.25 $
2.00 $
1.99 $
1.72 $
1.17 $
0.63 $
1.95
2.00
1.83
1.36
1.53
0.92
0.31
0.23
All of our outstanding shares have been deposited with the Depository Trust & Clearing Corporation (DTCC) since December 9,
2005.
As of January 31, 2018, we had approximately 26 record holders of our common stock. Because many of our shares are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders
represented by these record holders.
Dividends
We have never declared or paid any dividends on our common stock and do not anticipate paying any in the foreseeable future.
Furthermore, our Loan and Security Agreement currently prohibits our issuance of cash dividends on common stock.
52
Equity Compensation Plan Information
The following table gives information as of December 31, 2017 about shares of our common stock that may be issued upon the
exercise of outstanding options, and shares remaining available for issuance under all of our equity compensation plans:
Plan Category
Equity compensation plans not
approved by security
holders (1)
Equity compensation plans not
approved by security
holders (2)
Equity compensation plans not
approved by security
holders (3)
Total
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
(a)
Weighted-average exercise price
of outstanding options, warrants
and rights
(b)
Number of securities remaining
available for future issuance under
equity compensation
plans (excluding securities reflected
in column(a))
(c)
175,529 $
56.83
—
822,859 $
2.55
2,060,504
12,500 $
1,010,888 $
0.99
11.96
304,166
2,364,670
(1) The 2004 Stock Option and Stock Purchase Plan expired in August 2014.
(2)
(3)
See Notes to the Consolidated Financial Statements included elsewhere herein for a description of our 2014 Equity Incentive
Plan.
See Notes to the Consolidated Financial Statements included elsewhere herein for a description of our 2015 New Employee
Incentive Plan.
Comparative Stock Performance Graph
The following graph shows how an initial investment of $100 in our common stock would have compared to an equal investment in
the Nasdaq Composite Index and the Nasdaq Biotechnology Index during the period from December 31, 2012 through December 31,
2017. The performance shown is not necessarily indicative of future price performance.
53
Item 6. Selected Financial Data
The selected data presented below under the captions “Statements of Operations Data,” “Statements of Cash Flows Data” and
“Balance Sheet Data” for, and as of the end of, each of the years in the two-year period ended December 31, 2017, are derived from,
and should be read in conjunction with, our audited consolidated financial statements. The consolidated balance sheets as of December
31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows
for each of the years in the two-year period ended December 31, 2017 and 2016, which have been audited by BDO USA, LLP, an
independent registered public accounting firm, and their report thereon, is included elsewhere in this Annual Report.
The information contained in this table should also be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and related notes thereto included elsewhere in this report:
Consolidated Statements of Operations and Comprehensive Loss (in thousands)
Product revenues
Cost of product revenues
Amortization of intangible assets
Gross profit
Development revenues:
Government contracts and other
Operating expenses:
Research and development
Sales and marketing
General and administrative
In process research and development acquired from Azaya
Total operating expenses
Operating loss
Other income (expense):
Interest income
Interest expense
Other income, net
Total other expense
Net loss
Beneficial conversion feature for convertible
preferred stock
Net loss allocable to common stockholders
Basic and diluted net loss per share allocable to common
stockholders
Basic and diluted weighted average shares used in
calculating net loss per share allocable to common stockholders
Comprehensive loss:
Net loss
Other comprehensive income – foreign currency
translation adjustments
Comprehensive loss
For the Years Ended December 31,
2017
2016
$
$
$
$
$
2,689
1,318
1,225
146
3,722
3,722
11,678
3,593
7,594
1,686
24,551
(20,683 )
33
(2,049 )
13
(2,003 )
(22,686 )
$
4,656
2,170
545
1,941
6,724
6,724
16,197
3,611
8,563
—
28,371
(19,706 )
19
(2,592 )
233
(2,340 )
(22,046 )
(3,977 )
(26,663 )
$
—
(22,046 )
(0.82 )
$
(1.28 )
32,389,831
17,290,933
$
(22,686 )
$
(22,046 )
129
(22,557 )
$
262
(21,784 )
$
54
Consolidated Statements of Cash Flows (in thousands)
For the Years Ended December 31,
2017
2016
Net cash used in operating activities
Net cash provided by (used in) used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
Consolidated Balance Sheet Details (in thousands)
Cash and cash equivalents
Working capital (deficit)
Total assets
Deferred revenues
Long-term deferred rent and other
Long-term obligations, net of discount, less current portion
Total stockholders’ equity
$
(18,128 ) $
(1,708 )
16,815
11
(3,010 )
12,560
9,550 $
(19,533 )
64
17,609
82
(1,778 )
14,338
12,560
As of December 31,
2017
2016
9,550 $
(3,550 )
31,615
94
107
—
13,000
12,560
6,246
34,609
97
17
11,008
10,986
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Cell Therapy
and Cytori Nanomedicine.
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 providers and their patients, we are developing 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 lead product candidate, Habeo™
Cell Therapy, was evaluated in a Cytori-sponsored U.S. randomized, placebo-controlled, double-blind, multi-center clinical trial,
STAR (Scleroderma Treatment with Celution Processed Adipose Derived Regenerative Cells), for the treatment of impaired hand
function in patients with scleroderma. On July 24, 2017, we announced top-line, preliminary data and presented the full data analysis
on October 18, 2017. The STAR trial enrolled and evaluated 88 patients with scleroderma, including 51 patients within the diffuse
cutaneous subset and 37 with limited cutaneous scleroderma. While the primary and secondary endpoints did not reach statistical
significance at 24 or 48 weeks, the trial data reported clinically meaningful improvement in the primary and secondary endpoints of
both hand function and scleroderma-associated functional disability, for Habeo treated patients compared to placebo, in the pre-
specified subgroup of patients with diffuse cutaneous scleroderma. Further, 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 second half of 2018. Additional CCT treatments are in various stages of development in the areas of urology,
wounds, and orthopedics. Further, 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, detailed
in an announcement on November 13, 2017. Currently, we internally manufacture the Celution devices and consumables in the
United States and the United Kingdom and source our Celase and Intravase reagents from a third-party supplier. We are exploring
contract manufacturing organization options for the Celution System to 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.
The Cytori Nanomedicine platform features a versatile liposomal nanoparticle technology for drug encapsulation that has thus far
provided the foundation to bring two promising drugs into early/late stage clinical trials. Nanoparticle encapsulation is promising
55
because it can help improve the delivery and metabolism of many drugs, thus potentially enhancing the therapeutic profile and patient
benefits. Our lead drug candidate, ATI-0918 is a generic version of pegylated liposomal encapsulated doxorubicin. Pegylated
liposomal encapsulated doxorubicin is a heavily relied upon chemotherapeutic used 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 bioequivalence 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 nanomedicine drug candidate is ATI-1123, a novel and new
chemical entity which is a nanoparticle-encapsulated form of docetaxel, also a workhorse 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, most likely in conjunction with a development partner. 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 test, validate and eventually manufacture
commercial quantities of our nanoparticle drugs.
Results of Operations
Product revenues
Product revenues consisted of revenues primarily from the sale of our Cytori Cell Therapy-related products.
The following table summarizes the components for the years ended December 31, 2017 and 2016 (in thousands):
Product revenues - third party
Years ended
December 31,
2017
2016
$
2,689 $
4,656
A majority of our product revenue in 2017 and 2016 was derived from Japan. Two new regenerative medicine laws in Japan went into
effect in November 2014, removing regulatory uncertainties and providing a clear path for us to offer Cytori Cell Therapy in Japan,
where our technology is mainly being used in the aesthetics and orthopedic fields. Further, we expect continued demand from
researchers at academic hospitals seeking to perform investigator-initiated and funded studies.
We experienced a decrease of $2.0 million in product revenue during the year ended December 31, 2017 as compared to 2016,
primarily due to decrease in the number of Celution device sales in Japan of approximately $1.4 million and product revenues in the
Americas of $0.6 million, but partially offset by an increase in our Celution consumable utilization 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,
Crohn’s disease, peripheral artery disease, erectile dysfunction, liver cirrhosis, and diabetic foot ulcers.
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 years ended December 31, 2017 and 2016 (in thousands):
Years ended
December 31,
2017
2016
Cost of product revenues
Amortization of intangible assets
Share-based compensation
Total cost of product revenues
Total cost of product revenues as % of product revenues
$
$
1,294 $
1,225
24
2,543 $
95 %
2,128
546
41
2,715
58 %
Cost of product revenues as a percentage of product revenues was 95% and 58% for the years ended December 31, 2017 and 2016,
respectively. Fluctuation in this percentage is due to our product mix, distributor and direct sales mix, geographic mix, foreign
exchange rates, idle capacity, allocation of overhead, and higher intangible amortization expense, which increased by approximately
$0.7 million in 2017 compared to 2016.
56
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 $3.7 million and $6.7 million in development revenues for the
years ended December 31, 2017 and 2016, respectively which included allowable fees as well as cost reimbursements. During the
years ended December 31, 2017 and 2016, we incurred $3.5 million and $6.3 million in qualified expenditures, respectively. The
decrease in revenues for the years ended December 31, 2017 as compared to 2016 is primarily due to decreases in research and
development activities related to our contract with BARDA as we began a new clinical phase of the contract.
The future: We entered into a contract 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 in 2018.
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 years ended December 31, 2017
and 2016 (in thousands):
General research and development
Share-based compensation
Total research and development expenses
Years ended
December 31,
2017
2016
$
$
11,540 $
138
11,678 $
15,846
351
16,197
The decrease in research and development expenses, excluding share-based compensation for the year ended December 31, 2017 as
compared to 2016 is due to a decrease of approximately $3.1 million in clinical studies and related professional services as a result of
completion of enrollment in our U.S. clinical trials enrolling in 2016 as well as the decrease related to BARDA related expenditures,
and a decrease of $1.2 million in salaries and benefits as a result of the restructuring activities we implemented in September 2017.
The future: We expect aggregate research and development expenditures remain at current levels for 2018, as we begin enrollment of
our RELIEF clinical trial and our ongoing development efforts of ATI-0918.
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 years ended December 31, 2017 and 2016 (in thousands):
Sales and marketing
Share-based compensation
Total sales and marketing expenses
Years ended
December 31,
2017
2016
$
$
3,477 $
116
3,593 $
3,444
167
3,611
Sales and marketing expenses excluding share-based compensation presented no material variance for the year ended December 31,
2017 as compared to 2016.
57
The future: We expect sales and marketing expenditures to slightly decrease during 2018, as we delay 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 years ended December 31, 2017
and 2016 (in thousands):
General and administrative
Share-based compensation
Total general and administrative expenses
Years ended
December 31,
2017
2016
$
$
7,119 $
475
7,594 $
8,042
521
8,563
General and administrative expenses excluding share-based compensation decreased by $0.9 million for the year ended December 31,
2017, as compared to 2016 primarily due to decreases in salary and related benefits expense consistent with our ongoing cost
curtailment efforts and restructuring implemented in September 2017.
The future: We expect general and administrative expenditures to slightly decrease during 2018, as we benefit from full year of cost
curtailment efforts implemented in September 2017.
Share-based compensation expenses
Share-based compensation expenses include charges related to options and restricted stock awards issued to employees, directors and
non-employees along with charges related to the employee stock purchases under the Employee Stock Purchase Plan, or ESPP. 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 requisite service period.
The following table summarizes the components of our share-based compensation expenses for the years ended December 31, 2017
and 2016 (in thousands):
Cost of product revenues
Research and development-related
Sales and marketing-related
General and administrative-related
Total share-based compensation
Years ended
December 31,
2017
2016
$
$
24 $
138
116
475
753 $
41
351
167
521
1,080
The decrease in share-based compensation expenses for the year ended December 31, 2017 as compared to 2016 is primarily related to
a lower annual grant activity caused by reductions in headcount and due to the decline in the stock price during 2017 as compared to
2016, and its corresponding impact on share-based compensation.
The future: We expect to continue to grant options and stock awards (which will result in an expense) to our employees, directors,
and, as appropriate, to non-employee service providers. In addition, previously-granted options will continue to vest in accordance
with their original terms. As of December 31, 2017, the total compensation cost related to non-vested stock options and stock awards
not yet recognized for all our plans is approximately $0.6 million which is expected to be recognized as a result of vesting under
service conditions over a weighted average period of 1.52 years.
In process research and development acquired from Azaya Therapeutics
In February 2017, we entered into an agreement to acquire assets, including in process research and development, or IPR&D, related
to two oncology drug product candidates, from Azaya Therapeutics. In connection with this agreement, we recorded an IPR&D charge
totaling $1.7 million. The acquired IPR&D is in the early stage of development and has no alternative use. Additional research, pre-
clinical studies, and regulatory approvals must be successfully completed prior to commercialization of any product.
58
Financing items
The following table summarizes interest income, interest expense, and other income and expense for the years ended December 31,
2017 and 2016 (in thousands):
Interest income
Interest expense
Other income, net
Total
Years ended
December 31,
2017
2016
33
(2,049 )
13
(2,003 ) $
19
(2,592 )
233
(2,340 )
$
Interest expense decreased for the year ended December 31, 2017 as compared to 2016, due to principal payments made
on our debt from January through August 2017.
The changes in other income during the year ended December 31, 2017 as compared to 2016 resulted primarily from
changes in exchange rates related to transactions in foreign currency.
The future: We expect interest expense in 2018 to decrease due to the decrease in the principal balance of the Loan and Security
Agreement, dated May 29, 2015, or the Loan and Security Agreement, with Oxford Finance LLC, or Oxford.
Liquidity and Capital Resources
Short-term and long-term liquidity
The following is a summary of our key liquidity measures at December 31, 2017 and 2016 (in thousands):
Cash and cash equivalents
Current assets
Current liabilities
Working capital (deficit)
As of December 31,
2017
2016
9,550 $
12,560
14,864 $
18,414
(3,550 ) $
18,747
12,501
6,246
$
$
$
We incurred net losses of $22.7 million and $22.0 million for the years ended December 31, 2017 and 2016, respectively. We have an
accumulated deficit of $401.7 million as of December 31, 2017. Additionally, we have used net cash of $18.1 million and $19.5
million to fund our operating activities for the years ended December 31, 2017 and 2016, respectively.
Further, the Loan and Security Agreement, with Oxford Finance, LCC, or Oxford, as amended and further described in Note 8 to the
consolidated financial statements, requires us to maintain 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. Based on our cash and cash equivalents on hand of
approximately $9.6 million at December 31, 2017, we estimate that we 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 our $1.5 million minimum cash/cash
equivalents covenant.
On September 1, 2017, we announced a substantial corporate restructuring intended to significantly reduce expenses while
maintaining its ability to execute on its BARDA-sponsored cell therapy program, Japanese business and oncology program. The
restructuring reduced our workforce by approximately 50% and significantly reduced our operational cash burn.
To date, these operating losses have been funded primarily from outside sources of invested capital including our recently completed
underwritten public offering, our Lincoln Park Purchase Agreement, or the Lincoln Park Purchase Agreement, with Lincoln Park
Capital Fund, LLC, or Lincoln Park, and the 2016 and 2017 Rights Offerings (each defined below), our at-the-market, or ATM, equity
facility, the Loan and Security Agreement and gross profits. We have had, and we will likely continue to have, an ongoing need to
raise additional cash from outside sources to fund our future clinical development programs and other operations.
On November 28, 2017, we closed a rights offering originally filed under a Form S-1 registration statement in August 2017, or the
2017 Rights Offering. Pursuant to the 2017 Rights Offering, we 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 30,000,000 shares of common stock and
18,000,000 warrants, with each warrant exercisable for one share of common stock at an exercise price of $0.3333 per share, resulting
59
in total net proceeds to us of $8.8 million. These warrants only become exercisable upon approval of the increase in authorized shares
by our stockholders.
During the year ended December 31, 2017, we sold 894,050 shares of our common stock under our ATM offering program, receiving
total net proceeds of approximately $1.5 million. Although sales of our common stock have taken place pursuant to our ATM offering
program, there can be no assurance that we will be successful in consummating future sales based on prevailing market conditions or
in the quantities or at the prices that we deem appropriate. In addition, under current SEC regulations, at any time during which the
aggregate market value of our common stock held by non-affiliates, or public float, is less than $75.0 million, the amount we can raise
through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under
our ATM offering program, is limited to an aggregate of one-third of our public float. As of December 31, 2017, our public float was
57.8 million shares, the value of which was $17.3 million based upon the closing price of our common stock of $0.30 on such date.
The value of one-third of our public float calculated on the same basis was approximately $5.7 million.
On December 22, 2016, we entered into the Lincoln Park Purchase Agreement and a registration rights agreement with Lincoln Park
pursuant to which we have the right to sell to Lincoln Park and Lincoln Park is obligated to purchase up to $20.0 million of shares of
our common stock over the 30-month period following March 31, 2017. We may direct Lincoln Park, at our sole discretion and
subject to certain conditions, to purchase up to 100,000 shares of common stock on any business day but in no event will the amount
of a single Regular Purchase 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. Our sales of shares of common stock to Lincoln Park
under the Lincoln Park Purchase Agreement are limited to no more than the number of shares that would result in the beneficial
ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% 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 will shares be sold to Lincoln Park on a day our closing price is less than the floor price of $0.50 per share as set forth
in the Lincoln Park Purchase Agreement. On December 22, 2016, we issued to Lincoln Park 127,419 shares of common stock as
commitment shares in consideration for entering into the Lincoln Park Purchase Agreement. Through December 31, 2017, we sold a
total of 1.9 million shares under the Lincoln Park Purchase Agreement, for proceeds of approximately $1.7 million. We will issue up
to an additional 382,258 shares of common stock on a pro rata basis to Lincoln Park only as and when shares are sold under the
Lincoln Park Purchase Agreement to Lincoln Park.
On April 11, 2017, we entered into an underwriting agreement, or the Underwriting Agreement, with Maxim Group LLC, or Maxim,
relating to the issuance and sale of 8.6 million shares of our common stock, par value $0.001 per share. The price to the public in the
offering was $1.10 per share. Maxim agreed to purchase the shares from us pursuant to the Underwriting Agreement at a price of
$1.0395 per share. The net proceeds to us from the offering were approximately $8.7 million, after deducting underwriting discounts
and commissions and offering expenses incurred 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 944,000 additional shares of common stock. On May
31, 2017, Maxim exercised its option and purchased 849,000 shares at $1.10 per share. The net proceeds to us were $0.8 million, after
deducting underwriting costs and offering expenses incurred by us.
On June 15, 2016, we closed a rights offering originally filed under a Form S-1 registration statement in April 2016, or the 2016
Rights Offering. Pursuant to the 2016 Rights Offering, we sold an aggregate of 6,704,852 units consisting of a total of 6,704,852
shares of common stock and 3,352,306 warrants, with each warrant exercisable for one share of common stock at an exercise price of
$3.06 per share, resulting in total net proceeds to us of $17.1 million.
Pursuant to these securities transactions and related equity issuances, as well as anticipated gross profits and potential outside sources
of capital, we believe we have sufficient cash to fund operations through at least through the third quarter of 2018. We continue to
seek additional capital through product revenues, strategic transactions, including extension opportunities under the awarded BARDA
contract, and from other financing alternatives. However, there can be no assurance that we will be successful in securing additional
resources when needed, on terms acceptable to us or at all. Therefore, there exists substantial doubt about our ability to continue as a
going concern. In addition, if we are unable to raise additional cash, it will have a material adverse impact on operations and will
cause us to default on our loan.
The accompanying consolidated financial statements have been prepared assuming we 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 our ability to continue as a going concern.
The following summarizes our contractual obligations and other commitments at December 31, 2017, and the effect such obligations
could have on our liquidity and cash flow in future periods (in thousands):
60
Contractual Obligations
Long-term obligations
Interest commitment on long-term obligations
Operating lease obligations
Minimum purchase obligation
Clinical research study obligations
Total
Payments due by period
Total
Less than 1
year
1 – 3 years
3 – 5 years
More than
5 years
$
$
12,980 $
2,413
2,374
4,020
644
22,431 $
5,192 $
1,119
589
1,074
644
8,618 $
7,788 $
1,294
1,106
2,946
—
13,134 $
— $
—
679
—
—
679 $
—
—
—
—
—
—
Cash (used in) provided by operating, investing and financing activities for the years ended December 31, 2017 and 2016 is
summarized as follows (in thousands):
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
$
Net decrease in cash and cash equivalents
$
Years Ended
December 31,
2017
(18,128 ) $
(1,708 )
16,815
11
(3,010 ) $
2016
(19,533 )
64
17,609
82
(1,778 )
Operating activities
Net cash used in operating activities for the year ended December 31, 2017 was $18.1 million. Overall, our operational cash use
decreased during the year ended December 31, 2017 as compared to 2016 due primarily to a decrease in losses from operations (when
adjusted for non-cash items) of $1.7 million offset by a cash outlay of $0.3 million in working capital.
Investing activities
The increase in net cash used in investing activities for the year ended December 31, 2017, as compared to 2016, resulted primarily
from cash outflows for payment for long-lived assets purchased as part of Azaya’s acquisition of $1.2 million, purchase of fixed assets
of $0.3 million and increase in restricted cash of $0.3 million.
Financing Activities
The net cash provided by financing activities for the year ended December 31, 2017 is primarily related to sales of common and
preferred stocks of $21.5 million, net of costs from sale, through our Rights Offering, a confidentially marketed public offering,
Lincoln Park Agreement and ATM program offset by cash used in principal payments on our debt of $4.7 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as defined by applicable regulations of the SEC) that are reasonably likely to
have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital
resources.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenses, and that affect our
recognition and disclosure of contingent assets and liabilities.
While our estimates are based on assumptions we consider reasonable at the time they were made, our actual results may differ from
our estimates, perhaps significantly. If results differ materially from our estimates, we will make adjustments to our financial
statements prospectively as we become aware of the necessity for an adjustment.
We believe it is important for you to understand our most critical accounting policies. These are our policies that require us to make
our most significant judgments and, as a result, could have the greatest impact on our future financial results.
61
Revenue Recognition
In accordance with the Securities and Exchange Commission’s guidance, we recognize revenue from product sales when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer
is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. For customers that have not
developed a sufficient payment history with us or for whom a letter of credit is not in place at the time of the transaction, we defer
revenues until collectability is reasonably assured.
For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. If the other revenue recognition
criteria are met, revenue for these product sales is recognized upon delivery to the customer, as all risks and rewards of ownership
have been substantively transferred to the customer at that point. For sales to customers who arrange for and manage the shipping
process, we recognize revenue upon shipment from our facilities. Shipping and handling costs that are billed to our customers are
classified as revenue. The customer’s obligation to pay and the payment terms are set at the time of delivery and are not dependent on
the subsequent use or resale of our products. For sales where all revenue recognition criteria are not met, revenue is deferred and
related inventory remains on our books.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are
included in net cash provided by operating activities in the consolidated statements of cash flows. We maintain an allowance for
doubtful accounts for estimated losses inherent in our accounts receivable portfolio. In establishing the required allowance,
management considers historical losses adjusted to take into account current market conditions and our customers’ financial condition,
the amount of receivables in dispute, and the current receivables aging and current payment patterns. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories include the cost of material, labor, and overhead, and are stated at the lower of cost, determined on the first-in, first-out
(FIFO) method, or net realizable value. We periodically evaluate our on-hand stock and make appropriate provisions for any stock
deemed excess or obsolete. Manufacturing costs resulting from lower than “normal” production levels are expensed as incurred.
Impairment
We assess certain of our long-lived assets, such as property and equipment and intangible assets other than goodwill, for potential
impairment when there is a change in circumstances that indicates carrying values of assets may not be recoverable. Such long-lived
assets are deemed to be impaired when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than
the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value
exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating
expense.
62
Goodwill and Intangibles
Goodwill is reviewed for impairment annually or more frequently if indicators of impairment exist. We perform our impairment test
annually during the fourth quarter. The impairment evaluation is performed assuming that we operate in a single operating segment
and reporting unit. First we assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment
test. If, after assessing qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than
its carrying amount, then performing the two-step impairment test is unnecessary. If deemed necessary, a two-step test is used to
identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value
of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount,
goodwill is considered not impaired; otherwise, there is an indication that goodwill may be impaired and the amount of the loss, if
any, is measured by performing step two. Under step two, the impairment loss, if any, is measured by comparing the implied fair value
of the reporting unit goodwill with the carrying amount of goodwill. There was no indication of impairment of goodwill for all periods
presented, as our market capitalization throughout 2016 and 2017 was greater than our net asset position.
Separable intangible assets that have finite useful lives are amortized over their respective useful lives.
Share-based compensation
The estimated fair value of share-based awards exchanged for employee and non-employee director services are expensed over the
requisite service period and over the period during which the employee and non-employee director is required to provide service in
exchange for the award. For purposes of calculating stock-based compensation, we estimate the fair value of stock options and shares
issued under the Employee Stock Purchase Plan using a Black-Scholes option-pricing model. The determination of the fair value of
share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including
expected volatility, expected life, risk-free interest rate and expected dividends. The expected volatility is based on the historical
volatility of our common stock over the most recent period commensurate with the estimated expected term of the stock options. The
expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate
assumption is based on observed interest rates appropriate for the expected terms of our stock options. The dividend yield assumption
is based on our history and expectation of no dividend payouts. The fair value of restricted stock agreements granted is based on the
market price of our common stock on the day of the grant.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements included elsewhere herein for disclosure and discussion of new accounting
standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
63
Item 8. Financial Statements and Supplementary Data
Report of BDO USA, LLP, Independent Registered Public Accounting Firm ..............................................................................
Consolidated Balance Sheets as of December 31, 2017 and 2016 ................................................................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016 .................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016..........................................
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016.........................................................
Notes to Consolidated Financial Statements .................................................................................................................................
Schedule II – Valuation and Qualifying Accounts ........................................................................................................................
65
66
67
68
69
70
104
Page
64
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Cytori Therapeutics, Inc.
San Diego, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cytori Therapeutics, Inc. (the “Company”) and subsidiaries as of
December 31, 2017 and 2016 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and
cash flows for each of the two years in the period ended December 31, 2017, and the related notes and financial statement schedule
listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31,
2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31,
2017, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
San Diego, California
March 9, 2018
65
CYTORI THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of reserves of $167 in 2017 and 2016
Restricted cash
Inventories, net
Other current assets
Total current assets
Property and equipment, net
Other assets
Intangibles, net
Goodwill
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Current portion of long-term obligations, net of discount
Total current liabilities
Deferred revenues
Long-term deferred rent and other
Long-term obligations, net of discount, less current portion
Total liabilities
Commitments and contingencies (Note 7)
Stockholders’ equity:
$
$
$
As of December31,
2017
2016
9,550 $
145
675
3,183
1,311
14,864
3,052
2,570
7,207
3,922
31,615 $
4,790 $
13,624
18,414
94
107
—
18,615
12,560
1,242
350
3,725
870
18,747
1,157
2,336
8,447
3,922
34,609
5,872
6,629
12,501
97
17
11,008
23,623
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 23,500 shares issued; 2,431 shares outstanding in 2017
and no shares outstanding in 2016
Common stock, $0.001 par value; 75,000,000 shares authorized; 57,825,729 and
21,707,890 shares issued and outstanding in 2017 and 2016, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
—
—
58
413,304
1,387
(401,749 )
13,000
31,615 $
22
388,769
1,258
(379,063 )
10,986
34,609
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
66
CYTORI THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
Product revenues
Cost of product revenues
Amortization of intangible assets
Gross profit
Development revenues:
Government contracts and other
Operating expenses:
Research and development
Sales and marketing
General and administrative
In process research and development acquired from Azaya
Total operating expenses
Operating loss
Other income (expense):
Interest income
Interest expense
Other income, net
Total other expense
Net loss
Beneficial conversion feature for convertible preferred stock
Net loss allocable to common stockholders
Basic and diluted net loss per share allocable to common stockholders
Basic and diluted weighted average shares used in calculating net loss per share allocable
to common stockholders
Comprehensive loss:
Net loss
Other comprehensive income – foreign currency translation adjustments
Comprehensive loss
For the Years Ended December 31,
2017
2016
$
2,689
1,318
1,225
146
3,722
3,722
11,678
3,593
7,594
1,686
24,551
(20,683 )
33
(2,049 )
13
(2,003 )
(22,686 ) $
(3,977 )
(26,663 ) $
4,656
2,170
545
1,941
6,724
6,724
16,197
3,611
8,563
—
28,371
(19,706 )
19
(2,592 )
233
(2,340 )
(22,046 )
—
(22,046 )
(0.82 ) $
(1.28 )
32,389,831
17,290,933
(22,686 ) $
129
(22,557 ) $
(22,046 )
262
(21,784 )
$
$
$
$
$
$
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
67
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I
CYTORI THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Amortization of deferred financing costs and debt discount
In process research and development acquired from Azaya Therapeutics
Joint venture acquisition obligation accretion
Provision for expired inventory
Share-based compensation expense
Gain on asset disposal
Increases (decreases) in cash caused by changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable and accrued expenses
Deferred revenues
Long-term deferred rent
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of assets
Purchase of long-lived assets as part of Azaya Therapeutics' acquisition
Change in restricted cash
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Principal payments on long-term obligations
Joint venture purchase payments
Proceeds from sale of common stock
Costs from sale of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flows information:
Cash paid during period for:
Interest
Supplemental schedule of non-cash investing and financing activities:
Issuance costs paid in common stock
Conversion of preferred stock into common stock
Fair value of Series B Convertible Preferred Stock beneficial conversion feature
Common stock issued in payment for the assets acquired from Azaya Therapeutics
For the Years Ended
December 31,
2017
2016
$
(22,686 ) $
(22,046 )
2,151
707
1,686
—
340
753
(42 )
1,129
251
(593 )
(94 )
(1,817 )
(3 )
90
(18,128 )
(295 )
113
(1,201 )
(325 )
(1,708 )
(4,720 )
—
23,613
(2,078 )
16,815
11
(3,010 )
12,560
9,550 $
1,182
954
—
24
172
1,080
(127 )
(179 )
471
633
(764 )
(673 )
(8 )
(252 )
(19,533 )
(67 )
131
—
—
64
—
(1,774 )
21,467
(2,084 )
17,609
82
(1,778 )
14,338
12,560
1,364 $
1,618
— $
23 $
3,977 $
2,311 $
189
—
—
—
$
$
$
$
$
$
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
69
CYTORI THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
1. Organization and Operations
The Company
Cytori Therapeutics, Inc. (Nasdaq: CYTX) is a therapeutics company developing regenerative and oncologic therapies from its
proprietary cell therapy and nanoparticle platforms for a variety of medical conditions. The Company’s primary focus on
bringing its lead nanoparticle product candidate, ATI-0918, to the European market and the development of its cell therapies for
impaired hand function in scleroderma, in addition to our other pipeline areas, such as osteoarthritis of the knee, stress urinary
incontinence, and full thickness thermal burns including those complicated by radiation exposure.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and those of our subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company has five wholly-owned subsidiaries located in Japan, United Kingdom, Switzerland, India and Spain that have
been established primarily to support our sales and marketing activities in these regions.
Reverse Stock Split
On May 10, 2016, following stockholder and Board approval, an amendment (the “Amendment”) to the Company’s amended
and restated certificate of incorporation, as amended, was filed and declared effective, which Amendment effectuated a one-for-
fifteen (1:15) reverse stock split of the Company’s (i) outstanding common stock, and (ii) common stock reserved for issuance
upon exercise of outstanding warrants and options (the “1:15 Reverse Stock Split”). Upon effectiveness of the 1:15 Reverse
Stock Split, the number of shares of the Company’s common stock (x) issued and outstanding decreased
from approximately 200 million shares (as of May 10, 2016) to approximately 13.3 million shares; (y) reserved for
issuance upon exercise of outstanding warrants and options decreased from approximately 16 million shares to approximately
1.1 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 6.5 million common shares to
approximately 0.4 million common shares. In connection with the 1:15 Reverse Stock Split, the Company also decreased the
total number of its authorized shares of common stock from 290 million to 75 million. The number of authorized shares of
preferred stock remained unchanged. Following the 1:15 Reverse Stock Split. The Company adjusted stockholders’ equity to
reflect the 1:15 Reverse Stock Split by reclassifying an amount equal to the par value of the shares eliminated by the split from
common stock to the additional paid-in capital during the first quarter of fiscal 2016, resulting in no net impact to stockholders'
equity on our consolidated balance sheets. The Company’s shares of common stock commenced trading on a split-adjusted basis
on May 12, 2016. 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.
Certain Risks and Uncertainties
Our prospects are subject to the risks and uncertainties frequently encountered by companies in the early stages of development
and commercialization, especially those companies in rapidly evolving and technologically advanced industries such as the
biotech/medical device field. Our future viability largely depends on our ability to complete development of new products and
receive regulatory approvals for those products. No assurance can be given that our new products will be successfully
developed, regulatory approvals will be granted, or acceptance of these products will be achieved. The development of medical
devices for specific therapeutic applications is subject to a number of risks, including research, regulatory and marketing risks.
There can be no assurance that our development stage products will overcome these hurdles and become commercially viable
and/or gain commercial acceptance.
Liquidity and Going Concern
We incurred net losses of $22.7 million and $22.0 million for the years ended December 31, 2017 and 2016, respectively. We
have an accumulated deficit of $401.7 million as of December 31, 2017. Additionally, we have used net cash of $18.1 million
and $19.5 million to fund our operating activities for the years ended December 31, 2017 and 2016, respectively. The Company
does not have sufficient capital to fund operations through one year from the issuance date of these consolidated financial
statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
70
Further, the Loan and Security Agreement, with Oxford Finance, LCC (“Oxford”), as further described in Note 8, 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. Based on our cash and cash equivalents on hand of approximately $9.6 million at December 31,
2017, 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 our $1.5 million minimum cash/cash equivalents covenant.
To date, these operating losses have been funded primarily from outside sources of invested capital including our recently
completed underwritten public offering, Lincoln Park Purchase Agreement with Lincoln Park Capital Fund, LLC (“Lincoln
Park”) and the 2016 and 2017 Rights Offerings (each defined below), our at-the-market (“ATM”) equity facility, the Loan and
Security Agreement and gross profits. We have had, and we will likely continue to have, an ongoing need to raise additional
cash from outside sources to fund our future clinical development programs and other operations. Our inability to raise
additional cash will have a material and adverse impact on operations and will cause us to default on our loan.
On June 15, 2016, we closed a rights offering originally filed under Form S-1 registration statement in April 2016. Pursuant to
the 2016 Rights Offering (as defined below in Note 11), we sold an aggregate of 6,704,852 units consisting of a total of
6,704,852 shares of common stock and 3,352,306 warrants, with each warrant exercisable for one share of common stock at an
exercise price of $3.06 per share, resulting in total gross proceeds to Cytori of $17.1 million. See Note 11 for further discussion
on the 2016 Rights Offering.
On December 22, 2016, we entered into a purchase agreement and a registration rights agreement, with Lincoln Park pursuant to
which we have the right to sell to Lincoln Park and Lincoln Park is obligated to purchase up to $20.0 million of shares of the
Company’s common stock over the 30-month period following March 31, 2017, subject to the satisfaction of certain conditions.
See Note 11 for further discussion on the Lincoln Park agreement.
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 8.6 million shares of our common stock, par value $0.001 per share. The price to
the public in the offering was $1.10 per share. Maxim agreed to purchase the shares from us pursuant to the Underwriting
Agreement at a price of $1.0395 per share. The net proceeds to us from the offering were approximately $8.7 million, after
deducting underwriting discounts and commissions and offering expenses incurred by the Company. 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 944,000 additional shares of common stock. On May 31, 2017, Maxim exercised its option and purchased 849,000 shares at
$1.10 per share. The net proceeds to us were $0.8 million, after deducting underwriting costs and offering expenses incurred 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 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 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 this 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 be at least
$1 per share for a minimum of ten consecutive business days during this 180-day period.
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 30,000,000 shares
of common stock and 18,000,000 warrants, with each warrant exercisable for one share of common stock at an exercise price of
$0.3333 per share, resulting in total net proceeds to the Company of $8.8 million. These warrants only become exercisable upon
stockholder approval.
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 could negatively affect our ability to achieve corporate growth
goals.
Should we be unable to raise additional cash from outside sources, this will have a material adverse impact on our operations.
71
The accompanying consolidated financial statements have been prepared assuming we 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.
Reclassifications
Certain immaterial reclassifications have been made to certain of the prior years’ consolidated financial statements to conform
to the current year presentation.
2.
Summary of Significant Accounting Policies
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, 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.
Cash and cash equivalents
We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Cash and cash equivalents includes cash in readily available checking and savings accounts. We held no investments as of
December 31, 2017 and 2016. We maintain our cash at insured financial institutions.
Restricted Cash
Restricted cash consists of cash invested in certificate of deposits used as collateral for the issuance of letters of credit pursuant
to lease agreements for leasing of property at 3020 and 3030 Callan Road, San Diego, CA, which requires us to execute a letter
of credit for $0.2 million naming the landlord as a beneficiary as of December 31, 2017. In addition, in connection with the new
lease (see Note 7) we executed in 2017, we issued a letter of credit in favor of that landlord in the amount of $0.5 million, which
will remain in effect for the term of the lease.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company periodically assesses the
collectability of accounts receivable on a specific customer basis considering factors such as evaluation of collectability,
historical collection experience, the age of accounts receivable and other currently available evidence of the collectability, and
records an allowance for doubtful accounts for the estimated uncollectible amount. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories include the cost of material, labor, and overhead related to Celution devices, consumable kits, and reagents, and are
stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or net realizable value. We periodically evaluate
our on-hand stock and make appropriate provisions for any stock deemed excess or obsolete. Manufacturing costs resulting
from lower than “normal” production levels are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation expense, which includes the
amortization of capitalized leasehold improvements, is provided for on a straight-line basis over the estimated useful lives of the
assets, or the life of the lease, whichever is shorter, and range from three to five years. When assets are sold or otherwise
72
disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any,
is included in operations. Maintenance and repairs are charged to operations as incurred.
Impairment
We assess certain of our long-lived assets, such as property and equipment and intangible assets other than goodwill, for
potential impairment when there is a change in circumstances that indicates carrying values of assets may not be recoverable.
Such long-lived assets are deemed to be impaired when the undiscounted cash flows expected to be generated by the asset (or
asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which
the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset
and a charge to operating expense. We recognized no impairment losses during any of the periods presented in these financial
statements.
Goodwill and Intangibles
Goodwill is reviewed for impairment annually or more frequently if indicators of impairment exist. We perform our impairment
test annually during the fourth quarter. As the Company operates in a single operating segment and reporting unit, the Company
first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than
its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after
assessing qualitative factors, the Company determines it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then performing the two-step impairment test is unnecessary. If deemed necessary, a two-step test is
used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare
the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill is considered not impaired; otherwise, there is an indication that goodwill may be impaired and the
amount of the loss, if any, is measured by performing step two. Under step two, the impairment loss, if any, is measured by
comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill. There was no indication of
impairment of goodwill for all periods presented.
Separable intangible assets that have finite useful lives are amortized over their respective useful lives.
As part of the May 2013 acquisition of the Joint Venture (see Note 3), we acquired intangible assets which consisted primarily of
contractual license rights that had previously enabled the Joint Venture to conduct development and manufacturing activities
pertaining to certain aspects of Cytori’s Celution technology. The useful life of the identifiable intangible assets was estimated
based on the assumed future economic benefit expected to be received from the assets. The technology was valued at $9.4
million and is being amortized on a straight-line basis over a useful life of eleven years, commensurate with the expected cash
flows. The amortization expense was $1.2 million and $0.6 million for the years ended December 31, 2017 and 2016,
respectively. The estimated aggregate amortization expense will be $1.2 million per year from for 2018 through 2022, and $0.9
million thereafter. Accumulated amortization on the intangible assets was $4.7 million as of December 31, 2017 and $3.4 million
as of December 31, 2016.
The changes in the carrying amounts of finite-life intangible assets and goodwill for the years ended December 31, 2017 and
2016 are as follows (in thousands):
December 31, 2017 December 31, 2016
Intangibles, net:
Beginning balance
Increase
Amortization
Ending balance
Goodwill, net:
Beginning balance
$
Increase (decrease)
Ending balance
Total goodwill and other intangibles, net
$
8,447 $
—
(1,240 )
7,207
3,922
—
3,922
11,129 $
9,031
—
(584 )
8,447
3,922
—
3,922
12,369
73
Revenue Recognition
Product Sales
We recognize revenue from product sales when the following fundamental criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the
resulting accounts receivable is reasonably assured. We evaluate customers that have not developed a sufficient payment
history with us or for whom a letter of credit is not in place at the time of the transaction and defer revenues until collectability
is reasonably assured.
For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement. If the other revenue
recognition criteria are met, revenue for these product sales is recognized upon delivery to the customer as all risks and rewards
of ownership have been substantively transferred to the customer at that point. For sales to customers who arrange for and
manage the shipping process, we recognize revenue upon shipment from our facilities. Shipping and handling costs that are
billed to our customers are classified as revenue. The customer’s obligation to pay and the payment terms are set at the time of
delivery and are not dependent on the subsequent use or resale of our products. For sales where all revenue recognition criteria
are not met, revenue is deferred and related inventory remains on our books.
Concentration of Significant Customers & Geographical Sales
For the year ended December 31, 2017, our sales were concentrated with respect to five direct customers, which comprised 68%
of our product revenue recognized. One licensee and one direct customer accounted for 77% of total outstanding accounts
receivable (excluding receivables from BARDA) as of December 31, 2017.
For the year ended December 31, 2016, our sales were concentrated with respect to two distributors and three direct customers,
which comprised 65% of our product revenue recognized. Two direct customers accounted for 57% of total outstanding
accounts receivable (excluding receivables from BARDA) as of December 31, 2016.
Product revenues, classified by geographic location, are as follows (in thousands):
Years ended
December 31,
2017
2016
Product
Revenues
% of
Total
Product
Revenues
% of
Total
$
$
345
1,924
344
76
2,689
13 % $
71 %
13 %
3 %
100 % $
936
3,279
379
62
4,656
20 %
71 %
8 %
1 %
100 %
Americas
Japan
EMEA
Asia Pacific
Total product revenues
Development Revenues
We earn revenue for performing tasks under research and development agreements with governmental agencies like BARDA.
Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with government contracts
are recorded as government contract and other within development revenues. Government contract revenue is recorded at the
gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research
and development expense in our statements of operations. We recognized $3.7 million and $6.7 million in BARDA revenue for
the years ended December 31, 2017 and 2016, respectively.
Research and Development
Research and development expenditures, which are charged to operations in the period incurred, include costs associated with
the design, development, testing and enhancement of our products, regulatory fees, the purchase of laboratory supplies, and pre-
clinical and clinical studies as well as salaries and benefits for our research and development employees.
Also included in research and development expenditures are costs incurred to support the government reimbursement contract,
including $3.5 million and $6.3 million of qualified expenses that were incurred for the years ended December 31, 2017 and
2016, related to our government contract with BARDA.
74
Deferred Financing Costs and Other Debt-Related Costs
Deferred financing costs are capitalized, recorded as an offset to debt balances and amortized to interest expense over the term
of the associated debt instrument using the effective interest method. If the maturity of the debt is accelerated because of default
or early debt repayment, then the amortization would be accelerated.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary differences
are expected to be recovered or settled. Due to our history of losses, a full valuation allowance has been recognized against our
deferred tax assets.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. For the years
ended December 31, 2017 and 2016, the Company has not recorded any interest or penalties related to income tax matters. The
Company does not foresee any material changes to unrecognized tax benefits within the next twelve months.
Share-Based Compensation
We recognize the fair value of all share-based payment awards in our statements of operations over the requisite vesting period
of each award, which approximates the period during which the employee and non-employee director is required to provide
service in exchange for the award. We estimate the fair value of these options using the Black-Scholes option pricing model
using assumptions for expected volatility, expected term, and risk-free interest rate. Expected volatility is based primarily on
historical volatility and is computed using daily pricing observations for recent periods that correspond to the expected term of
the options. The expected term is calculated based on historical data for and applied to all employee awards as a single group as
we do not expect (nor does historical data suggest) substantially different exercise or post-vesting termination behavior amongst
our employee population. The risk-free interest rate is the interest rate for treasury instruments with maturities that approximate
the expected term.
Segment Information
For the years ended December 31, 2017 and 2016, the Company is managed as a single operating segment, therefore we report
our results in one operating segment.
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 entirely to outstanding but unexercised options and warrants for
all periods presented.
We have excluded all potentially dilutive securities, including unvested performance-based restricted stock, from the calculation
of diluted loss per share attributable to common stockholders for the years ended December 31, 2017 and 2016, as their
inclusion would be antidilutive. Potentially dilutive securities excluded from the calculations of diluted loss per share were 20.5
million as of December 31, 2017, which includes 19.5 million outstanding warrants and 1.0 million options and restricted stock
awards. Potentially dilutive securities excluded from the calculations of diluted loss per share were 4.2 million as of December
31, 2016.
Recently Issued and Recently Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board 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
75
the cumulative effect of applying the standard would be recognized at the date of initial application. We will adopt the standards
beginning the first quarter of 2018 using the modified retrospective method. We have completed our assessment of the new
standard and are evaluating the impact of the new required disclosures. Overall, we do not expect the timing or amounts related
to the revenue recognition under the new standards to be materially different from our current revenue recognition policy. Our
product revenues are recognized at a point in time, which is when we control transfers to the customer. We will make
accounting policy elections to 1) treat shipping and handling activities that occur after the customer obtains control of the goods
as fulfillment costs and 2) exclude sales (and similar) taxes from the measurement of the transaction price. Because we have no
open contracts as of December 31, 2017, there will be no cumulative effect of applying the new standards.
In February 2016, the FASB issued 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. We are currently evaluating the impact that this standard will have on our consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of certain cash receipts
and cash payments, which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies
(including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in
securitization transactions; and separately identifiable cash flows and application of the predominance principle. The new
standard is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2017,
with early adoption permitted. We do not anticipate that the adoption of ASU 2016-15 will have a material impact on our
consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 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 amendments in this update should be applied using a retrospective
transition method to each period presented. This update is effective for annual periods beginning after December 15, 2017, and
interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. The adoption of
this standard will change the presentation of our statement of cash flows to include our restricted cash balance with the non-
restricted cash balances. We do not anticipate that the adoption of ASU 2016-18 will have a material impact on our
consolidated financial statements.
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.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation, to provide clarity and reduce both 1)
diversity in practice and 2) cost and complexity when applying the guidance in Topic 718 to a change in the terms or conditions
of a share-based payment award. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-
based payment award require an entity to apply modification accounting under Topic 718. The amendments in ASU 2017-09
are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is
permitted, including adoption in any interim period. The amendments in ASU 2017-09 should be applied prospectively to an
award modified on or after the adoption date. We do not anticipate that the adoption of ASU 2017-09 will have a material
impact on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This update applies to companies that
measure inventory on a first in, first out, or FIFO, or average cost basis. Under this update, companies are to measure their
inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion. The amendments in this update are effective for annual reporting
periods, and interim periods within those periods, beginning after December 15, 2016 with earlier application permitted as of
76
the beginning of an interim or annual reporting period. The adoption, effective January 1, 2017, did not have a material impact
on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which involves
several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance will require all
income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest
or are settled, as opposed to additional paid-in-capital where it is currently recorded. It also will allow an employer to
repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting.
All tax-related cash flows resulting from stock-based payments are to be reported as operating activities on the statement of
cash flows. The guidance also allows a Company to make a policy election to either estimate the number of awards that are
expected to vest or account for forfeitures as they occur. This new standard is effective for annual reporting periods, and interim
periods within those periods, beginning after December 15, 2016, with early adoption permitted. We have elected to keep our
policy consistent for the application of a forfeiture rate and, as such, the adoption of this standard did not have a material impact
on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business, which
clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The
amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual
periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for
acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions
have not been reported in issued or made available for issuance financial statements. We elected to early adopt the new
guidance effective January 1, 2017 and this guidance was used in our assessment of the Azaya Therapeutics asset purchase
agreement entered into in February 2017.
3.
Transactions with Olympus Corporation
Under our Joint Venture Termination Agreement (“Termination Agreement”), dated May 8, 2013, with Olympus Corporation
(“Olympus”), we were required to pay Olympus a total purchase price of $6.0 million within two years of the date of the
Termination Agreement. Pursuant to amendments to the Termination Agreement, dated April 30, 2015 and January 8, 2016, the
Company’s repayment obligations were extended through May 8, 2016. We made payments under the Termination Agreement
totaling approximately $4.2 million through December 31, 2015, as well as separate payments of $0.5 million each in January
2016 and April 2016, and paid the remaining balance of $0.8 million before the May 8, 2016 due date. There were no
outstanding obligations to Olympus as of December 31, 2017.
4.
Fair Value
Measurements
Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value
measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. We
follow a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair
value measurements for each level within the hierarchy is described below:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations in which all significant inputs are observable in active
markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active
markets.
As of December 31, 2017 and 2016, we did not have any assets or liabilities measured at fair value presented on our balance
sheets.
Financial Instruments
We disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it
is practicable to estimate fair value. The disclosures of estimated fair value of financial instruments at December 31, 2017 and
2016, 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.
77
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.
At December 31, 2017 and 2016, the aggregate fair value and the carrying value of the Company’s long-term debt were as
follows (in thousands):
December 31, 2017
December 31, 2016
Debt
Fair Value
$
13,427 $
Carrying Value Fair Value
13,624 $
17,611 $
Carrying Value
17,637
Carrying value is net of debt discount of $0.4 million and $1.2 million as of December 31, 2017 and 2016, respectively.
The fair value of debt is classified as Level 3 in the fair value hierarchy as some of the inputs, primarily the effective interest
rate, to our valuation model are either not observable quoted prices or are not derived principally from or corroborated by
observable market data by correlation or other means.
Nonfinancial Assets and Liabilities
We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment losses related to
goodwill which are accounted for pursuant to the authoritative guidance for intangibles—goodwill and other; and (2) valuing
potential impairment losses related to long-lived assets which are accounted for pursuant to the authoritative guidance for
property, plant and equipment.
5. Asset Purchase Agreement with Azaya Therapeutics
On February 15, 2017 (the “Closing Date”), we 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 Cytori. In addition, pursuant to the Agreement, we 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®/Caelix®, 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, we (i) issued 1,173,241 of shares of our common stock in Azaya’s name, (A) 879,931 of which
were delivered to Azaya promptly after the Closing, and (B) 293,310 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 prior December 31, 2017. At the Closing Date, Azaya had no employees and therefore no Azaya
employees were transitioned to us.
In addition, as of the Closing Date, the Company committed to certain contingent consideration to: (i) pay Azaya fixed
commercialization milestone payments based upon achievement of certain net sales milestones for ATI-0918; (ii) make certain
earn-out payments to Azaya equal to a mid-single-digit percentage of net sales of ATI-0918; and (iii) make certain earn-out
payments to Azaya equal to a low single-digit percentage of net sales of any product (ATI-0918 is the “Generic Product” and
ATI-1123 is the “Patented Product”), including ATI-1123, that practices a claim in the related patent assigned by Azaya to the
Company (the “ATI-1123 Patent”). Our aggregate earn-out payment obligations to Azaya from global net sales of both ATI-
0918 and any Patented Product will not exceed $100.0 million (the “Earn-Out Cap”).
Further, the Agreement provides that if we enter into certain assignments, licenses or other transfers of rights to a Patented
Product or the ATI-1123 Patent, we will pay Azaya a percentage in the low to mid-teens of the consideration received by us,
provided, that our aggregate payment obligation to Azaya for any such assignment, license or other transfer of rights will not
exceed $50.0 million.
If the Company or its successors, sublicenses or transferees sells a competing product to ATI-0918 at any time prior to
satisfaction of the Earn-Out Cap, other than because ATI-0918 fails to receive marketing authorization from the European
Medicines Agency within a certain period of time or fails to generate a minimum threshold of net sales within a pre-determined
amount of time, then 50% of the net sales of such competing product would be deemed to be net sales of ATI-0918 under the
Agreement for purposes of calculating commercialization milestone payments and earn-out payments.
78
We 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.
When determining the fair value of tangible assets acquired, the Company estimated the cost to replace the tangible asset with a
new asset, taking into consideration such factors as age, condition and the economic useful life of the asset. When determining
the fair value of intangible assets acquired, the Company used a discounted cash flow model with key inputs being the
applicable discount rate, market growth rates and the timing and amount of future cash flows. The acquired IPR&D is in the
early stage of development. Additional research, pre-clinical studies, and regulatory approvals must be successfully completed
prior to selling any product. Because there is no current alternative use for the IPR&D, following the authoritative accounting
guidance, the Company has expensed it in full on the Closing Date. The Company measured the fair value of the shares issued
as consideration in the acquisition of the assets based on the stock price at the acquisition date. Transaction costs directly related
to the acquisition of the assets have been capitalized. The total consideration was allocated on a relative fair value basis to the
assets acquired, as follows (in thousands):
Tangible assets
Intangible assets
Total assets
Accounts payable
Fair value of the common stock issued
Transaction costs
Total consideration
February 15, 2017
2,586
$
1,686
4,272
$
$
$
1,796
2,311
165
4,272
6.
Composition of Certain Financial Statement Captions
Inventories, net
As of December 31, 2017 and 2016, inventories, net, were comprised of the following (in thousands):
Raw materials
Work in process
Finished goods
December 31,
2017
2016
$
$
681 $
722
1,780
3,183 $
885
1,021
1,819
3,725
Other Current Assets
As of December 31, 2017 and 2016, other current assets were comprised of the following (in thousands):
Prepaid supplies or services, current
Prepaid insurance
Prepaid consumption tax in Japan
Other receivables
December 31,
2017
2016
$
$
544 $
556
99
112
1,311 $
734
83
2
51
870
79
Property and Equipment, net
As of December 31, 2017 and 2016, property and equipment, net, were comprised of the following (in thousands):
Manufacturing and development equipment
Office and computer equipment
Leasehold improvements
Less accumulated depreciation
December 31,
2017
2016
$
$
4,507 $
1,805
5,087
11,399
(8,347 )
3,052 $
4,256
1,953
3,399
9,608
(8,451 )
1,157
Depreciation expense totaled $0.9 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively.
Other Assets
As of December 31, 2017 and 2016, other assets were comprised of the following (in thousands):
Prepaid supplies, long-term
Deposits
December 31,
2017
2016
$
$
2,181 $
389
2,570 $
1,838
498
2,336
Accounts Payable and Accrued Expenses
As of December 31, 2017 and 2016, accounts payable and accrued expenses were comprised of the following (in thousands):
Accrued expenses
Accounts payable
Accrued payroll and bonus
Accrued legal fees
Accrued vacation
Accrued R&D studies
Other current liabilities
December 31,
2017
2016
1,599 $
1,297
810
509
64
286
225
4,790 $
1,752
1,332
989
614
502
347
336
5,872
$
$
7.
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 December 31, 2017, we have clinical research study obligations of $0.6
million, all of which are expected to be complete within a year. Should the timing of the clinical trials change, the timing of the
payment of these obligations would also change.
We lease facilities for our headquarters office location as well as international office locations. As of December 31, 2017, we
have contractual lease obligations to make payments on leases of office and manufacturing space as follows:
80
Years Ending December 31,
2018
2019
2020
2021
2022
Total
Obligation
589
565
541
541
138
2,374
$
$
Rent expense, which includes common area maintenance, for the years ended December 31, 2017 and 2016 was $2.2 million
and $2.5 million, respectively.
On February 27, 2017, we entered into a Lease Agreement of office space for our corporate headquarters in San Diego,
California (the “Lease”). The initial term of the Lease is 63 months and may be 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 began negotiations with the landlord and in February 2018,
announced a buy-out of our obligations with the Lease of approximately $0.6 million.
On January 27, 2017, we entered into a Lease Agreement of 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 Lease commenced on April 15,
2017.
We are party to an agreement with Roche Diagnostics Corporation, our sole supplier of reagents, which requires us to make
certain product purchase minimums until 2020. Pursuant to the agreement, as of December 31, 2017, we have a minimum
purchase obligation as follows:
Years Ending December 31,
2018
2019
2020
Total
Obligation
1,074
1,473
1,473
4,020
$
$
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.
8.
Long-term Obligations
On May 29, 2015, we entered into the Loan and Security Agreement, (the “Loan and Security Agreement”), with Oxford,
pursuant to which Oxford 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 94,441 shares of our common stock at an exercise price of $10.35 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, we entered into an amendment to the Term Loan, pursuant to which, among other things, Oxford and
the Lenders 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 before December 29, 2017.
81
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
liquidity level when the total principal outstanding under the Loan Agreement is less than $3 million. As of December 31, 2017,
we were in compliance with all of the debt covenants under the Loan and Security Agreement.
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 December 31, 2017, we were in compliance with all covenants
under the Term Loan and have not received any notification or indication from the Lenders 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.
Additional details relating to the outstanding Term Loan as of December 31, 2017 and 2016 are presented in the following table
(in thousands):
Year ended December 31, 2017
Origination Date
May 2015
Year ended December 31, 2016
Origination Date
May 2015
Original
Loan
Amount
Interest
Rate**
Current
Monthly
Payment*** Original Term
$
17,700
8.95 % $
100
48 Months $
Remaining
Principal
(Face Value)
12,980
Original Loan
Amount
Interest
Rate**
Current
Monthly
Payment*
Original
Term
$
17,700
8.95 % $
136 48 Months $
Remaining
Principal
(Face Value)
17,700
*
**
***
Monthly payment as of December 2016, which reflects interest only
3 month LIBOR rate with a floor of 1% plus 7.95%
Monthly payment as of December 2017, which reflects interest only
As of December 31, 2017, the future contractual principal and final fee payments on all of our debt and capital lease obligations
are as follows (as thousands):
Years Ending December 31,
2018
2019
Total
Reconciliation of Face Value to Book Value as of December 31, 2017
Total debt and lease obligations, including final payment fee
(Face Value)
Less: Debt discount
Total obligation
$
$
$
$
5,192
8,877
14,069
14,069
(445 )
13,624
Our interest expense for the years ended December 31, 2017 and 2016 was $2.0 million and $2.6 million, respectively. Interest
expense is calculated using the effective interest method, therefore it is inclusive of non-cash amortization in the amount of $0.7
million and $1.0 million, respectively, related to the amortization of the debt discount, capitalized loan costs, and accretion of
final payment.
9.
Income Taxes
Due to our net losses for the years ended December 31, 2017 and 2016, and since we have recorded a full valuation allowance
against deferred tax assets, there was no provision or benefit for income taxes recorded.
82
The components of income/(loss) before income tax provision (benefit) as of December 31, 2017 and 2016 are as follows (in
thousands):
U.S.
Foreign
2017
(21,915) $
(771)
(22,686) $
$
$
2016
(20,387)
(1,659)
(22,046)
A reconciliation of the total income tax provision tax rate to the statutory federal income tax rate of 34% for the years ended
December 31, 2017 and 2016 is as follows:
Income tax expense (benefit) at federal statutory rate
Income tax expense (benefit) at state statutory rate
Change in valuation allowance
Change in state rate
Permanent interest adjustments
Stock compensation
Research credit
Foreign rate differential
NOLs expiring and adjustments to NOL
Other, net
2017
2016
(34.0 )%
(3.9 )%
(172.4 )%
(0.8 )%
0.2 %
3.0 %
(1.1 )%
202.1 %
7.0 %
(0.2 )%
(0.0 )%
(34.0 )%
(3.4 )%
16.8 %
(0.1 )%
0.2 %
12.7 %
(1.4 )%
0.8 %
6.0 %
2.5 %
0.0 %
The tax effects of temporary differences that give rise to significant portions of our deferred tax assets and deferred tax liabilities
as of December 31, 2017 and 2016 are as follows (in thousands):
Deferred tax assets:
$
Allowances and reserves
Accrued expenses
Stock based compensation
Net operating loss carryforwards
Income tax credit carryforwards
Property and equipment, principally due to differences in
depreciation
Other, net
Valuation allowance
Total deferred tax assets, net of allowance
Deferred tax liabilities:
Intangibles assets
Total deferred tax liability
Net deferred tax assets (liability)
2017
2016
140 $
154
1,065
87,426
8,587
573
701
1,947
125,182
7,764
514
45
97,931
(97,089 )
842
675
48
136,890
(134,873 )
2,017
(842 )
(842 )
— $
(2,017 )
(2,017 )
—
$
We have established a valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization
of such assets. We periodically evaluate the recoverability of the deferred tax assets. At such time as it is determined that it is
more likely than not that deferred assets are realizable, the valuation allowance will be reduced. We have recorded a full
valuation allowance of $97.1 million as of December 31, 2017 as we do not believe it is more likely than not our net deferred
tax assets will be realized. We decreased our valuation allowance by approximately $37.8 million during the year ended
December 31, 2017.
At December 31, 2017, we had federal, and state tax loss carry forwards of approximately $365.9 million, and $147.4
million. The federal and state net operating loss carry forwards begin to expire in 2019 and 2028, respectively, if unused. At
December 31, 2017, we had federal and state tax credit carry forwards of approximately $5.1 million and $4.5 million,
respectively, after reduction for uncertain tax positions. The Company has not performed a formal research and development
83
credit study with respect to these credits. The federal credits will begin to expire in 2018, if unused, and the state credits carry
forward indefinitely.
Pursuant to the Internal Revenue Code (“IRC”) of 1986, as amended, specifically IRC §382 and IRC §383, our ability to use net
operating loss and R&D tax credit carry forwards (“tax attribute carry forwards”) to offset future taxable income is limited if we
experience a cumulative change in ownership of more than 50% within a three-year testing period. We have not completed an
ownership change analysis pursuant to IRC Section 382 for taxable years ended after December 31, 2007. If ownership changes
within the meaning of IRC Section 382 are identified as having occurred subsequent to 2007, the amount of remaining tax
attribute carry forwards available to offset future taxable income and income tax expense in future years may be significantly
restricted or eliminated. Further, our deferred tax assets associated with such tax attributes could be significantly reduced upon
realization of an ownership change within the meaning of IRC §382.
In December 2017, the Tax Cuts and Jobs Act (the "2017 Act) was enacted. The 2017 Tax Act includes a number of changes to
existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent
to 21 percent for tax years beginning after December 31, 2017. The 2017 Act also provides for a one-time transition tax on
certain foreign earnings and the acceleration of depreciation for certain assets placed in service after September 27, 2017, as
well as, prospective changes beginning in 2018, including additional limitations on executive compensation, limitations on the
deductibility of interest and capitalization of research and development expenditures. While the 2017 Act provides for a
territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provision, the global intangible low-taxed
income ("GILTI") provisions and the base-erosion and anti-abuse tax ("BEAT") provisions.
Reduction of the U.S. Corporate Income Tax Rate: The Company measures deferred tax assets and liabilities using enacted tax
rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the
Company's deferred tax assets and liabilities were premeasured to reflect the reduction in the U.S. corporate income tax rate
from 35 percent to 21 percent, resulting in a $45.8 million increase in tax expense for the year ended December 31, 2017 and a
corresponding $(45.8) million decrease in net deferred tax assets as of December 31, 2017. The impact was fully offset by a
valuation allowance.
The Act will no longer allow deductions for compensation in excess of $1 million for certain employees, even if paid as
commissions or performance based compensation. It also subjects the principal executive officer, principal financial officer and
three other highest paid officers to the limitation and once the individual becomes a covered person, the individual will remain a
covered person for all future years. The tax effects of these provisions require further analysis which is expected to be
completed in the second half of 2018.
The 2017 Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings
and profits ("E&P") through the year ended December 31, 2017. The Company's foreign subsidiary had an estimated
accumulated deficit as of December 31, 2017. The Company does not expect it will be subject to this tax and therefore has not
included any tax impacts related to the mandatory deemed repatriation in its consolidated financial statements.
The GILTI provisions require the Company to include in its US income tax return foreign subsidiary earnings in excess of an
allowable return on the foreign subsidiary's tangible assets. While the Company may elect to account for GILTI tax in the period
in which it is incurred, or recognize deferred taxes when basis differences exist that are expected to affect the amount of the
GILTI inclusion upon reversal, the Company has not yet completed a detailed analysis of the GILTI and has not made a policy
election as of December 31, 2017.
The BEAT provisions in the 2017 Act eliminates the deduction of certain base-erosion payments made to foreign corporations,
and impose a minimum tax if greater than regular tax. The Company does not expect it will be subject to this tax and does not
anticipate any tax impacts of BEAT with the filing of its consolidated financial statements for 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S.
GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. The Company has
recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in
its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these
provisional amounts due to among other things, additional analysis, changes in interpretations and assumptions the Company
has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the 2017 Act. The
accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
The Company follows the provisions of income tax guidance which provides recognition criteria and a related measurement
model for uncertain tax positions taken or expected to be taken in income tax returns. The guidance requires that a position
taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the
position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are
then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50%
84
likely of being realized upon ultimate settlement. The Company has not recognized any liability for uncertain tax positions as of
December 31, 2017 and 2016.
Following is a tabular reconciliation of the unrecognized tax benefits activity during the years ended December 31, 2017 and
2016 (in thousands):
Unrecognized Tax Benefits – Beginning
Gross increases – tax positions in prior period
Gross decreases – tax positions in prior period
Gross increase – current-period tax positions
Unrecognized Tax Benefits – Ending
2017
2016
$
$
2,062 $
—
—
95
2,157 $
1,987
1
(13 )
87
2,062
The unrecognized tax benefit amounts are reflected in the determination of the Company’s deferred tax assets. If recognized,
none of these amounts would affect the Company’s effective tax rate, since it would be offset by an equal reduction in the
deferred tax asset valuation allowance. The Company does not foresee material changes to its liability for uncertain tax benefits
within the next twelve months.
The Company did not recognize interest related to unrecognized tax benefits in interest expense and penalties in operating
expenses as of December 31, 2017.
The Company’s material tax jurisdictions are United States and California. To its knowledge, the Company is currently not
under examination by the Internal Revenue Service or any other taxing authority.
The Company’s tax years for 1998 (federal) and 1997 (CA) and forward can be subject to examination by the United States and
California tax authorities due to the carry forward of net operating losses and research development credits.
10. Employee Benefit Plan
We implemented a 401(k) retirement savings and profit sharing plan (the “Plan”) effective January 1, 1999. We may make
discretionary annual contributions to the Plan, which is allocated to the profit sharing accounts based on the number of years of
employee service and compensation. At the sole discretion of the Board of Directors, we may also match the participants’
contributions to the Plan. We made no discretionary or matching contributions to the Plan in 2017 or 2016.
11. Stockholders’ Equity
Preferred Stock
The Company has authorized 5 million 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 that had been issued at December 31,
2017 and 2016, none of which were outstanding as of either date. All outstanding shares of the Series A 3.6% Convertible
Preferred Stock were converted into common stock by the first quarter of 2015 at the option of the holders.
On November 27, 2017, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B
Convertible Preferred Stock 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 B Convertible Preferred Stock”. The number of shares initially constituting the
Series B Convertible Preferred Stock was set at 10,000 shares. Pursuant to a registration statement on Form S-1, originally filed
on August 14, 2017, as amended, and declared effective by the U.S. Securities and Exchange Commission (“SEC”) on
November 2, 2017, and related prospectus (as supplemented), the Company registered and distributed to holders of its common
stock, at no charge, non-transferable subscription rights to purchase up to an aggregate of 10,000 units consisting of 10,000
shares of Series B Convertible Preferred Stock and 18 million warrants, with each warrant exercisable for one common stock at
an exercise price of $0.3333 per share for 30 months from the date of issuance at any time after the date the stockholder
approval to increase our authorized common stock share count. Pursuant to the 2017 Rights Offering, which closed on
November 28, 2017, the Company sold an aggregate of 10,000 units, resulting in total net proceeds to the Company of
approximately $8.8 million. The Company applied to list the warrants on Nasdaq under the symbol “CYTXS” to meet the
minimum listing criteria to be accepted for listing on Nasdaq subsequent to attainment of stockholder approval. Based on the
relevant authoritative accounting guidance, the warrants were equity 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 $0.833
per share for 10 consecutive trading days.
The fair value of the common stock into which the Series B Convertible Preferred Stock was convertible on the date of issuance
exceeded the proceeds allocated to the preferred stock, resulting in the beneficial conversion feature that we recognized as a
85
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 $4.0 million for the year ended December 31,
2017, related to a beneficial conversion feature included in the issuance of our Series B Convertible Preferred Stock.
Approximately 75% of the of the outstanding shares of the Series B Convertible Preferred Stock were converted into common
stock by December 31, 2017 at the option of the holders.
Common Stock
Pursuant to a registration statement on Form S-1, originally filed on April 6, 2016, as amended, and declared effective by the
U.S. Securities and Exchange Commission (“SEC”) on May 26, 2016, and related prospectus (as supplemented), the Company
registered and distributed to its participating stockholders of record as of the announced May 20, 2016 record date, one non-
transferable subscription right for each share of common stock held by each stockholder as of the record date (“2016 Rights
Offering”). Each right entitled the holder thereof to purchase one unit at the subscription price of $2.55 per unit, composed of
one share of common stock and 0.5 of a warrant, with each whole warrant exercisable to purchase one share of common stock at
an exercise price of $3.06 per share for 30 months from the date of issuance. Pursuant to the 2016 Rights Offering, which
closed on June 15, 2016, the Company sold an aggregate of 6,704,852 units, resulting in total net proceeds to the Company of
$15.3 million. The warrants issued pursuant to the 2016 Rights Offering are currently listed on Nasdaq under the symbol
“CYTXW.” Based on the relevant authoritative accounting guidance, the warrants were equity 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 $7.65 per share for 10 consecutive trading days.
On December 22, 2016, the Company entered into a Purchase Agreement (the “Lincoln Park Purchase Agreement”) with
Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which the Company has the right to sell to Lincoln Park and
Lincoln Park is obligated to purchase up to $20.0 million in amounts of shares, of the Company’s common stock, over the 30-
month period following March 30, 207. The Company may direct Lincoln Park, at the Company’s sole discretion and subject to
certain conditions, to purchase up to 100,000 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 no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any
single point in time, of more than 9.99% 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 will shares be
sold to Lincoln Park on a day our closing price is less than the floor price of $0.50 per share as set forth in the Purchase
Agreement. On December 22, 2016, the Company issued to Lincoln Park 127,419 shares of common stock with a market value
on the date of issuance of approximately $0.2 million as commitment shares in consideration for entering into the Lincoln Park
Purchase Agreement. The Company will issue up to an additional 382,258 shares of common stock on a pro rata basis to
Lincoln Park only as and when shares are sold under the Lincoln Park Purchase Agreement to Lincoln Park. Through December
31, 2017, the Company has sold a total of 1.9 million shares under the Lincoln Park Purchase Agreement, for proceeds of
approximately $1.7 million.
12. Stock-based Compensation
In August 2014, we adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which provides our employees, directors and
consultants the opportunity to purchase our common stock in the form of options (incentive or non-qualified), stock appreciation
rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares, performance units,
cash-based awards other stock-based awards, and deferred compensation awards. The 2014 Plan initially provides for issuance
of 265,000 shares of our common stock. In August 2015, the Company amended the 2014 Plan to add 301,800 shares to its
share pool. In addition, the amendment increased the number of “incentive stock options” which may be issued under the 2014
Plan by an identical amount. In May 2016, the Company amended the 2014 Plan to add 333,333 shares to its share pool. In May
2017, the Company amended the 2014 Plan to add 2,000,000 shares to its share pool.
On December 29, 2015, we adopted the 2015 New Employee Incentive Plan (the “2015 Plan”). Awards under the 2015 Plan
may only be made to an employee who has not previously been an employee or member of the Board of any parent or
subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted
such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an
inducement material to his or her entering into employment with the Company or such subsidiary. The 2015 Plan provides for
issuance of 66,666 shares. In January 2017, the Company amended the 2015 Plan to add 250,000 shares to its share pool.
As of December 31, 2017, there are 304,166 shares and 2,060,504 shares of common stock remaining and available for future
issuances under the 2015 and 2014 Plans, respectively, which are exclusive of securities to be issued upon an exercise of
outstanding options, warrants, and rights.
86
Stock Options
Generally, options issued under the 2014 Plan, are subject to four-year vesting, and have a contractual term of 10 years. Most
options contain one of the following two vesting provisions:
12/48 of a granted award will vest after one year of service, while an additional 1/48 of the award will vest at the
end of each month thereafter for 36 months, or
1/48 of the award will vest at the end of each month over a four-year period.
A summary of activity for the year ended December 31, 2017 is as follows:
Balance as of January 1, 2017
Granted
Expired
Cancelled/forfeited
Balance as of December 31, 2017
Balance as of December 31, 2017
Vested and expected to vest at December 31, 2017
Exercisable at December 31, 2017
There were no stock options exercised in 2017 or 2016.
Options
636,112 $
710,600 $
(19,450 ) $
(316,944 ) $
1,010,318 $
Weighted
Average
Exercise Price
24.39
1.47
82.46
9.06
11.96
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Options
1,010,318 $
893,185 $
401,599 $
11.96
13.35
26.89
Aggregate
Intrinsic Value
—
—
—
7.95 $
7.80 $
6.45 $
The fair value of each option awarded during the year ended December 31, 2017 and 2016 was estimated on the date of grant
using the Black-Scholes-Merton option valuation model based on the following weighted-average assumptions:
Expected term
Risk-free interest rate
Volatility
Dividends
Resulting weighted average grant date fair value
Years ended December 31,
2017
6.6 years
2.20 %
78.84 %
—
1.05 $
2016
6.0 years
1.75 %
77.56 %
—
1.84
$
The weighted average risk-free interest rate represents the interest rate for treasury constant maturity instruments published by
the Federal Reserve Board. If the term of available treasury constant maturity instruments is not equal to the expected term of an
employee option, we use the weighted average of the two Federal Reserve securities closest to the expected term of the
employee option.
The dividend yield has been assumed to be zero as we (a) have never declared or paid any dividends and (b) do not currently
anticipate paying any cash dividends on our outstanding shares of common stock in the foreseeable future.
Restricted Stock Awards
Generally, restricted stock awards issued under the 2014 Plan are subject to a vesting period that coincides with the fulfillment
of service requirements for each award and have a contractual term of 10 years. These awards are amortized to compensation
expense over the estimated vesting period based upon the fair value of our common stock on the award date.
87
The following summarizes the total compensation cost recognized for the stock options and restricted stock awards in the
accompanying financial statements (in thousands):
Total compensation cost for share-based payment
arrangements recognized in the statement of operations
$
753 $
1,080
Years ended December 31,
2017
2016
As of December 31, 2017, the total compensation cost related to non-vested stock options and stock awards not yet recognized
for all our plans is approximately $0.6 million, which is expected to be recognized as a result of vesting under service conditions
over a weighted average period of 1.5 years.
To settle stock options and restricted stock awards, we will issue new shares of our common stock. At December 31, 2017, we
have an aggregate of 6,208,390 shares authorized and available to satisfy option exercises under our plans.
13. Quarterly Information (unaudited)
The following unaudited quarterly financial information includes, in management’s opinion, all the normal and recurring
adjustments necessary to fairly state the results of operations and related information for the periods presented (in thousands):
March 31,
2017
For the three months ended
June 30,
2017
September 30,
2017
December 31,
2017
$
Product revenues
Gross profit
Development revenues
Operating expenses
In process research and development acquired from Azaya
Other expense, net
Net income (loss)
$
Beneficial conversion feature for convertible preferred stock
Net income (loss) allocable to common stock holders
Basic and diluted net loss per share
$
591 $
(125 )
1,018
(6,336 )
(1,686 )
(415 )
(7,544 ) $
—
(7,544 )
(0.33 ) $
969 $
262
531
(6,374 )
—
(468 )
(6,049 ) $
—
(6,049 )
(0.19 ) $
467 $
(20 )
1,306
(5,629 )
—
(464 )
(4,807 ) $
—
(4,807 )
(0.14 ) $
662
29
867
(4,526 )
—
(656 )
(4,286 )
(3,977 )
(8,263 )
(0.20 )
March 31,
2016
For the three months ended
June 30,
2016
September 30,
2016
December 31,
2016
$
Product revenues
Gross profit
Development revenues
Operating expenses
Other expense, net
Net income (loss)
$
Beneficial conversion feature for convertible preferred stock
Net income (loss) allocable to common stock holders
Basic and diluted net loss per share
$
1,333 $
766
1,585
(7,448 )
(242 )
(5,339 ) $
—
(5,339 )
(0.41 ) $
1,126 $
541
1,699
(8,464 )
(181 )
(6,405 ) $
—
(6,405 )
(0.43 ) $
731 $
113
1,879
(6,789 )
(587 )
(5,384 ) $
—
(5,384 )
(0.26 ) $
1,466
521
1,561
(5,670 )
(1,330 )
(4,918 )
—
(4,918 )
(0.24 )
88
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our reports filed or furnished pursuant to the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily
is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this Annual Report were effective.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal
financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and our Board of Directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting as
of the end of the fiscal year covered by this annual report on Form 10-K based on the criteria set forth in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our evaluation, management concluded that our internal control over financial reporting was effective
as of December 31, 2017 based on the COSO criteria.
This report does not include an attestation report on internal control over financial reporting by the Company’s
independent registered public accounting firm since the Company is a smaller reporting company under the rules of the
SEC.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2017
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
89
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The following table sets forth biographical information regarding our directors as of February 28, 2018
DIRECTORS AND BUSINESS EXPERIENCE
Name
Richard J. Hawkins ..................................
Marc H. Hedrick, MD ..............................
Gregg A. Lapointe....................................
Gary A. Lyons ..........................................
Ronald A. Martell ....................................
Age
69
55
59
66
56
Position
Chairman of the Board
President and Chief Executive Officer and Director
Director
Director
Director
Richard J. Hawkins has served on our Board since December 2007. In 1982, Mr. Hawkins founded Pharmaco, a clinical
research organization, or CRO, that merged with the predecessor of PPD-Pharmaco in 1991 and is one of the largest CROs in the
world today. In 1992, Mr. Hawkins co-founded Sensus Drug Development Corporation, or SDDC, a privately-held company focused
on the treatment of drugs to treat endocrine disorders, which developed and received regulatory approval for SOMAVERT®, a growth
hormone antagonist approved for the treatment of acromegaly, which is now marketed by Pfizer, Inc., and he served as Chairman of
SDDC until 2000. In 1994, Mr. Hawkins co-founded Corning Biopro, a contract protein manufacturing firm, where he served on the
Board until Corning BioPro’s sale to Akzo-Nobel, N.V., a publicly-held producer of paints, coatings and specialty chemicals, in 2000.
In September 2003 Mr. Hawkins founded LabNow, Inc., a privately held company that develops lab-on-a-chip sensor technology,
where he served as the Chairman and CEO until October 2009. Mr. Hawkins has served on the Board of SciClone Pharmaceuticals,
Inc., a publicly-held specialty pharmaceutical company, from October 2004 through December 2017. In February 2011, Mr. Hawkins
became CEO, and is currently CEO, of Lumos Pharma, Inc., a privately-held pharmaceutical company. He served on the Presidential
Advisory Committee for the Center for Nano and Molecular Science and Technology at the University of Texas in Austin, and was
inducted into the Hall of Honor for the College of Natural Sciences at the University of Texas. Mr. Hawkins is a member of the
National Ernst & Young Entrepreneur of the Year Hall of Fame. Mr. Hawkins graduated cum laude with a B.S. in Biology from Ohio
University, where he later received Ohio University Konneker Medal, the highest award given to a faculty member or former student
for entrepreneurial excellence. Mr. Hawkins’s qualifications to sit on our Board include his executive experience working with life
sciences companies, his extensive experience in pharmaceutical research and development, his knowledge, understanding and
experience in the regulatory development and approval process and his service on other public company boards and committees. On
January 25, 2018, Mr. Hawkins was appointed to serve as Chairman of our Board of Directors and succeed Mr. David Rickey.
Marc H. Hedrick, M.D. was appointed as Chief Executive Officer of the Company in April 2014. He was appointed as
President of the Company in May 2004, and joined us as Chief Scientific Officer and Medical Director in October 2002. Dr. Hedrick
has also served as a member of our Board since October 2002. In December 2000, Dr. Hedrick co-founded and served as President
and Chief Executive Officer and Director of StemSource, Inc., a privately-held company specializing in stem cell research and
development, which was acquired by us in 2002. He is a plastic surgeon and is a former Associate Professor of Surgery and Pediatrics
at the University of California, Los Angeles, or UCLA. From 1998 until 2005, he directed the Laboratory of Regenerative
Bioengineering and Repair for the Department of Surgery at UCLA. Dr. Hedrick earned his M.D. degree from University of Texas
Southwestern Medical School, Dallas and an M.B.A. from UCLA Anderson School of Management. Dr. Hedrick’s qualifications to
sit on our Board include his experience as a general, vascular and plastic surgeon; his academic appointments and achievements in the
life sciences; his executive and managerial experience in stem cell research and scientific product development; and his foundational
knowledge and experience of and contributions to our technology and operations. In addition, Dr. Hedrick has extensive global
experience and familiarity with the cell therapy and regenerative medical industry.
90
Gregg A. Lapointe has served on our Board since March 2017. Mr. Lapointe is currently the Chief Executive Officer of
Cerium Pharmaceuticals, Inc., a privately-held specialty pharmaceutical company. From April 2008 to March 2012, Mr. Lapointe
served as Chief Executive Officer of Sigma-Tau Pharmaceuticals, Inc., a pharmaceutical company focused on rare disorders and the
U.S. wholly-owned subsidiary of Sigma-Tau Finanziaria S.pA. He served as Chief Operating Officer of Sigma-Tau Pharmaceuticals,
Inc. from November 2003 to March 2008. Mr. Lapointe also serves on the boards of Soligenix, Inc., a publicly-held biopharmaceutical
company (since March 2009), Rigel Pharmaceuticals, Inc., a publicly-held biopharmaceutical company (since November 2017) and
S1Biopharma, Inc. a privately held biopharmaceutical company. Mr. Lapointe previously served as a director of SciClone
Pharmaceuticals, Inc., from March 2009 through October 2016, Raptor Pharmaceuticals Corp. from December 2014 until its
acquisition by Horizon Pharma plc in October 2016. Mr. Lapointe is a Certified Public Accountant in the United States. He holds a
Bachelor of Commerce degree from Concordia University of Montreal, a Graduate Diploma in Public Accountancy from McGill
University of Montreal and an M.B.A. from Duke University. Mr. Lapointe’s qualifications to sit on our Board include his substantial
experience in finance, management and specialty drug commercialization, including operational experience as the CEO of a
pharmaceutical development and sales organization.
Gary A. Lyons has served on our Board since October 2013. Mr. Lyons has served on the Board of Neurocrine Biosciences,
Inc., or Neurocrine, since 1993 and served as the President and Chief Executive Officer of Neurocrine from 1993 through January
2008. Prior to joining Neurocrine, Mr. Lyons held a number of senior management positions at Genentech, Inc., including Vice
President of Business Development and Vice President of Sales. Mr. Lyons has served on the Boards of Rigel Pharmaceuticals, Inc., a
publicly-held biotechnology company, since October 2005 (and as Chairman since November 2014); Vical Incorporated, a publicly-
held biopharmaceutical company, since 1997; Retrophin, Inc., a publicly-held biopharmaceutical company, since 2014 (and as
Chairman since May 2016) and Novus Therapeutics, Inc., a publicly-held biopharmaceutical company, since Mary 2017. Mr. Lyons
was previously a director of PDL BioPharma, Inc., Poniard Pharmaceuticals, Inc., Neurogesx, KaloBios Pharmaceuticals, Inc. and
Facet Biotech Corporation. Mr. Lyons holds a B.S. in Marine Biology from the University of New Hampshire and an M.B.A. from
Northwestern University’s J.L. Kellogg Graduate School of Management. Mr. Lyons’ qualifications to sit on our Board include his
executive experience working with life sciences companies, his extensive experience in pharmaceutical business development, his
knowledge, understanding and experience in the regulatory development and approval process and his service on other public
company boards and committees.
Ronald A. Martell has served on our Board since December 2016. Mr. Martell has more than 25 years’ experience building
and managing unique businesses in the biotech industry. Mr. Martell is currently a founder of Achieve Life Sciences, ORCA
BioSystems, Inc. and Cetya Therapeutics, Inc. Most recently he served as Chief Executive Officer of Sevion Therapeutics and
Executive Chairman of KaloBios Pharmaceuticals, Inc. Prior to Sevion, Mr. Martell was President and CEO of NeurogesX and sold
the company’s assets to Acorda Therapeutics. Prior to NeurogesX he was Chief Executive Officer of Poniard Pharmaceuticals. Before
joining Poniard he served in the capacity of the Office of the CEO and as Senior Vice President of Commercial Operations at ImClone
Systems. Mr. Martell built ImClone Systems' Commercial Operations and field sales force to market and commercialize Erbitux®
with partners Bristol-Myers Squibb and Merck KGaA. Prior to joining ImClone Systems, Mr. Martell worked for 10 years at
Genentech, Inc., or Genentech, in a variety of positions, the last of which was Group Manager, Oncology Products. At Genentech, he
was responsible for the launch of Herceptin® for metastatic HER-2 positive breast cancer and Rituxan® for non-Hodgkin's
lymphoma. Mr. Martell began his career at Roche Pharmaceuticals. Mr. Martell’s qualifications to sit on our Board include his
executive experience working for life sciences companies, his extensive experience in pharmaceutical business development, his
knowledge, understanding of and experience in developing and commercializing pharmaceutical products, and his service on other
public company boards and committees.
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EXECUTIVE OFFICERS AND BUSINESS EXPERIENCE
The following table sets forth biographical information regarding our executive officers as of February 28, 2018.
Name
Age Position(s)
Marc H. Hedrick, M.D.(1)
Tiago Girão
John Harris
55 President, Chief Executive Officer and Director
38 Vice President, Finance & Chief Financial Officer
49 Vice President and General Manager of Cell Therapy
(1) See “Directors and Business Experience” above for biographical information regarding Dr. Hedrick.
Tiago Girão joined us as Vice President of Finance and Chief Financial Officer in September 2014. Mr. Girão joined us from
NuVasive, Inc., or NuVasive, a publicly-held medical device company, where he last served as International Controller from February
2014 to August 2014. Prior to his position as International Controller, he served as NuVasive’s Director of Financial Reporting from
March 2012 to February 2014. In his position as Director of Financial Reporting, Mr. Girao managed a team responsible for all
corporate technical accounting and SEC-related matters for Nuvasive. Prior to joining NuVasive, Mr. Girão served as Senior Manager,
Assurance at KPMG, LLP from October 2004 to March 2012. Prior to joining KPMG, Mr. Girão was a senior accountant for Ernst
&Young in Brazil from October 2000 to August 2004. Mr. Girão is a certified public accountant with over 15 years’ experience in the
accounting, finance and reporting for U.S. and public companies and substantial experience in global finance and operations.
John D. Harris has served as our Vice President and General Manager of Cell Therapy since he joined us in October 2015.
Mr. Harris has over 20 years’ experience in medical device and biotechnology, most recently serving as the Vice President and
General Manager of Becton Dickinson’s operations in Japan. Prior to Becton Dickinson, Mr. Harris held business development,
product development, and marketing and sales leadership roles with Tyco Electronics (now TE Connectivity Corp.), Delphi
Automotive, Sorenson Medical, Kimberly-Clark Healthcare and Ballard Medical Products. Mr. Harris is a member of the Board of
Governors of the American Chamber of Commerce in Japan (ACCJ) and a member of the Executive Committee of the American
Medical Device & Diagnostics Association, where he chairs the Regenerative Medicine Working Group. Mr. Harris holds Master of
Business Administration and Bachelor of Arts degrees from the University of Utah. On February 5, 2018, Mr. Harris tendered his
resignation from Cytori effective May 1, 2018.
CORPORATE GOVERNANCE
During 2017
the Board held twenty meetings and took action via unanimous written consent three times;
the Audit Committee met four times and did not take any actions via unanimous written consent;
the Compensation Committee met two times and took action via unanimous written consent five times;
the Governance and Nominating Committee met three times and took action via unanimous written consent one time;
the Executive Committee met one time did not take action via unanimous written consent; and
the sub-committee of the Executive Committee, comprised of our Chairman and our CEO, took action via unanimous
written consent one time.
Each member of the Board attended seventy-five percent (75%) or more of the aggregate of (i) the total number of Board
meetings held during the period of such member’s service and (ii) the total number of meetings of committees of the Board on which
such member served, during the period of such member’s service.
All Board members are encouraged to attend our annual meetings of stockholders in person. However, in 2017, our
stockholder meeting date did not coincide with our regularly scheduled quarterly Board meeting. Mr. Rickey, our Chairman at the
time of our 2017 Annual Meeting of Stockholders, and Dr. Hedrick attended our 2017 Annual Meeting of Stockholders.
Board Independence
The Board has determined that Messrs. Hawkins, Lapointe, Lyons and Martell are “independent” under the rules of the
NASDAQ Stock Market. The Board had previously determined that Mr. Rickey and Dr. Naughton were also “independent” under the
rules of the NASDAQ Stock Market when they served on the Board. Under applicable SEC and the NASDAQ rules, the existence of
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certain “related person” transactions above certain thresholds between a director and the Company are required to be disclosed and
preclude a finding by the Board that the director is independent. The Board is not able to consider Dr. Hedrick, our President and
Chief Executive Officer, independent, as a result of his employment with us during his tenure as one of our directors.
Board of Directors Leadership Structure
Our bylaws and governance principles provide the Board with the flexibility to combine or separate the positions of
Chairman and Chief Executive Officer. Historically, these positions have been separate. Our Board believes that the separation of
these positions strengthens the independence of our Board and allows us to have a Chairman focused on the leadership of the Board
while allowing our Chief Executive Officer to focus more of his time and energy on managing our operations. The Board currently
believes this structure works well to meet the leadership needs of the Board and of the Company. Dr. Hedrick, our President and Chief
Executive Officer, has comprehensive industry expertise and is able to devote substantial time to the Company, and Mr. Hawkins, our
Chairman, is able to devote focus on longer term and strategic matters, and to provide related leadership to the Board. As a result, we
do not currently intend to combine these positions; however a change in this leadership structure could be made if the Board
determined it was in the best long-term interests of stockholders based upon a departure of either our Chief Executive Officer or
Chairman. For example, if the two roles were to be combined, we believe that the independence of the majority of our directors, and
the three fully independent Board committees, would provide effective oversight of our management and the Company.
The Board’s Role in Risk Oversight
The Board’s role in risk oversight includes assessing and monitoring risks and risk management. The Board reviews and
oversees strategic, financial and operating plans and holds management responsible for identifying and moderating risk in accordance
with those plans. The Board fulfills its risk oversight function by reviewing and assessing reports from members of management on a
regular basis regarding material risks faced by us Company and applicable mitigation strategy and activity. The reports cover the
critical areas of operations, sales and marketing, development, regulatory and quality affairs, intellectual property, clinical
development, legal and financial affairs. The Board and its Committees (described below) consider these reports; discuss matters with
management and identify and evaluate any potential strategic or operational risks, and appropriate activity to address those risks.
Board Committees
The Board has standing Audit, Compensation, and Governance and Nominating Committees. All members of the
Compensation Committee, Audit Committee, and Governance and Nominating Committee are independent directors.
Compensation Committee
The Compensation Committee currently consists of Mr. Lyons (Chairman) and Mr. Lapointe. In January 2018, Mr. Rickey
and Dr. Naughton, former directors, stepped down of our Compensation Committee, and Mr. Lapointe joined the Compensation
Committee to fill the vacancy created by Mr. Rickey’s and Dr. Naughton’s departure. Each of the members of our Compensation
Committee is independent as defined by NASDAQ and a “Non-Employee Director” as defined by rule 16b-3(b)(3)(i) of the Securities
Exchange Act of 1934, as amended. The Committee Chairman is responsible for setting the Committee’s calendar and meeting
agenda.
The Compensation Committee is responsible for developing and implementing compensation programs for our executive
officers and other employees, subject only to the discretion of the full Board. More specifically, our Compensation Committee
establishes base salary rates for each of the Company’s officers, and administers our equity compensation plans. The Compensation
Committee establishes the compensation and benefits for our Chief Executive Officer and other executive officers, and also reviews
the relationship between our performance and our compensation policies as well as assessing any risks associated with our
compensation policies. In addition, the Compensation Committee reviews, and advises the Board on director compensation matters
and on, regional and industry-wide compensation practices and trends in order to assess the adequacy of our executive compensation
programs. The charter of the Compensation Committee has been established and approved by the Board, and a copy of the charter has
been posted on our website at www.cytori.com under Investor Relations – Corporate Governance.
Our CEO attends some of the meetings of the Compensation Committee upon invitation, but does not participate in the
executive sessions of the Compensation Committee.
Audit Committee
Our Audit Committee currently consists of Mr. Lapointe (Chairman), Mr. Martell and Mr. Lyons. At the outset of 2017, Mr.
Hawran and Mr. Hawkins were the members of our Audit Committee. Upon Mr. Hawran’s departure in May 2017, Mr. Lapointe
joined the Audit Committee as Chairman. Further, upon the appointment of Mr. Hawkins as Chairman of our Board of Directors in
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January 2018, Mr. Hawkins stepped down from the Audit Committee and Mr. Martel joined the Audit Committee to fill the vacancy
created. The Audit Committee is comprised solely of independent directors, as defined by NASDAQ. The Board has determined that
Mr. Lapointe is an “audit committee financial expert” within the meaning of Item 407(d)(5) of SEC Regulation S-K. The charter of
the Audit Committee has been established and approved by the Board, and a copy of the charter has been posted on our website at
www.cytori.com under Investor Relations – Corporate Governance.
The Audit Committee selects our auditors, reviews the scope of the annual audit, approves the audit fees and non-audit fees
to be paid to our auditors, and reviews our financial accounting controls with the staff and the auditors. The Audit Committee is also
charged with review and oversight of management’s enterprise risk management assessment.
Governance and Nominating Committee
Our Governance and Nominating Committee currently consists of Mr. Martell (Chairman) and Mr. Lyons. Mr. Martell
replaced Mr. Hawkins as Chairman of Governance and Nominating Committee in January 2018. Mr. Lyons joined the Governance
and Nominating Committee to fill the vacancy created by Dr. Naughton’s departure. The Governance and Nominating Committee is
comprised solely of independent directors, as defined by NASDAQ. The Governance and Nominating Committee interviews,
evaluates, nominates and recommends individuals for membership on the Board, evaluates the effectiveness of the Board and its
serving members, and recommends the structure, responsibility and composition of the committees of the Board. The Committee is
also responsible for recommending guidelines and policies for corporate governance for adoption by the Board. The charter of the
Governance and Nominating Committee has been established and approved by the Board, and a copy of the charter has been posted on
our website at www.cytori.com under Investor Relations – Corporate Governance.
Executive Committee
During 2017, the Executive Committee was comprised of our Chief Executive Officer, Chairman of the Board, and
Chairpersons of each committee of the Board. During 2017, the Executive Committee consisted of Dr. Hedrick, Mr. Rickey, Mr.
Hawkins, Mr. Lapointe, and Mr. Lyons.
The Executive Committee’s responsibilities, when such responsibilities are not discharged by our full Board, included
evaluating and approving the material terms of any financing transactions or business transactions as well as authorizing and
approving the issuance of stock and/or other equity securities. The Executive Committee also was able to act on behalf of the full
Board in urgent or exigent circumstances wherein it would have been very difficult or impossible to assemble the full Board between
regularly scheduled meetings. In 2017, our Executive Committee acted as a special pricing committee of the Board with respect to
our confidentially marketed public offering financing, consummated in April 2017. The Sub-Committee of the Executive Committee,
consisted of our Chairman of the Board and our Chief Executive Officer, had the authority to approve corporate expenditures
presented by our management in excess of $250,000 up to a maximum of $1,000,000 for a single corporate transaction.
Effective January 25, 2018, upon Mr.Rickey’s and Dr. Naughton’s resignations from the Board, the Board of Directors
decided to suspend the activities of the Executive Committee.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer and principal accounting officer. This Code of Business Conduct
and Ethics has been posted on our website at www.cytori.com. We intend to post amendments to this code, or any waivers of its
requirements, on our website at www.cytori.com under Investor Relations – Corporate Governance, as permitted under SEC rules and
regulations.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers, and persons or entities who
own more than ten percent of our common stock, to file with the SEC reports of beneficial ownership and changes in beneficial
ownership of our common stock. Those directors, officers, and stockholders are required by regulations to furnish us with copies of
all forms they file under Section 16(a). Based solely upon a review of the copies of such reports furnished to us and written
representations from such directors, officers, and stockholders, we believe that all such reports required to be filed during 2017 were
filed on a timely basis, except for the report filed by Mr. Lyons in February 2018, related to an acquisition of securities from
November 2017.
Item 11. Executive Compensation
94
Our named executive officers for fiscal year 2017 are:
Marc H. Hedrick, M.D., our President and Chief Executive Officer;
Tiago Girao, our Chief Financial Officer; and
John Harris, our Vice President and General Manager of Cell Therapy.
These individuals are collectively referred to in this discussion as the “named executive officers,” or “NEOs.” Investors are
encouraged to read this discussion in conjunction with the compensation tables and related notes, which include more detailed
information about the compensation of our NEOs for 2017 and 2016.
95
2017 Summary Compensation Table
The following table sets forth information concerning compensation earned during 2016 and 2017 for services rendered to us
by our NEOs.
(a)
(b)
(c)
(d)
(e)
Name and Principal Position
Marc H. Hedrick, M.D.,
President and Chief Executive Officer
Tiago M. Girao,
VP of Finance, Chief Financial Officer and
Chief Accounting Officer
John Harris,
VP and General Manager of Cell Therapy(5)
Stock
Awards
Option
Awards(2)
(f)
Non-Equity
Incentive Plan
Comp. (3)
(g)
All Other
Comp-
ensation
(h)
Total
— $ 116,182 $ 140,250 89,607 (4) $ 846,039
— $ 156,273 $ 146,250
— $ 752,523
— $ 48,205 $ 72,615 46,360 (4) $ 474,680
Year
Salary
2017 $ 500,000
2016 $ 450,000
2017 $ 307,500
2016
$ 265,000
2017 $ 358,750
2016 $ 361,830 (6)
$ 65,535
$ 79,560
—
$ 410,095
— $ 48,205 $ 64,890 $93,957 (4) $ 565,802
— $ 65,535 $ 64,365 $125,249 (1) $ 616,979
—
(1)
(2)
(3)
(4)
Per the terms of his employment offer letter with us, in 2016, Mr. Harris was eligible to receive a housing allowance while on assignment
in Japan up to a maximum of 13,900,000 Japanese Yen per year, including direct payment by us of Mr. Harris’ local rent (not to exceed
1,100,000 Japanese Yen per month) and additional healthcare coverage. We paid these benefits in Japanese Yen, and we recorded them in
2016 at the average exchange rate of 0.0086 Japanese Yen to U.S. dollar. During 2016, Mr. Harris’ rent expense was $111,994, and cost of
his additional health care coverage was $13,255.
This column represents the dollar amount of the aggregate grant date fair value of option awards granted in the applicable fiscal year,
computed in accordance with FASB ASC Topic 718. For information relating to the assumptions made by us in valuing the option awards
made to our NEOs in 2017 and 2016, refer to Note 12 to our audited consolidated financial statements included in this Form 10-K. These
amounts do not reflect the actual economic value that will be realized by our NEOs upon vesting of the stock options, exercise of the stock
options, or sale of the common stock underlying the stock options.
The amounts in column (f) reflect the cash awards under our EMIC Plan, which is discussed in further detail below under the heading in
the subsection entitled “Executive Management Incentive Compensation Plan” of the “Narrative Disclosure to Compensation Tables”
below.
For 2017, this column includes life insurance premiums paid by the Company for each of the named executive officers and the payout of
accrued paid time off in connection with our restructuring in 2017 in the following amounts: Dr. Hedrick, $81,482; Mr. Girão, $43,526;
and Mr. Harris, $38,128. In addition, during 2017, the Company paid directly to third party vendors $50,260 related to the relocation of Mr.
Harris from Tokyo to San Diego.
(5)
During 2016, we paid Mr. Harris in Japanese Yen. His 2016 salary was reported at the average exchange rate over the year, or 0.0086
Japanese Yen to US dollar.
(6)
On February 5, 2018, Mr. Harris tendered his resignation from Cytori effective May 1, 2018.
Narrative Disclosures to Summary Compensation Table
Executive Compensation
In the process of determining compensation for our NEOs, the Compensation Committee considers the current financial
position of the Company, the strategic goals of the Company and the performance of each of our NEOs. The Committee also
benchmarks the various components (described below) of our compensation program for executives to compensation paid by other
public companies in our defined peer group, compensation data from Radford Global Life Sciences Survey and BIOCOM Total
Rewards Survey, historical review of all executive officer compensation, and recommendations from our CEO (other than for his own
salary). From time to time the Committee engages the services of outside compensation consultants to provide compensation research,
analysis and recommendations. The Committee has the sole authority to select, compensate and terminate its external advisors.
The Compensation Committee utilizes the following components of compensation (described further below) to strike an
appropriate balance between promoting sustainable and excellent performance and discouraging any inappropriate short-sighted risk-
taking behavior:
Base salary;
Annual long-term equity compensation;
Personal benefits and perquisites; and
Acceleration and severance agreements tied to changes on control of the Company.
96
Base Salaries
In connection with determination of executive compensation for fiscal year 2017, the Compensation Committee directed
Marsh & McLennan, LLC, its independent compensation consultant, to prepare an updated senior management compensation
assessment. The Compensation Committee reviewed this assessment at its normally scheduled meeting in January 2017. Based on
this assessment and including other data points and information considered by the Compensation Committee in its discretion, the
Compensation Committee approved the following NEO base salaries for fiscal year 2017, which base salaries went into effect in
March 2017: Dr. Hedrick: $510,000; Mr. Harris: $360,500; Mr. Girao: $309,000. The increases to Dr. Hedrick’s and Mr. Girao’s
base salaries were made to move such salaries closer to or within the 50th and 60th percentile range of base salary compensation for
similarly situated executive at our peer companies, per our corporate compensation philosophy. Our compensation analysis indicates
that Dr. Hedrick’s base salary is substantially closer to, but still below, this stated range, while Mr. Girao’s base salary is now within
this stated range. Mr. Harris’ base salary remains above our stated range, but we believe that the Mr. Harris’ actual duties and
responsibilities, combined with his experience and skills (including Japanese linguistic and business/cultural fluency) are
appropriately reflected in his base salary and other compensation.
Marsh & McLennan did not provide any services to us in 2017 beyond its engagement as an advisor to the Compensation
Committee on compensation matters. After review and consultation with Marsh & McLennan, the Compensation Committee has
determined that Barney & Barney is independent and there is no conflict of interest resulting from retaining Marsh & McLennan
currently or during the year ended December 31, 2017. In reaching these conclusions, the Compensation Committee considered the
factors set forth in Exchange Act Rule 10C-1 and NASDAQ listing standards.
None of our NEOs received base salary increases for 2018.
Annual Bonuses (Executive Management Incentive Compensation Plan)
Our Compensation Committee adopted the Cytori Therapeutics Executive Management Incentive Compensation, or EMIC,
plan to increase the performance-based component of our executives’ compensation by linking their annual cash bonus payments to
achievement of shorter-term performance goals. Target bonuses are reviewed annually and established as a percentage of the
executives’ base salaries, generally based upon seniority of the officer and targeted at or near the median of the peer group (with
reference to our corporate compensation philosophy) and relevant survey data (including the Radford Global Life Sciences Survey and
BIOcom Total Rewards Survey). Each year the Compensation Committee establishes corporate and individual objectives and
respective target percentages, taking into account recommendations from our Chief Executive Officer as it relates to executive
positions other than the Chief Executive Officer’s compensation. Our Chief Executive Officer’s EMIC plan is set by the
Compensation Committee to align entirely with our overall corporate objectives, while the other NEOs are also provided individual
goals that constitute a portion of their overall EMIC plans. After each fiscal year-end, our Chief Executive Officer provides the
Compensation Committee with a written evaluation showing actual performance as compared to corporate and/or individual
objectives, and the Compensation Committee uses that information, along with the overall corporate performance, to determine what
percentage of each executive’s bonus target will be paid out as a bonus for that year. Overall, we attempt to set the corporate and
individual functional goals to be highly challenging yet attainable.
For 2017, the general corporate goals approved by the Board (upon recommendation of the Compensation Committee for
purposes of executive compensation) were determined by the Compensation Committee to account for 100% of the target cash bonus
amount payable under the EMIC plan for our Chief Executive Officer, Dr. Hedrick, and to account for 75% of the overall target bonus
amount payable under the EMIC plans for our other NEOs. The Company’s general corporate objectives included clinical, financial
and operational objectives, including the pipeline expansion goals; the achievement of certain year-end cash objectives, revenue goals
and business development objectives; and various operational objectives.
The following individual objectives for the NEOs other than Dr. Hedrick expanded upon their particular functions in the
overall corporate objectives and were to weighted as 25% of their respective overall target bonus amounts.
Mr. Girão’s individual objectives included the achievement of certain investor-related, liquidity, and operating cash
management goals.
Mr. Harris’s individual objectives included achievement of certain revenue, product utilization and business
development/partnering goals.
Our NEOs’ target bonuses for 2017 as a percentage of base salary were as follows: Dr. Hedrick, 55% (increased from 50%
in 2016); Mr. Girao, 40% (unchanged from 2015); and Mr. Harris, 40% (increased from 30% in 2016). The Compensation
Committee, in its January 2018 meeting, evaluated our achievement in 2017 as compared to overall the corporate and individual
97
objectives for the NEOs in the 2017 EMIC Plan described above. The Committee evaluated the overall results and then evaluated the
NEOs’ achievement relative to their own functional objectives and the results are tabulated in the table below:
Officer and Position
Marc H. Hedrick, M.D.
President & CEO
Tiago M. Girao,
Chief Financial Officer
John Harris
VP & General Manager of Cell Therapy
Target
Bonus
as a % of
Salary
% of Target
Bonus
Awarded
Bonus
Awarded
as a % of
Salary
Amount of
2017
Bonus
Payable
in 2018(1)
55 %
50.0 %
27.5 % $ 140,250
40 %
58.75 %
23.5 %
$
72,615
40 %
45.0 %
18 % $
64,890
(1)
The 2017 bonus amounts are payable in 2018 in installments as follows: 25% of such amounts are payable on April 1, 2018, 25% of
such amounts are payable on July 1, 2018, 25% of such amounts are payable on October 1, 2018 and the remaining 25% of such
amounts are payable on December 31, 2018.
As part of its determination of target executive compensation for fiscal year 2018, the Compensation Committee determined
bonus targets for our NEOs based on materials and information, as deemed necessary or appropriate by the Compensation Committee
in its discretion. Upon completion of this review, the Compensation Committee approved target bonuses (as a percentage of base
salary) for our NEOs for fiscal year 2018 as follows: Dr. Hedrick: 55%; Mr. Girao: 40%; Mr. Harris: 40%.
Long-Term Equity Compensation
We designed our long-term equity grant program to further align the interests of our executives with those of our
stockholders and to reward the executives’ longer-term performance. Historically, the Compensation Committee has granted
individual option grant awards, although from time-to-time, to further increase the emphasis on compensation tied to performance, the
Compensation Committee may grant other equity awards as allowed by the 2014 Equity Incentive Plan. The Compensation
Committee grants stock options, restricted stock, restricted stock units and similar equity awards permitted under our plans based on
its judgment as to whether the complete compensation packages to our executives, including prior equity awards, are appropriate and
sufficient to retain and incentivize the executives and whether the grants balance long-term versus short-term compensation. The
Compensation Committee also considers our overall performance as well as the individual performance of each NEO, and the
potential dilutive effect of restricted stock awards, and the dilutive and overhang effect of the equity grant awards, and
recommendations from the Chief Executive Officer (other than with respect to his own equity awards).
Stock options are granted with an exercise price equal to the fair market value of our common stock on the date of grant.
In March 2017, our NEOs were granted stock options to acquire shares of our common stock at an exercise price equal to the
fair market value of our common stock on the Nasdaq Stock Market as of the date of grant, vesting in accordance with our standard
four-year vesting schedule. Specifically, Dr. Hedrick, Mr. Girao and Mr. Harris were granted options to purchase 96,350, 31,100 and
31,100 shares of our common stock, respectively.
Personal Benefits and Perquisites
All of our executives are eligible to participate in our employee benefit plans, including medical, dental, vision, life
insurance, short-term and long-term disability insurance, flexible spending accounts, 401(k), and an Employee Stock Purchase
Program (ESPP). These plans are available to all full-time employees. In keeping with our philosophy to provide total compensation
that is competitive within our industry, we offer limited personal benefits and perquisites to executive officers that include
supplemental long-term disability insurance. You can find more information on the amounts paid for these perquisites to or on behalf
of our NEOs in our 2017 Summary Compensation Table.
Company Acquisition / Post-Termination Compensation
We have entered into individual change of control and severance agreements, or CIC Agreements, with each of our NEOs.
The CIC Agreements provide for certain severance benefits to be paid to each of our NEOs in the event of his involuntary termination
without cause, or due to the executive’s resignation for good reason (including the Company’s material breach of its obligations,
material reduction in duties, responsibilities, compensation or benefits, or relocation by more than 30 miles without prior consent),
provided such termination or resignation occurs in connection with an acquisition of the Company. Upon such termination or
resignation in the event of an acquisition, Dr. Hedrick would receive a lump sum payment of 18 times his monthly base salary, and 18
times his monthly COBRA payments, and Mr. Girão and Mr. Harris would each receive a lump sum payment of 12 times his monthly
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base salary, and 12 times his monthly COBRA payments. Notwithstanding the foregoing, these NEOs’ employment may be
terminated for cause (including extended disability, repudiation of their CIC Agreements, conviction of a plea of no contest to certain
crimes or misdemeanors, negligence that materially harms us, failure to perform material duties without cure, drug or alcohol use that
materially interferes with performance, and chronic unpermitted absence) without triggering an obligation for us to pay severance
benefits under the CIC Agreements.
In addition, under the CIC Agreements, any unvested stock options granted to each of the above named executive officers
would vest in full upon (1) the date of the executive’s termination under the circumstances described above following entry into an
acquisition agreement (subject to the actual consummation of the acquisition) or (2) consummation of an acquisition.
In all events, each NEO’s entitlement to the benefits described above is expressly conditioned upon his execution and
delivery to us of a CIC Agreement and a general release of claims, in the form attached to each CIC Agreement.
Outstanding Equity Awards at December 31, 2017
The following table sets forth information regarding outstanding equity awards held by our NEOs as of December 31, 2017.
Option Awards
Number
of Securities
Underlying
Unexercised
Options
(#) Un-
Exercisable
(2)(5)
Number
of Securities
Underlying
Unexercised
Options
(#)
Exercisable(5)
4,000
Option Grant
Date
(1)
1/31/2008
1/29/2009
5,000
2/05/2010
1/27/2011
1/26/2012
1/31/2013
1/31/2013
4/11/2014
8/21/2014
1/30/2015
1/04/2016
3/08/2017
9/2/2014
7,333
3,666
7,666
12,222
6,111
17,815
6,666
12,004
28,970
20,073
8,544(4)
— $
— $
— $
— $
— $
— $
— $
1,185 $
— (3) $
3,996 $
26,643 $
76,277
$
1,456 $
1/30/2015
6,008(4)
1,992 $
1/04/2016
3/08/2017
12,149
6,479
11,173 $
$
24,621
11/11/2015
12,103(4)
10,230 $
1/04/2016
3/08/2017
12,149(4)
6,479
11,173 $
$
24,621
Option
Exercise
Price
($)(5)
77.10
72.00
100.65
83.55
51.60
41.10
75.00
35.00
21.00
7.20
2.81
1.55
20.40
7.20
2.81
1.55
5.55
2.81
1.55
Option
Expiration
Date
1/31/2018
1/29/2019
2/05/2020
1/27/2021
1/26/2022
1/31/2023
1/31/2023
4/11/2024
8/21/2024
1/30/2025
1/04/2026
3/08/2027
9/2/2024
1/30/2025
1/04/2026
3/08/2027
11/11/2025
1/04/2026
3/08/2027
Name
Marc H. Hedrick, M.D.,
President and Chief Executive
Officer
Tiago M. Girao,
VP of Finance Chief Financial
Officer
John Harris, VP and General
Manager Cell Therapy
(1) For a better understanding of this table, we have included an additional column showing the grant date of the stock options.
(2) Unless otherwise provided, stock options are subject to four-year vesting, and have a contractual term of 10 years from the date of grant.
Awards presented in this table contain one of the following two vesting provisions:
With respect to an initial stock option grant to an employee, 25% of the shares subject to the award vest on the one-year
anniversary of the vesting start date, while an additional 1/48th of the remaining option shares vest at the end of each month
thereafter for 36 consecutive months, or
With respect to stock option grants made to an employee after one full year of employment, 1/48th of the shares subject to
the award vest at the end of each month over a four-year period, as measured from the vesting start date.
99
(3) The August 2014 stock option awards vested as to 50% of the shares subject to such awards after one year of service and the additional
50% vested on the second anniversary of the grant.
(4) These options were granted during the first year of the NEO’s employment and thus were subject to the following vesting schedule: 25% of
the shares subject to the award vest on the one-year anniversary of the vesting start date, while an additional 1/48th of the remaining option
shares vest at the end of each month thereafter for 36 consecutive months.
(5) We consummated a 1-for-15 reverse stock split in May 2016. The amounts set forth in this column reflect this 1-for-15 reverse stock split.
Director Compensation
Generally, our Board believes that the level of director compensation should be based on time spent carrying out Board and
committee responsibilities and be competitive with comparable companies. In addition, the Board believes that a significant portion of
director compensation should align director interests with the long-term interests of stockholders. The Board makes changes in its
director compensation practices only upon the recommendation of the Compensation Committee, and discussion and approval by the
Board.
The following table summarizes director compensation awarded to, earned by or paid to our non-employee directors who served on
our Board during fiscal year 2017.
(a)
Director Name(1)
David M. Rickey, Chairman(2)
Richard J. Hawkins (2)
Paul W. Hawran(6)
Gary A. Lyons
Gail K. Naughton, Ph.D. (2)
Gregg Lapointe(4)
Ronald A. Martel
(b)
Fees Earned
or Paid in
Cash(2)
($)
(c)
(d)
(e)
Stock
Awards
($)
Option
Awards(3)(5)
($)
Total
($)
$
$
$
$
$
$
$
40,000
32,500
30,000
33,333
30,000
40,000
49,167
— $
— $
— $
— $
— $
— $
— $
39,000 $
39,000 $
39,000 $
39,000 $
39,000 $
80,000 $
78,000 $
79,000
71,500
69,000
72,333
69,000
120,000
127,167 12
(1)
(2)
(3)
(4)
(5)
Dr. Hedrick is not included in this table as he is an employee of ours and receives no extra compensation for his service as
a director. The compensation received by Dr. Hedrick in his capacity as an employee is set forth in the 2017 Summary
Compensation Table and further described in the “Narrative Disclosures to Summary Compensation Table” above
On January 25, 2018, as part of the ongoing restructuring of the Company, David M. Rickey and Gail K. Naughton, Ph.D.
submitted their resignations as members of our Board of Directors, effective immediately, and the Board of Directors
decreased its size from seven to five members. In addition, Richard J. Hawkins was appointed to serve as Chairman to
succeed Mr. Rickey.
Column (d) represents the grant date fair value of the option awards, computed in accordance with FASB ASC Topic 718,
granted to our non-employee directors during 2017. For additional information on the valuation assumptions with respect
to the 2017 grants, refer to Note 12 to our audited consolidated financial statements included in this Form 10-K, regarding
assumptions underlying valuation of equity awards. These amounts do not reflect the actual economic value that will be
realized by our non-employee directors upon vesting of the stock options, exercise of the stock options or sale of the
common stock underlying the stock.
Mr. Lapointe joined our Board in March 2017.
As of December 31, 2017, our non-employee directors held the following aggregate options: Mr. Rickey: 27,727 options;
Richard Hawkins: 36,396 options; Paul Hawran: 37,728 options; Mr. Lyons: 31,654 options; Ronald Martell: 50,000
options; Gregg Lapointe: 50,000 options; and Dr. Naughton: 31,654 options.
(6)
Mr. Hawran resigned from the Board of Directors in May 2017.
Director Compensation Program
In October 2016, the Compensation Committee approved a Director Compensation Program for fiscal year 2017, as
subsequently amended. The materials elements of the 2017 Director Compensation Program are as follows:
$40,000 annual cash retainer for Board members (an increase from $30,000 in 2016);
$30,000 annual cash retainer for the Chairman of the Board (no change from 2016);
$20,000 annual cash retainer for the Chairman of the Audit Committee (no change from 2016);
100
$15,000 annual cash retainer for the Chairman of our Compensation Committee and Governance and Nominating
Committee (no change from 2016);
$10,000 annual cash retainer for each non-Chairman committee member (no change from 2016);
Initial grants for new directors: Initial option grant, upon commencement of services, to purchase 50,000 shares of our
common stock, vesting over two years in equal, annual installments as measured from the grant date;
Annual grants for existing directors: Recurring option grants to purchase 25,000 shares of our common stock, vesting in
one installment on the first anniversary of the grant date.
The Compensation Committee believed that these enhancements to the Director Compensation Program allow us to remain
aligned with director compensation practices at our peer companies.
On July 27, 2017, as the Company considered its plans to curtail expenses, the Board of Directors, following the
Compensation Committee’s recommendation, decided to suspend the cash compensation under the Director Compensation Program
for the remainder of 2017. Further, it decided to provide a one-time $25,000 cash retainer to both Mr. Lapointe and Mr. Martell for
their ongoing input and support with the Company’s strategic and tactical activities.
On January 25, 2018, the Board of Directors, following the Compensation Committee’s recommendation, decided to reinstate
the Director Compensation Program effective January 1, 2018. Further, considering the ongoing cash constraints of the Company, the
Board of Directors decided to amend the cash components of the Director Compensation Program for 2018 as follows:
$30,000 annual cash retainer for Board members;
$20,000 annual cash retainer for the Chairman of the Board;
$12,500 annual cash retainer for the Chairman of the Audit Committee;
$7,500 annual cash retainer for the Chairman of our Compensation Committee and Governance and Nominating
Committee; and
$2,500 annual cash retainer for each non-Chairman committee member.
The equity components of the Director Compensation Program for 2018 remain unchanged from those in effect in 2017 and
described above.
The Compensation Committee believes that these enhancements to the Director Compensation Program allow us to remain
aligned with director compensation practices at our peer companies while considering the ongoing cash constraints of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the heading “Equity Compensation Plan Information” in Part II, Item 5 is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding ownership of our Common Stock as of February 28, 2018 (or earlier date
for information based on filings with the SEC) by (a) each person known to us to own more than 5% of the outstanding shares of our
Common Stock, (b) each director and nominee for director, (c) our President and Chief Executive Officer, VP of Finance and Chief
Financial Officer and each other NEO named in the compensation tables in this Annual Report on Form 10-K and (d) all directors and
executive officers as a group.
The information in this table is based solely on statements in filings with the SEC or other reliable information. We believe,
based on information provided to us, that each of the stockholders listed below has sole voting and investment power with respect to
the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
A total of 61,607,797 shares of our common stock were issued and outstanding as of February 28, 2018.
101
Name and Address of Beneficial Owner (1)
Swissquote Bank SA(5)
Chemin de la Crétaux 33
1196 Gland, Switzerland
PostFinance AG(6)
Mingerstrasse 20
3030 Bern, Switzerland
Marc H. Hedrick, M.D.
Tiago M. Girao
John D. Harris
Richard J. Hawkins
Gary A. Lyons
Ronald A. Martell
Gregg Lapointe
All executive officers and directors as a group
Number of
Shares of
Common Stock
Owned (2)
Number of Shares
of Common Stock
Subject to
Awards/Warrants
Exercisable Within
60 Days (3)
Total Number of
Shares of
Common Stock
Beneficially
Owned (4)
5,328,229
—
5,328,229
Percent
Ownership
8.6%
4,543,086
—
4,543,086
7.4%
78,133
14,084
7,000
8,433
4,357
—
—
112,006
193,780
41,461
37,894
52, 472
37,404
25,000
25,000
384,211
271,913
55,545
44,894
60,905
41,761
25,000
25,000
496,218
*
*
*
*
*
*
0.8 %
*
(1)
(2)
(3)
(4)
Represents beneficial ownership of less than one percent (1%) of the outstanding shares as of February 28, 2018.
Unless otherwise indicated, the address of each of the named individuals is c/o Cytori Therapeutics, Inc., 3020 Callan Road, San Diego,
CA 92121.
Unless otherwise indicated, represents shares of outstanding common stock owned by the named parties as of February 28, 2018.
Shares of common stock subject to stock options or warrants currently exercisable or exercisable within 60 days of February 28, 2018 are
deemed to be outstanding for computing the percentage ownership of the person holding such options and the percentage ownership of any
group of which the holder is a member, but are not deemed outstanding for computing the percentage of any other person.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security
if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment
power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial
owner of any securities for which that person has a right to acquire beneficial ownership within 60 days.
(5)
(6)
Based upon a Form 4 filed January 11, 2018, reporting beneficial ownership as of January 11, 2018
Based upon a Form 4 filed February 15, 2018, reporting beneficial ownership as of February 14, 2018
Item 13. Certain Relationships and Related Transactions, and Director Independence
The following includes a summary of transactions since January 1, 2017 to which we have been a party in which the amount
involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or, to our knowledge, beneficial
owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest. We also describe below certain other transactions with our directors, executive officers and 5%
stockholders. We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the
transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, from
unaffiliated third parties.
Rights Offering
In November 2017, we consummated a rights offering, or Rights Offering, to our stockholders of record (as of October 27,
2017) to subscribe for units at a subscription price of $1,000 per unit. Pursuant to the Rights Offering, we sold an aggregate of 10,000
units consisting of a total of 10,000 shares of Series B Convertible Preferred Stock and 18,000,000 warrants to our stockholders, or
Warrants, with each Warrant exercisable for one share of common stock at an exercise price of $0.3333 per share. Certain of our
directors participated in the Rights Offering and along with other participants in the Rights Offering, purchased common stock and
Warrants to purchase our common stock.
Director and Officer Indemnification
102
Our amended and restated certificate of incorporation, as amended, and our amended and restated bylaws, as amended,
provide that we will indemnify each of our directors and officers to the fullest extent permitted by the Delaware General Corporation
Law.
Stock Option Grants to Executive Officers and Directors
We have granted stock options to our executive officers and non-employee directors as more fully described elsewhere in this
Form 10-K.
The information under the heading “Board Independence” in Part III, Item 10 is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
On July 12, 2016, we notified KPMG, LLP, or KPMG, of its dismissal as our independent registered public accounting firm,
effective as of that date. The decision to change independent registered public accounting firms was recommended by our Audit
Committee and was approved by the Board.
On July 12, 2016, the Audit Committee appointed BDO USA, LLP, or BDO, as our independent registered public accounting
firm for the fiscal year ending December 31, 2016, subject to completion of its standard client acceptance procedures (which were
subsequently completed). The decision to engage BDO as our independent registered public accounting firm was recommended by the
Audit Committee and approved by the Board. The Audit Committee reviews and must pre-approve all audit and non-audit services
performed by our independent registered public accounting firm, as well as the fees charged by it for such services. No fees charged
by KPMG or BDO during 2016 were approved under the Regulation S-X Rule 2.01(c)(7)(i)(C) exception to the pre-approval
requirement. In its review of non-audit service fees, the Audit Committee considers, among other things, the possible impact of the
performance of such services on the accounting firm’s independence.
The following table shows the aggregate fees paid or accrued by us for the audit and other services provided by BDO for the
fiscal years ended December 31, 2017 and 2016.
Audit Fees (1)
Audit Related Fees (2)
Tax Fees (3)
Total
Fiscal Year Ended
December 31,
BDO
2017
$ 378,000 $
—
32,000
$ 410,000 $
2016
281,000
—
35,000
316,000
(1)
Audit fees consist of fees for professional services performed by BDO USA, LLP for the audit of our annual financial
statements included in this Form 10-K filing and review of financial statements included in our quarterly Form 10-Q
filings, reviews of registration statements and issuances of consents, and services that are normally provided in connection
with statutory and regulatory filings or engagements.
(2)
Audit related fees consist of fees for assurance and related services, performed by BDO USA, LLP that are reasonably
related to the performance of the audit or review of our financial statements.
(3)
Tax fees consist of fees for professional services performed by BDO USA, LLP with respect to tax compliance, tax
advice, tax consulting and tax planning.
103
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
PART IV
Page
Report of BDO USA, LLP, Independent Registered Public Accounting Firm ..............................................................................
Consolidated Balance Sheets as of December 31, 2017 and 2016 ................................................................................................
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016 .................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016..........................................
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016.........................................................
Notes to Consolidated Financial Statements .................................................................................................................................
Schedule II – Valuation and Qualifying Accounts ........................................................................................................................
65
66
67
68
69
70
104
(a) (2) Financial Statement Schedules
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2017 and 2016
(in thousands)
Allowance for doubtful accounts
Year ended December 31, 2017
Year ended December 31, 2016
(A)
Includes charges to costs and expenses.
Balance at
beginning of
year
Additions (A) Deductions (B) Other (C)
Balance at
end of year
$
$
167 $
797 $
— $
— $
— $
(630 ) $
— $
— $
167
167
(B) Deductions for uncollectible accounts receivable includes payments collected and devices recovered from customers.
(C) Miscellaneous activity.
(a) (3) Exhibits
List of Exhibits required by Item 601 of Regulation S-K. See Item 15(b) below.
(b) Exhibits
The exhibits listed in the accompanying “Exhibit Index” are filed, furnished or incorporated by reference as part of this Annual
Report, as indicated.
Item 16. Form 10-K Summary
None.
104
EXHIBIT INDEX
CYTORI THERAPEUTICS, INC.
Exhibit Title
Filed
with this
Form 10-
K
Exhibit
Number
3.1
Composite Certificate of Incorporation.
3.2
Amended and Restated Bylaws of Cytori Therapeutics, Inc.
Amendment
Therapeutics, Inc.
to Amended and Restated Bylaws of Cytori
Certificate of Designation of Preferences, Rights and Limitations of
Series A 3.6% Convertible Preferred Stock
Certificate of Amendment to Amended and Restated Certificate of
Incorporation, as amended
Certificate of Designation of Preferences, Rights and Limitations of
Series B Convertible Preferred Stock
Incorporated by Reference
Form
10-K
10-Q
8-K
8-K
8-K
8-K
File No.
000-32501
Exhibit 3.1
000-32501
Exhibit 3.2
001-34375
Exhibit 3.1
001-34375
Exhibit 3.1
001-34375
Exhibit 3.1
Date Filed
03/11/2016
08/14/2003
05/06/2014
10/08/2014
05/10/2016
001-34375
Exhibit 3.1
11/28/2017
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on October 14, 2008 in favor of Silicon Valley Bank, pursuant
to the Loan and Security Agreement dated October 14, 2008.
10-K
000-32501
Exhibit 10.62
03/06/2009
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 11, 2010 in favor of GE Capital Equity Investments,
Inc., pursuant to the Amended and Restated Loan and Security
Agreement dated June 11, 2010.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 11, 2010 in favor of Silicon Valley Bank, pursuant to
the Amended and Restated Loan and Security Agreement dated June
11, 2010.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 11, 2010 in favor of Oxford Financial Corporation,
pursuant to the Amended and Restated Loan and Security Agreement
dated June 11, 2010.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on September 9, 2011 in favor of GE Capital Equity Investments,
Inc., pursuant to the Amended and Restated Loan and Security
Agreement dated September 9, 2011.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on September 9, 2011 in favor of Silicon Valley Bank, pursuant
to the Amended and Restated Loan and Security Agreement dated
September 9, 2011.
8-K
001-34375
Exhibit 10.73
06/17/2010
8-K
001-34375
Exhibit 10.74
06/17/2010
8-K
001-34375
Exhibit 10.75
06/17/2010
8-K
001-34375
Exhibit 10.84
09/15/2011
8-K
001-34375
Exhibit 10.85
09/15/2011
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on September 9, 2011 in favor of Oxford Financial Corporation,
8-K
001-34375
Exhibit 10.86
09/15/2011
105
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
pursuant to the Amended and Restated Loan and Security Agreement
dated September 9, 2011.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on September 9, 2011 in favor of Oxford Financial Corporation,
pursuant to the Amended and Restated Loan and Security Agreement
dated September 9, 2011.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 28, 2013 in favor of Oxford Finance LLC pursuant to
the Loan and Security Agreement dated June 28, 2013.
8-K
001-34375
Exhibit 10.87
09/15/2011
10-Q
001-34375
Exhibit 4.17
08/09/2013
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 28, 2013 in favor of Oxford Finance LLC pursuant to
the Loan and Security Agreement dated June 28, 2013.
10-Q
001-34375
Exhibit 4.18
08/09/2013
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 28, 2013 in favor of Oxford Finance LLC pursuant to
the Loan and Security Agreement dated June 28, 2013.
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 28, 2013 in favor of Oxford Finance LLC pursuant to
the Loan and Security Agreement dated June 28, 2013.
10-Q
001-34375
Exhibit 4.19
08/09/2013
10-Q
001-34375
Exhibit 4.20
08/09/2013
Warrant to Purchase Common Stock issued by Cytori Therapeutics,
Inc. on June 28, 2013 in favor of Silicon Valley Bank pursuant to the
Loan and Security Agreement dated June 28, 2013.
10-Q
001-34375
Exhibit 4.21
08/09/2013
Form of Warrant to Purchase Common Stock for Investors in the
Units issued in May 2014.
Form of Warrant to Purchase Common Stock for Placement Agent
of the Units issued in May 2014.
4.16
Form of Amendment to Warrant to Purchase Common Stock.
4.17
Form of Warrant to Purchase Common Stock.
4.18
Form of Warrant for Purchasers of the Units issued in October 2014.
4.19
Form of Initial Warrant to Purchase Common Stock.
4.20
Form of Additional Warrant to Purchase Common Stock.
4.21
Form of Pre-Funded Warrant to Purchase Common Stock.
4.22
Amendment to Common Stock Purchase Warrant.
4.23
Amendment to Series A-1 Warrant to Purchase Common Stock.
106
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
001-34375
Exhibit 4.1
001-34375
Exhibit 4.2
001-34375
Exhibit 4.1
001-34375
Exhibit 4.2
001-34375
Exhibit 4.1
001-34375
Exhibit 4.1
001-34375
Exhibit 4.2
001-34375
Exhibit 4.3
05/30/2014
05/30/2014
09/08/2014
09/08/2014
10/08/2014
05/05/2015
05/05/2015
05/05/2015
10-K
001-34375
Exhibit 4.23
03/11/2016
10-K
001-34375
Exhibit 4.24
03/11/2016
4.24
Amendment to Series A-2 Warrant to Purchase Common Stock.
4.25
4.26
Form of Non-Transferable Subscription Rights Certificate issued in
2016.
Form of Series R Warrant.
4.27
Form of Series S Warrant.
4.28
4.29
4.30
Form of Warrant Agent Agreement between Cytori Therapeutics,
Inc. and Broadridge Corporate Issuer Solutions, Inc.
Form of Warrant by and between Cytori Therapeutics, Inc. and
Maxim Group LLC.
Form of Restated Warrant by and between Cytori Therapeutics, Inc.
and Broadridge Corporate Issuer Solutions, Inc.
4.31
Form of Non-Transferable Subscription Rights Certificate.
4.32
Form of Warrant Agent Agreement between Cytori Therapeutics,
Inc. and Broadridge Corporate Issuer Solutions, Inc.
4.33
Form of Common Stock Certificate.
X
10-K
S-1/A
S-1/A
S-1/A
S-1/A
8-K
10-Q
S-1/A
S-1/A
10.1# Amended and Restated 1997 Stock Option and Stock Purchase Plan.
10-12G
10.2#
2004 Equity Incentive Plan of Cytori Therapeutics, Inc.
10.3#
Form of Options Exercise and Stock Purchase Agreement Relating
to the 2004 Equity Incentive Plan.
10.4#
Form of Notice of Stock Options Grant Relating to the 2004 Equity
Incentive Plan.
10.5+
License & Royalty Agreement, effective August 23, 2007, by and
between Olympus-Cytori, Inc. and Cytori Therapeutics, Inc.
10.7
10.8
Common Stock Purchase Agreement, dated February 8, 2008, by and
between Green Hospital Supply, Inc. and Cytori Therapeutics, Inc.
Amendment No. 1, dated February 29, 2008, to Common Stock
Purchase Agreement, dated February 8, 2008, by and between Green
Hospital Supply, Inc. and Cytori Therapeutics, Inc.
8-K
10-Q
10-Q
10-Q
8-K
8-K
001-34375
Exhibit 4.25
333-210628
Exhibit 4.26
333-210628
Exhibit 4.27
333-219967
Exhibit 4.27
03/11/2016
05/11/2016
05/11/2016
10/03/2017
333-210628
Exhibit 4.28
05/11/2016
000-32501
Exhibit 4.1
04/12/2017
001-34375
Exhibit 4.2
08/11/2017
333-219967
Exhibit 4.31
10/03/2017
333-219967
Exhibit 4.32
10/03/2017
000-32501
Exhibit 10.1
000-32501
Exhibit 10.1
03/30/2001
08/27/2004
000-32501
Exhibit 10.23
11/15/2004
000-32501
Exhibit 10.24
11/15/2004
000-32501
Exhibit 10.49
000-32501
Exhibit 10.51
000-32501
Exhibit 10.51
11/13/2007
2/19/2008
2/29/2008
10.9
Lease Agreement entered into on April 2, 2010, between HCP Callan
Rd, LLC. and Cytori Therapeutics, Inc.
10-Q
001-34375
Exhibit 10.69
05/06/2010
10.10
Common Stock Purchase Agreement, dated December 6, 2010, by
and among Cytori Therapeutics, Inc. and Astellas Pharma Inc.
10.11# Form of Notice and Restricted Stock Award Agreement for grants of
performance-based restricted stock awards under the 2004 Equity
Incentive Plan.
First Amendment to Lease Agreement entered into on November 4,
2011, between HCP Callan Rd, LLC. and Cytori Therapeutics, Inc.
10.12
8-K
8-K
001-34375
Exhibit 10.76
12/09/2010
001-34375
Exhibit 10.1
03/04/2011
10-Q
001-34375
Exhibit 10.88
11/08/2011
107
10.13# 2011 Employee Stock Purchase Plan
10.14
Contract HHSO100201200008C dated September 27, 2012, by and
between Cytori Therapeutics, Inc. and the U.S. Department of Health
and Human Services Biomedical Advanced Research and
Development Authority.
DEF 14A
001-34375
Appendix A
05/02/2011
S-1/A
333-219967
Exhibit 10.14
10/03/2017
10.15
Joint Venture Termination Agreement dated May 8, 2013 by and
between Cytori Therapeutics, Inc. and Olympus Corporation.
10-Q
001-34375
Exhibit 10.91
05/10/2013
10.16+ Puregraft Sale-License-Supply Agreement, dated July 30, 2013, by
and between Cytori Therapeutics, Inc. and Bimini Technologies
LLC.
10-Q/A
001-34375
Exhibit 10.93
11/12/2013
10.17+ Amended and Restated License and Supply Agreement dated
January 30, 2014, by and between Cytori Therapeutics, Inc. and
Lorem Vascular Pty. Ltd.
10.18
Sales Agreement, dated May 12, 2014, by and between Cytori
Therapeutics, Inc. and Cowen and Company, LLC.
10.19
10.20
Contract HHSO100201200008C Amendment No. 1 dated August
18, 2014, by and between Cytori Therapeutics, Inc. and the U.S.
Department of Health and Human Services Biomedical Advanced
Research and Development Authority.
Form of Securities Purchase Agreement by and between Cytori
Therapeutics, Inc. and the Purchasers (as defined therein), dated as
of October 8, 2014.
10.21 Amendment of Solicitation/Amendment of Contract, effective
December 17, 2014, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
10.22 Amendment of Solicitation/Modification of Contract, effective
January 5, 2015, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
8-K
8-K
8-K
8-K
10-K
10-K
001-34375
Exhibit 10.94
02/04/2014
001-34375
Exhibit 10.1
05/12/2014
001-34375
Exhibit 10.99
08/19/2014
001-34375
Exhibit 10.1
10/08/2014
001-34375
Exhibit 10.21
03/24/2017
001-34375
Exhibit 10.22
03/24/2017
10.23 Amendment One to the Securities Purchase Agreement, dated March
16, 2015, between Cytori Therapeutics, Inc. and certain institutional
investors.
10-Q
001-34375
Exhibit 10.1
05/11/2015
10.24
Form of Securities Purchase Agreement, dated May 5, 2015, by and
among Cytori Therapeutics, Inc. and the investors named therein.
10.25
Placement Agency Agreement, dated May 5, 2015, by and between
Cytori Therapeutics, Inc. and Mizuho Securities USA Inc.
10.26 Amendment One to Joint Venture Termination Agreement, dated
April 30, 2015, by and between Cytori Therapeutics, Inc. and
Olympus Corporation.
10.27
Loan and Security Agreement, dated May 29, 2015, by and between
Cytori Therapeutics, Inc. and Oxford Finance, LLC.
10.28
First Amendment to Loan and Security Agreement, dated September
20, 2017, by and between Cytori Therapeutics, Inc. and Oxford
Finance, LLC.
108
8-K
8-K
8-K
10-Q
S-1/A
001-34375
Exhibit 10.1
001-34375
Exhibit 10.2
001-34375
Exhibit 10.1
05/05/2015
05/05/2015
05/05/2015
001-34375
Exhibit 10.4
08/10/2015
333-219967
Exhibit 10.45
10/03/2017
10.29 Amendment One to the Securities Purchase Agreement between
Cytori Therapeutics, Inc. and certain institutional investors dated
May 5, 2015.
10.30# 2015 New Employee Incentive Plan.
10.31# Form of Agreement for Acceleration and/or Severance.
10.32# Form of Stock Option Agreement under the New Employee
Incentive Plan.
10.33# Form of Notice of Grant of Stock Option under the 2015 New
Employee Incentive Plan.
10-K
8-K
10-K
S-8
S-8
10.34# 2014 Equity Incentive Plan of Cytori Therapeutics, Inc., as
DEF 14A
amended and restated.
10.35 Amendment Two to Joint Venture Termination Agreement, dated
January 8, 2016.
10.36 Amendment of Solicitation/Amendment of Contract, effective April
1, 2016, by and between ASPR-BARDA and Cytori Therapeutics,
Inc.
10.37 Amendment of Solicitation/Amendment of Contract, effective
10.38
September 9, 2016, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
Purchase Agreement between Cytori Therapeutics, Inc. and Lincoln
Park Capital Fund, LLC, dated December 22, 2016.
Registration Rights Agreement between Cytori Therapeutics, Inc.
and Lincoln Park Capital Fund, LLC, dated December 22, 2016.
10.40# Third Amendment to the Cytori Therapeutics, Inc. 2014 Equity
10.39
Incentive Plan, dated January 26, 2017.
10.41+ Asset Purchase Agreement by and between Cytori Therapeutics,
10.42
10.43
10.44
Inc. and Azaya Therapeutics, Inc., effective January 16, 2017.
Lease Agreement, dated February 27, 2017, by and between 6262
Lusk Investors LLC and Cytori Therapeutics, Inc.
First Amendment to Lease Agreement, dated July 27, 2017, by and
between 6262 Lusk Investors LLC and Cytori Therapeutics, Inc.
Second Amendment to Lease Agreement, dated September 7, 2017,
by and between 6262 Lusk Investors LLC and Cytori Therapeutics,
Inc.
X
X
10.45
Termination of Lease Agreement, dated February 21, 2018, by and
between 6262 Lusk Investors LLC and Cytori Therapeutics, Inc.
10.46# First Amendment to the Cytori Therapeutics, Inc. 2015 New
Employee Incentive Plan, dated Jan. 26, 2017.
Sixth Amendment of Solicitation/Modification of Contract, effective
April 14, 2017, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
10.47
10.48
03/11/2016
001-34375
Exhibit
10.111
001-34375
Exhibit 10.1
01/05/2016
03/11/2016
001-34375
Exhibit
10.113#
333-210211
Exhibit 99.4
333-210211
Exhibit 99.5
001-34375
Appendix A
001-34375
Exhibit 10.4
001-34375
Exhibit 10.1
03/15/2016
03/15/2016
04/10/2017
05/10/2016
08/05/2016
001-34375
Exhibit 10.1
11/09/2016
001-34375
Exhibit 10.1
001-34375
Exhibit10.2
001-34375
Exhibit 10.39
001-34375
Exhibit 10.40
001-34375
Exhibit 10.41
12/29/2016
12/29/2016
03/24/2017
03/24/2017
03/24/2017
001-34375
Exhibit 10.1
02/23/2018
001-34375
Exhibit 10.42
001-34375
Exhibit 10.1
03/24/2017
05/12/2017
10-Q
10-Q
10-Q
8-K
8-K
10-K
10-K
10-K
8-K
10-K
10-Q
Seventh Amendment of Solicitation/Modification of Contract,
effective May 19, 2017, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
10-Q
001-34375
Exhibit 10.3
08/11/2017
109
10.49
Eighth Amendment of Solicitation/Modification of Contract,
effective May 23, 2017, by and between ASPR-BARDA and Cytori
Therapeutics, Inc.
10-Q
001-34375
Exhibit 10.4
08/11/2017
23.1
31.1
31.2
32.1
Consent of BDO USA, LLP, Independent Registered Public
Accounting Firm
Certification of Principal Executive Officer Pursuant to Securities
Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification of Principal Financial and Accounting Officer Pursuant
to Securities Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certifications Pursuant to 18 U.S.C. Section 1350/ Securities
Exchange Act Rule 13a-14(b), as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
X
X
X
X
X
X
X
X
X
X
#
+
Indicates management contract or compensatory plan or arrangement.
Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CYTORI THERAPEUTICS, INC.
By: /s/ Marc H. Hedrick, MD
Marc. H. Hedrick, MD
President & Chief Executive Officer
March 9, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Richard J. Hawkins
Richard J. Hawkins
/s/ Marc H. Hedrick, MD
Marc H. Hedrick, MD
/s/ Tiago M. Girão
Tiago M. Girão
/s/ Gregg A. Lapointe
Gregg A. Lapointe
/s/ Gary A. Lyons
Gary A. Lyons
/s/ Ronald A. Martell
Ronald A. Martell
Chairman of the Board
March 9, 2018
President & Chief Executive Officer (Principal Executive Officer)
March 9, 2018
VP of Finance and Chief Financial Officer (Principal Financial and
Accounting Officer)
March 9, 2018
Director
Director
Director
March 9, 2018
March 9, 2018
March 9, 2018
111
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T
N
E
M
E
T
A
T
S
Y
X
O
R
P
NOTICE OF 2018 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 18, 2018
CYTORI THERAPEUTICS, INC.
Headquarters
3020 CALLAN RD
SAN DIEGO, CALIFORNIA 92121
Dear Cytori Therapeutics, Inc. Stockholder:
Meeting Location:
CYTORI THERAPEUTICS, INC
3020 CALLAN RD
SAN DIEGO, CALIFORNIA 92121
You are cordially invited to attend the 2018 Annual Meeting of the stockholders of Cytori Therapeutics, Inc. (the “Annual Meeting”).
The Annual Meeting will be held on May 18, 2018, commencing at 9:00 a.m., San Diego local time, at the Cytori Therapeutics, Inc. corporate
offices, located at 3020 Callan Rd., San Diego, California 92121.
The meeting will be webcast live for those who are unable to attend in person. To access the webcast of the meeting, please visit the
Investor Relations section of our corporate website at ir.cytori.com. To vote online, please see the instructions on the accompanying proxy card.
The items of business for the meeting are:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Election of members of our Board of Directors for a one-year term;
Ratification of the appointment of BDO USA, LLP as our independent registered public accounting firm for the
2018 fiscal year;
Approval of the amendment and restatement of the Cytori Therapeutics, Inc. 2014 Equity Incentive Plan;
Approval of an amendment to our amended and restated certificate of incorporation, as amended, to effect, at
the discretion of our Board of Directors (with the effectiveness or abandonment of such amendment to be
determined by the Board of Directors as permitted under Section 242(c) of the Delaware General Corporation
Law) a reverse stock split of our shares of common stock issued and outstanding or reserved for issuance, at an
exchange ratio of not less than 1-for-5 and not greater than 1-for-15, such exchange ratio to be determined by
our Board of Directors at its sole discretion;
Approval of an amendment to our amended and restated certificate of incorporation, as amended, to effect an
increase of the total number of authorized shares of common stock under our certificate of incorporation from
75,000,000 shares to 100,000,000 shares (which amount is not otherwise affected by the reverse split);
Non-binding advisory vote on compensation of our named executive officers; and
Transact such other business as may be properly brought before the meeting or any adjournment or
postponement thereof.
The Board of Directors recommends the approval of each of these proposals.
We have attached a Proxy Statement that contains more information about these items and the Annual Meeting. Only stockholders
that own stock at the close of business on March 21, 2018, the record date, can vote at the Annual Meeting. A list of our stockholders entitled to
vote will be available for inspection by any stockholder at our offices in San Diego, during normal business hours for ten business days prior to
the Annual Meeting. This list will also be available during the Annual Meeting.
As permitted by rules adopted by the U.S. Securities and Exchange Commission, we are using the Internet as our primary means of
furnishing proxy materials to our stockholders. We will send our stockholders a notice with instructions for accessing the proxy materials and
voting electronically over the Internet or by telephone. The notice also provides information on how stockholders may request paper copies of
our proxy materials. For those stockholders who elect to receive their proxy materials in the mail, please review the Proxy Statement and Annual
Report and vote using the enclosed proxy card.
We hope that you will find it convenient to attend the Annual Meeting in person. Whether or not you expect to attend, please vote
electronically over the Internet or by telephone, or if you receive a proxy card in the mail, by mailing the completed proxy card to us to ensure
your representation at the Annual Meeting and the presence of a quorum. If you decide to attend the meeting and wish to change your proxy
vote, you may do so by voting in person at the Annual Meeting. If your shares are held in the name of a bank or broker, however, you must
obtain a legal proxy from the bank or broker to attend the Annual Meeting and vote in person.
By Order of the Board of Directors,
San Diego, California, USA
April 6, 2018
MARC H. HEDRICK
President & Chief Executive Officer
YOUR VOTE IS IMPORTANT!
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE ENCOURAGE YOU TO READ
THIS PROXY STATEMENT AND SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS AS SOON AS
POSSIBLE. THIS WILL ENSURE THE PRESENCE OF A QUORUM AT THE MEETING. FOR
SPECIFIC INSTRUCTIONS ON HOW TO VOTE YOUR SHARES, PLEASE REFER TO THE
INSTRUCTIONS ON THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS (THE
“NOTICE” ) YOU RECEIVED IN THE MAIL, THE QUESTION “WHAT DIFFERENT METHODS CAN I
USE TO VOTE?” IN THIS PROXY STATEMENT, OR, IF YOU REQUESTED PRINTED PROXY
MATERIALS, YOUR ENCLOSED PROXY CARD. IF YOU ATTEND THE MEETING, YOU MAY VOTE
IN PERSON IF YOU WISH TO DO SO EVEN IF YOU HAVE PREVIOUSLY SUBMITTED YOUR
PROXY OR VOTING INSTRUCTIONS.
Cytori Therapeutics, Inc.
3020 Callan Road
San Diego, CA 92121
(858) 458-0900
PROXY STATEMENT
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
STOCKHOLDER MEETING TO BE HELD ON MAY 18, 2018
This Proxy Statement and the Company’s 2017 Annual Report are both available at www.proxyvote.com.
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Cytori Therapeutics, Inc.
3020 Callan Road
San Diego, CA 92121
(858) 458-0900
PROXY STATEMENT
2018 ANNUAL MEETING OF STOCKHOLDERS
The 2017 Annual Report to Stockholders, including financial statements, is being made available to stockholders
together with these proxy materials on or about April6, 2018.
This Proxy Statement is being furnished in connection with the solicitation of proxies by and on behalf of
our Board of Directors (“Board”) to be used at our Annual Meeting of Stockholders to be held on May 18, 2018 at
9:00 a.m., San Diego local time (“Annual Meeting”), and at any adjournment or postponement of the Annual
Meeting, for the purposes set forth in the accompanying notice of Annual Meeting.
We have fixed the close of business on March 21, 2018 as the record date for the determination of the
stockholders entitled to notice of and to vote at the Annual Meeting. Only holders of record of shares of our
common stock on that date are entitled to notice of and to vote at the Annual Meeting.
Questions and Answers about the Meeting and Voting
Q: What is a Proxy Statement and why has this Proxy Statement been provided to me?
A: A Proxy Statement is a document that the U.S. Securities and Exchange Commission (“SEC”)
regulations require us to give you when we ask you to sign a proxy card with regard to voting on proposals at the
Annual Meeting. Among other things, a Proxy Statement describes those proposals and provides information about
us. Our Board is soliciting your proxy to vote at the Annual Meeting and at any adjournment or postponement of
the Annual Meeting. The Annual Meeting will be held at the Cytori Therapeutics, Inc. corporate offices, located at
3020 Callan Road, San Diego, California 92121. We will use the proxies received in connection with proposals to:
(i)
(ii)
(iii)
(iv)
Elect members of our Board for a one-year term;
Ratify the appointment of BDO USA, LLP as our independent registered public
accounting firm for the 2018 fiscal year;
Approve the amendment and restatement of the Cytori Therapeutics, Inc. 2014 Equity
Incentive Plan;
Approve the amendment to our amended and restated certificate of incorporation, as
amended, to effect, at the discretion of our Board of Directors (with the effectiveness or
abandonment of such amendment to be determined by the Board of Directors as
permitted under Section 242(c) of the Delaware General Corporation Law) a reverse
stock split of our shares of common stock issued and outstanding or reserved for
issuance, at an exchange ratio of not less than 1-for-5 and not greater than 1-for-15, such
exchange ratio to be determined by our Board of Directors at its sole discretion;
(v)
Approve an increase of the total number of authorized shares of common stock under our
certificate of incorporation from 75,000,000 shares to 100,000,000 shares (which amount
is not otherwise affected by the reverse split);
(vi)
Provide a non-binding advisory vote on the compensation of our named executive
officers; and
Proxy Statement | Page 1
(vii)
Transact such other business as may be properly brought before the meeting or any
adjournment or postponement thereof.
Q: Why did I receive a notice in the mail regarding Internet availability of proxy materials this year
instead of a full set of proxy materials?
A: We provide access to our proxy materials on the Internet. Some stockholders (those who hold in “street
name”) will not receive printed copies of the proxy materials unless requested. Instead, these stockholders will
receive a Notice of Internet Availability of Proxy Materials (the “Notice”) that will instruct you as to how you may
access and review the proxy materials on the Internet. The Notice explains how you may vote your proxy. If you
received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the
instructions for requesting printed materials included in the Notice.
Q: What is a proxy?
A: A proxy is your legal designation of another person to vote the stock you own. That designee is
referred to as a proxy holder. Designation of a particular proxy holder can be effected by completion of a written
proxy card, or by voting via the Internet or by telephone. Our President, Chief Executive Officer and Director, Marc
H. Hedrick, M.D., and our Chief Financial Officer, Tiago M. Girão, have each been designated as the proxy holders
for the Annual Meeting.
Q: What is the difference between a stockholder of record and a beneficial owner who holds stock in
street name?
A: You are a stockholder of record, or a “registered holder”, if your shares are registered in your own
name through our transfer agent. You are a beneficial owner of our stock in street name if you hold your shares
through a broker, bank or other third party institution (in this situation, the banks, brokers, etc. are the stockholders
of record). The vast majority of our stockholders are represented on our share register in the name of a bank, broker
or other third party institution and not in their own name. If you have elected to hold your shares in certificate form,
your name will appear directly on our register as a stockholder of record.
Q: What different methods can I use to vote?
A: If you are a registered holder and you are viewing this proxy over the Internet, you may vote
electronically over the Internet. For those stockholders who receive a paper proxy in the mail, you may also vote
electronically over the Internet or by telephone or by completing and mailing the proxy card provided. The website
identified in our Notice provides specific instructions on how to vote electronically over the Internet. Those
stockholders who receive a paper proxy by mail, and who elect to vote by mail, should complete and return the
mailed proxy card in the prepaid and addressed envelope that was enclosed with the proxy materials.
If you are the beneficial owner of stock in street name, that is, your shares are held in the name of a
brokerage firm, bank or other nominee, you will receive instructions from your broker, bank or other nominee that
must be followed in order for you to vote your shares. Your broker will be sending you a Notice which contains
instructions on how to access the website and to vote your shares. If, however, you have elected to receive paper
copies of our proxy materials from your brokerage firm, bank or other nominee, you will receive a voting instruction
form. Please complete and return the enclosed voting instruction form in the addressed, postage paid envelope
provided.
Stockholders who have previously elected to access our proxy materials and annual report electronically
over the Internet will continue to receive an email, referred to in this Proxy Statement as an email notice, with
information on how to access the proxy information and voting instructions.
Only proxy cards and voting instruction forms that have been signed, dated and timely returned and only
proxies that have been timely voted electronically or by telephone will be counted in the quorum and voted. The
Internet and telephone voting facilities will close at 11:59 p.m. Eastern Time, May 17, 2018.
Proxy Statement | Page 2
Stockholders who vote over the Internet or by telephone need not return a proxy card or voting instruction
form by mail, but may incur costs, such as usage charges, from telephone companies or Internet service providers.
You may also vote your shares in person at the Annual Meeting. If you are a registered holder, you may
request a ballot at the Annual Meeting. If your shares are held in street name and you wish to vote in person at the
meeting, you must obtain a proxy issued in your name from your broker, bank or other nominee and bring it with
you to the Annual Meeting. We recommend that you vote your shares in advance as described above so that your
vote will be counted if you later decide not to attend the Annual Meeting.
If you receive more than one Notice, email notice, proxy card or voting instruction form because your
shares are held in multiple accounts or registered in different names or addresses, please vote your shares held in
each account to ensure that all of your shares will be voted.
Q: What is the record date and what does it mean?
A: The record date for the 2018 Annual Meeting is March 21, 2018. The record date is established by our
Board as required by Delaware General Corporation Law. Owners of our common stock at the close of business on
the record date are entitled to receive notice of the meeting and to vote at the meeting and any adjournment or
postponement of the meeting.
Q: How can I change my vote?
A: You may revoke your proxy and change your vote at any time before the final vote at the meeting. You
can revoke a proxy by giving written notice or revocation to our Corporate Secretary, following the Internet voting
instructions, delivering a later dated proxy, or voting in person at the meeting. However, your attendance at the
Annual Meeting will not automatically revoke your proxy unless you vote again at the meeting or specifically
request in writing that your proxy be revoked.
Q: What are my voting choices when voting for director nominees and what vote is needed to elect
directors?
A: In voting on the election of director nominees to serve until the 2019 Annual Meeting, stockholders
may vote in favor of each nominee, or may withhold votes as to each nominee. In addition, if any other candidates
are properly nominated at the meeting, stockholders of record who attend the meeting could vote for the other
candidates. Directors will be elected by the affirmative vote of a majority of the shares of common stock present in
person or represented by proxy and entitled to vote at the meeting, provided a quorum is present. Stockholders are
not entitled to cumulative voting rights with respect to the election of directors. Abstentions are considered present
and entitled to vote with respect to this proposal and will, therefore, be treated as votes “AGAINST” this proposal.
Broker non-votes with respect to this proposal will not be considered as present and entitled to vote on this proposal,
which will therefore reduce the number of affirmative votes needed to approve this proposal.
The Board recommends a vote “FOR” each of the director nominees identified in this Proxy
Statement.
Q: What are my voting choices when voting to ratify the appointment of our independent registered
public accounting firm, and what vote is needed to ratify the appointment?
A: In voting on the ratification of the appointment our independent registered public accounting firm,
stockholders may vote in favor of or against the appointment, or may abstain from voting on the appointment. The
affirmative vote of a majority of the shares of common stock present in person or represented by proxy and voting at
the meeting is required to approve this proposal. Abstentions will be counted as present for purposes of determining
a quorum and are considered shares present and entitled to vote and thus will have the effect of a vote “AGAINST”
this proposal. Brokers have discretionary authority to vote on this proposal; broker non-votes will have no effect on
this proposal.
The Board recommends a vote “FOR” ratification.
Proxy Statement | Page 3
Q: What are my voting choices when voting to approve the amendment and restatement of our 2014
Equity Incentive Plan?
A: In voting on the approval of the amendment and restatement of our 2014 Equity Incentive Plan,
stockholders may vote in favor of the approval or against the approval, or may abstain from voting. The affirmative
vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on such
proposal is required to approve this proposal. Abstentions are considered present and entitled to vote with respect to
this proposal and will, therefore, be treated as votes “AGAINST” this proposal. Broker non-votes with respect to
this proposal will not be considered as present and entitled to vote on this proposal, which will therefore reduce the
number of affirmative votes needed to approve this proposal.
The Board recommends a vote “FOR” approval of an amendment to our 2014 Equity Incentive Plan.
Q: Why is the Company seeking approval for a reverse stock split?
A: On September 5, 2017, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock
Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the our common stock for the previous
30 consecutive trading days, we no longer met the requirement to maintain a minimum bid price of $1 per share, as
set forth in Nasdaq Listing Rule 5450(a)(1). 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 unable to regain
compliance with the minimum bid price requirement within this 180-day period, and requested an additional 180
calendar day compliance period, or until September 4, 2018, to regain compliance and was granted such extension on
March 6, 2018.
To cure the listing deficiency and comply with Nasdaq’s requests, we are requesting stockholder approval of
a reverse stock split of our common stock, as further described in Proposal 4 of this Proxy statement.
Our Board of Directors has approved the reverse stock split as a means of increasing the share price of our
common stock. Our Board of Directors believes that it is in our best interests to maintain our listing on Nasdaq Capital
Market (“NCM”) to provide for broader trading of our common stock and to facilitate the use of our common stock
in financing and other transactions. We expect the reverse stock split to facilitate the continuation of our listing on the
NCM. We cannot assure you, however, that the reverse stock split will result in an increase in the per share price of
our common stock, or if it does, how long the increase would be sustained, if at all.
Q: What are the consequences of being delisted from The Nasdaq Stock Market?
A: If we do not effect the reverse stock split, it is likely that we will not be able to meet the $1 minimum
closing bid price continued listing requirement of NCM, and, consequently, our common stock would be delisted from
the NCM. If we are delisted from the NCM, we may be forced to seek to be traded on the OTC Bulletin Board or the
“pink sheets,” which would require our market makers to request that our common stock be so listed. There are a
number of negative consequences that could result from our delisting from the NCM, including, but not limited to, the
following:
• The liquidity and market price of our common stock may be negatively impacted and the spread
between the “bid” and “asked” prices quoted by market makers may be increased;
• Although the reverse stock split is designed to raise the stock price, there is no guarantee that the
share price will rise proportionately to the reverse stock split, so the end result could be a loss of
value;
• Our access to capital may be reduced, causing us to have less flexibility in responding to our capital
requirements;
Proxy Statement | Page 4
• Existing or prospective institutional investors may be less interested or prohibited from investing in
our common stock, which may cause the market price of our common stock to decline;
• We will no longer be deemed a “covered security” under Section 18 of the Securities Act of 1933,
as amended, and, as a result, we will lose our exemption from state securities regulations. This
means that granting stock options and other equity incentives to our employees will be more
difficult; and
•
If our stock is traded as a “penny stock,” transactions in our stock would be more difficult and
cumbersome.
Q: How will the reverse stock split work?
A: Instead of being asked to approve a fixed number of Company common stock that will be combined into
one share of common stock, the Company’s stockholders are being asked to approve a range of shares of Common
Stock – between 5 and 15 shares - which will be combined into one share of common stock. Approval of this range
will authorize our Board of Directors in its discretion to effect the reverse stock split using any exchange ratio within
the range and with an accompanying reduction in the authorized common stock, or not to effect a reverse stock split
at all.
Q: Why am I being asked to approve a range of reverse split ratios rather than a fixed ratio?
A: Our Board of Directors believes it is in the best interest of the Company and its stockholders to retain
the discretion to fix the exact reverse split exchange ratio immediately prior to consummation of the reverse split.
Our stock price has experienced significant volatility recently due to a combination of factors, including the effects
of recent financing transactions and restructurings, our Nasdaq delisting deficiency, the market’s perceptions of our
clinical, operational and financial results and prospects, as well as recent downturns in our industry and general
economic conditions as a whole. Further, we have a number of potential milestones and other events that may occur
or otherwise be announced that could positively or negatively affect our stock price and thus impact the reverse split
exchange ratio. Should our stockholders approve our reverse stock split proposal, our Board of Directors will take
into account our then-current stock price and appropriate related factors before determining a final reverse split ratio.
Q: If the stockholders approve the reverse stock split proposal, when would the Company implement
the reverse stock split?
A: We currently expect that the reverse stock split will be implemented as soon as practicable after the receipt
of the requisite stockholder approval so as to provide sufficient time for the closing bid price of our stock to exceed
$1 for at least ten (10) consecutive trading days prior to September 4, 2018. However, our Board of Directors will
have the discretion to delay or abandon the reverse stock split if believes it to be in the best interests of Cytori and our
stockholders to do so.
Q: What would be the principal effects of the reverse stock split?
A: The reverse stock split will have the following effects:
•
•
the market price of our common stock immediately upon effect of the reverse stock split will increase
substantially over the market price of our common stock immediately prior to the reverse stock split;
the number of shares of our common stock outstanding and reserved for issuance (including shares
issuable upon exercise of outstanding warrants and equity incentive awards) will be reduced to
between one-fifth (1/5th) and one-fifteenth (1/15th) of the number of shares currently outstanding
(except for the effect of eliminating fractional shares), depending upon the reverse split exchange
ratio determined by our Board of Directors; and
Proxy Statement | Page 5
•
the number of authorized shares of our common stock will be maintained at 75,000,000 shares unless
stockholders approve the proposal to increase the number of authorized shares of our common stock
to 100,000,000 (which amount is not otherwise affected by the reverse split).
Q: Are my pre-split stock certificates still good after the reverse stock split? Do I need to exchange
them for new stock certificates?
A: As of the effective date of the amendment to our certificate of incorporation, each certificate representing
pre-split shares of common stock will, until surrendered and exchanged, be deemed to represent only the relevant
number of post-split shares of common stock as a result and at the time of the reverse stock split. As soon as practicable
after the effective date of the reverse stock split, our transfer agent, Broadridge, will mail you a letter of transmittal.
Upon receipt of your properly completed and executed letter of transmittal and your stock certificate(s), you will be
issued the appropriate number of shares of the Company’s common stock either as stock certificates (including
legends, if appropriate) or electronically in book-entry form, as determined by the Company.
Q. What if I hold some or all of my shares electronically in book-entry form and I am a registered
stockholder? Do I need to take any action to receive post-split shares?
A. If you hold shares of our common stock in book-entry form (that is, you do not have stock certificates
evidencing your ownership of our common stock but instead received a statement reflecting the number of shares
registered in your account), you do not need to take any action to receive your post-split shares. If you are entitled to
post-split shares, a transaction statement will be sent automatically to your address of record indicating the number of
shares you hold. However, if you hold any shares in certificated form, you must still surrender and exchange your
stock certificates for those shares and provide a properly completed and executed letter of transmittal.
Q. What if I hold some or all of my shares in street name (that is, through a broker, bank or other third
party institution)? Do I need to take any action to receive post-split shares?
A. If you hold shares of our common stock in street name through a brokerage, bank or other third party
institution (that is, you do not have stock certificates evidencing your ownership of our common stock but instead
received a statement reflecting the number of shares registered in your account from your broker, bank or other third
party nominee), you do not need to take any action to receive your post-split shares. If you are entitled to post-split
shares, your next transaction statement from your broker, bank or other third party nominee will indicate the number
of shares you hold on a post-reverse split basis.
Q. What happens to any fractional shares resulting from the reverse stock split?
A. Stockholders will not receive fractional post-reverse stock split shares in connection with the reverse stock
split. Instead, stockholders of record who otherwise would be entitled to receive fractional shares will be entitled to
rounding up of the fractional share to the nearest whole number.
Q. What happens to equity awards under the Company’s equity incentive plans as a result of the
reverse stock split?
A. All shares of the Company’s common stock subject to outstanding equity awards under our 2004 Equity
Incentive Plan, 2011 Employee Stock Purchase Plan, 2014 Equity Incentive Plan and 2015 New Employee Incentive
Plan (our “Plans”) will be converted and combined upon the effective date of the reverse stock split into common
stock at the ratio determined by our Board of Directors (and subject to adjustment for fractional interests). In addition,
the exercise price of outstanding equity awards (including stock options and stock appreciation rights) will be
proportionately increased such that the approximate aggregate exercise prices for such equity awards will remain the
same following the reverse stock split. No fractional shares will be issued pursuant to the Plans following the reverse
stock split. Therefore, if the number of shares subject to the outstanding equity awards immediately before the reverse
stock split is not evenly divisible (in other words, it would result in a fractional interest following the reverse stock
Proxy Statement | Page 6
split), the number of shares of common stock issuable pursuant to such equity awards (including upon exercise of
stock options and stock appreciation rights) will be rounded up to the nearest whole number.
Q: What are my voting choices when voting on the approval of an amendment to our certificate of
incorporation to effect a reverse stock split?
A: In voting on the approval of an amendment to our certificate of incorporation to effect a reverse stock
split, stockholders may vote in favor of the approval or against the approval, or may abstain from voting. The
affirmative vote of a majority of the shares outstanding and entitled to vote on such proposal is required to approve
this proposal. Because a majority of shares outstanding and entitled to vote is required for approval, abstentions,
broker non-votes, and shares not present at the annual meeting and entitled to vote with respect to this proposal will
have the same effect as votes “AGAINST” this proposal.
The Board recommends a vote “FOR” approval of an amendment to our certificate of incorporation
to effect a reverse stock split.
Q: Why is the Company seeking approval for an increase of our authorized shares of common
stock?
A: On November 28, 2017, we issued warrants to purchase 18,000,000 shares of our common stock as part
of a rights offering of common stock and warrants to raise additional capital to fund our business. We committed to
seek approval of an increase in our authorized common stock as part of the rights offering. The warrants issued in the
rights offering will become exercisable after the number of authorized shares of our common stock is increased. In
addition to the warrants, an increase in the number of authorized shares of our common stock will also allow us the
flexibility to issue shares of common stock for other purposes, including in connection with the proposed increase in
the share reserve under our 2014 Equity Incentive Plan. Our Board of Directors may also choose to issue shares of
common stock in connection with future capital raising transactions, strategic partnerships and collaborations or
acquisitions, although we do not currently have any commitments or plans to do so.
Q: What are my voting choices when voting on the approval of an amendment to our certificate of
incorporation increase our authorized shares of common stock?
A: In voting on the approval of an amendment to our certificate of incorporation to increase our authorized
shares of common stock, stockholders may vote in favor of the approval or against the approval, or may abstain
from voting. The affirmative vote of a majority of the shares outstanding and entitled to vote on such proposal is
required to approve this proposal. Because a majority of shares outstanding and entitled to vote is required for
approval, abstentions, broker non-votes, and shares not present at the annual meeting and entitled to vote with
respect to this proposal will have the same effect as votes “AGAINST” this proposal.
The Board recommends a vote “FOR” approval of an amendment to our certificate of incorporation
to increase our authorized shares of common stock.
Q: What are my voting choices when voting to approve, on an advisory basis, the compensation of
the Company’s named executive officers?
A. In voting on the approval, on an advisory basis, of the compensation of our named executive officers,
stockholders may vote in favor of the approval or against the approval, or may abstain from voting on the approval
of such compensation. The affirmative vote of a majority of the shares present in person or represented by proxy at
the meeting and entitled to vote on such proposal is required to approve this proposal. Abstentions are considered
present and entitled to vote with respect to this proposal and will, therefore, be treated as votes “AGAINST” this
proposal. Broker non-votes with respect to this proposal will not be considered as present and entitled to vote on
this proposal, which will therefore reduce the number of affirmative votes needed to approve this proposal.
Proxy Statement | Page 7
The Board recommends a vote “FOR” the approval, on an advisory basis, of the compensation of our
named executive officers. This vote is advisory, and therefore not binding on the Board. Although the vote is
non-binding, the Board will review the voting results, seek to determine the cause or causes of any significant
negative voting, and take them into consideration when making future decisions regarding executive compensation
programs.
Q: How will a proxy get voted?
A: If you properly complete and return a proxy card or vote by Internet or by telephone, the designated
proxy holders will vote your shares as you have directed. If you sign a proxy card but do not make specific choices
or if you vote by Internet or telephone but do not make specific choices, the designated proxy holders will vote your
shares as recommended by the Board as follows:
•
•
•
•
•
•
“FOR” the election of each listed nominee for director;
“FOR” ratification of BDO USA, LLP as our independent registered public accounting firm for the
2018 fiscal year;
“FOR” approval of the amendment and restatement of the Cytori Therapeutics, Inc. 2014 Equity
Incentive Plan;
“FOR” approval of an amendment to our certificate of incorporation to effect a reverse stock split;
“FOR” approval of an amendment to our certificate of incorporation to increase our authorized shares
of common stock, and
“FOR” approval, on an advisory basis, of the compensation of our named executive officers.
Q: How are abstentions and broker non-votes counted?
A: Abstentions and broker non-votes will be counted as present for purposes of determining a quorum.
An abstention occurs when a stockholder withholds his or her vote by checking the “abstain” box on the proxy card
or (if present and voting at the meeting) a ballot. A broker non-vote occurs when a broker, bank, or other
stockholder of record, in nominee name or otherwise, exercising fiduciary powers submits a proxy for the Annual
Meeting, but does not vote on a particular proposal because that holder does not have discretionary voting power
with respect to that proposal and has not received voting instructions from the beneficial owner. Under the rules
that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote
those shares on routine matters, but not on non-routine matters. Routine matters include the ratification of the
appointment of our independent registered public accounting firm. Non-routine matters include the election of
directors and the other proposals in this proxy statement.
Q: Who pays for the solicitation of proxies?
A: We pay the entire cost of the solicitation of proxies. This includes preparation, assembly, printing, and
mailing of the Notice, this Proxy Statement and any other information we send to stockholders. We may
supplement our efforts to solicit your proxy in the following ways:
• We may contact you using the telephone or electronic communication;
• Our directors, officers or other regular employees may contact you personally; or
• We may hire agents for the sole purpose of contacting you regarding your proxy.
If we hire soliciting agents, we will pay them a reasonable fee for their services. We will not pay directors,
officers or other regular employees any additional compensation for their efforts to supplement our proxy
solicitation. We anticipate banks, brokerage houses and other custodians, nominees and fiduciaries will forward
Proxy Statement | Page 8
soliciting material to the beneficial owners of shares of common stock entitled to vote at the Annual Meeting and
that we will reimburse those persons for their out-of-pocket expenses incurred in performing such services.
Q: What constitutes a quorum?
A: For business to be conducted at the Annual Meeting, a quorum must be present. A quorum exists when
at least 33 ⅓ % of the holders of shares of our common stock issued, outstanding and entitled to vote are represented
at the meeting. Shares of common stock represented in person or by proxy (including broker non-votes and shares
that abstain or do not vote with respect to one or more of the matters to be voted upon) will be counted for the
purpose of determining whether a quorum exists.
Q: How many votes may I cast? How many shares are eligible to be voted?
A: You may cast one vote for every share of our common stock that you owned on the record date. As of
the record date, March 21, 2018, there were 61,613,798 shares of common stock outstanding, each of which is
entitled to one vote.
Q: How will voting on any “other business” be conducted?
A: Although we do not know of any business to be considered at the Annual Meeting other than the
proposals described in this Proxy Statement, if any additional business is presented at the Annual Meeting, your
signed proxy card gives authority to the designated proxy holders to vote on such matters according to their best
judgment.
Q: Where can I find the voting results of the Annual Meeting?
A: We will publish the final voting results in a current report on Form 8-K, which we expect to file with
the SEC within four business days of the Annual Meeting. If the final voting results are unavailable in time to file a
current report on Form 8-K with the SEC within four business days after the Annual Meeting, we intend to file a
Form 8-K to disclose the preliminary results and, within four business days after the final results are known, we will
file an additional current report on Form 8-K with the SEC to disclose the final voting results.
Proxy Statement | Page 9
PROPOSAL #1
ELECTION OF DIRECTORS
The Board currently consists of five (5) persons. The Board, upon recommendation of our Governance and
Nominating Committee, has nominated the following persons listed below for election as directors. The names of
the five (5) nominees for election as directors are set forth below (the ages shown are as of April 6, 2018). All of the
nominees are currently serving as a member of our Board. All directors are elected annually and serve one-year
terms until the next Annual Meeting, or until their respective successors are duly elected. All of the nominees listed
below are expected to serve as directors if they are elected. If any nominee should decline or be unable to accept
such nomination or to serve as a director, an event which our Board does not now expect, our Board reserves the
right to nominate another person or to vote to reduce the size of our Board. If another person is nominated, the
proxy holders intend to vote the shares to which the proxy relates for the election of the persons nominated by our
Board.
For more information on nomination of directors, see “Director Nominations” below in the section entitled
“Corporate Governance.”
The Board recommends a vote “FOR” the nominees named below:
Director Nominees
Name
Richard J. Hawkins.............................................
Marc H. Hedrick, MD ........................................
Gregg A. Lapointe ..............................................
Gary A. Lyons ....................................................
Ronald A. Martell ...............................................
President and Chief Executive Officer and Director
Position
Age
69 Chairman of the Board
55
59 Director
67 Director
56 Director
Richard J. Hawkins has served on our Board since December 2007. In 1982, Mr. Hawkins founded
Pharmaco, a clinical research organization, or CRO, that merged with the predecessor of PPD-Pharmaco in 1991 and
is one of the largest CROs in the world today. In 1992, Mr. Hawkins co-founded Sensus Drug Development
Corporation, or SDDC, a privately-held company focused on the treatment of drugs to treat endocrine disorders,
which developed and received regulatory approval for SOMAVERT®, a growth hormone antagonist approved for
the treatment of acromegaly, which is now marketed by Pfizer, Inc., and he served as Chairman of SDDC until
2000. In 1994, Mr. Hawkins co-founded Corning Biopro, a contract protein manufacturing firm, where he served on
the Board until Corning BioPro’s sale to Akzo-Nobel, N.V., a publicly-held producer of paints, coatings and
specialty chemicals, in 2000. In September 2003 Mr. Hawkins founded LabNow, Inc., a privately held company
that develops lab-on-a-chip sensor technology, where he served as the Chairman and CEO until October 2009. Mr.
Hawkins has served on the Board of SciClone Pharmaceuticals, Inc., a publicly-held specialty pharmaceutical
company, from October 2004 through December 2017. In February 2011, Mr. Hawkins became CEO, and is
currently CEO, of Lumos Pharma, Inc., a privately-held pharmaceutical company. He served on the Presidential
Advisory Committee for the Center for Nano and Molecular Science and Technology at the University of Texas in
Austin, and was inducted into the Hall of Honor for the College of Natural Sciences at the University of Texas. Mr.
Hawkins is a member of the National Ernst & Young Entrepreneur of the Year Hall of Fame. Mr. Hawkins
graduated cum laude with a B.S. in Biology from Ohio University, where he later received Ohio University
Konneker Medal, the highest award given to a faculty member or former student for entrepreneurial excellence. Mr.
Hawkins’s qualifications to sit on our Board include his executive experience working with life sciences companies,
his extensive experience in pharmaceutical research and development, his knowledge, understanding and experience
in the regulatory development and approval process and his service on other public company boards and
committees. On January 25, 2018, Mr. Hawkins was appointed to serve as Chairman of our Board of Directors and
succeed Mr. David Rickey.
Marc H. Hedrick, M.D. was appointed as Chief Executive Officer of the Company in April 2014. He was
appointed as President of the Company in May 2004, and joined us as Chief Scientific Officer and Medical Director
in October 2002. Dr. Hedrick has also served as a member of our Board since October 2002. In December 2000,
Proxy Statement | Page 10
Dr. Hedrick co-founded and served as President and Chief Executive Officer and Director of StemSource, Inc., a
privately-held company specializing in stem cell research and development, which was acquired by us in 2002. He
is a plastic surgeon and is a former Associate Professor of Surgery and Pediatrics at the University of California, Los
Angeles, or UCLA. From 1998 until 2005, he directed the Laboratory of Regenerative Bioengineering and Repair
for the Department of Surgery at UCLA. Dr. Hedrick earned his M.D. degree from University of Texas
Southwestern Medical School, Dallas and an M.B.A. from UCLA Anderson School of Management. Dr. Hedrick’s
qualifications to sit on our Board include his experience as a general, vascular and plastic surgeon; his academic
appointments and achievements in the life sciences; his executive and managerial experience in stem cell research
and scientific product development; and his foundational knowledge and experience of and contributions to our
technology and operations. In addition, Dr. Hedrick has extensive global experience and familiarity with the cell
therapy and regenerative medical industry.
Gregg A. Lapointe has served on our Board since March 2017. Mr. Lapointe is currently the Chief
Executive Officer of Cerium Pharmaceuticals, Inc., a privately-held specialty pharmaceutical company. From April
2008 to March 2012, Mr. Lapointe served as Chief Executive Officer of Sigma-Tau Pharmaceuticals, Inc., a
pharmaceutical company focused on rare disorders and the U.S. wholly-owned subsidiary of Sigma-Tau Finanziaria
S.pA. He served as Chief Operating Officer of Sigma-Tau Pharmaceuticals, Inc. from November 2003 to March
2008. Mr. Lapointe also serves on the boards of Soligenix, Inc., a publicly-held biopharmaceutical company (since
March 2009), Rigel Pharmaceuticals, Inc., a publicly-held biopharmaceutical company (since November 2017) and
S1Biopharma, Inc. a privately held biopharmaceutical company. Mr. Lapointe previously served as a director of
SciClone Pharmaceuticals, Inc., from March 2009 through October 2016, Raptor Pharmaceuticals Corp. from
December 2014 until its acquisition by Horizon Pharma plc in October 2016. Mr. Lapointe is a Certified Public
Accountant in the United States. He holds a Bachelor of Commerce degree from Concordia University of Montreal,
a Graduate Diploma in Public Accountancy from McGill University of Montreal and an M.B.A. from Duke
University. Mr. Lapointe’s qualifications to sit on our Board include his substantial experience in finance,
management and specialty drug commercialization, including operational experience as the CEO of a
pharmaceutical development and sales organization.
Gary A. Lyons has served on our Board since October 2013. Mr. Lyons has served on the Board of
Neurocrine Biosciences, Inc., or Neurocrine, since 1993 and served as the President and Chief Executive Officer of
Neurocrine from 1993 through January 2008. Prior to joining Neurocrine, Mr. Lyons held a number of senior
management positions at Genentech, Inc., including Vice President of Business Development and Vice President of
Sales. Mr. Lyons has served on the Boards of Rigel Pharmaceuticals, Inc., a publicly-held biotechnology company,
since October 2005 (and as Chairman since November 2014); Vical Incorporated, a publicly-held biopharmaceutical
company, since 1997; Retrophin, Inc., a publicly-held biopharmaceutical company, since 2014 (and as Chairman
since May 2016) and Novus Therapeutics, Inc., a publicly-held biopharmaceutical company, since Mary 2017. Mr.
Lyons was previously a director of PDL BioPharma, Inc., Poniard Pharmaceuticals, Inc., Neurogesx, KaloBios
Pharmaceuticals, Inc. and Facet Biotech Corporation. Mr. Lyons holds a B.S. in Marine Biology from the University
of New Hampshire and an M.B.A. from Northwestern University’s J.L. Kellogg Graduate School of Management.
Mr. Lyons’ qualifications to sit on our Board include his executive experience working with life sciences
companies, his extensive experience in pharmaceutical business development, his knowledge, understanding and
experience in the regulatory development and approval process and his service on other public company boards and
committees.
Ronald A. Martell has served on our Board since December 2016. Mr. Martell has more than 25 years’
experience building and managing unique businesses in the biotech industry. Mr. Martell is currently a founder of
Achieve Life Sciences, ORCA BioSystems, Inc. and Cetya Therapeutics, Inc. Most recently he served as Chief
Executive Officer of Sevion Therapeutics and Executive Chairman of KaloBios Pharmaceuticals, Inc. Prior to
Sevion, Mr. Martell was President and CEO of NeurogesX and sold the company’s assets to Acorda Therapeutics.
Prior to NeurogesX he was Chief Executive Officer of Poniard Pharmaceuticals. Before joining Poniard, he served
in the capacity of the Office of the CEO and as Senior Vice President of Commercial Operations at ImClone
Systems. Mr. Martell built ImClone Systems' Commercial Operations and field sales force to market and
commercialize Erbitux® with partners Bristol-Myers Squibb and Merck KGaA. Prior to joining ImClone Systems,
Mr. Martell worked for 10 years at Genentech, Inc., or Genentech, in a variety of positions, the last of which was
Group Manager, Oncology Products. At Genentech, he was responsible for the launch of Herceptin® for metastatic
HER-2 positive breast cancer and Rituxan® for non-Hodgkin's lymphoma. Mr. Martell began his career at Roche
Proxy Statement | Page 11
Pharmaceuticals. Mr. Martell’s qualifications to sit on our Board include his executive experience working for life
sciences companies, his extensive experience in pharmaceutical business development, his knowledge,
understanding of and experience in developing and commercializing pharmaceutical products, and his service on
other public company boards and committees.
Required Vote
The nominees will be elected by an affirmative vote of a majority of the shares present in person or by
proxy at the Annual Meeting and entitled to vote on such proposal, assuming a quorum is present. Abstentions are
considered present and entitled to vote with respect to this proposal and will, therefore, be treated as votes against
this proposal. Broker non-votes will not be considered as present and entitled to vote on this proposal, which will
therefore reduce the number of affirmative votes needed to approve this proposal. Stockholders do not have
cumulative voting rights in the election of directors.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE NOMINEES TO THE BOARD
NAMED ABOVE.
Proxy Statement | Page 12
PROPOSAL #2
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Our Audit Committee has selected BDO USA, LLP, or BDO, as our independent registered public
accounting firm for the fiscal year ending December 31, 2018, and has further directed that we submit the selection
of the independent registered public accounting firm for ratification by our stockholders at the Annual Meeting.
BDO has served as our independent registered public accounting firm since July 2016. The selection of the
independent registered public accounting firm is not required to be submitted for stockholder approval. However, if
the stockholders do not ratify this selection, the Audit Committee will reconsider its selection of BDO. Even if the
selection is ratified, our Audit Committee may direct the appointment of a different independent accounting firm at
any time during the year if the Audit Committee determines that the change would be in the Company’s best
interests.
Representatives of BDO will be present at the Annual Meeting and will have an opportunity to make a
statement if they desire to do so and will be available to respond to appropriate questions from stockholders.
Additional information concerning the Audit Committee and BDO can be found in the “Audit Matters”
section of this Proxy Statement.
Required Vote
The proposal to ratify the appointment of BDO requires the affirmative vote of a majority of the shares
present in person or represented by proxy at the Annual Meeting and entitled to vote on such proposal. Abstentions
are considered present and entitled to vote with respect to this proposal and will, therefore, be treated as votes
against this proposal. Because brokers have discretionary authority to vote on this proposal, we do not expect any
broker non-votes in connection with this proposal.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE
SELECTION OF BDO USA, LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM FOR FISCAL YEAR 2018.
Proxy Statement | Page 13
PROPOSAL #3
APPROVAL OF AMENDMENT AND RESTATEMENT OF THE
CYTORI THERAPEUTICS, INC.
2014 EQUITY INCENTIVE PLAN
Our stockholders are being asked to approve the amendment and restatement of the Cytori Therapeutics,
Inc. 2014 Equity Incentive Plan. The Cytori Therapeutics, Inc. 2014 Equity Incentive Plan, as amended, as currently
in effect, is referred to herein as the “2014 Plan.” On March 19, 2018, our Board approved the amendment and
restatement of the 2014 Plan, subject to stockholder approval. The amended and restated 2014 Plan is referred to
herein as the “Restated Plan.” The Restated Plan will become effective upon stockholder approval.
The share numbers and share prices set forth in this Proposal #3 are “pre-split” and do not take into account
the reverse stock split the stockholders are also being asked to approve (with a proposed range of reverse split ratios
between 1-for 5 and 1-for-15, with the exact ratio to be determined by our Board of Directors). Assuming approval
of the reverse stock split and the Restated Plan are obtained, the share numbers under the Restated Plan, and all
outstanding awards under the 2014 Plan and our other equity plans, will be proportionately adjusted in accordance
with the terms of the outstanding awards and plans. All of the figures in this proposal will be adjusted if such
proposal is approved.
Overview of Proposed Amendments and Key Features
Increase in Share Reserve; ISO Limit. Our Board believes that approval of Restated Plan is in the best
interests of our Company and stockholders because the availability of an adequate number of shares reserved for
issuance under our equity compensation plan is an important factor in attracting, motivating and retaining qualified
individuals essential to our success. As of March 21, 2018, a total of 2,900,133 shares of our common stock were
reserved under the 2014 Plan, the aggregate number of shares of common stock subject to awards under the 2014
Plan was 822,859 and 2,077,274 shares of common stock remained available under the 2014 Plan for future issuance
(which numbers do not give effect to the proposed reverse stock split).
Pursuant to the Restated Plan, an additional 7,500,000 shares will be reserved for issuance under the
Restated Plan over the existing share reserve under the 2014 Plan (which numbers do not give effect to the proposed
reverse stock split and will be adjusted in accordance with the reverse stock split if it is approved).
Pursuant to the Restated Plan, the maximum number of shares of common stock that may be issued or
transferred pursuant to incentive stock options (“ISOs”), as defined under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the “Code”), under the Restated Plan shall be increased from 2,900,133 to 10,400,133
shares (which numbers do not give effect to the proposed reverse stock split and will be adjusted in accordance with
the reverse stock split if it is approved).
All of the foregoing numbers shall be subject to adjustment pursuant to the terms of the Restated Plan in the
event of certain corporate events as described below under “Adjustments for Capital Structure Changes.”
Extension of Term. The term of the Restated Plan will also be extended for a new ten-year term so that the
Restated Plan will terminate on March 18, 2028. The 2014 Plan is currently set to terminate in March 2027.
Removal of Section 162(m) Provisions. Section 162(m) of the Internal Revenue Code, or the Code, prior
to the Tax Cuts and Jobs Act of 2017 (the “TCJA”), allowed performance based compensation that met certain
requirements to be tax deductible regardless of amount. This qualified performance based compensation exception
was repealed as part of the TCJA. We have removed certain provisions from the Restated Plan which were
otherwise required for awards to qualify as performance-based compensation under the Section 162(m) exception
prior to its repeal, including, without limitation, the limits on the number of awards that may be granted to an
individual in any fiscal year and the maximum amount that could be paid under cash awards during any fiscal year.
Awards granted prior to November 2, 2017 may be grandfathered under the old law subject to certain limited
transition relief.
Proxy Statement | Page 14
The Restated Plan does not amend the 2014 Plan in any material respect other than to reflect the changes
described above.
Key Features Designed to Protect Stockholders’ Interests
The design of the Restated Plan reflects our commitment to strong corporate governance and the desire to
preserve stockholder value as demonstrated by the following features of the plan:
•
Independent administrator. The Compensation Committee of the Board of Directors, which is
comprised solely of non-employee directors, administers the Restated Plan.
• No evergreen feature. The maximum number of shares available for issuance under the Restated Plan
is fixed and cannot be increased without stockholder approval.
• No Single-Trigger Vesting of Awards. The Restated Plan does not have single-trigger accelerated
vesting provisions for changes in control.
• Repricing and reloading prohibited. Stockholder approval is required for any repricing, replacement,
or buyout of underwater awards. In addition, no new awards are granted automatically upon the
exercise or settlement of any outstanding award.
• Limitations on Dividend Payments on Awards. Dividends and dividend equivalents may not be paid
on awards subject to vesting conditions unless and until such conditions are met.
• No discount awards; maximum term specified. Stock options and stock appreciation rights must have
an exercise price or base price no less than the fair market value on the date the award is granted and a
term no longer than ten years’ duration.
• Award design flexibility. Different kinds of awards may be granted under the Restated Plan, giving us
the flexibility to design our equity incentives to compliment the other elements of compensation and to
support the attainment of our strategic goals.
•
Share counting. The number of shares remaining for grant under the Restated Plan is reduced by the
gross number of shares subject to options and stock appreciation rights settled on a net basis, and
shares withheld for taxes in connection with options or stock appreciation rights or tendered in
payment of an option’s exercise price are not recycled.
• Non-employee director limits. The Restated Plan contains a limit on the compensation that may be
paid to any non-employee member of our Board in any calendar year.
• No tax gross-ups. The Restated Plan does not provide for tax gross-ups.
• Fixed term. The Restated Plan has a fixed term of ten years.
Shares Available Under the Plan and Historical Use of Equity
We have operated, and continue to operate in a challenging marketplace in which our success depends to a
great extent on our ability to attract and retain employees, directors, and other service providers of the highest
caliber. One of the tools our Board regards as essential in addressing these challenges is a competitive equity
incentive program. Our equity incentive program is designed to provide a vehicle under which a variety of stock-
based and other awards can be granted to service providers (including, employees, consultants, and directors) of our
company (and its subsidiaries) which align the interests of award recipients with those of our stockholders, reinforce
key goals and objectives that help drive stockholder value, and attract, motivate and retain experienced and highly
qualified individuals who will contribute to our success.
Unless the Restated Plan is authorized and approved by our stockholders, the number of shares available
for issuance under the 2014 Plan will be too limited to effectively achieve its purpose as an incentive and retention
Proxy Statement | Page 15
tool for employees, directors and consultants that benefits all of our stockholders. The proposed increase in the
share reserve under the Restated Plan over the existing share reserve under the 2014 Plan will enable us to continue
our policy of equity ownership by employees, directors and consultants as an incentive to contribute to our success.
Without sufficient equity awards to effectively attract, motivate and retain employees, we may be forced to consider
cash replacement alternatives to provide a market-competitive total compensation package necessary to attract,
retain and motivate the individual talent critical to the future success of our company. These cash replacement
alternatives would then reduce the cash available for other purposes. Our equity incentive program is broad-based.
As of March 21, 2018, 17 of our approximately 37 employees had received grants of equity awards, all four of our
non-employee directors had received grants of equity awards and none of our consultants had received grants of
equity awards. We have historically granted equity awards to consultants only under specific, limited circumstances.
The following table sets forth the number of awards outstanding under the 2004 Stock Option and Stock
Purchase Plan (the “2004 Plan”), the 2014 Plan and the 2015 New Employee Incentive Plan (the “Inducement
Plan”), as well as the number of shares which remain available for grant under the 2014 Plan and Inducement Plan
and the number of shares we are asking stockholders to authorize for future issuance under the Restated Plan, along
with the potential equity dilution represented by the outstanding shares and shares available for future awards as a
percentage of the common shares outstanding (determined on a fully diluted basis), in each case as of March 21,
2018. The numbers in the following table do not give effect to the proposed reverse stock split and will be adjusted
in accordance with the reverse stock split if it is approved.
Number of Shares
As a % of Shares
Outstanding(1)
Dollar Value(2)
2004 Plan
Options outstanding ...............................................................
Weighted average exercise price of outstanding options ....... $
Weighted average remaining term of outstanding options ....
Restricted stock units outstanding .........................................
2014 Plan
Options outstanding ...............................................................
Weighted average exercise price of outstanding options ....... $
Weighted average remaining term of outstanding options ....
Restricted stock units outstanding .........................................
Shares Remaining Available for Issuance .............................
Inducement Plan
Options outstanding ...............................................................
Weighted average exercise price of outstanding options ....... $
Weighted average remaining term of outstanding options ....
Restricted stock units outstanding .........................................
Shares Remaining Available for Issuance .............................
Restated Plan
Proposed aggregate increase to share reserve ........................
Shares remaining available for grant under Restated Plan
assuming approval of the Restated Plan ................................
* Less than 0.01%
175,014
57.00
4.88 years
515
822,859
2.55
8.57
—
2,077,274
28,500
0.69
9.6 years
—
288,166
0.28%
$
56,004
* $
164.80
1.34%
$
263,315
—
3.37%
0.05%
$
$
—
664,728
9,120
—
0.47%
$
$
—
92,213
7,500,000
12.17%
$ 2,400,000
9,577,274
15.54%
$ 3,064,728
(1) Based on 61,613,798 shares of our common stock outstanding as of March 21, 2018, determined on a fully diluted basis, meaning the total
shares outstanding includes shares issuable under authorized and outstanding awards under our equity compensation plans and remaining
shares available for issuance under our equity compensation plans (but excluding the 10,000 shares reserved for future issuance under our
2011 Employee Stock Purchase Plan as of such date).
(2) Based on the closing price of our common stock on March 21, 2018 of $0.32 per share.
Proxy Statement | Page 16
At the 2017 Annual Meeting, our stockholders approved a 2,000,000 share increase (the “2017 Increase”)
to the share reserve under the 2014 Plan. The amount of this increase was carefully reviewed and analyzed with
reference to a number of factors and within the context of our historical grant history and projected grants to existing
and new employees. Though at the time of the 2017 Annual Meeting we believed that the 2017 Increase would be
sufficient to last through mid-2019, the negative outcome related to the STAR trial results had a materially greater
negative impact on our stock price than anticipated. Thus, subsequent award grants to directors, executive officers
and employees in the first quarter of 2018 consumed a larger portion of our available share reserve under the 2014
Plan than anticipated at the time of the 2017 Increase. However, the Compensation Committee deemed these grants
necessary and appropriate based on relevant benchmarks for director and officer equity compensation, and as
necessary and advisable to compensate our directors for their services and retain and incentivize executive
management.
We have not yet completed our 2018 annual equity award grant-making process pursuant to which we will
grant annual equity awards to our directors, officers and employees. We currently anticipate granting a mix of time-
based and performance-based equity awards as part of this year's annual equity award program. We expect the
annual grants will occur in April 2018 and that, following the granting of such awards, the share reserve under the
2014 Plan will be largely depleted and few, if any, shares will remain available for issuance thereunder. As a result,
if the Restated Plan is not approved, we will not have any shares available for issuance under our 2014 Plan.
Among the factors the Board considered in determining the appropriate size of the increase to the share
reserve for the Restated Plan was the Company’s recent stock price performance, its prior grant history and the
range of potential uses of equity compensation for the next few years. Other factors considered by the Board
include, but are not limited to, the ratio of the number of shares issued to employees relative to the total number of
outstanding shares, the use of both time and performance-based vesting requirements, and a comparison of the
Company’s rate of burn of employee equity to industry/market cap peer companies. The Board also considered the
availability of shares available for issuance to new employees under our Inducement Plan. The Inducement Plan
currently has 316,666 shares reserved for issuance over the term of the plan, 288,166 of which were available for
issuance as of March 21, 2018 (which numbers do not give effect to the proposed reverse stock split and will be
adjusted in accordance with the reverse stock split if it is approved). With the Inducement Plan available for use
with respect to new employee grants, the Board decreased the proposed requested increase to the existing share
reserve under the 2014 Plan to reflect the number of equity awards that we anticipate will be eligible to be granted
under the Inducement Plan. However, as the Inducement Plan can be used only for new employees’ grants in
connection with commencement of their employment with us, its impact on our aggregate anticipated director,
officer and employee grants is relatively modest. Based on our analysis of the foregoing considerations and other
relevant considerations, we believe that, after taking into account the proposed share increase, the Restated Plan’s
share reserve will be sufficient for us to make grants of equity incentive awards under the Restated Plan for
approximately two years. Of course, however, changes in business practices, industry standards, our compensation
strategy, or equity market performance could alter this projection. In addition, we are growing rapidly and as a
result, our employee population is also growing. Accordingly, although the requested authorized share reserve is
designed to accommodate equity compensation needs under a variety of scenarios for approximately two years,
under some scenarios the reserve could prove to be insufficient for this period, in which case the stockholders would
have the opportunity to either approve or disapprove any addition to the requested share reserve. We cannot predict
our future equity grant practices, the future price of our shares or future hiring activity with any degree of certainty
at this time, and the share reserve under the Restated Plan could last for a shorter or longer time.
The following table sets forth the number of shares we have granted (under our 2004 Plan, our 2014 Plan
and our Inducement Plan) during our last three fiscal years and our annual and three-year average burn rate
(calculated as (1) the gross number of shares subject to equity awards granted during the year divided by (2) the
weighted average common shares outstanding for such year). The numbers in the following table do not give effect
to the proposed reverse stock split and will be adjusted in accordance with the reverse stock split if it is approved.
Stock Options Granted ................................................
Restricted Stock and Restricted Stock Units ...............
Weighted average common shares outstanding ...........
Burn Rate .....................................................................
710,600
32,389,831
2.19%
347,407
—
17,290,933
2.01%
144,514
36,101
9,386,488
1.92%
Fiscal 2017
Fiscal 2016
Fiscal 2015
Three-Year
Average
400,840
12,034
19,689,084
2.10%
Proxy Statement | Page 17
In fiscal year 2017, the end of year overhang rate was approximately 5.51%. If the Restated Plan is
approved, we expect our overhang at the end of 2018 will be approximately 15.8%. Overhang is calculated by
dividing (1) the sum of the number of shares subject to equity awards outstanding at the end of the fiscal year plus
shares remaining available for issuance for future awards under our equity compensation plans at the end of the
fiscal year, by (2) the number of shares outstanding at the end of the fiscal year (which shares outstanding for
purposes of this clause (2) will be deemed to include the total number of shares determined pursuant to clause (1)
above).
In light of the factors described above, and the fact that the ability to continue to grant equity compensation
is vital to our ability to continue to attract and retain employees in the extremely competitive labor markets in which
we compete, our Board has determined that the size of the share reserve under the Restated Plan is reasonable and
appropriate at this time. Our Board will not create a subcommittee to evaluate the risk and benefits for issuing shares
under the Restated Plan.
Stockholder Approval Requirement for the Proposal
Stockholder approval of the Restated Plan is necessary in order for us to (1) meet the stockholder approval
requirements of the Nasdaq Stock Market, (2) grant ISOs thereunder.
If the Restated Plan is not approved by our stockholders, the Restated Plan will not become effective, the
existing 2014 Plan will continue in full force and effect, and we may continue to grant awards under the 2014 Plan,
subject to its terms, conditions and limitations, using the limited remaining shares available for issuance thereunder.
Summary of the Restated Plan
What follows is a summary of the material terms of the Restated Plan. This summary is qualified in its
entirety by the specific language of the Restated Plan, which is attached as Appendix A to this Proxy Statement.
General. The purpose of the Restated Plan is to advance the interests of the Company and its stockholders
by providing an incentive program that will enable the Company to attract and retain employees, consultants and
directors and to provide them with an equity interest in the growth and profitability of the Company. These
incentives are provided through the grant of stock options, SARs, restricted stock, restricted stock units,
performance shares, performance units, other stock-based awards, cash-based awards and deferred compensation
awards.
Authorized Shares. Subject to certain equitable adjustments for capital structure changes, as described in
more detail below, the maximum aggregate number of shares authorized for issuance under the Restated Plan is
10,400,133 (which number does not give effect to the proposed reverse stock split and will be adjusted in
accordance with the reverse stock split if it is approved).
Share Counting. Each share subject to an award under the Restated Plan will reduce the number of shares
remaining available for grant under the Restated Plan by one share.
If any award granted under the Restated Plan expires or otherwise terminates for any reason without having
been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by the
Company for not more than the participant’s purchase price, any such shares reacquired or subject to a terminated
award will again become available for issuance under the Restated Plan. Shares will not be treated as having been
issued under the Restated Plan and will, therefore, not reduce the number of shares available for issuance to the
extent an award is settled in cash. Shares that are withheld or reacquired by the Company in satisfaction of a tax
withholding obligation for an option or stock appreciation right, or that are tendered in payment of the exercise price
of an option will not be made available for new awards under the Restated Plan. Upon the exercise of a SAR or net-
exercise of an option, the number of shares available under the Restated Plan will be reduced by the gross number of
shares for which the award is exercised. Shares reacquired by the Company on the open market or otherwise using
cash proceeds from the exercise of options shall not be added to the shares of Stock authorized for grant under the
Restated Plan.
Proxy Statement | Page 18
Adjustments for Capital Structure Changes. Appropriate and proportionate adjustments will be made to
the number of shares authorized under the Restated Plan, to the numerical limits on certain types of awards
described below, and to outstanding awards in the event of any change in our common stock effected without receipt
of consideration by us, whether through merger, consolidation, reorganization, reincorporation, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares,
exchange of shares or similar change in our capital structure, or if we make a distribution to our stockholders in a
form other than common stock (excluding normal cash dividends) that has a material effect on the fair market value
of our common stock. In such circumstances, the Compensation Committee also has the discretion under the
Restated Plan to adjust other terms of outstanding awards as it deems appropriate.
Other Award Limits. To comply with applicable tax rules, the Restated Plan also limits to 10,400,133 the
number of shares that may be issued upon the exercise of ISOs granted under the Restated Plan (which number does
not give effect to the proposed reverse stock split and will be adjusted in accordance with the reverse stock split if it
is approved).
Under the Restated Plan, the total aggregate value of cash compensation, or other compensation, and the
value (determined as of the grant date in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718, or any successor thereto) of awards granted to a non-employee director as
compensation for services as a non-employee director during any calendar year under the Restated Plan may not
exceed $500,000 (increased to $700,000 in the fiscal year of a non-employee director’s initial service as a non-
employee director). The Board may make exceptions to this limit for individual non-employee directors in
extraordinary circumstances, as the Board may determine in its discretion, provided that the non-employee director
receiving such additional compensation may not participate in the decision to award such compensation or in other
contemporaneous compensation decisions involving non-employee directors.
All of the foregoing numbers shall be subject to adjustment pursuant to the terms of the Restated Plan in the
event of certain corporate events as described below under “Adjustments for Capital Structure Changes.”
Administration. The Restated Plan generally will be administered by the Compensation Committee of the
Board, although the Board retains the right to appoint another of its committees to administer the Restated Plan or to
administer the Restated Plan directly. In the case of awards intended to qualify for the performance-based
compensation exemption under Section 162(m) of the Code, administration of the Restated Plan must be by a
committee comprised solely of two or more “outside directors” within the meaning of Section 162(m) of the Code.
(For purposes of this summary, the term “Committee” will refer to any such duly appointed committee or the
Board.) Subject to the provisions of the Restated Plan, the Committee determines in its discretion the persons to
whom and the times at which awards are granted, the types and sizes of awards, and all of their terms and
conditions. The Committee may, subject to certain limitations on the exercise of its discretion required by Section
162(m) of the Code or otherwise provided by the Restated Plan, amend, cancel or renew any award, waive any
restrictions or conditions applicable to any award, and accelerate, continue, extend or defer the vesting of any award.
The Restated Plan provides, subject to certain limitations, for indemnification by the Company of any director,
officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection with any legal
action arising from such person’s action or failure to act in administering the Restated Plan. All awards granted
under the Restated Plan will be evidenced by a written or digitally signed agreement between the Company and the
participant specifying the terms and conditions of the award, consistent with the requirements of the Restated Plan.
The Committee will interpret the Restated Plan and awards granted thereunder, and all determinations of the
Committee generally will be final and binding on all persons having an interest in the Restated Plan or any award.
Prohibition of Option and SAR Repricing. The Restated Plan expressly provides that, without the
approval of a majority of the votes cast in person or by proxy at a meeting of our stockholders, the Committee may
not provide for any of the following with respect to underwater options or stock appreciation rights: (1) either the
cancellation of such outstanding options or stock appreciation rights in exchange for the grant of new options or
stock appreciation rights at a lower exercise price or the amendment of outstanding options or stock appreciation
rights to reduce the exercise price, (2) the issuance of new full value awards in exchange for the cancellation of such
outstanding options or stock appreciation rights, or (3) the cancellation of such outstanding options or stock
appreciation rights in exchange for payments in cash.
Proxy Statement | Page 19
Eligibility. Awards may be granted to employees, directors and consultants of the Company or any present
or future parent or subsidiary corporation or other affiliated entity of the Company. Incentive stock options may be
granted only to employees who, as of the time of grant, are employees of the Company or any parent or subsidiary
corporation of the Company. As of March 21, 2018, we had approximately 37 employees, including three executive
officers, four non-employee directors, and approximately 10 consultants who were eligible to participate in the
Restated Plan. We historically have granted equity awards to consultants only under specific, limited circumstances.
Stock Options. The Committee may grant nonstatutory stock options, incentive stock options within the
meaning of Section 422 of the Code, or any combination of these. The exercise price of each option may not be less
than the fair market value of a share of our common stock on the date of grant. However, any incentive stock option
granted to a person who at the time of grant owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any parent or subsidiary corporation of the Company (a “10%
Stockholder”) must have an exercise price equal to at least 110% of the fair market value of a share of common
stock on the date of grant. The closing price of our common stock on the Nasdaq Stock Market on March 21, 2018
was $0.32 per share.
The Restated Plan provides that the option exercise price may be paid in cash, by check, or cash equivalent;
by means of a broker-assisted cashless exercise; by means of a net-exercise procedure; by such other lawful
consideration as approved by the Committee; or by any combination of these. Nevertheless, the Committee may
restrict the forms of payment permitted in connection with any option grant. No option may be exercised unless the
participant has made adequate provision for federal, state, local and foreign taxes, if any, relating to the exercise of
the option, including, if permitted or required by the Company, through the participant’s surrender of a portion of
the option shares to the Company.
Options will become vested and exercisable at such times or upon such events and subject to such terms,
conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option
granted under the Restated Plan is ten years, provided that an incentive stock option granted to a 10% Stockholder
must have a term not exceeding five years. Unless otherwise permitted by the Committee, an option generally will
remain exercisable for three months following the participant’s termination of service, provided that if service
terminates as a result of the participant’s death or disability, the option generally will remain exercisable for two
years, but in any event the option must be exercised no later than its expiration date, and provided further that an
option will terminate immediately upon a participant’s termination for cause (as defined by the Restated Plan).
Options are nontransferable by the participant other than by will or by the laws of descent and distribution,
and are exercisable during the participant’s lifetime only by the participant. However, a nonstatutory stock option
may be assigned or transferred to certain family members or trusts for their benefit to the extent permitted by the
Committee.
Stock Appreciation Rights. The Committee may grant stock appreciation rights (a “SAR”). A SAR is
exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or
restrictions as specified by the Committee. The exercise price of each SAR may not be less than the fair market
value of a share of our common stock on the date of grant.
Upon the exercise of any SAR, the participant is entitled to receive an amount equal to the excess of the fair
market value of the underlying shares of common stock as to which the right is exercised over the aggregate exercise
price for such shares. At the Committee’s discretion, payment of this amount upon the exercise of a SAR may be
made in cash or shares of common stock. The maximum term of any SAR granted under the Restated Plan is ten
years.
SARs are generally nontransferable by the participant other than by will or by the laws of descent and
distribution, and are generally exercisable during the participant’s lifetime only by the participant. If permitted by
the Committee, a SAR may be assigned or transferred to certain family members or trusts for their benefit to the
extent permitted by the Committee. Other terms of SARs are generally similar to the terms of comparable stock
options.
Restricted Stock Awards. The Committee may grant restricted stock awards under the Restated Plan either
in the form of a restricted stock purchase right, giving a participant an immediate right to purchase common stock,
Proxy Statement | Page 20
or in the form of a restricted stock bonus, in which stock is issued in consideration for services to the Company
rendered by the participant. The Committee determines the purchase price payable under restricted stock purchase
awards, which may be less than the then current fair market value of our common stock. Restricted stock awards
may be subject to vesting conditions based on such service or performance criteria as the Committee specifies,
including the attainment of one or more performance goals similar to those described below in connection with
performance awards. Shares acquired pursuant to a restricted stock award may not be transferred by the participant
until vested. Unless otherwise provided by the Committee, a participant will forfeit any shares of restricted stock as
to which the vesting restrictions have not lapsed prior to the participant’s termination of service. Unless otherwise
determined by the Committee, participants holding restricted stock will have the right to vote the shares and to
receive any dividends paid, except that dividends or other distributions will be subject to the same restrictions,
including vesting conditions, as the original award.
Restricted Stock Units. The Committee may grant restricted stock units under the Restated Plan, which
represent rights to receive shares of our common stock at a future date determined in accordance with the
participant’s award agreement. No monetary payment is required for receipt of restricted stock units or the shares
issued in settlement of the award, the consideration for which is furnished in the form of the participant’s services to
the Company. The Committee may grant restricted stock unit awards subject to the attainment of one or more
performance goals similar to those described below in connection with performance awards, or may make the
awards subject to vesting conditions similar to those applicable to restricted stock awards. Unless otherwise
provided by the Committee, a participant will forfeit any restricted stock units which have not vested prior to the
participant’s termination of service. Participants have no voting rights or rights to receive cash dividends with
respect to restricted stock unit awards until shares of common stock are issued in settlement of such awards.
However, the Committee may grant restricted stock units that entitle their holders to dividend equivalent rights,
which are rights to receive additional restricted stock units for a number of shares whose value is equal to any cash
dividends the Company pays. Any such dividend equivalent rights will be subject to the same vesting conditions as
the underlying award.
Cash-Based Awards and Other Stock-Based Awards. The Committee may grant cash-based awards or
other stock-based awards in such amounts and subject to such terms and conditions as the Committee determines.
Cash-based awards will specify a monetary payment or range of payments, while other stock-based awards will
specify a number of shares or units based on shares or other equity-related awards. Such awards may be subject to
vesting conditions based on continued performance of service or subject to the attainment of one or more
performance goals similar to those described above in connection with performance awards. Settlement of awards
may be in cash or shares of common stock, as determined by the Committee. A participant will have no voting
rights with respect to any such award unless and until shares are issued pursuant to the award. The committee may
grant dividend equivalent rights with respect to other stock-based awards. Any such dividend equivalent rights will
be subject to the same vesting conditions as the underlying award. The effect on such awards of the participant’s
termination of service will be determined by the Committee and set forth in the participant’s award agreement.
Performance Awards. The Committee may grant performance awards subject to such conditions and the
attainment of such performance goals over such periods as the Committee determines in writing and sets forth in a
written agreement between the Company and the participant. These awards may be designated as performance
shares or performance units, which consist of unfunded bookkeeping entries generally having initial values equal to
the fair market value determined on the grant date of a share of common stock in the case of performance shares and
a monetary value established by the Committee at the time of grant in the case of performance units. Performance
awards will specify a predetermined amount of performance shares or performance units that may be earned by the
participant to the extent that one or more performance goals are attained within a predetermined performance period.
To the extent earned, performance awards may be settled in cash, shares of common stock (including shares of
restricted stock that are subject to additional vesting) or any combination thereof. In its discretion, the Committee
may provide for a participant awarded performance shares of to receive dividend equivalent rights with respect to
cash dividends paid on the Company’s common stock. Any such dividend equivalent rights will be subject to the
same vesting conditions as the underlying award. The Committee may provide for performance award payments in
lump sums or installments.
The vesting or payment of performance awards may be based upon the attainment of performance goals set
by our compensation committee. Performance goals may be based on the attainment of specified target levels with
Proxy Statement | Page 21
respect to one or more measures of business or financial performance of the Company and each subsidiary
corporation consolidated with the Company for financial reporting purposes, or such division or business unit of the
Company as may be selected by the Committee. The Committee, in its discretion, may base performance goals
applicable to awards on one or more performance measures, including, without limitation, the following: revenue;
sales; expenses; operating income; gross margin; operating margin; earnings before any one or more of: stock-based
compensation expense, interest, taxes, depreciation and amortization; pre-tax profit; net operating income; net
income; economic value added; free cash flow; operating cash flow; balance of cash, cash equivalents and
marketable securities; stock price; earnings per share; return on stockholder equity; return on capital; return on
assets; return on investment; total stockholder return, employee satisfaction; employee retention; market share;
customer satisfaction; product development; research and development expense; completion of an identified special
project; and completion of a joint venture or other corporate transaction. The target levels with respect to these
performance measures may be expressed on an absolute basis or relative to an index, budget or other standard
specified by the Committee. The degree of attainment of performance measures will be calculated according to
criteria established by the Committee.
Change in Control. Unless otherwise defined in a participant’s award or other agreement with the
Company, the Restated Plan provides that a “Change in Control” occurs upon (a) a person or entity (with certain
exceptions described in the Restated Plan) becoming the direct or indirect beneficial owner of more than 50% of the
Company’s voting stock; (b) stockholder approval of a liquidation or dissolution of the Company; or (c) the
occurrence of any of the following events upon which the stockholders of the Company immediately before the
event do not retain immediately after the event direct or indirect beneficial ownership of more than 50% of the
voting securities of the Company, its successor or the entity to which the assets of the company were transferred: (i)
a sale or exchange by the stockholders in a single transaction or series of related transactions of more than 50% of
the Company’s voting stock; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale,
exchange or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to
one or more subsidiaries of the Company).
If a Change in Control occurs, the surviving, continuing, successor or purchasing entity or its parent may,
without the consent of any participant, either assume or continue outstanding awards or substitute substantially
equivalent awards for its stock. If so determined by the Committee, stock-based awards will be deemed assumed if,
for each share subject to the award prior to the Change in Control, its holder is given the right to receive the same
amount of consideration that a stockholder would receive as a result of the Change in Control. In general, any
awards which are not assumed, substituted for or otherwise continued in connection with a Change in Control or
exercised or settled prior to the Change in Control will terminate effective as of the time of the Change in Control.
Subject to the restrictions of Section 409A of the Code, the Committee may provide for the acceleration of vesting
or settlement of any or all outstanding awards upon such terms and to such extent as it determines. The Restated
Plan also authorizes the Committee, in its discretion and without the consent of any participant, to cancel each or
any award denominated in shares of stock upon a Change in Control in exchange for a payment to the participant
with respect each vested share (and each unvested share if so determined by the Committee) subject to the cancelled
award of an amount equal to the excess of the consideration to be paid per share of common stock in the Change in
Control transaction over the exercise price per share, if any, under the award.
Amendment, Suspension or Termination. The Restated Plan will continue in effect until its termination
by the Committee, provided that no awards may be granted under the Restated Plan following the tenth anniversary
of the date the Restated Plan was adopted by the Board. The Committee may amend, suspend or terminate the
Restated Plan at any time, provided that no amendment may be made without stockholder approval that would
increase the maximum aggregate number of shares of stock authorized for issuance under the Restated Plan, change
the class of persons eligible to receive incentive stock options or require stockholder approval under any applicable
law. No amendment, suspension or termination of the Restated Plan may affect any outstanding award unless
expressly provided by the Committee, and, in any event, may not have a materially adverse effect on an outstanding
award without the consent of the participant unless necessary to comply with any applicable law, regulation or rule,
including, but not limited to, Section 409A of the Code, or unless expressly provided in the terms and conditions
governing the award.
Proxy Statement | Page 22
Summary of U.S. Federal Income Tax Consequences
The following summary is intended only as a general guide to the U.S. federal income tax consequences of
participation in the Restated Plan and does not attempt to describe all possible federal or other tax consequences of
such participation or tax consequences based on particular circumstances.
Incentive Stock Options. A participant recognizes no taxable income for regular income tax purposes as a
result of the grant or exercise of an ISO qualifying under Section 422 of the Code. Participants who neither dispose
of their shares within two years following the date the option was granted nor within one year following the exercise
of the option will normally recognize a capital gain or loss upon the sale of the shares equal to the difference, if any,
between the sale price and the purchase price of the shares. If a participant satisfies such holding periods upon a
sale of the shares, we will not be entitled to any deduction for federal income tax purposes. If a participant disposes
of shares within two years after the date of grant or within one year after the date of exercise (a “disqualifying
disposition”), the difference between the fair market value of the shares on the option exercise date and the exercise
price (not to exceed the gain realized on the sale if the disposition is a transaction with respect to which a loss, if
sustained, would be recognized) will be taxed as ordinary income at the time of disposition. Any gain in excess of
that amount will be a capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a
capital loss. Any ordinary income recognized by the participant upon the disqualifying disposition of the shares
generally should be deductible by us for federal income tax purposes, except to the extent such deduction is limited
by applicable provisions of the Code.
In general, the difference between the option exercise price and the fair market value of the shares on the
date of exercise of an ISO is treated as an adjustment in computing the participant’s alternative minimum taxable
income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the
year. Special rules may apply with respect to certain subsequent sales of the shares in a disqualifying disposition,
certain basis adjustments for purposes of computing the alternative minimum taxable income on a subsequent sale of
the shares and certain tax credits which may arise with respect to participants subject to the alternative minimum tax.
Nonstatutory Stock Options. Options not designated or qualifying as ISOs are nonstatutory stock options
having no special tax status. A participant generally recognizes no taxable income upon receipt of such an option.
Upon exercising a nonstatutory stock option, the participant normally recognizes ordinary income equal to the
difference between the exercise price paid and the fair market value of the shares on the date when the option is
exercised. If the participant is an employee, such ordinary income generally is subject to withholding of income and
employment taxes. Upon the sale of stock acquired by the exercise of a nonstatutory stock option, any gain or loss,
based on the difference between the sale price and the fair market value of the shares on the exercise date, will be
taxed as capital gain or loss. We generally should be entitled to a tax deduction equal to the amount of ordinary
income recognized by the participant as a result of the exercise of a nonstatutory stock option, except to the extent
such deduction is limited by applicable provisions of the Code.
Stock Appreciation Rights. A Participant recognizes no taxable income upon the receipt of a stock
appreciation right. Upon the exercise of a stock appreciation right, the participant generally will recognize ordinary
income in an amount equal to the excess of the fair market value of the underlying shares of common stock on the
exercise date over the exercise price. If the participant is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. We generally should be entitled to a deduction equal to the amount
of ordinary income recognized by the participant in connection with the exercise of the stock appreciation right,
except to the extent such deduction is limited by applicable provisions of the Code.
Restricted Stock. A participant acquiring restricted stock generally will recognize ordinary income equal to
the excess of the fair market value of the shares on the “determination date” over the price paid, if any, for such
shares. The “determination date” is the date on which the participant acquires the shares unless the shares are
subject to a substantial risk of forfeiture and are not transferable, in which case the determination date is the earlier
of (i) the date on which the shares become transferable or (ii) the date on which the shares are no longer subject to a
substantial risk of forfeiture (e.g., when they become vested). If the determination date follows the date on which
the participant acquires the shares, the participant may elect, pursuant to Section 83(b) of the Code, to designate the
date of acquisition as the determination date by filing an election with the Internal Revenue Service no later than 30
days after the date on which the shares are acquired. If the participant is an employee, such ordinary income
generally is subject to withholding of income and employment taxes. Upon the sale of shares acquired pursuant to a
Proxy Statement | Page 23
restricted stock award, any gain or loss, based on the difference between the sale price and the fair market value of
the shares on the determination date, will be taxed as capital gain or loss. We generally should be entitled to a
deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to
the extent such deduction is limited by applicable provisions of the Code.
Restricted Stock Unit, Performance, Cash-Based and Other Stock-Based Awards. A participant generally
will recognize no income upon the receipt of a restricted stock unit, performance share, performance unit, cash-
based or other stock-based award. Upon the settlement of such awards, participants normally will recognize
ordinary income in the year of settlement in an amount equal to the cash received and the fair market value of any
substantially vested shares of stock received. If the participant is an employee, such ordinary income generally is
subject to withholding of income and employment taxes. If the participant receives shares of restricted stock, the
participant generally will be taxed in the same manner as described above under “Restricted Stock.” Upon the sale
of any shares received, any gain or loss, based on the difference between the sale price and the fair market value of
the shares on the determination date (as defined above under “Restricted Stock”), will be taxed as capital gain or
loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the
participant on the determination date, except to the extent such deduction is limited by applicable provisions of the
Code.
Section 162(m) Limitation. In general, under Section 162(m), income tax deductions of publicly-held
corporations may be limited to the extent total compensation (including base salary, annual bonus, stock option
exercises and non-qualified benefits paid) for certain executive officers exceeds $1 million (less the amount of any
“excess parachute payments” as defined in Section 280G of the Code) in any one year. Prior to the TCJA, covered
employees generally consisted of our Chief Executive Officer and each of the next three highest compensated
officers serving at the end of the taxable year other than our Chief Financial Officer, and compensation that qualified
as “performance-based” under Section 162(m) was exempt from this $1 million deduction limitation. As part of the
TCJA, the ability to rely on this exemption was, with certain limited exceptions, eliminated; in addition, the
definition of covered employees was expanded to generally include all named executive officers. Certain awards
under the 2013 Plan granted prior to November 2, 2017 may be grandfathered from the changes made by the TCJA
under certain limited transition relief, however, for grants after that date and any grants which are not grandfathered,
we will no longer be able to take a deduction for any compensation in excess of $1 million that is paid to a covered
employee. There is no guarantee that we will be able to take a deduction for any compensation in excess of $1
million that is paid to a covered employee under the 2014 Plan or the Restated 2014 Plan.
Plan Benefits
Plan Benefits. The following table shows the number of shares issued pursuant to awards or subject to
awards through March 21, 2018 under the 2014 Plan since its inception to the following individuals and groups (the
numbers in the following table do not give effect to the proposed reverse stock split and will be adjusted in
accordance with the reverse stock split if it is approved):
Name and Position
Marc H. Hedrick, M.D.
President and Chief Executive Officer ................................................
Tiago Girão
VP of Finance and Chief Financial Officer .........................................
John D. Harris
Vice President and General Manager of Cell Therapy ........................
All executive officers as a group (3 persons) .....................................
All directors who are not employees, as a group (4 persons) (1) ..........
All employees as a group (excluding executive officers) (34 persons)
Number of Shares
Underlying Options
Granted (#)
Number of Shares
Underlying RSUs
Granted (#)(2)
167,963
72,422
76,755
317,140
160,508
345,211
8,000
4,000
—
12,000
—
—
(1) Our non-employee directors are eligible to receive automatic equity awards under our director compensation policy, as described under the
heading “Executive Compensation – Director Compensation” below.
(2) Reflects the target number of RSUs granted. The maximum number of RSUs was equal to 200% of target.
Proxy Statement | Page 24
The granting of all other future awards under the Restated Plan is subject to the discretion of the Board or
the Committee, therefore, the benefits or amounts that any participant or group of participants may receive in the
future under the Restated Plan are not currently determinable.
Vote Required
Approval of this proposal would require the affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote at the Annual Meeting. Abstentions are considered present and entitled to
vote with respect to this proposal and will, therefore, be treated as votes against this proposal. Broker non-votes will
have no effect on the outcome of this proposal.
Board Recommendation
The Board believes that the amendment and restatement of the 2014 Plan is in the best interests of Cytori
and its stockholders for the reasons stated above.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF AMENDMENT
AND RESTATEMENT OF THE CYTORI THERAPEUTICS, INC. 2014 EQUITY INCENTIVE PLAN.
Proxy Statement | Page 25
PROPOSALS #4 AND #5
APPROVAL OF AMENDMENTS TO AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE STOCK SPLIT AND AN INCREASE IN AUTHORIZED
SHARES OF COMMON STOCK
Background
Our Board of Directors has approved proposed amendments to our Amended and Restated Certificate of
Incorporation, as amended (“Certificate of Incorporation”), that:
•
Proposal 4
would effect a share consolidation, or reverse stock split (reverse split) of our outstanding common stock and common
stock reserved for issuance, at an exchange ratio of not less than 1-for-5 (1:5) and not greater than 1-for-15 (1:15), as
shall be determined in the sole discretion of the Board of Directors on the terms described in this Proxy Statement;
and
Proposal 5
would increase the number of authorized shares of our common stock from 75,000,000 to 100,000,000 (which amount
•
is not otherwise affected by the reverse split).
The number of authorized shares of our preferred stock, of which 5,000,000 million is currently authorized,
will not be affected by either of the reverse split or the increase in authorized shares of our common stock.
The effectiveness of either one of these amendments to our Certificate of Incorporation, and the abandonment
of the reverse stock split, if approved, will be determined by our Board of Directors following the Annual Meeting.
Our Board of Directors has recommended that each of these proposed amendments to our Certificate of Incorporation
be presented to our stockholders for approval. Each of Proposal 4 and Proposal 5 is not conditioned on the approval
of any other proposal; stockholders may approve one proposal, both proposals or neither proposal and the Board of
Directors would enact only the proposal or proposals approved by the stockholders, subject to the discretion of Board
of Directors with regard to Proposal 4 approving the reverse stock split, as discussed below.
If our stockholders approve Proposal 4 amending our Certificate of Incorporation to enact the reverse stock
split, our Board of Directors will have the sole discretion to elect, as it determines to be in the best interests of the
Company and its stockholders, whether to effect a reverse stock split and, if so, the number of shares of common stock
within the stockholder-approved range (between five and 15 shares) which will be combined into one share of common
stock. Our Board of Directors believes that stockholder approval of this range of reverse split ratios (as opposed to
approval of a single reverse split ratio) provides the Board with maximum flexibility to achieve the purposes of a
reverse stock split and, therefore, is in the best interests of the Company and its stockholders.
In Proposal 5, the increase in the authorized common stock is designed to address the conditions of our
warrants issued on November 28, 2017 as part of our rights offering. The warrants issued in the rights offering become
exercisable after the number of authorized shares of our common stock is increased. The amount of the increase
would allow for the warrants to become exercisable in the event that stockholders approve the increase in the number
of authorized shares of our common stock and do not approve the reverse stock split.
If, following stockholder approval of Proposal 4 regarding the reverse stock split, the Board determines that
it is the best interests of the Company and its stockholders to effect the reverse stock split, the Board would determine
the reverse stock split ratio (within the approved range) and authorize the filing of the applicable amendment to our
Certificate of Incorporation with the Secretary of State of the State of Delaware reflecting the reverse stock split.
Additionally, following stockholder approval of Proposal 5 regarding an increase in the number of shares of common
stock, the Board would authorize the filing of the applicable amendment to our Certificate of Incorporation with the
Secretary of State of the State of Delaware reflecting the increase in the number of authorized shares of our common
stock. The text of the form of amendment to the Certificate of Incorporation is set forth in Appendix B to this Proxy
Statement. However, such text is subject to amendment to include such changes as may be required by the office of
Proxy Statement | Page 26
the Secretary of State of the State of Delaware or as the Board deems necessary and advisable to effect the reverse
stock split and/or increase the number of authorized shares of the Company’s common stock. The total number of
authorized shares of our common stock is left blank in Appendix B as it will reflect the result of the stockholder vote
on Proposal 5. If Proposal 5 is approved, the authorized shares of common stock will be increased to 100,000,000; if
Proposal 5 is not approved the authorized shares of common stock will be maintained at 75,000,000.
If, following stockholder approval of Proposal 4, the Board elects to effect the proposed reverse stock split,
then except for adjustments that may result from the treatment of fractional shares as described below, each
stockholder will hold the same percentage of outstanding common stock immediately following the reverse stock split
as such stockholder held immediately prior to the reverse stock split. The par value of the common stock would remain
unchanged at $0.001 per share.
Our Board of Directors does not intend for the reverse stock split transaction to be the first step in a series of
plans or proposals of a “going private transaction” within the meaning of Rule 13e-3 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”).
Proposal #4 – Approval of Amendment to Amended and Restated Certificate of Incorporation to Effectuate a
Reverse Stock Split
Reasons For The Reverse Stock Split
Nasdaq Listing Deficiency
Background: Our Board of Directors’ primary objective in asking for authority to effect a reverse split is to
increase the per-share trading price of our common stock on the Nasdaq Stock Market. On September 5, 2017, we
received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that,
based upon the closing bid price of our common stock for the previous 30 consecutive trading days, we no longer met
the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). 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 unable to regain compliance with the minimum bid price
requirement within this 180-day period, and requested an additional 180 calendar day compliance period, or until
September 4, 2018, to regain compliance and was granted such extension on March 6, 2018.
In the event we do not cure our listing deficiency by September 4, 2018, Nasdaq will provide us notice that
our common stock will be subject to delisting.
Potential Adverse Effects of Delisting: Our Board of Directors has considered the potential harm to us of a
delisting from NCM and believes that delisting from the NCM would materially and adversely affect us, including as
follows:
• We would be forced to seek to be traded on a less recognized or accepted exchange or market such
as the OTC Bulletin Board or the “pink sheets;”
•
•
•
the trading price of our common stock would be adversely affected, including an increased spread
between the “bid” and “asked” prices quoted by market makers;
the liquidity and marketability of shares of our common stock would be adversely affected, thereby
reducing the ability of holders of our common stock to purchase or sell our shares as quickly and as
inexpensively as they have done historically (if our stock is traded as a “penny stock,” transactions
in our stock would be more difficult and cumbersome);
our ability to access capital on terms favorable to us (or at all) would be adversely affected, as
companies trading on the OTC Bulletin Board or “pink sheets” are viewed as less attractive
investments with materially higher associated risks, such that existing or prospective institutional
Proxy Statement | Page 27
investors may be less interested in, or prohibited from, investing in our common stock (which may
also cause the market price of our common stock to decline);
•
our relationships with vendors and customers may be adversely affected, as they may perceive our
business less favorably, which would have a detrimental effect on our relationships with these
parties.
Further, if we are required to move our stock listing to the OTC Bulletin Board, or “pink sheets,” we will no
longer be deemed a “covered security” under Section 18 of the Securities Act of 1933, as amended, and, as a result,
we will lose our exemption from state securities regulations. Among other things, this means that granting stock
options and other equity incentives to our employees will be more difficult.
Potential Increased Investor Interest
Although the proposed reverse stock split will not have the effect of increasing our equity market capitalization,
we believe that implementing the reverse stock split will provide benefits to us and our existing stockholders in a
number of ways:
•
•
Stock Price Volatility: We have been advised by certain institutional investors, as well as by our
financial advisors, that a higher stock price may increase the acceptability of our common stock to
a number of long-term investors who may not find our shares attractive at their current prices due
to the trading volatility often associated with stocks below certain prices.
Stock Price Requirements: We understand that many brokerage houses and institutional investors
have internal policies and practices that either prohibit them from investing in low-priced stocks or
tend to discourage individual brokers from recommending low-priced stocks to their customers or
by restricting or limiting the ability to purchase such stocks on margin.
• Transaction Costs: Investors also may be dissuaded from purchasing stocks below certain prices
because the brokerage commissions, as a percentage of the total transaction value, tend to be higher
for such low-priced stocks.
Board Discretion to Implement Reverse Stock Split
If the reverse stock split is approved by our stockholders at the Annual Meeting, the actual reverse stock split
will be effected, if at all, only upon a subsequent determination by the Board of Directors that the reverse stock split
(with the actual reverse split exchange ratio to be determined by the Board within the stockholder-approved range, as
described above) is in the best interests of the Company and its stockholders at the time. Such determination will be
based upon many factors, including existing and expected marketability and liquidity of the common stock, prevailing
market conditions and the likely effect of the reverse split on the market price of our common stock. Notwithstanding
approval of the proposed reverse stock split by the stockholders, the Board of Directors may, in its sole discretion,
abandon the proposed amendment to our Certificate of Incorporation and determine prior to the effectiveness of any
filing with the Delaware Secretary of State not to effect the reverse stock split. If the Board of Directors fails to
implement the reverse stock split after stockholder approval, further stockholder approval would thereafter be required
prior to implement any reverse stock split.
Effects of the Reverse Stock Split
Maintenance of Ownership Percentage:
If the reverse stock split is approved and effected, each stockholder will own a reduced number of shares of
common stock. This would affect all of our stockholders uniformly and would not affect any stockholder’s percentage
ownership in the Company, except to the extent that the reverse stock split results in a stockholder owning a fractional
share, as described below. The number of stockholders of record would not be affected by the reverse stock split.
Proxy Statement | Page 28
Voting Rights: Proportionate voting rights and other rights of the holders of our common stock would not be
affected by the reverse stock split, other than as a result of rounding up each fractional share amount to the next whole
share amount, as described below. For example, a holder of 1% of the voting power of the outstanding shares of our
common stock immediately prior to the reverse stock split would continue to hold 1% of the voting power of the
outstanding shares of common stock after the reverse stock split, regardless of the exchange ratio chosen by the Board
of Directors.
Equity Incentive Plans:
All shares of our common stock subject to outstanding equity awards (including stock options, performance
shares and stock appreciation rights) under our Amended and Restated 2004 Equity Incentive Plan (“2004 Plan”),
2011 Employee Stock Purchase Plan, 2014 Equity Incentive Plan (“2014 Plan”), the proposed amended and restated
2014 Plan (as described in Proposal #3) (the “Restated 2014 Plan”), and our 2015 New Employee Incentive Plan
(“Inducement Plan” and collectively with the other incentive plans, the “Plans”) and the number of shares of common
stock which have been authorized for issuance under our Plans but as to which no equity awards have yet been granted
or which have been returned respective Plan pools upon cancellation or expiration of such equity awards (including
the requested increase to the share reserve under the Restated 2014 Plan pursuant to Proposal #3, if approved by
stockholders), will be converted on the effective date of the reverse stock split in proportion to the reverse split ratio
of the reverse stock split (subject to adjustment for fractional interests). In addition, the exercise price of outstanding
stock awards will be proportionately increased such that approximately the same aggregate price will be required to
be paid after the reverse stock split as immediately preceding the reverse stock split. No fractional shares with respect
to the shares subject to the outstanding equity awards (including stock options, performance shares and stock
appreciation rights) under our Plans will be issued following the reverse stock split. Therefore, if the number of shares
subject to any outstanding equity awards under our Plans immediately before the reverse stock split is not evenly
divisible (in other words, it would result in a fractional interest following the reverse stock split), the number of shares
of common stock subject to such equity award (including upon exercise of stock options and stock appreciation rights)
will be rounded up to the nearest whole number. This will result in an increase to the proportion of shares reserved for
issuance under our Plans to the number of authorized shares of common stock following the reverse stock split.
The number of shares of our common stock subject to awards under our 2004 Plan, 2014 Plan and Inducement
Plan as of March 21, 2018 are 175,529; 822,859; and 28,500, respectively. For more information about the shares
reserved for issuance under the Plans and subject to outstanding awards thereunder, please see Proposal #3 above.
Summary Table re: Effects of Stock Split
The following table contains approximate information relating to our common stock based upon certain
reverse stock split ratios within the range that has been submitted for stockholder approval, and based on share
information as of February 28, 2018.
Proxy Statement | Page 29
Pre-Reverse Stock
Split
Post-Split (1:5)
Post-Split (1:15)
Total Authorized Shares
75,000,000
100,000,000(1)
100,000,000(1)
Shares Outstanding
61,607,797
12,321,560
3,615,000
723,000
4,107,187
241,000
Shares Reserved for
Issuance Upon
Conversion of Series B
Convertible Preferred
Shares
Shares Reserved for
Issuance Upon Exercise
of Warrants(2)
Allocated Option Pool -
Shares Reserved for
Issuance Upon
Exercise/Release of
Employee Incentive Plan
Awards(3)
Unallocated Option Pool
- Authorized but not
Issued or Outstanding,
or Reserved for
Issuance, Under our
Employee Incentive
Plans(3)
Fully Diluted Shares
(Issued and Reserved for
Issuance)
Shares Authorized but
not Issued or Reserved
(and % of Total
Authorized)(2)
21,659,508
4,331,902
1,443,968
1,026,888
205,378
68,460
2,364,670
472,934
157,645
90,273,863
18,054,774
6,018,260
0 (0%)
81,945,226 (81.95%)
93,981,740 (93.98%)
(1) These authorized share amounts are for purposes of example only, and assumes stockholder
approval of Proposal 5 to increase the number of authorized shares of our common stock to
100,000,000.
(2) Includes 18,000,000 shares (on a pre-split basis) issuable upon exercise of warrants issued as
part of our rights offering on November 28, 2017.
(3) Includes shares issuable upon exercise of awards under our 2004 Plan, 2014 Plan and
Inducement Plan. Does not include the requested increase of 7,500,000 shares to the share
reserve under the Restated Plan pursuant to Proposal #3, which increase is subject to
stockholder approval.
No fractional shares of our common stock will be issued in connection with the proposed reverse stock
split. Holders of common stock who would otherwise receive a fractional share of common stock pursuant to the
reverse stock split will receive have their fractional shares rounded up to the nearest whole share amount, as
explained more fully below.
Proxy Statement | Page 30
Our common stock is currently registered under Section 12(b) of the Exchange Act, and the Company is
subject to the periodic reporting and other requirements of the Exchange Act. The reverse stock split would not
affect the registration of our common stock under the Exchange Act. After the reverse stock split, our common stock
would continue to be reported on the Nasdaq Capital Market tier under the symbol “CYTX”.
Certain Risks and Potential Disadvantages Associated with the Reverse Stock Split
If the reverse stock split is implemented, some stockholders may consequently own less than one hundred
shares of our common stock. A purchase or sale of less than one hundred shares (an “odd lot” transaction) may result
in incrementally higher trading costs through certain brokers, particularly “full service” brokers. Therefore, those
stockholders who own less than one hundred shares following the reverse stock split may be required to pay modestly
higher transaction costs should they then determine to sell their shares in the Company.
The effect of the reverse stock split upon the market prices for our common stock cannot be accurately
predicted. However, surveys of similar stock split combinations for companies in like circumstances in our industry
over the past twelve months have reported decreases in stock price performance in the near-term trading period after
effectiveness of the reverse stock split. In particular, there is no assurance that the price per share of our common stock
after the reverse stock split will increase in a manner directly proportionate to our reverse split ratio so as to cause our
market capitalization (and the value of our stockholders’ respective common stock holdings) to remain the same.
Furthermore, there can be no assurance that the market price of our common stock immediately after the proposed
reverse stock split will be maintained for any period of time. Even if an increased share price can be maintained, the
reverse stock split may not achieve the other desired results which have been outlined above. Moreover, because some
investors may view a reverse stock split negatively, there can be no assurance that approval of the reverse stock split
will not adversely impact the market price of our common stock.
In addition, although we believe the reverse stock split may enhance the desirability of our common stock to
certain potential investors, we cannot assure you that, if the reverse stock split is implemented, our common stock will
be more attractive to institutional and other long term investors or that the liquidity of our common stock will increase
since there would be a reduced number of shares outstanding after the reverse stock split.
Effective Date
If the proposed reverse stock split is approved at our Annual Meeting and the Board of Directors elects to
proceed with a reverse stock split within the stockholder-approved range, the reverse stock split would become
effective as of the filing (the “Effective Time”) of the applicable certificate of amendment to our Certificate of
Incorporation with the office of the Secretary of State of the State of Delaware. Except as explained below with respect
to fractional shares, at the Effective Time, all shares of our common stock issued and outstanding immediately prior
thereto will be, automatically and without any action on the part of the stockholders, combined and converted into
new shares of common stock in accordance with the reverse stock split ratio determined by the Board of Directors
(within the approved range).
If the Board elects to effect a reverse split, before we file the amendment to our Certificate of Incorporation
with the Secretary of State of the State of Delaware, we intend to issue a press release announcing the terms, including
the reverse stock split ratio, as well as the effective date of the reverse split.
Exchange of Stock Certificates
As soon as practicable after the effective date of the reverse stock split, stockholders will be notified that the
reverse stock split has been effected. Broadridge, our transfer agent, will act as exchange agent for purposes of
implementing the exchange of stock certificates. Holders of pre-split shares will be asked to surrender to the exchange
agent certificates representing pre-split shares in exchange for certificates representing post-split shares in accordance
with the procedures to be set forth in a letter of transmittal that will be delivered to our stockholders. No new
certificates will be issued to a stockholder until the stockholder has surrendered to the exchange agent his, her or its
outstanding certificate(s) together with the properly completed and executed letter of transmittal. STOCKHOLDERS
SHOULD NOT DESTROY ANY STOCK CERTIFICATES AND SHOULD NOT SUBMIT THEIR STOCK
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM FROM OUR EXCHANGE AGENT.
Proxy Statement | Page 31
STOCKHOLDERS ARE ENCOURAGED TO PROMPTLY SURRENDER CERTIFICATES TO THE EXCHANGE
AGENT FOLLOWING RECEIPT OF TRANSMITTAL FORMS IN ORDER TO AVOID HAVING SHARES
POSSIBLY BECOMING SUBJECT TO ESCHEAT LAWS.
Stockholders whose shares are held by their stockbroker do not need to submit old share certificates for exchange.
These shares will automatically reflect the new quantity of shares based on the selected Reverse Stock Split ratio.
Beginning on the effective date of the Reverse Stock Split, each certificate representing pre-split shares will be deemed
for all corporate purposes to evidence ownership of post-split shares.
Treatment of Fractional Shares
In lieu of any fractional shares to which a holder of our common stock would otherwise be entitled as a result
of the reverse stock split, we shall round up each such fractional shares to the nearest whole share amount. We expect
that this will result in a slight increase in the overall number of shares outstanding after the split than if we were to
elect payment of cash for fractional shares, but the effect on stockholders’ respective ownership percentages will be
negligible. As of January 31, 2018, there were approximately twenty-six (26) stockholders of record of our common
stock.
Discretionary Authority of the Board to Abandon Reverse Stock Split
The Board of Directors reserves the right to abandon the reverse stock split without further action by our
stockholders at any time before the effectiveness of the certificate of amendment, even if the reverse stock split has
been authorized by our stockholders. By voting in favor of the reverse stock split, you are expressly also authorizing
our Board of Directors to determine not to proceed with, and abandon, the reverse stock split, if it should so decide.
No Appraisal Rights
Under the Delaware General Corporation Law, our stockholders do not have a right to dissent and are not
entitled to appraisal rights with respect to the proposed amendments to our Certificate of Incorporation to effect the
reverse stock split, and we will not independently provide our stockholders with any such rights.
Certain U.S. Federal Income Tax Consequences of the Reverse Stock Split
The following discussion is a general summary of certain U.S. federal income tax consequences of the
reverse stock split that may be relevant to U.S. Holders (as defined below) of our common stock, but does not
purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate
and gift tax laws, and any applicable state, local or non-U.S. tax laws, are not discussed. This discussion is based on
the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder
(the “Treasury Regulations”), judicial decisions, and published rulings and administrative pronouncements of the
U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change
or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in
a manner that could adversely affect a U.S. Holder of our common stock. We have not sought and will not seek an
opinion of counsel or any rulings from the IRS regarding the matters discussed below. There can be no assurance the
IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the reverse
stock split.
This discussion is limited to U.S. Holders that hold our common stock as a “capital asset” within the
meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all
U.S. federal income tax consequences relevant to a U.S. Holder’s particular circumstances, including the impact of
the alternative minimum tax and the Medicare contribution tax on net investment income. In addition, it does not
address consequences relevant to U.S. Holders subject to special rules, including, without limitation:
• U.S. expatriates and former citizens or long-term residents of the United States;
• U.S. Holders (as defined below) whose functional currency is not the U.S. dollar;
Proxy Statement | Page 32
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persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of
a conversion transaction or other integrated investment;
banks, insurance companies, and other financial institutions;
real estate investment trusts or regulated investment companies;
brokers, dealers or traders in securities;
corporations that accumulate earnings to avoid U.S. federal income tax;
partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes
(and investors therein);
tax-exempt organizations or governmental organizations;
persons deemed to sell our common stock under the constructive sale provisions of the Code;
persons holding our common stock as “qualified small business stock” within the meaning of Section 1202
of the Code;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our
common stock being taken into account in an “applicable financial statement” (as defined in the Code);
persons who hold or receive our common stock pursuant to the exercise of any employee stock option or
otherwise as compensation; and
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tax-qualified retirement plans.
If an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax
treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and
certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the
partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to
them.
THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. U.S.
HOLDERS OF OUR COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT ARISING
UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE,
LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX
TREATY.
For purposes of this discussion, a “U.S. Holder” is any beneficial owner of our common stock that, for U.S.
federal income tax purposes, is or is treated as any of the following:
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an individual who is a citizen or resident of the United States;
a corporation created or organized under the laws of the United States, any state thereof, or the District of
Columbia;
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United
States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in
effect to be treated as a United States person for U.S. federal income tax purposes.
The reverse stock split should constitute a “recapitalization” for U.S. federal income tax purposes. As a
result, a U.S. Holder generally should not recognize gain or loss upon the reverse stock split, except with respect to
cash received in lieu of a fractional share of our common stock, as discussed below. A U.S. Holder’s aggregate tax
basis in the shares of our common stock received pursuant to the reverse stock split should equal the aggregate tax
basis of the shares of our common stock surrendered (excluding any portion of such basis allocated to any fractional
share of our common stock), and such U.S. Holder’s holding period in the shares of our common stock received
should include the holding period in the shares of our common stock surrendered. Treasury Regulations provide
detailed rules for allocating the tax basis and holding period of the shares of our common stock surrendered to the
shares of our common stock received pursuant to the reverse stock split. U.S. Holders of shares of our common
stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of
the tax basis and holding period of such shares.
A U.S. Holder that receives cash in lieu of a fractional share of our common stock pursuant to the reverse
stock split should recognize capital gain or loss in an amount equal to the difference between the amount of cash
received and the U.S. Holder’s tax basis in the shares of our common stock surrendered that is allocated to such
fractional share of our common stock. Such capital gain or loss should be long-term capital gain or loss if the U.S.
Holder’s holding period for our common stock surrendered exceeded one year at the effective time of the reverse
stock split.
Information Reporting and Backup Withholding
A U.S. Holder may be subject to information reporting and backup withholding when such holder receives
cash in lieu of a fractional share of our common stock pursuant to the reverse stock split. Certain U.S. Holders are
exempt from backup withholding, including corporations and certain tax-exempt organizations. A U.S. Holder will
be subject to backup withholding if such holder is not otherwise exempt and:
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the holder fails to furnish the holder’s taxpayer identification number, which for an individual is ordinarily
his or her social security number;
the holder furnishes an incorrect taxpayer identification number;
the applicable withholding agent is notified by the IRS that the holder previously failed to properly report
payments of interest or dividends; or
the holder fails to certify under penalties of perjury that the holder has furnished a correct taxpayer
identification number and that the IRS has not notified the holder that the holder is subject to backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding
rules may be refunded or allowed as a credit against the U.S. Holder’s U.S. federal income tax liability, if any,
provided the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisors
regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an
exemption.
Required Vote and Board Recommendation
The affirmative vote of the holders of a majority of the shares of the Common Stock outstanding and entitled
to vote will be required to approve the reverse stock split and the corresponding amendment to our Certificate of
Incorporation. As a result, abstentions, broker non-votes, and shares not present at the annual meeting and entitled to
vote with respect to this proposal will have the same effect as “Against” votes.
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The Board believes that the above proposal is in the best interests of the Company and its stockholders for the
reasons stated above.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF AN
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT A REVERSE STOCK SPLIT.
Proposal #5 – Approval of Amendment to Amended and Restated Certificate of Incorporation to Increase
Number of Authorized Shares of Common Stock
Reasons for the Increase in Total Number of Authorized Shares of Common Stock
Our Board of Directors has approved proposed amendments to our Certificate of Incorporation that would
increase the number of authorized shares of our common stock from 75,000,000 to 100,000,000 (which amount is not
otherwise affected by the reverse split). As a matter of Delaware law, implementation of the reverse stock split does
not require a change in the total number of shares of our common stock authorized under our Certificate of
Incorporation. The increase in the authorized common stock is designed to address the conditions of our warrants
issued on November 28, 2017 as part of our rights offering. The warrants issued in the rights offering become
exercisable after the number of authorized shares of our common stock is increased. The amount of the increase
would allow for the warrants to become exercisable in the event that stockholders approve the increase in the number
of authorized shares of our common stock and do not approve the reverse stock split. In addition to the warrants, an
increase in the number of authorized shares of our common stock will also allow us the flexibility to issue shares of
common stock for other purposes, including in connection with the proposed increase in the share reserve under our
2014 Equity Incentive Plan. Our Board of Directors may also choose to issue shares of common stock in connection
with future capital raising transactions, strategic partnerships and collaborations or acquisitions, although we do not
currently have any commitments or plans to do so.
Certain entities that make recommendations to stockholders regarding proposals submitted by the Company
may perceive increasing the number of shares of common stock while also conducting a reverse stock split as creating
an unreasonably high number of authorized but unissued shares of common stock. However, given the unique
circumstances related to the conditions of our warrants and the possibility that the stockholders may approve Proposal
5 regarding the increase in the number of authorized shares of common stock while not approving Proposal 4 regarding
the reverse stock split, the Board of Directors believes that putting forward a proposal to increase the number of
authorized shares of the Company’s common stock is appropriate and in the best interests of the Company and its
stockholders.
Increase in % of Unissued/Unreserved versus Issued/Reserved for Issuance:
Effect With Approval of Reverse Stock Split
Assuming stockholder approval of Proposal 4 and Proposal 5, at the time of the reverse stock split, the number
of authorized shares of the Company’s common stock would be increased to 100,000,000. The par value per share of
our common stock would remain unchanged at $0.001 per share after the reverse stock split, and we would continue
to have 4,976,500 shares of authorized but unissued preferred stock.
On a post-split basis we anticipate that the proportion of authorized but unissued and unreserved shares of
common stock will increase as compared to the number of common stock outstanding or reserved for issuance. For
example, as of February 28, 2018, the 61,607,797 shares of our common stock outstanding or reserved for issuance
represented approximately 82.1% of the 75,000,000 total shares of common stock authorized under our Certificate of
Incorporation, while the 90,273,863 fully-diluted outstanding shares of our common stock (equal to the sum of (i)
61,607,797 shares of outstanding common stock, plus (ii) shares issuable upon exercise of outstanding warrants
(including the warrants issued as part of our rights offering on November 28, 2017 for 18,000,000 shares exercisable
after an increase in our authorized common stock) plus (iii) option pool shares that are unallocated or reserved for
issuance under outstanding awards under our equity incentive plans represented approximately 120.4% of the
75,000,000 total shares of common stock authorized under our Certificate of Incorporation (this number exceeds 100%
Proxy Statement | Page 35
because it includes warrants for 18,000,000 shares that are not exercisable until stockholders approve an increase in
the authorized shares of common stock). By way of example, were our Board of Directors to elect to effect a 1-for-15
reverse stock split, (i) our outstanding share count would decrease from 61,607,797 (on a pre-split basis) to
approximately 4,107,187 shares (on a post-split basis) and (ii) our fully-diluted share count would decrease from
90,273,863 (on a pre-split basis) to approximately 6,018,258 shares (on a post-split basis), while the total number of
authorized shares of the Company would increase from 75,000,000 to 100,000,000. Thus, after the reverse stock split
and increase in the number of our authorized shares of common stock, we may have a substantially greater proportion
of authorized but unissued and unreserved shares available to us after the amendment to the Certificate of
Incorporation is approved and filed. See “Summary Table re: Effects of Stock Split” above for hypothetical amounts
of unissued and unreserved shares based on the reverse stock split ratio that is ultimately selected by our Board.
Effect Without Approval of Reverse Stock Split
Assuming stockholders approve Proposal 5 but do not approve Proposal 4, the number of authorized shares
of the Company’s common stock would be increased to 100,000,000. The par value per share of our common stock
would remain unchanged at $0.001 per share, and we would continue to have 4,976,500 shares of authorized but
unissued preferred stock.
Upon filing of the amendment to the Certificate of Incorporation increasing the number of authorized shares
of common stock, we anticipate that the proportion of authorized but unissued and unreserved shares of common stock
will increase as compared to the number of common stock outstanding or reserved for issuance. For example, as of
February 28, 2018, the 61,607,797 shares of our common stock outstanding or reserved for issuance represented
approximately 82.1% of the 75,000,000 total shares of common stock authorized under our Certificate of
Incorporation, while the 90,273,863 fully-diluted outstanding shares of our common stock (as calculated above)
represented approximately 120.4% of the 75,000,000 total shares of common stock authorized under our Certificate
of Incorporation. After the increase in the number of authorized shares of common stock to 100,000,000 (i) our
outstanding share count as a percentage of our authorized common stock would decrease to 61.6% and (ii) our fully-
diluted share count as a percentage of our authorized common stock would decrease to 90.3%. Thus after the increase
in the number of our authorized shares of common stock, we may have a substantially greater proportion of authorized
but unissued and unreserved shares available to us after the amendment to the Certificate of Incorporation is approved
and filed.
Other Effects
We anticipate that we may use a portion of any authorized and unreserved/unissued shares to help
consummate future financing transactions, although we do not currently have any commitments or plans to do so.
However, any such financing would likely be dilutive to the stockholders unless it is structured as an offering in which
all current stockholders could participate.
Further, the increase in the number of shares of authorized and unissued/unreserved Common Stock could
have an ‘anti-takeover effect’ by permitting the issuance of a proportionately great number shares on a post-split basis
(as compared to pre-split) to purchasers who might oppose a hostile takeover bid or oppose any efforts to amend or
repeal certain provisions of our Certificate of Incorporation or our Amended and Restated Bylaws, as amended. The
increased number of available authorized and unissued/unreserved shares as a result of the reverse stock split would
give our management more flexibility to resist or impede a third-party takeover bid that provides an above-market
premium that is favored by a majority of the independent stockholders. Any such anti-takeover effect of a reverse
stock split would be in addition to existing anti-takeover provisions of the Certificate of Incorporation and our
Amended and Restated Bylaws.
Required Vote and Board of Directors Recommendation
The affirmative vote of the holders of a majority of the shares of the Common Stock outstanding and entitled
to vote will be required to approve the increase in our authorized shares of common stock and the corresponding
Proxy Statement | Page 36
amendment to our Certificate of Incorporation to effect the reverse split. As a result, abstentions, broker non-votes,
and shares not present at the annual meeting and entitled to vote with respect to this proposal will have the same effect
as “Against” votes.
The Board believes that the above proposal is in the best interests of the Company and its stockholders for
the reasons stated above.
YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF AN
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
EFFECT AN INCREASE IN AUTHORIZED SHARES OF COMMON STOCK.
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PROPOSAL #6
NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, and
related SEC regulations, we are required to provide our stockholders with the opportunity to cast an advisory vote on
the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with the
compensation disclosure rules of the Securities and Exchange Commission.
Our executive compensation programs are designed to reward our named executive officers for the
achievement of short-term and long-term strategic and operational goals, while at the same time avoiding the
encouragement of unnecessary or excessive risk taking. Stockholders are encouraged to read the Executive
Compensation section of this Proxy Statement for a more detailed discussion of how our compensation programs
reflect our objectives.
The Board believes the Company’s executive compensation programs use appropriate structures and sound
pay practices that are effective in achieving our core objectives. Accordingly, the Board recommends that you vote
in favor of the following resolution:
“RESOLVED, that Cytori Therapeutics, Inc. stockholders approve, on an advisory basis, the compensation
of the Company’s named executive officers as disclosed pursuant to the Securities and Exchange Commission’s
compensation disclosure rules in this Proxy Statement.”
The vote on this Proposal is advisory and therefore not binding on us or our Board. Although the vote is
non-binding, the Board will review the voting results, seek to determine the cause or causes of any significant
negative voting, and take them into consideration when making future decisions regarding executive compensation
programs.
Required Vote and Board Recommendation
In voting on the approval, on an advisory basis, of the compensation of our named executive officers,
stockholders may vote in favor of the approval or against the approval, or may abstain from voting on the approval
of such compensation. The affirmative vote of a majority of the shares present in person or represented by proxy at
the meeting and entitled to vote on such proposal is required to approve this proposal. Abstentions are considered
present and entitled to vote with respect to this proposal and will, therefore, be treated as votes “AGAINST” this
proposal. Broker non-votes with respect to this proposal will not be considered as present and entitled to vote on
this proposal, which will therefore reduce the number of affirmative votes needed to approve this proposal.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE APPROVAL,
ON AN ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
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During the year ended December 31, 2017:
CORPORATE GOVERNANCE
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the Board held twenty meetings and took action via unanimous written consent three times;
the Audit Committee met four times and did not take any actions via unanimous written consent;
the Compensation Committee met two times and took action via unanimous written consent five
times;
the Governance and Nominating Committee met three times and took action via unanimous written
consent one time;
the Executive Committee met one time did not take action via unanimous written consent; and
the sub-committee of the Executive Committee, comprised of our Chairman and our CEO, took
action via unanimous written consent one time.
Each member of the Board attended seventy-five percent (75%) or more of the aggregate of (i) the total
number of Board meetings held during the period of such member’s service and (ii) the total number of meetings of
committees of the Board on which such member served, during the period of such member’s service.
All Board members are encouraged to attend our annual meetings of stockholders in person. However, in
2017, our stockholder meeting date did not coincide with our regularly scheduled quarterly Board meeting. Mr.
Rickey, our Chairman at the time of our 2017 Annual Meeting of Stockholders, and Dr. Hedrick attended our 2017
Annual Meeting of Stockholders.
Board Independence
The Board has determined that Messrs. Hawkins, Lapointe, Lyons and Martell are “independent” under the
rules of the Nasdaq Stock Market. The Board had previously determined that Mr. Rickey and Dr. Naughton were
also “independent” under the rules of the Nasdaq Stock Market when they served on the Board. Under applicable
SEC and Nasdaq rules, the existence of certain “related person” transactions above certain thresholds between a
director and the Company are required to be disclosed and preclude a finding by the Board that the director is
independent. The Board is not able to consider Dr. Hedrick, our President and Chief Executive Officer, independent,
as a result of his employment with us during his tenure as one of our directors.
Board Leadership Structure
Our bylaws and governance principles provide the Board with the flexibility to combine or separate the
positions of Chairman and Chief Executive Officer. Historically, these positions have been separate. Our Board
believes that the separation of these positions strengthens the independence of our Board and allows us to have a
Chairman focused on the leadership of the Board while allowing our Chief Executive Officer to focus more of his
time and energy on managing our operations. The Board currently believes this structure works well to meet the
leadership needs of the Board and of the Company. Dr. Hedrick, our President and Chief Executive Officer, has
comprehensive industry expertise and is able to devote substantial time to the Company, and Mr. Hawkins, our
Chairman, is able to devote focus on longer term and strategic matters, and to provide related leadership to the
Board. As a result, we do not currently intend to combine these positions; however a change in this leadership
structure could be made if the Board determined it was in the best long-term interests of stockholders based upon a
departure of either our Chief Executive Officer or Chairman. For example, if the two roles were to be combined, we
believe that the independence of the majority of our directors, and the three fully independent Board committees,
would provide effective oversight of our management and the Company.
The Board’s Role in Risk Oversight
The Board’s role in risk oversight includes assessing and monitoring risks and risk management. The Board
reviews and oversees strategic, financial and operating plans and holds management responsible for identifying and
Proxy Statement | Page 39
moderating risk in accordance with those plans. The Board fulfills its risk oversight function by reviewing and
assessing reports from members of management on a regular basis regarding material risks faced by us Company
and applicable mitigation strategy and activity. The reports cover the critical areas of operations, sales and
marketing, development, regulatory and quality affairs, intellectual property, clinical development, legal and
financial affairs. The Board and its Committees (described below) consider these reports; discuss matters with
management and identify and evaluate any potential strategic or operational risks, and appropriate activity to address
those risks.
Board Committees
The Board has standing Audit, Compensation, and Governance and Nominating Committees. All members
of the Compensation Committee, Audit Committee, and Governance and Nominating Committee are independent
directors.
Compensation Committee
The Compensation Committee currently consists of Mr. Lyons (Chairman) and Mr. Lapointe. In January
2018, Mr. Rickey and Dr. Naughton, former directors, stepped down of our Compensation Committee, and Mr.
Lapointe joined the Compensation Committee to fill the vacancy created by Mr. Rickey’s and Dr. Naughton’s
departure. Each of the members of our Compensation Committee is independent as defined by Nasdaq and a “Non-
Employee Director” as defined by rule 16b-3(b)(3)(i) of the Exchange Act. The Committee Chairman is responsible
for setting the Committee’s calendar and meeting agenda.
The Compensation Committee is responsible for developing and implementing compensation programs for
our executive officers and other employees, subject only to the discretion of the full Board. More specifically, our
Compensation Committee establishes base salary rates for each of the Company’s officers, and administers our
equity compensation plans. The Compensation Committee establishes the compensation and benefits for our Chief
Executive Officer and other executive officers, and also reviews the relationship between our performance and our
compensation policies as well as assessing any risks associated with our compensation policies. In addition, the
Compensation Committee reviews, and advises the Board on director compensation matters and on, regional and
industry-wide compensation practices and trends in order to assess the adequacy of our executive compensation
programs. The charter of the Compensation Committee has been established and approved by the Board, and a copy
of the charter has been posted on our website at www.cytori.com under Investor Relations – Corporate Governance.
Our CEO attends some of the meetings of the Compensation Committee upon invitation, but does not
participate in the executive sessions of the Compensation Committee.
Audit Committee
Our Audit Committee currently consists of Mr. Lapointe (Chairman), Mr. Martell and Mr. Lyons. At the
outset of 2017, Mr. Hawran and Mr. Hawkins were the members of our Audit Committee. Upon Mr. Hawran’s
departure in May 2017, Mr. Lapointe joined the Audit Committee as Chairman. Further, upon the appointment of
Mr. Hawkins as Chairman of our Board of Directors in January 2018, Mr. Hawkins stepped down from the Audit
Committee and Mr. Martel joined the Audit Committee to fill the vacancy created. The Audit Committee is
comprised solely of independent directors, as defined by Nasdaq and applicable SEC rules. The Board has
determined that Mr. Lapointe is an “audit committee financial expert” within the meaning of Item 407(d)(5) of SEC
Regulation S-K. The charter of the Audit Committee has been established and approved by the Board, and a copy of
the charter has been posted on our website at www.cytori.com under Investor Relations – Corporate Governance.
The Audit Committee selects our auditors, reviews the scope of the annual audit, approves the audit fees
and non-audit fees to be paid to our auditors, and reviews our financial accounting controls with the staff and the
auditors. The Audit Committee is also charged with review and oversight of management’s enterprise risk
management assessment.
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Governance and Nominating Committee
Our Governance and Nominating Committee currently consists of Mr. Martell (Chairman) and Mr. Lyons.
Mr. Martell replaced Mr. Hawkins as Chairman of Governance and Nominating Committee in January 2018. Mr.
Lyons joined the Governance and Nominating Committee to fill the vacancy created by Dr. Naughton’s departure.
The Governance and Nominating Committee is comprised solely of independent directors, as defined by Nasdaq.
The Governance and Nominating Committee interviews, evaluates, nominates and recommends individuals for
membership on the Board, evaluates the effectiveness of the Board and its serving members, and recommends the
structure, responsibility and composition of the committees of the Board. The Committee is also responsible for
recommending guidelines and policies for corporate governance for adoption by the Board. The charter of the
Governance and Nominating Committee has been established and approved by the Board, and a copy of the charter
has been posted on our website at www.cytori.com under Investor Relations – Corporate Governance.
Executive Committee
During 2017, the Executive Committee was comprised of our Chief Executive Officer, Chairman of the
Board, and Chairpersons of each committee of the Board. During 2017, the Executive Committee consisted of Dr.
Hedrick, Mr. Rickey, Mr. Hawkins, Mr. Lapointe, and Mr. Lyons.
The Executive Committee’s responsibilities, when such responsibilities are not discharged by our full
Board, included evaluating and approving the material terms of any financing transactions or business transactions
as well as authorizing and approving the issuance of stock and/or other equity securities. The Executive Committee
also was able to act on behalf of the full Board in urgent or exigent circumstances wherein it would have been very
difficult or impossible to assemble the full Board between regularly scheduled meetings. In 2017, our Executive
Committee acted as a special pricing committee of the Board with respect to our confidentially marketed public
offering financing, consummated in April 2017. The Sub-Committee of the Executive Committee, consisted of our
Chairman of the Board and our Chief Executive Officer, had the authority to approve corporate expenditures
presented by our management in excess of $250,000 up to a maximum of $1,000,000 for a single corporate
transaction.
Effective January 25, 2018, upon Mr. Rickey’s and Dr. Naughton’s resignations from the Board, the Board
of Directors decided to suspend the activities of the Executive Committee.
Proxy Statement | Page 41
Criteria for Board Membership
DIRECTOR NOMINATIONS
The Governance and Nominating Committee is responsible for annually reviewing the applicable skills and
characteristics required of Board nominees with the Board in the context of current Board composition and our
circumstances. In making its recommendations to the Board, the Governance and Nominating Committee considers,
among other things, the qualifications of individual director candidates in light of the Board’s membership criteria as
set forth in our Corporate Governance Guidelines. The Governance and Nominating Committee may utilize a
variety of sources, including stockholder recommendations, Board member recommendations, executive search
firms, management recommendations or other reasonable means to identify director candidates.
The Governance and Nominating Committee considers candidates recommended by our Board and
management, as well as candidates submitted by our stockholders (as discussed below). Board members or
management that wish to recommend that a person be considered for Board membership are required to provide
relevant qualifications and other information regarding the prospective candidate to the Governance and Nominating
Committee along with their recommendations and reasons why such person should be considered. The Governance
and Nominating Committee then, at its next regularly scheduled meeting, reviews each of the proposed candidates
and determine whether or not to add such person to the proposed candidates list. In the event the Board determines
to add an additional Board member, the Committee shall select candidates from this list in addition to candidates
drawn from any search firm that the Committee deems necessary to retain for this purpose.
The criteria we use in selecting Board candidates include the candidate’s integrity, business acumen,
commitment, reputation among our various constituencies and communities, ability to make independent analytical
inquiries, understanding of our business environment, and willingness to devote adequate time to Board duties. The
Board has also determined that gender and ethnic diversity of the Board will be an important factor in evaluation of
candidates. There are no other pre-established qualifications, qualities or skills at this time that any particular
Director nominee must possess and nominees are not discriminated against on the basis of race, religion, national
origin, sexual orientation, disability or any other basis proscribed by law. The Governance and Nominating
Committee does not assign specific weights to particular criteria, nor has it adopted a particular policy. Rather, the
Board believes that the backgrounds and qualifications of the directors, considered as a group, should provide a
composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. The
goal of the Governance and Nominating Committee is to assemble a Board that brings a variety of skills derived
from high quality businesses and professional experience. The Governance and Nominating Committee seeks to
ensure that at least a majority of the directors are independent under Nasdaq rules, and that members of the
Company’s Audit Committee meet the financial literacy and sophistication requirements under the Nasdaq rules,
and at least one of them qualifies as an “audit committee financial expert” under the rules of the SEC.
Stockholder Recommendations
The Governance and Nominating Committee is responsible for the consideration of any director candidates
recommended by security holders. Any recommendations received from the security holders will be evaluated in the
same manner that potential nominees suggested by Board members, management or other parties are evaluated. Any
such recommendations should be submitted to the Governance and Nominating Committee c/o the Secretary of the
Company and should include the following information: (a) all information relating to such recommended candidate
as would be required to be disclosed for a director nominee pursuant to Regulation 14A under the Exchange Act
(including such person’s written consent to being named in the proxy statement as a nominee and to serving as a
director if elected) and as required for stockholder nominations of director candidates pursuant to the Company’s
Amended and Restated Bylaws (“Bylaws”); (b) the names and addresses of the stockholders making the
recommendation and the number of shares of the Company’s common stock which are owned beneficially and of
record by such stockholders; and (c) other appropriate biographical information and a statement as to the
qualification of the nominee.
Proxy Statement | Page 42
STOCKHOLDER COMMUNICATION WITH THE BOARD
Stockholders may contact an individual director, the Board as a group, or a specified Board committee or
group, including the independent directors as a group, by the following means:
-
Mail:
Chairman of the Board
Cytori Therapeutics, Inc.
3020 Callan Road
San Diego, CA 92121
CC:
Chief Financial Officer
-
E-mail: chairman@cytori.com
Each communication should specify the applicable addressee or addressees to be contacted as well as the
general topic of the communication. The Chairman of the Board will initially receive and process communications
before forwarding them to the addressee. Communications also may be referred to other departments within the
Company. The Chairman of the Board generally will not forward to the directors a communication that he
determines to be primarily commercial in nature or related to an improper or irrelevant topic, or that requests general
information about us. Concerns about questionable accounting or auditing matters or possible violations of the
Cytori Code of Business Conduct and Ethics should be reported pursuant to the procedures outlined in the Code of
Business Conduct and Ethics, which are available on the Company’s website in the Investor Relations section under
“Corporate Governance Materials.”
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and
employees, including our principal executive officer, principal financial officer and principal accounting officer.
This Code of Business Conduct and Ethics has been posted on our website at www.cytori.com. We intend to post
amendments to this code, or any waivers of its requirements, on our website at www.cytori.com under Investor
Relations – Corporate Governance, as permitted under SEC rules and regulations.
Proxy Statement | Page 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding ownership of our Common Stock as of February 28,
2018 (or earlier date for information based on filings with the SEC) by (a) each person known to us to own more
than 5% of the outstanding shares of our Common Stock, (b) each director and nominee for director, (c) our
President and Chief Executive Officer, VP of Finance and Chief Financial Officer and each other NEO named in the
compensation tables in Proxy Statement and (d) all directors and executive officers as a group.
The information in this table is based solely on statements in filings with the SEC or other reliable
information. We believe, based on information provided to us, that each of the stockholders listed below has sole
voting and investment power with respect to the shares beneficially owned by the stockholder unless noted
otherwise, subject to community property laws where applicable.
A total of 61,607,797 shares of our common stock were issued and outstanding as of February 28, 2018.
Name and Address of Beneficial Owner (1)
Swissquote Bank SA(5)
Chemin de la Crétaux 33
1196 Gland, Switzerland
PostFinance AG(6)
Mingerstrasse 20
3030 Bern, Switzerland
Marc H. Hedrick, M.D.
Tiago M. Girao
John D. Harris
Richard J. Hawkins
Gary A. Lyons
Ronald A. Martell
Gregg Lapointe
All executive officers and directors as a group
Number of Shares
of Common Stock
Subject to
Awards/Warrants
Exercisable
Within
60 Days (3)
Total Number
of
Shares of
Common
Stock
Beneficially
Owned (4)
— 5,328,229
Number of
Shares of
Common Stock
Owned (2)
5,328,229
Percent
Ownership
8.6%
4,543,086
— 4,543,086
7.4%
78,133
14,084
7,000
8,433
4,357
—
—
112,006
193,780
41,461
37,894
52, 472
37,404
25,000
25,000
384,211
271,913
55,545
44,894
60,905
41,761
25,000
25,000
496,218
*
*
*
*
*
*
0.8 %
*
Represents beneficial ownership of less than one percent (1%) of the outstanding shares as of February 28, 2018.
(1)
Road, San Diego, CA 92121.
Unless otherwise indicated, the address of each of the named individuals is c/o Cytori Therapeutics, Inc., 3020 Callan
(2)
2018.
Unless otherwise indicated, represents shares of outstanding common stock owned by the named parties as of February 28,
Shares of common stock subject to stock options or warrants currently exercisable or exercisable within 60 days of
(3)
February 28, 2018 are deemed to be outstanding for computing the percentage ownership of the person holding such options and the
percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing the percentage of
any other person.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC
(4)
governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial
owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such
security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities for which that person has a right to acquire beneficial ownership within 60 days.
(5)
(6)
Based upon a Form 4 filed January 11, 2018, reporting beneficial ownership as of January 11, 2018
Based upon a Form 4 filed February 15, 2018, reporting beneficial ownership as of February 14, 2018
Proxy Statement | Page 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transactions
The following includes a summary of transactions since January 1, 2017 to which we have been a party in
which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers
or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect material interest. We also describe below
certain other transactions with our directors, executive officers and 5% stockholders. We believe the terms obtained
or consideration that we paid or received, as applicable, in connection with the transactions described below were
comparable to terms available or the amounts that would be paid or received, as applicable, from unaffiliated third
parties.
Rights Offering
In November 2017, we consummated a rights offering, or Rights Offering, to our stockholders of record (as
of October 27, 2017) to subscribe for units at a subscription price of $1,000 per unit. Pursuant to the Rights
Offering, we sold an aggregate of 10,000 units consisting of a total of 10,000 shares of Series B Convertible
Preferred Stock and 18,000,000 warrants to our stockholders, or Warrants, with each Warrant exercisable for one
share of common stock at an exercise price of $0.3333 per share. Certain of our directors participated in the Rights
Offering and along with other participants in the Rights Offering, purchased common stock and Warrants to
purchase our common stock.
Director and Officer Indemnification
Our amended and restated certificate of incorporation, as amended, and our amended and restated bylaws,
as amended, provide that we will indemnify each of our directors and officers to the fullest extent permitted by the
Delaware General Corporation Law.
Stock Option Grants to Executive Officers and Directors
We have granted stock options to our executive officers and non-employee directors as more fully
described elsewhere in Proxy Statement.
The information under the heading “Board Independence” in this Proxy Statement is incorporated herein by
reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive officers, and persons or entities who own
more than ten percent of our common stock, to file with the SEC reports of beneficial ownership and changes in
beneficial ownership of our common stock. Those directors, officers, and stockholders are required by regulations to
furnish us with copies of all forms they file under Section 16(a). Based solely upon a review of the copies of such
reports furnished to us and written representations from such directors, officers, and stockholders, we believe that all
such reports required to be filed during 2017 were filed on a timely basis, except for the report filed by Mr. Lyons in
February 2018, related to a single transaction for an acquisition of securities from November 2017.
Proxy Statement | Page 45
The following table sets forth biographical information regarding our executive officers as of April 6, 2018.
EXECUTIVE OFFICERS
Name
Marc H. Hedrick, M.D.(1) ................ 55
Tiago M. Girão ................................ 38
John D. Harris ................................. 49
Age
Position(s)
President, Chief Executive Officer and Director
Vice President of Finance and Chief Financial Officer
Vice President and General Manager of Cell Therapy
See “Proposal No. 1 Election of Directors” for biographical information regarding Dr. Hedrick.
Tiago M. Girão joined us as Vice President of Finance and Chief Financial Officer in September 2014. Mr.
Girão joined us from NuVasive, Inc., or NuVasive, a publicly-held medical device company, where he last served as
International Controller from February 2014 to August 2014. Prior to his position as International Controller, he
served as NuVasive’s Director of Financial Reporting from March 2012 to February 2014. In his position as
Director of Financial Reporting, Mr. Girão managed a team responsible for all corporate technical accounting and
SEC-related matters for Nuvasive. Prior to joining NuVasive, Mr. Girão served as Senior Manager, Assurance at
KPMG, LLP from October 2004 to March 2012. Prior to joining KPMG, Mr. Girão was a senior accountant for
Ernst &Young in Brazil from October 2000 to August 2004. Mr. Girão is a certified public accountant with over 15
years’ experience in the accounting, finance and reporting for U.S. and public companies and substantial experience
in global finance and operations.
John D. Harris has served as our Vice President and General Manager of Cell Therapy since he joined us
in October 2015. Mr. Harris has over 20 years’ experience in medical device and biotechnology, most recently
serving as the Vice President and General Manager of Becton Dickinson’s operations in Japan. Prior to Becton
Dickinson, Mr. Harris held business development, product development, and marketing and sales leadership roles
with Tyco Electronics (now TE Connectivity Corp.), Delphi Automotive, Sorenson Medical, Kimberly-Clark
Healthcare and Ballard Medical Products. Mr. Harris is a member of the Board of Governors of the American
Chamber of Commerce in Japan (ACCJ) and a member of the Executive Committee of the American Medical
Device & Diagnostics Association, where he chairs the Regenerative Medicine Working Group. Mr. Harris holds
Master of Business Administration and Bachelor of Arts degrees from the University of Utah. On February 5, 2018,
Mr. Harris tendered his resignation from Cytori effective May 1, 2018.
Proxy Statement | Page 46
EXECUTIVE COMPENSATION
Our named executive officers, or NEOs, for fiscal year 2017 are:
• Marc H. Hedrick, M.D., our President and Chief Executive Officer;
• Tiago M. Girão, our Vice President of Finance and Chief Financial Officer; and
•
John D. Harris, our Vice President and General Manager of Cell Therapy.
Investors are encouraged to read the compensation discussion below in conjunction with the compensation
tables and related notes, which include more detailed information about the compensation of our NEOs for 2017 and
2016.
2017 Summary Compensation Table
The following table sets forth information concerning compensation earned during 2016 and 2017 for
services rendered to us by our NEOs.
(a)
(b)
(c)
(d)
(e)
Name and Principal Position
Marc H. Hedrick, M.D.,
President and Chief Executive Officer
Tiago M. Girao,
VP of Finance, Chief Financial Officer and
Chief Accounting Officer
John Harris,
VP and General Manager of Cell Therapy(6)
Stock
Awards
Option
Awards(2)
(f)
Non-Equity
Incentive Plan
Comp. (3)
(g)
All Other
Comp-
ensation
(h)
Total
— $ 116,182 $ 140,250 89,607 (4) $ 846,039
— $ 156,273 $ 146,250
$ 752,523
— $ 48,205 $ 72,615 46,360 (4) $ 474,680
—
Year
Salary
2017 $ 500,000
2016 $ 450,000
2017 $ 307,500
$ 265,000
2016
2017 $ 358,750
2016 $ 361,830 (5)
$ 79,560
$ 65,535
$ 410,095
—
— $ 48,205 $ 64,890 $93,957 (4) $ 565,802
— $ 65,535 $ 64,365 $125,249 (1) $ 616,979
—
(1)
(2)
(3)
(4)
Per the terms of his employment offer letter with us, in 2016, Mr. Harris was eligible to receive a housing allowance
while on assignment in Japan up to a maximum of 13,900,000 Japanese Yen per year, including direct payment by us
of Mr. Harris’ local rent (not to exceed 1,100,000 Japanese Yen per month) and additional healthcare coverage. We
paid these benefits in Japanese Yen, and we recorded them in 2016 at the average exchange rate of 0.0086 Japanese
Yen to U.S. dollar. During 2016, Mr. Harris’ rent expense was $111,994, and cost of his additional health care
coverage was $13,255.
This column represents the dollar amount of the aggregate grant date fair value of option awards granted in the
applicable fiscal year, computed in accordance with FASB ASC Topic 718. For information relating to the assumptions
made by us in valuing the option awards made to our NEOs in 2017 and 2016, refer to Note 12 to our audited
consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017,
filed with the SEC on March 9, 2018. These amounts do not reflect the actual economic value that will be realized by
our NEOs upon vesting of the stock options, exercise of the stock options, or sale of the common stock underlying the
stock options.
The amounts in column (f) reflect the cash awards under our EMIC Plan, which is discussed in further detail below
under the heading in the subsection entitled “Executive Management Incentive Compensation Plan” of the “Narrative
Disclosure to Compensation Tables” below.
For 2017, this column includes life insurance premiums paid by the Company for each of the named executive officers
and the payout of accrued paid time off in connection with our restructuring in 2017 in the following amounts: Dr.
Hedrick, $81,482; Mr. Girão, $43,526; and Mr. Harris, $38,128. In addition, during 2017, the Company paid directly to
third party vendors $50,260 related to the relocation of Mr. Harris from Tokyo to San Diego.
(5)
During 2016, we paid Mr. Harris in Japanese Yen. His 2016 salary was reported at the average exchange rate over the
year, or 0.0086 Japanese Yen to US dollar.
(6)
On February 5, 2018, Mr. Harris tendered his resignation from Cytori effective May 1, 2018.
Proxy Statement | Page 47
Narrative Disclosures to Summary Compensation Table
Executive Compensation
In the process of determining compensation for our NEOs, the Compensation Committee considers the
current financial position of the Company, the strategic goals of the Company and the performance of each of our
NEOs. The Committee also benchmarks the various components (described below) of our compensation program
for executives to compensation paid by other public companies in our defined peer group, compensation data from
Radford Global Life Sciences Survey and BIOCOM Total Rewards Survey, historical review of all executive officer
compensation, and recommendations from our CEO (other than for his own salary). From time to time the
Committee engages the services of outside compensation consultants to provide compensation research, analysis and
recommendations. The Committee has the sole authority to select, compensate and terminate its external advisors.
The Compensation Committee utilizes the following components of compensation (described further
below) to strike an appropriate balance between promoting sustainable and excellent performance and discouraging
any inappropriate short-sighted risk-taking behavior:
• Base salary;
• Annual long-term equity compensation;
• Personal benefits and perquisites; and
• Acceleration and severance agreements tied to changes on control of the Company.
Base Salaries
In connection with determination of executive compensation for fiscal year 2017, the Compensation
Committee directed Marsh & McLennan, LLC, its independent compensation consultant, to prepare an updated
senior management compensation assessment. The Compensation Committee reviewed this assessment at its
normally scheduled meeting in January 2017. Based on this assessment and including other data points and
information considered by the Compensation Committee in its discretion, the Compensation Committee approved
the following NEO base salaries for fiscal year 2017, which base salaries went into effect in March 2017: Dr.
Hedrick: $510,000; Mr. Harris: $360,500; Mr. Girao: $309,000. The increases to Dr. Hedrick’s and Mr. Girao’s
base salaries were made to move such salaries closer to or within the 50th and 60th percentile range of base salary
compensation for similarly situated executive at our peer companies, per our corporate compensation philosophy.
Our compensation analysis indicates that Dr. Hedrick’s base salary is substantially closer to, but still below, this
stated range, while Mr. Girao’s base salary is now within this stated range. Mr. Harris’ base salary remains above
our stated range, but we believe that the Mr. Harris’ actual duties and responsibilities, combined with his experience
and skills (including Japanese linguistic and business/cultural fluency) are appropriately reflected in his base salary
and other compensation.
Marsh & McLennan did not provide any services to us in 2017 beyond its engagement as an advisor to the
Compensation Committee on compensation matters. After review and consultation with Marsh & McLennan, the
Compensation Committee has determined that Barney & Barney is independent and there is no conflict of interest
resulting from retaining Marsh & McLennan currently or during the year ended December 31, 2017. In reaching
these conclusions, the Compensation Committee considered the factors set forth in Exchange Act Rule 10C-1 and
Nasdaq listing standards.
None of our NEOs received base salary increases for 2018.
Annual Bonuses (Executive Management Incentive Compensation Plan)
Our Compensation Committee adopted the Cytori Therapeutics Executive Management Incentive
Compensation, or EMIC, plan to increase the performance-based component of our executives’ compensation by
linking their annual cash bonus payments to achievement of shorter-term performance goals. Target bonuses are
reviewed annually and established as a percentage of the executives’ base salaries, generally based upon seniority of
the officer and targeted at or near the median of the peer group (with reference to our corporate compensation
Proxy Statement | Page 48
philosophy) and relevant survey data (including the Radford Global Life Sciences Survey and BIOcom Total
Rewards Survey). Each year the Compensation Committee establishes corporate and individual objectives and
respective target percentages, taking into account recommendations from our Chief Executive Officer as it relates to
executive positions other than the Chief Executive Officer’s compensation. Our Chief Executive Officer’s EMIC
plan is set by the Compensation Committee to align entirely with our overall corporate objectives, while the other
NEOs are also provided individual goals that constitute a portion of their overall EMIC plans. After each fiscal year-
end, our Chief Executive Officer provides the Compensation Committee with a written evaluation showing actual
performance as compared to corporate and/or individual objectives, and the Compensation Committee uses that
information, along with the overall corporate performance, to determine what percentage of each executive’s bonus
target will be paid out as a bonus for that year. Overall, we attempt to set the corporate and individual functional
goals to be highly challenging yet attainable.
For 2017, the general corporate goals approved by the Board (upon recommendation of the Compensation
Committee for purposes of executive compensation) were determined by the Compensation Committee to account
for 100% of the target cash bonus amount payable under the EMIC plan for our Chief Executive Officer, Dr.
Hedrick, and to account for 75% of the overall target bonus amount payable under the EMIC plans for our other
NEOs. The Company’s general corporate objectives included clinical, financial and operational objectives, including
the pipeline expansion goals; the achievement of certain year-end cash objectives, revenue goals and business
development objectives; and various operational objectives.
The following individual objectives for the NEOs other than Dr. Hedrick expanded upon their particular
functions in the overall corporate objectives and were weighted as 25% of their respective overall target bonus
amounts.
Mr. Girão’s individual objectives included the achievement of certain investor-related, liquidity, and
operating cash management goals.
Mr. Harris’s individual objectives included achievement of certain revenue, product utilization and
business development/partnering goals.
Our NEOs’ target bonuses for 2017 as a percentage of base salary were as follows: Dr. Hedrick, 55%
(increased from 50% in 2016); Mr. Girao, 40% (unchanged from 2015); and Mr. Harris, 40% (increased from 30%
in 2016). The Compensation Committee, in its January 2018 meeting, evaluated our achievement in 2017 as
compared to overall the corporate and individual objectives for the NEOs in the 2017 EMIC Plan described above.
The Committee evaluated the overall results and then evaluated the NEOs’ achievement relative to their own
functional objectives and the results are tabulated in the table below:
Officer and Position
Marc H. Hedrick, M.D.
President & CEO
Tiago M. Girao,
Chief Financial Officer
John Harris
VP & General Manager of Cell Therapy
Target
Bonus
as a % of
Salary
% of
Target
Bonus
Awarded
55 %
50.0 %
Bonus
Awarded
as a % of
Salary
Amount of
2017
Bonus
Payable
in 2018(1)
27.5 % $ 140,250
40 %
58.75 %
23.5 % $ 72,615
40 %
45.0 %
18 % $ 64,890
(1)
The 2017 bonus amounts are payable in 2018 in installments as follows: 25% of such amounts are payable on April
1, 2018, 25% of such amounts are payable on July 1, 2018, 25% of such amounts are payable on October 1, 2018
and the remaining 25% of such amounts are payable on December 31, 2018.
As part of its determination of target executive compensation for fiscal year 2018, the Compensation
Committee determined bonus targets for our NEOs based on materials and information, as deemed necessary or
appropriate by the Compensation Committee in its discretion. Upon completion of this review, the Compensation
Proxy Statement | Page 49
Committee approved target bonuses (as a percentage of base salary) for our NEOs for fiscal year 2018 as follows:
Dr. Hedrick: 55%; Mr. Girao: 40%; Mr. Harris: 40%.
Long-Term Equity Compensation
We designed our long-term equity grant program to further align the interests of our executives with those
of our stockholders and to reward the executives’ longer-term performance. Historically, the Compensation
Committee has granted individual option grant awards, although from time-to-time, to further increase the emphasis
on compensation tied to performance, the Compensation Committee may grant other equity awards as allowed by
the 2014 Equity Incentive Plan. The Compensation Committee grants stock options, restricted stock, restricted stock
units and similar equity awards permitted under our plans based on its judgment as to whether the complete
compensation packages to our executives, including prior equity awards, are appropriate and sufficient to retain and
incentivize the executives and whether the grants balance long-term versus short-term compensation. The
Compensation Committee also considers our overall performance as well as the individual performance of each
NEO, and the potential dilutive effect of restricted stock awards, and the dilutive and overhang effect of the equity
grant awards, and recommendations from the Chief Executive Officer (other than with respect to his own equity
awards).
Stock options are granted with an exercise price equal to the fair market value of our common stock on the
date of grant.
In March 2017, our NEOs were granted stock options to acquire shares of our common stock at an exercise
price equal to the fair market value of our common stock on the Nasdaq Stock Market as of the date of grant, vesting
in accordance with our standard four-year vesting schedule. Specifically, Dr. Hedrick, Mr. Girao and Mr. Harris
were granted options to purchase 96,350, 31,100 and 31,100 shares of our common stock, respectively.
Personal Benefits and Perquisites
All of our executives are eligible to participate in our employee benefit plans, including medical, dental,
vision, life insurance, short-term and long-term disability insurance, flexible spending accounts, 401(k), and an
Employee Stock Purchase Program (ESPP). These plans are available to all full-time employees. In keeping with
our philosophy to provide total compensation that is competitive within our industry, we offer limited personal
benefits and perquisites to executive officers that include supplemental long-term disability insurance. You can find
more information on the amounts paid for these perquisites to or on behalf of our NEOs in our 2017 Summary
Compensation Table.
Company Acquisition / Post-Termination Compensation
We have entered into individual change of control and severance agreements, or CIC Agreements, with
each of our NEOs. The CIC Agreements provide for certain severance benefits to be paid to each of our NEOs in the
event of his involuntary termination without cause, or due to the executive’s resignation for good reason (including
the Company’s material breach of its obligations, material reduction in duties, responsibilities, compensation or
benefits, or relocation by more than 30 miles without prior consent), provided such termination or resignation occurs
in connection with an acquisition of the Company. Upon such termination or resignation in the event of an
acquisition, Dr. Hedrick would receive a lump sum payment of 18 times his monthly base salary, and 18 times his
monthly COBRA payments, and Mr. Girão and Mr. Harris would each receive a lump sum payment of 12 times his
monthly base salary, and 12 times his monthly COBRA payments. Notwithstanding the foregoing, these NEOs’
employment may be terminated for cause (including extended disability, repudiation of their CIC Agreements,
conviction of a plea of no contest to certain crimes or misdemeanors, negligence that materially harms us, failure to
perform material duties without cure, drug or alcohol use that materially interferes with performance, and chronic
unpermitted absence) without triggering an obligation for us to pay severance benefits under the CIC Agreements.
In addition, under the CIC Agreements, any unvested stock options granted to each of the above named
executive officers would vest in full upon (1) the date of the executive’s termination under the circumstances
described above following entry into an acquisition agreement (subject to the actual consummation of the
acquisition) or (2) consummation of an acquisition.
Proxy Statement | Page 50
In all events, each NEO’s entitlement to the benefits described above is expressly conditioned upon his
execution and delivery to us of a CIC Agreement and a general release of claims, in the form attached to each CIC
Agreement.
Outstanding Equity Awards at December 31, 2017
The following table sets forth information regarding outstanding equity awards held by our NEOs as of
December 31, 2017.
Option Awards
Number
of Securities
Underlying
Unexercised
Options
(#) Un-
Exercisable
(2)(5)
Number
of Securities
Underlying
Unexercised
Options
(#)
Exercisable(5)
4,000
Option Grant
Date
(1)
1/31/2008
Option
Exercise
Price
($)(5)
77.10
Option
Expiration
Date
1/31/2018
72.00
1/29/2019
100.65
83.55
51.60
41.10
75.00
35.00
21.00
7.20
2.81
1.55
20.40
2/05/2020
1/27/2021
1/26/2022
1/31/2023
1/31/2023
4/11/2024
8/21/2024
1/30/2025
1/04/2026
3/08/2027
9/2/2024
— $
— $
— $
— $
— $
— $
— $
1,185 $
— (3) $
3,996 $
26,643 $
76,277
$
1,456 $
1/29/2009
5,000
2/05/2010
1/27/2011
1/26/2012
1/31/2013
1/31/2013
4/11/2014
8/21/2014
1/30/2015
1/04/2016
3/08/2017
9/2/2014
7,333
3,666
7,666
12,222
6,111
17,815
6,666
12,004
28,970
20,073
8,544(4)
1/30/2015
6,008(4)
1,992 $
7.20
1/30/2025
1/04/2016
3/08/2017
12,149
6,479
11,173 $
$
24,621
2.81
1.55
1/04/2026
3/08/2027
11/11/2015 12,103(4)
10,230 $
5.55 11/11/2025
1/04/2016 12,149(4)
6,479
3/08/2017
11,173 $
$
24,621
2.81
1.55
1/04/2026
3/08/2027
Name
Marc H. Hedrick, M.D.,
President and Chief
Executive Officer
Tiago M. Girao,
VP of Finance Chief
Financial Officer
John Harris, VP and
General Manager Cell
Therapy
(1) For a better understanding of this table, we have included an additional column showing the grant date of the stock
options.
(2) Unless otherwise provided, stock options are subject to four-year vesting, and have a contractual term of 10 years from
the date of grant. Awards presented in this table contain one of the following two vesting provisions:
• With respect to an initial stock option grant to an employee, 25% of the shares subject to the award vest
on the one-year anniversary of the vesting start date, while an additional 1/48th of the remaining option
shares vest at the end of each month thereafter for 36 consecutive months, or
• With respect to stock option grants made to an employee after one full year of employment, 1/48th of
the shares subject to the award vest at the end of each month over a four-year period, as measured from
the vesting start date.
(3) The August 2014 stock option awards vested as to 50% of the shares subject to such awards after one year of service
and the additional 50% vested on the second anniversary of the grant.
Proxy Statement | Page 51
(4) These options were granted during the first year of the NEO’s employment and thus were subject to the following
vesting schedule: 25% of the shares subject to the award vest on the one-year anniversary of the vesting start date,
while an additional 1/48th of the remaining option shares vest at the end of each month thereafter for 36 consecutive
months.
(5) We consummated a 1-for-15 reverse stock split in May 2016. The amounts set forth in this column reflect this 1-for-15
reverse stock split.
Director Compensation
Generally, our Board believes that the level of director compensation should be based on time spent
carrying out Board and committee responsibilities and be competitive with comparable companies. In addition, the
Board believes that a significant portion of director compensation should align director interests with the long-term
interests of stockholders. The Board makes changes in its director compensation practices only upon the
recommendation of the Compensation Committee, and discussion and approval by the Board.
The following table summarizes director compensation awarded to, earned by or paid to our non-employee
directors who served on our Board during fiscal year 2017.
(a)
Director Name(1)
David M. Rickey, Chairman(2)
Richard J. Hawkins (2)
Paul W. Hawran(6)
Gary A. Lyons
Gail K. Naughton, Ph.D. (2)
Gregg Lapointe(4)
Ronald A. Martel
(c)
(d)
(e)
(b)
Fees Earned
or Paid in
Cash(2)
($)
40,000
32,500
30,000
33,333
30,000
40,000
49,167
$
$
$
$
$
$
$
Stock
Option
Awards
($)
Awards(3)(5)
($)
39,000 $
39,000 $
39,000 $
39,000 $
39,000 $
80,000 $
78,000 $
— $
— $
— $
— $
— $
— $
— $
Total
($)
79,000
71,500
69,000
72,333
69,000
120,000
127,167 12
(1)
(2)
(3)
(4)
(5)
Dr. Hedrick is not included in this table as he is an employee of ours and receives no extra
compensation for his service as a director. The compensation received by Dr. Hedrick in his capacity as
an employee is set forth in the 2017 Summary Compensation Table and further described in the
“Narrative Disclosures to Summary Compensation Table” above
On January 25, 2018, as part of the ongoing restructuring of the Company, David M. Rickey and Gail
K. Naughton, Ph.D. submitted their resignations as members of our Board of Directors, effective
immediately, and the Board of Directors decreased its size from seven to five members. In addition,
Richard J. Hawkins was appointed to serve as Chairman to succeed Mr. Rickey.
Column (d) represents the grant date fair value of the option awards, computed in accordance with
FASB ASC Topic 718, granted to our non-employee directors during 2017. For additional information
on the valuation assumptions with respect to the 2017 grants, refer to Note 12 to our audited
consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2017, filed with the SEC on March 9, 2018, regarding assumptions underlying
valuation of equity awards. These amounts do not reflect the actual economic value that will be
realized by our non-employee directors upon vesting of the stock options, exercise of the stock options
or sale of the common stock underlying the stock.
Mr. Lapointe joined our Board in March 2017.
As of December 31, 2017, our non-employee directors held the following aggregate options: Mr.
Rickey: 27,727 options; Richard Hawkins: 36,396 options; Paul Hawran: 37,728 options; Mr. Lyons:
31,654 options; Ronald Martell: 50,000 options; Gregg Lapointe: 50,000 options; and Dr. Naughton:
31,654 options.
(6)
Mr. Hawran resigned from the Board of Directors in May 2017.
Proxy Statement | Page 52
Director Compensation Program
In October 2016, the Compensation Committee approved a Director Compensation Program for fiscal year
2017, as subsequently amended. The materials elements of the 2017 Director Compensation Program are as
follows:
•
•
•
•
•
•
$40,000 annual cash retainer for Board members (an increase from $30,000 in 2016);
$30,000 annual cash retainer for the Chairman of the Board (no change from 2016);
$20,000 annual cash retainer for the Chairman of the Audit Committee (no change from 2016);
$15,000 annual cash retainer for the Chairman of our Compensation Committee and Governance and
Nominating Committee (no change from 2016);
$10,000 annual cash retainer for each non-Chairman committee member (no change from 2016);
Initial grants for new directors: Initial option grant, upon commencement of services, to purchase
50,000 shares of our common stock, vesting over two years in equal, annual installments as measured
from the grant date;
• Annual grants for existing directors: Recurring option grants to purchase 25,000 shares of our common
stock, vesting in one installment on the first anniversary of the grant date.
The Compensation Committee believed that these enhancements to the Director Compensation Program
allow us to remain aligned with director compensation practices at our peer companies.
On July 27, 2017, as the Company considered its plans to curtail expenses, the Board of Directors,
following the Compensation Committee’s recommendation, decided to suspend the cash compensation under the
Director Compensation Program for the remainder of 2017. Further, it decided to provide a one-time $25,000 cash
retainer to both Mr. Lapointe and Mr. Martell for their ongoing input and support with the Company’s strategic and
tactical activities.
On January 25, 2018, the Board of Directors, following the Compensation Committee’s recommendation,
decided to reinstate the Director Compensation Program effective January 1, 2018. Further, considering the ongoing
cash constraints of the Company, the Board of Directors decided to amend the cash components of the Director
Compensation Program for 2018 as follows:
•
•
•
•
•
$30,000 annual cash retainer for Board members;
$20,000 annual cash retainer for the Chairman of the Board;
$12,500 annual cash retainer for the Chairman of the Audit Committee;
$7,500 annual cash retainer for the Chairman of our Compensation Committee and Governance and
Nominating Committee; and
$2,500 annual cash retainer for each non-Chairman committee member.
The equity components of the Director Compensation Program for 2018 remain unchanged from those in
effect in 2017 and described above.
The Compensation Committee believes that these enhancements to the Director Compensation Program
allow us to remain aligned with director compensation practices at our peer companies while considering the
ongoing cash constraints of the Company.
Proxy Statement | Page 53
Equity Compensation Plan Information
The following table gives information as of December 31, 2017 about shares of our common stock that
may be issued upon the exercise of outstanding options, warrants and rights and shares remaining available for
issuance under all of our equity compensation plans:
Plan Category
Equity compensation plans not approved by
security holders(1) .................................................
Equity compensation plans not approved by
security holders(2) .................................................
Total ....................................................................
Number of securities
to be Issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column(a)) (c)
822,859
12,500
835,359
$
$
$
2.55
0.99
2.52
2,060,504
304,166
2,364,670
(1) The 2004 Stock Option and Stock Purchase Plan expired in August 2014. See Proposal #3 above for a description of our 2014 Equity
Incentive Plan. Also includes 10,000 shares available for issuance under our 2011 Employee Stock Purchase Plan.
(2) See Note 12 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2017 filed with the SEC on March 9, 2018 for a description of our 2015 New Employee Incentive Plan.
Proxy Statement | Page 54
Report of the Audit Committee
AUDIT MATTERS
The duties and responsibilities of the Audit Committee are set forth in its written charter, a copy which is
available on the Company’s website. Under the guidance of a written charter adopted by the Board, the purpose of
the Audit Committee is to oversee the accounting and financial reporting processes of the Company and audits of its
financial statements. The responsibilities of the Audit Committee include appointing and providing for the
compensation of the Company’s registered public accounting firm. Each of the members of the Audit Committee
meets the independence requirements of Nasdaq.
Management has primary responsibility for the system of internal controls over financial reporting,
disclosure controls and procedures, and for preparing the Company’s consolidated financial statements. The
independent registered public accounting firm has the responsibility to express an opinion on the financial
statements based on an audit conducted in accordance with generally accepted auditing standards.
In this context and in connection with the audited financial statements contained in the Company’s Annual
Report on Form 10-K, the Audit Committee provided the following report:
The Audit Committee has reviewed and discussed the Company’s audited financial statements for the year
ended December 31, 2017 with the Company’s management and the Company’s independent registered public
accounting firm, BDO USA, LLP (“BDO”). The Audit Committee has discussed with BDO the matters required to
be discussed by AS 1301, “Communication with Audit Committees,” as adopted by the Public Company
Accounting Oversight Board in Rule 3200T. The Audit Committee has received the written disclosures and the letter
from BDO required by the applicable requirements of the Public Company Accounting Oversight Board Rule 3526,
Communication with Audit Committees Concerning Independence regarding BDO’s communications with the
Audit Committee concerning independence, discussed with BDO their independence, and concluded that the non-
audit services performed by BDO are compatible with maintaining their independence. BDO advised the audit
committee that BDO was and continues to be independent accountants with respect to the Company. Based upon
the Audit Committee’s review and discussions as noted above, the Audit Committee recommended to the Board that
the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017 for filing with the Securities and Exchange Commission.
Respectfully submitted,
Gregg A. Lapointe (Chairman)
Ronald A. Martell
Gary A. Lyons
Principal Accountant Fees and Services
On July 12, 2016, we notified KPMG, LLP of its dismissal as our independent registered public accounting
firm, effective as of that date. The decision to change independent registered public accounting firms was
recommended by our Audit Committee and was approved by the Board.
On July 12, 2016, the Audit Committee appointed BDO USA, LLP, or BDO, as our independent registered
public accounting firm for the fiscal year ending December 31, 2016, subject to completion of its standard client
acceptance procedures (which were subsequently completed). Additionally, the Audit Committee appointed BDO
as our independent public accounting firm for the fiscal year ending December 31, 2017. The decision to engage
BDO as our independent registered public accounting firm was recommended by the Audit Committee and approved
by the Board.
The Audit Committee reviews and must pre-approve all audit and non-audit services performed by our
independent registered public accounting firm, as well as the fees charged by it for such services. No fees charged
by BDO during 2017 were approved under the Regulation S-X Rule 2.01(c)(7)(i)(C) exception to the pre-approval
requirement. In its review of non-audit service fees, the Audit Committee considers, among other things, the
possible impact of the performance of such services on the accounting firm’s independence.
Proxy Statement | Page 55
The following table shows the aggregate fees paid or accrued by us for the audit and other services
provided by BDO for fiscal years ended December 31, 2017 and 2016.
Audit Fees (1)
Audit Related Fees (2)
Tax Fees (3)
Total
Fiscal Year Ended
December 31,
2017
2016
$ 378,000 $ 281,000
—
35,000
$ 410,000 $ 316,000
—
32,000
(1)
Audit fees consist of fees for professional services performed by BDO USA, LLP for the audit of our
annual financial statements included in our Annual Report on Form 10-K for the year ended December
31, 2017 filed with the SEC on March 9, 2018 and review of financial statements included in our
quarterly Form 10-Q filings, reviews of registration statements and issuances of consents, and services
that are normally provided in connection with statutory and regulatory filings or engagements.
(2)
Audit related fees consist of fees for assurance and related services, performed by BDO USA, LLP that
are reasonably related to the performance of the audit or review of our financial statements.
(3)
Tax fees consist of fees for professional services performed by BDO USA LLP with respect to tax
compliance, tax advice, tax consulting and tax planning.
Proxy Statement | Page 56
OTHER MATTERS
As of the time of preparation of this Proxy Statement, neither the Board nor management intends to bring
before the meeting any business other than the matters referred to in the Notice of Annual Meeting and this Proxy
Statement. If any other business should be properly brought before the meeting, or any adjournment or
postponement thereof, the persons named in the proxy will vote on such matters according to their best judgment.
Stockholders Sharing the Same Address
In accordance with notices previously sent to many stockholders who hold their shares through a bank,
broker or other holder of record (a “street-name stockholder”) and share a single address, only one Notice of
Availability of Proxy Materials is being delivered to that address unless contrary instructions from any stockholder
at that address were received. This practice, known as “householding,” is intended to reduce our printing and
postage costs. However, any such street-name stockholder residing at the same address who wishes to receive a
separate copy of this Proxy Statement or accompanying Annual Report to Stockholders may request a copy by
contacting the bank, broker or other holder of record, or the Company by telephone at: (858) 458-0900. The voting
instruction sent to a street-name stockholder should provide information on how to request (1) householding of
future Company materials or (2) separate materials if only one set of documents is being sent to a household. If it
does not, a stockholder who would like to make one of these requests should contact us as indicated above.
Stockholder Proposals for the 2019 Meeting
Stockholders interested in submitting a proposal for consideration at our 2019 Annual Meeting must do so
by sending such proposal to our Corporate Secretary at Cytori Therapeutics, Inc., 3020 Callan Road, San Diego, CA
92121, Attention: Corporate Secretary. Under the SEC’s proxy rules, the deadline for submission of proposals to be
included in our proxy materials for the 2019 Annual Meeting is December 11, 2018. Accordingly, for a stockholder
proposal to be considered for inclusion in our proxy materials for the 2019 Annual Meeting, any such stockholder
proposal must be received by our Corporate Secretary on or before December 11, 2018 and comply with the
procedures and requirements set forth in Rule 14a-8 under the Securities Exchange Act of 1934.
In addition, our bylaws require advance notice of business to be brought before a stockholders’ meeting
(other than non-binding proposals presented under Rule 14a-8), including nominations of persons for election as
directors. To be timely, notice to our Corporate Secretary must be received at our principal executive offices not less
than 120 days prior to the anniversary date of the preceding year’s proxy statement and must contain specified
information concerning the matters to be brought before such meeting, including nominations, if applicable, and
concerning the stockholder proposing such matters. Any stockholder proposal or nomination received after
December 11, 2018 will be considered untimely, and we will not entertain any proposals or nominations at the
annual meeting that do not meet the requirements set forth in our bylaws. However, in the event we hold the 2019
Annual Meeting of stockholders more than 30 days before or after the one-year anniversary date of the 2018 Annual
Meeting, a proposal must be received by us a reasonable time before the proxy solicitation is made. If the
stockholder does not also comply with the requirements of Rule 14a-4(c)(2) under the Exchange Act, we may
exercise discretionary voting authority under proxies that we solicit to vote in accordance with our best judgement
on any such stockholder proposal or nomination.
By Order of the Board of Directors,
MARC H. HEDRICK
President and Chief Executive Officer
Proxy Statement | Page 57
APPENDIX A
AMENDED AND RESTATED
2014 EQUITY INCENTIVE PLAN
of
CYTORI THERAPEUTICS, INC.
Proxy Statement | Page 58
2014 Equity Incentive Plan
Of
Cytori Therapeutics, Inc.
(As Amended and Restated May 18, 2018)
1.
ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1
Establishment. This Plan constitutes an amendment and restatement of the 2014 Equity
Incentive Plan of Cytori Therapeutics, Inc. (as amended to date, the “Original Plan”), which was first approved by the
Board on February 27, 2014, and approved by the stockholders of the Company on July 31, 2014, as amended by the
Board on June 12, 2015, which amendment was approved by the stockholders of the Company on August 13, 2015,
and as further amended by the Board on March 3, 2016, which amendment was approved by the stockholders of the
Company on May 10, 2016, and as further amended by the Board on January 26, 2017, which amendment was
approved by the stockholders of the Company on May 22, 2017. This amended and restated Plan (the “Plan”) was
approved by the Board on March 19, 2018, subject to stockholder approval. The date on which this amended and
restated Plan is approved by the stockholders of the Company will be the “Restatement Effective Date.”
1.2
Purpose. The purpose of the Plan is to advance the interests of the Participating Company
Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the growth and profitability of the
Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options,
Stock Appreciation Rights, Restricted Stock Purchase Rights, Restricted Stock Bonuses, Restricted Stock Units,
Performance Shares, Performance Units, Cash-Based Awards, Other Stock-Based Awards, and Deferred
Compensation Awards.
Term of Plan. The Plan shall continue in effect until its termination by the Committee;
provided, however, that all Awards shall be granted, if at all, on or before ten (10) years from March 19, 2018, the
date the Board approved this amended and restated Plan.
1.3
1.4
Stockholder Approval. This amended and restated Plan shall be submitted for the approval
of the Company’s stockholders within twelve (12) months after March 19, 2018, the date the Board approved this
amended and restated Plan. In the event the Restatement Effective Date does not occur because the stockholders of
the Company have not approved this amended and restated Plan within said 12-month period, the Original Plan shall
continue in full force and effect in accordance with its terms and conditions as in effect immediately prior to the date
this amended and restated Plan was approved by the Board.
2.
DEFINITIONS AND CONSTRUCTION.
meanings set forth below:
2.1
Definitions. Whenever used herein, the following terms shall have their respective
(a)
“Affiliate” means (i) a parent entity, other than a Parent Corporation, that directly,
or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other than a
Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more intermediary
entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall have the meanings
assigned such terms for the purposes of registration of securities on Form S-8 under the Securities Act.
“Award” means any Option, Stock Appreciation Right, Restricted Stock Purchase
Right, Restricted Stock Bonus, Restricted Stock Unit, Performance Share, Performance Unit, Cash-Based Award,
Other Stock-Based Award or Deferred Compensation Award granted under the Plan.
(b)
“Award Agreement” means a written or electronic agreement between the
Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award. Award
(c)
Proxy Statement | Page 59
Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet
the applicable provisions of Section 422 of the Code.
(d)
(e)
to Section 11.
“Board” means the Board of Directors of the Company.
“Cash-Based Award” means an Award denominated in cash and granted pursuant
(f)
“Cashless Exercise” means a Cashless Exercise as defined in Section 6.3(b)(i).
(g)
“Cause” means, unless such term or an equivalent term is otherwise defined by
the applicable Award Agreement or other written agreement between a Participant and a Participating Company
applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of
fiduciary duty for personal profit, or falsification of any Participating Company documents or records; (ii) the
Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including,
without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s
unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate
opportunity of a Participating Company (including, without limitation, the Participant’s improper use or disclosure of
a Participating Company’s confidential or proprietary information); (iv) any intentional act by the Participant which
has a material detrimental effect on a Participating Company’s reputation or business; (v) the Participant’s repeated
failure or inability to perform any reasonable assigned duties after written notice from a Participating Company of,
and a reasonable opportunity to cure, such failure or inability; (vi) any material breach by the Participant of any
employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between the
Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or
(vii) the Participant’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud,
dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties
with a Participating Company.
following:
(h)
“Change in Control” means the occurrence of any one or a combination of the
(i)
any “person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) becomes the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total Fair Market
Value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the
election of Directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree
of beneficial ownership results from any of the following: (A) an acquisition by any person who on the Restatement
Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition
directly from the Company, including, without limitation, pursuant to or in connection with a public offering of
securities, (C) any acquisition by the Company, (D) any acquisition by a trustee or other fiduciary under an employee
benefit plan of a Participating Company or (E) any acquisition by an entity owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the
Company; or
(ii)
an Ownership Change Event or series of related Ownership Change
Events (collectively, a “Transaction”) in which the stockholders of the Company immediately before the Transaction
do not retain immediately after the Transaction direct or indirect beneficial ownership of more than fifty percent (50%)
of the total combined voting power of the outstanding securities entitled to vote generally in the election of Directors
or, in the case of an Ownership Change Event described in Section 2.1(ff)(iii), the entity to which the assets of the
Company were transferred (the “Transferee”), as the case may be; or
dissolution of the Company.
(iii)
approval by the stockholders of a plan of complete liquidation or
Proxy Statement | Page 60
For purposes of the preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business
entities which own the Company or the Transferee, as the case may be, either directly or through one or more
subsidiary corporations or other business entities. The Committee shall determine whether multiple acquisitions of
the voting securities of the Company and/or multiple Ownership Change Events are related and to be treated in the
aggregate as a single Change in Control, and its determination shall be final, binding and conclusive.
applicable regulations or administrative guidelines promulgated thereunder.
(i)
“Code” means the Internal Revenue Code of 1986, as amended, and any
(j)
“Committee” means the Compensation Committee and such other committee or
subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each instance as
shall be specified by the Board. If, at any time, there is no committee of the Board then authorized or properly
constituted to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in
any event, the Board may in its discretion exercise any or all of such powers.
(k)
successor corporation thereto.
“Company” means Cytori Therapeutics, Inc., a Delaware corporation, or any
(l)
“Consultant” means a person engaged to provide consulting or advisory services
(other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such
person, the nature of such services or the entity to which such services are provided would not preclude the Company
from offering or selling securities to such person pursuant to the Plan in reliance on registration on Form S-8 under
the Securities Act.
pursuant to Section 12.
(m)
Deferred Compensation Award” means an Award granted to a Participant
(n)
(o)
“Director” means a member of the Board.
“Disability” means the permanent and total disability of the Participant, within
the meaning of Section 22(e)(3) of the Code.
(p)
“Dividend Equivalent Right” means the right of a Participant, granted at the
discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant
in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award
(other than an Option or SAR) held by such Participant. Notwithstanding anything to the contrary contained in the
Plan, no dividends or Dividend Equivalent Rights that are paid prior to the vesting of any Award subject to Vesting
Conditions shall be paid to a Participant with respect to such Award unless and until such Vesting Conditions are
subsequently satisfied and the Award vests.
(q)
“Employee” means any person treated as an employee (including an Officer or a
member of the Board who is also treated as an employee) in the records of a Participating Company and, with respect
to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code;
provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to
constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its
discretion, whether an individual has become or has ceased to be an Employee and the effective date of such
individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights,
if any, under the terms of the Plan as of the time of the Company’s determination of whether or not the individual is
an Employee, all such determinations by the Company shall be final, binding and conclusive as to such rights, if any,
notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary
determination as to such individual’s status as an Employee.
applicable regulations or administrative guidelines promulgated thereunder.
(r)
“ERISA” means the Employee Retirement Income Security Act of 1974 and any
Proxy Statement | Page 61
(s)
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fair Market Value” means, as of any date, the value of a share of Stock or other
property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination
is expressly allocated to the Company herein, subject to the following:
(t)
(i)
Except as otherwise determined by the Committee, if, on such date, the
Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a
share of Stock shall be the closing price of a share of Stock as quoted on the national or regional securities exchange
or quotation system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other
source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on
such securities exchange or quotation system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded or quoted prior to the relevant date.
(ii)
Notwithstanding the foregoing, the Committee may, in its discretion,
determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high and
low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a share of Stock
received by a Participant, any other reasonable basis using actual transactions in the Stock as reported on a national
or regional securities exchange or quotation system, or on any other basis consistent with the requirements of Section
409A. The Committee may vary its method of determination of the Fair Market Value as provided in this Section for
different purposes under the Plan to the extent consistent with the requirements of Section 409A.
If, on such date, the Stock is not listed or quoted on a national or regional
securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by the
Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse,
and in a manner consistent with the requirements of Section 409A.
(iii)
“Full Value Award” means any Award settled in Stock, other than (i) an Option,
(ii) a Stock Appreciation Right, or (iii) a Restricted Stock Purchase Right or an Other Stock-Based Award under which
the Company will receive monetary consideration equal to the Fair Market Value (determined on the effective date of
grant) of the shares subject to such Award.
(u)
“Incentive Stock Option” means an Option intended to be (as set forth in the
Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.
(v)
Stock are subject to Section 16 of the Exchange Act.
(w)
“Insider” means an Officer, Director or any other person whose transactions in
(x)
(y)
(z)
“Net Exercise” means a Net Exercise as defined in Section 6.3(b)(ii).
“Nonemployee Director” means a Director who is not an Employee.
“Nonemployee Director Award” means any Award granted to a Nonemployee
Director.
“Nonstatutory Stock Option” means an Option not intended to be (as set forth in
the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section 422(b)
of the Code.
(aa)
Company.
(bb)
“Officer” means any person designated by the Board as an officer of the
granted pursuant to the Plan.
(cc)
“Option” means an Incentive Stock Option or a Nonstatutory Stock Option
Proxy Statement | Page 62
(dd)
granted pursuant to Section 11.
“Other Stock-Based Award” means an Award denominated in shares of Stock and
(ee)
“Ownership Change Event” means the occurrence of any of the following with
respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the
stockholders of the Company of securities of the Company representing more than fifty percent (50%) of the total
combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of
Directors; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange, or transfer of all
or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of
the Company).
Company, as defined in Section 424(e) of the Code.
(ff)
“Parent Corporation” means any present or future “parent corporation” of the
Awards.
(gg)
“Participant” means any eligible person who has been granted one or more
Subsidiary Corporation or Affiliate.
(hh)
“Participating Company” means the Company or any Parent Corporation,
other entities collectively which are then Participating Companies.
(ii)
“Participating Company Group” means, at any point in time, the Company and all
Units.
(jj)
“Performance Award” means an Award of Performance Shares or Performance
“Performance Award Formula” means, for any Award, a formula or table
established by the Committee pursuant to Section 10.3 which provides the basis for computing the value of an Award
at one or more levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable
Performance Period.
(kk)
“Performance-Based Compensation” means compensation under an Award
granted under the Plan prior to November 2, 2017 that is intended to qualify as “performance-based compensation”
as described in Section 162(m)(4)(C) of the Code prior to its repeal.
(ll)
pursuant to Section 10.3.
(mm)
“Performance Goal” means a performance goal established by the Committee
Section 10.3 at the end of which one or more Performance Goals are to be measured.
(nn)
“Performance Period” means a period established by the Committee pursuant to
“Performance Share” means a right granted to a Participant pursuant to Section
10 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based upon
attainment of applicable Performance Goal(s).
(oo)
“Performance Unit” means a right granted to a Participant pursuant to Section 10
to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon attainment
of applicable Performance Goal(s).
(pp)
Restricted Stock Purchase Right.
(qq)
“Restricted Stock Award” means an Award of a Restricted Stock Bonus or a
Section 8.
(rr)
“Restricted Stock Bonus” means Stock granted to a Participant pursuant to
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Participant pursuant to Section 8.
(ss)
“Restricted Stock Purchase Right” means a right to purchase Stock granted to a
9 to receive on a future date or event a share of Stock or cash in lieu thereof, as determined by the Committee.
(tt)
“Restricted Stock Unit” means a right granted to a Participant pursuant to Section
to time, or any successor rule or regulation.
(uu)
“Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time
“SAR” or “Stock Appreciation Right” means a right granted to a Participant
pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to the
excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the exercise
price thereof.
(vv)
(ww)
“Section 162(m)” means Section 162(m) of the Code.
(xx)
“Section 409A” means Section 409A of the Code.
to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.
(yy)
“Section 409A Deferred Compensation” means compensation provided pursuant
(zz)
“Securities Act” means the Securities Act of 1933, as amended.
(aaa)
“Service” means a Participant’s employment or service with the Participating
Company Group, whether as an Employee, a Director or a Consultant. Unless otherwise provided by the Committee,
a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which
the Participant renders such Service or a change in the Participating Company for which the Participant renders such
Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s
Service shall not be deemed to have been interrupted or terminated if the Participant takes any military leave, sick
leave, or other bona fide leave of absence approved by the Company. However, unless otherwise provided by the
Committee, if any such leave taken by a Participant exceeds ninety (90) days, then on the ninety-first (91st) day
following the commencement of such leave the Participant’s Service shall be deemed to have terminated, unless the
Participant’s right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, an unpaid leave of absence shall not be treated as Service
for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be
deemed to have terminated either upon an actual termination of Service or upon the business entity for which the
Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its
discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.
(bbb)
Subject to the provisions of Section 409A, the term “Short-Term Deferral Period”
means the 2½ month period ending on the later of (i) the 15th day of the third month following the end of the
Participant’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject
to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the Company’s taxable
year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk
of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning provided by
Section 409A.
(ccc)
in accordance with Section 4.3.
“Stock” means the common stock of the Company, as adjusted from time to time
(ddd)
of the Company, as defined in Section 424(f) of the Code.
“Subsidiary Corporation” means any present or future “subsidiary corporation”
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“Ten Percent Owner” means a Participant who, at the time an Option is granted
to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes
of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.
(eee)
“Trading Compliance Policy” means the written policy of the Company
pertaining to the purchase, sale, transfer or other disposition of the Company’s equity securities by Directors, Officers,
Employees or other service providers who may possess material, nonpublic information regarding the Company or its
securities.
(fff)
“Vesting Conditions” mean those conditions established in accordance with the
Plan prior to the satisfaction of which an Award or shares subject to an Award remain subject to forfeiture or a
repurchase option in favor of the Company exercisable for the Participant’s monetary purchase price, if any, for such
shares upon the Participant’s termination of Service.
(ggg)
2.2
Construction. Captions and titles contained herein are for convenience only and shall not
affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be
exclusive, unless the context clearly requires otherwise.
3.
ADMINISTRATION.
3.1
Administration by the Committee. The Plan shall be administered by the Committee. All
questions of interpretation of the Plan, of any Award Agreement or of any other form of agreement or other document
employed by the Company in the administration of the Plan or of any Award shall be determined by the Committee,
and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or such
Award, unless fraudulent or made in bad faith. Any and all actions, decisions and determinations taken or made by
the Committee in the exercise of its discretion pursuant to the Plan or Award Agreement or other agreement thereunder
(other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and
conclusive upon all persons having an interest therein. All expenses incurred in the administration of the Plan shall
be paid by the Company.
3.2
Authority of Officers. Any Officer shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which is the responsibility of or which is
allocated to the Company herein, provided that the Officer has apparent authority with respect to such matter, right,
obligation, determination or election.
Administration with Respect to Insiders. With respect to participation by Insiders in the
Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.
3.3
3.4
Committee Complying with Section 162(m). Should any Awards made under the Plan
prior to November 2, 2017, be intended to qualify as Performance-Based Compensation within the meaning of Section
162(m)(4)(C) of the Code prior to its repeal, then all such determinations regarding such Awards will be made solely
by a Committee comprised solely of two of more “outside directors” within the meaning of Section 162(m) of the
Code.
Powers of the Committee. In addition to any other powers set forth in the Plan and subject
to the provisions of the Plan, including, but not limited to the prohibitions on Option or SAR repricings set forth in
Section 3.6, the Committee shall have the full and final power and authority, in its discretion:
3.5
be granted and the number of shares of Stock, units or monetary value to be subject to each Award;
(a)
to determine the persons to whom, and the time or times at which, Awards shall
(b)
to determine the type of Award granted;
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(c)
to determine the Fair Market Value of shares of Stock or other property;
(d)
to determine the terms, conditions and restrictions applicable to each Award
(which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise
or purchase price of shares pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any
Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with any Award,
including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability
or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Measures, Performance Period,
Performance Award Formula and Performance Goals applicable to any Award and the extent to which such
Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s
termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any
Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;
property or in any combination thereof;
(e)
to determine whether an Award will be settled in shares of Stock, cash, other
(f)
(g)
to approve one or more forms of Award Agreement;
to amend, modify, or cancel any Award or to waive any restrictions or conditions
applicable to any Award or any shares acquired pursuant thereto;
to accelerate, continue, extend or defer the exercisability or vesting of any Award
or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of
Service;
(h)
to prescribe, amend or rescind rules, guidelines and policies relating to the Plan,
or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the
Committee deems necessary or desirable to comply with the laws or regulations of or to accommodate the tax policy,
accounting principles or custom of, foreign jurisdictions whose citizens may be granted Awards; and
(i)
to correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the
Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan
or applicable law.
(j)
3.6
Option or SAR Repricing. Without the affirmative vote of holders of a majority of the
shares of Stock cast in person or by proxy at a meeting of the stockholders of the Company at which a quorum
representing a majority of all outstanding shares of Stock is present or represented by proxy, the Committee shall not
approve a program providing for either (a) the cancellation of outstanding Options or SARs having exercise prices per
share greater than the then Fair Market Value of a share of Stock (“Underwater Awards”) and the grant in substitution
therefore of new Options or SARs having a lower exercise price, Full Value Awards, or payments in cash, or (b) the
amendment of outstanding Underwater Awards to reduce the exercise price thereof. This Section shall not apply to
adjustments pursuant to the assumption of or substitution for an Option or SAR in a manner that would comply with
Section 424(a) or Section 409A of the Code or to an adjustment pursuant to Section 4.3.
3.7
Indemnification. In addition to such other rights of indemnification as they may have as
members of the Board or the Committee or as officers or employees of the Participating Company Group, to the extent
permitted by applicable law, members of the Board or the Committee and any officers or employees of the
Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and
necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be
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adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional
misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and
defend the same.
4.
SHARES SUBJECT TO PLAN.
4.1
Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.3,
as of the Restatement Effective Date, the maximum number of shares of Stock that may be issued under the Plan
pursuant to Awards shall be equal to Ten Million Four Hundred Thousand One Hundred Thirty-Three (10,400,133)
shares. Shares of Stock that may be issued under the Plan pursuant to Awards shall consist of authorized or reacquired
shares of Stock or any combination thereof.
4.2
Share Counting.
(a)
If an outstanding Award for any reason expires or is terminated or canceled
without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to
forfeiture or repurchase are forfeited or repurchased by the Company for an amount not greater than the Participant’s
purchase price, then in each case the shares of Stock allocable to the terminated portion of such Award or such forfeited
or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock shall not be
deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash. Shares
withheld or reacquired by the Company in satisfaction of tax withholding obligations applicable to SARs and Options
pursuant to Section 17.2, shall not again be available for issuance under the Plan. Shares withheld by the Company
in satisfaction of tax withholding obligations described in Section 17.2 with respect to Full Value Awards, shall again
be available for issuance under the Plan. Upon payment in shares of Stock pursuant to the exercise of a SAR, the
number of shares available for issuance under the Plan shall be reduced by the gross number of shares subject to the
SAR. If the exercise price of an Option is paid by means of a Net-Exercise, the number of shares available for issuance
under the Plan shall be reduced by the gross number of shares for which the Option is exercised. Shares reacquired
by the Company on the open market or otherwise using cash proceeds from the exercise of Options shall not be added
to the shares of Stock authorized for grant under this Plan.
shall be added back as one (1) share of Stock for every one share subject to an Award.
(b)
Any shares of Stock that again become available for grant pursuant to this Section
4.3
Adjustments for Changes in Capital Structure. Subject to any required action by the
stockholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent applicable, in
the event of any change in the Stock effected without receipt of consideration by the Company, whether through
merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the
capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the
Company in a form other than Stock (excepting regular, periodic cash dividends) that has a material effect on the Fair
Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number and kind of
shares subject to the Plan and to any outstanding Awards, the Award limits set forth in Section 5.3, and in the exercise
or purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’
rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall
not be treated as “effected without receipt of consideration by the Company.” If a majority of the shares which are of
the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the “New Shares”),
the Committee may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In
the event of any such amendment, the number of shares subject to, and the exercise or purchase price per share of, the
outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion.
Any fractional share resulting from an adjustment pursuant to this Section shall be rounded down to the nearest whole
number, and in no event may the exercise or purchase price under any Award be decreased to an amount less than the
par value, if any, of the stock subject to such Award. The Committee in its discretion, may also make such adjustments
in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions
as it deems appropriate, including modification of Performance Goals, Performance Award Formulas and Performance
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Periods. The adjustments determined by the Committee pursuant to this Section shall be final, binding and conclusive.
Unless otherwise determined by the Committee, no adjustment or action described in this Section 4.3 or in any other
provision of the Plan shall be authorized to the extent it would (i) with respect to Awards which are intended to qualify
as Performance-Based Compensation, cause such Awards to fail to so qualify as Performance-Based Compensation,
(ii) cause the Plan to violate Section 422(b)(1) of the Code, (iii) result in short-swing profits liability under Section 16
of the Exchange Act or violate the exemptive conditions of Rule 16b-3 of the Exchange Act, or (iv) cause an Award
to fail to be exempt from or comply with Section 409A.
4.4
Assumption or Substitution of Awards. The Committee may, without affecting the number
of shares of Stock reserved or available hereunder, authorize the issuance or assumption of benefits under this Plan in
connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and
conditions as it may deem appropriate, subject to compliance with Section 409A and any other applicable provisions
of the Code. In addition, subject to compliance with applicable laws, and listing requirements, shares available for
grant under a stockholder approved plan of an acquired company (as appropriately adjusted to reflect the transaction)
may be used for awards under the Plan to individuals who were not Employees or Directors of the Participating
Company Group prior to the transaction and shall not reduce the share reserve set forth above. Shares reacquired by
the Company on the open market or otherwise using cash proceeds from the exercise of Options shall not be added to
the shares of Stock authorized for grant under this Plan.
5.
ELIGIBILITY, PARTICIPATION AND AWARD LIMITATIONS.
Directors.
5.1
Persons Eligible for Awards. Awards may be granted only to Employees, Consultants and
Participation in the Plan. Awards are granted solely at the discretion of the Committee.
Eligible persons may be granted more than one Award. However, eligibility in accordance with this Section shall not
entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.
5.2
5.3
Award Limitations.
(a)
Incentive Stock Option Limitations.
Maximum Number of Shares Issuable Pursuant to Incentive Stock
Options. Subject to adjustment as provided in Section 4.3, the maximum aggregate number of shares of Stock that
may be issued under the Plan pursuant to the exercise of Incentive Stock Options shall not exceed Ten Million Four
Hundred Thousand One Hundred Thirty-Three (10,400,133) shares.
(i)
Persons Eligible. An Incentive Stock Option may be granted only to a
person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary
Corporation (each being an “ISO-Qualifying Corporation”). Any person who is not an Employee of an ISO-
Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a
Nonstatutory Stock Option.
(ii)
(iii)
Fair Market Value Limitation. To the extent that options designated as
Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan)
become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value
greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall
be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options
shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a
limitation different from that set forth in this Section, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If
an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is
exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock
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Option portion of the Option first. Upon exercise, shares issued pursuant to each such portion shall be separately
identified.
(b)
Limit on Awards to Nonemployee Directors. Notwithstanding any other
provision of the Plan to the contrary, the Board may establish compensation for Nonemployee Directors from time to
time, subject to the limitations in the Plan. The Board will from time to time determine the terms, conditions and
amounts of all such Nonemployee Director compensation in its discretion and pursuant to the exercise of its business
judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to
time, provided that the sum of any cash compensation, or other compensation, and the value (determined as of the
grant date in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718,
or any successor thereto) of Awards granted to a Nonemployee Director as compensation for services as a
Nonemployee Director during any calendar year of the Company may not exceed $500,000 (increased to $700,000 in
the calendar year of his or her initial service as a Nonemployee Director). The Board may make exceptions to this
limit for individual Nonemployee Directors in extraordinary circumstances, as the Board may determine in its
discretion, provided that the Nonemployee Director receiving such additional compensation may not participate in the
decision to award such compensation or in other contemporaneous compensation decisions involving Nonemployee
Directors.
6.
STOCK OPTIONS.
Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby,
in such form as the Committee shall from time to time establish. Award Agreements evidencing Options may
incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms
and conditions:
6.1
Exercise Price. The exercise price for each Option shall be established in the discretion of
the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value
of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten
Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option
(whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than
the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for
another option in a manner that would qualify under the provisions of Section 409A or 424(a) of the Code.
6.2
Exercisability and Term of Options. Options shall be exercisable at such time or times, or
upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be
determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that
(a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option,
(b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years
after the effective date of grant of such Option and (c) no Option granted to an Employee who is a non-exempt
employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least
six (6) months following the date of grant of such Option (except in the event of such Employee’s death, disability or
retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject
to the foregoing, unless otherwise specified by the Committee in the grant of an Option, each Option shall terminate
ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.
6.3
Payment of Exercise Price.
(a)
Forms of Consideration Authorized. Except as otherwise provided below,
payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made
(i) in cash, by check or in cash equivalent; (ii) if permitted by the Committee and subject to the limitations contained
in Section 6.3(b), by means of (1) a Cashless Exercise, or (2) a Net Exercise; (iii) by such other consideration as may
be approved by the Committee from time to time to the extent permitted by applicable law, or (iv) by any combination
thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing
forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of
consideration.
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(b)
Limitations on Forms of Consideration.
(i)
Cashless Exercise. A “Cashless Exercise” means the delivery of a
properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to
the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise
of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves,
at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or
terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with
respect to one or more Participants specified by the Company notwithstanding that such program or procedures may
be available to other Participants.
(ii)
Net Exercise. A “Net Exercise” means the delivery of a properly
executed exercise notice followed by a procedure pursuant to which (1) the Company will reduce the number of shares
otherwise issuable to a Participant upon the exercise of an Option by the largest whole number of shares having a Fair
Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is
exercised, and (2) the Participant shall pay to the Company in cash the remaining balance of such aggregate exercise
price not satisfied by such reduction in the number of whole shares to be issued.
6.4
Effect of Termination of Service.
(a)
Option Exercisability. Subject to earlier termination of the Option as otherwise
provided by this Plan and unless otherwise provided by the Committee, an Option shall terminate immediately upon
the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the
Participant’s termination of Service to the extent it is then vested only during the applicable time period determined
in accordance with this Section and thereafter shall terminate. Except as otherwise provided in the Award Agreement,
or other agreement governing the Option, and subject to Section 6.2 above, vested Options shall remain exercisable
following a termination of Service as follows:
(i)
Disability. If the Participant’s Service terminates because of the
Disability of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on
which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal
representative) at any time prior to the expiration of two (2) years after the date on which the Participant’s Service
terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Award
Agreement evidencing such Option (the “Option Expiration Date”).
(ii)
Death. If the Participant’s Service terminates because of the death of the
Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the
Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who
acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of two
(2) years after the date on which the Participant’s Service terminated, but in any event no later than the Option
Expiration Date.
Termination for Cause. Notwithstanding any other provision of the Plan
to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination of
Service and during any period in which the Option otherwise would remain exercisable, the Participant engages in
any act that would constitute Cause, the Option shall terminate in its entirety and cease to be exercisable immediately
upon such termination of Service or act.
(iii)
Other Termination of Service. If the Participant’s Service terminates for
any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for vested shares
on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the
expiration of ninety (90) days after the date on which the Participant’s Service terminated, but in any event no later
than the Option Expiration Date.
(iv)
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(b)
Extension if Exercise Prevented. Notwithstanding the foregoing, other than with
respect to a termination of Service for Cause, and subject to the requirements of Section 409A, if the exercise of an
Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 15 below
because such exercise would violate applicable securities laws, the Option shall remain exercisable until the later of
(i) thirty (30) days after the date such exercise first would no longer violate applicable securities laws or (ii) the end
of the applicable time period under Section 6.4(a), but in any event no later than the Option Expiration Date.
6.5
Transferability of Options. During the lifetime of the Participant, an Option shall be
exercisable only by the Participant or the Participant’s guardian or legal representative. An Option shall not be subject
in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment
by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and
distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth
in the Award Agreement evidencing such Option, a Nonstatutory Stock Option may be assignable or transferable
subject to the applicable limitations, described in the General Instructions to Form S-8 under the Securities Act;
provided that no consideration may be received for any transfer. An Incentive Stock Option shall not be assignable
or transferable in any manner.
7.
STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of
Stock subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements
evidencing SARs may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject
to the following terms and conditions:
7.1
Exercise Price. The exercise price for each SAR shall be established in the discretion of
the Committee; provided, however, that the exercise price per share subject to a SAR shall be not less than the Fair
Market Value of a share of Stock on the effective date of grant of the SAR. Notwithstanding the foregoing, a SAR
may be granted with an exercise price lower than the minimum exercise price set forth above if such SAR is granted
pursuant to an assumption or substitution for another stock appreciation right in a manner that would qualify under
the provisions of Section 409A of the Code.
7.2
Exercisability and Term of SARs. SARs shall be exercisable at such time or times, or upon
such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined
by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that (i) no SAR
shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR, and (ii) no SAR
granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as
amended, shall be first exercisable until at least six (6) months following the date of grant of such SAR (except in the
event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the
Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the
grant of a SAR, each SAR shall terminate ten (10) years after the effective date of grant of the SAR, unless earlier
terminated in accordance with its provisions.
7.3
Exercise of SARs. Upon the exercise of a SAR, the Participant (or the Participant’s legal
representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall
be entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the
excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price.
Payment of such amount shall be made in cash, shares of Stock, or any combination thereof as determined by the
Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be made in shares of Stock, the
number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the
date of exercise of the SAR. For purposes of Section 7, a SAR shall be deemed exercised on the date on which the
Company receives notice of exercise from the Participant.
7.4
Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise
provided herein and unless otherwise provided by the Committee, a SAR shall be exercisable after a Participant’s
termination of Service only to the extent and during the applicable time period determined in accordance with
Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.
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7.5
Transferability of SARs. During the lifetime of the Participant, a SAR shall be exercisable
only by the Participant or the Participant’s guardian or legal representative. A SAR shall not be subject in any manner
to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of
the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award
Agreement evidencing such Award, a SAR may be assignable or transferable subject to the applicable limitations,
described in the General Instructions to Form S-8 under the Securities Act; provided that no consideration may be
received for any transfer.
8.
RESTRICTED STOCK AWARDS.
Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a
Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock subject to the Award,
in such form as the Committee shall from time to time establish. Award Agreements evidencing Restricted Stock
Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the
following terms and conditions:
8.1
Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted
in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be
granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of
one or more Performance Goals described in Section 10.4.
8.2
Purchase Price. The purchase price for shares of Stock issuable under each Restricted
Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than
applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Restricted Stock
Bonus, the consideration for which shall be services actually rendered to a Participating Company or for its benefit.
Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration
in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than
the par value of the shares of Stock subject to a Restricted Stock Award.
Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period
established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of
the Restricted Stock Purchase Right.
8.3
8.4
Payment of Purchase Price. Except as otherwise provided below, payment of the purchase
price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be
made (a) in cash, by check or in cash equivalent, (b) by such other consideration as may be approved by the Committee
from time to time to the extent permitted by applicable law, or (c) by any combination thereof.
8.5
Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock
Award may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service
requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as
described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing
such Award. During any period in which shares acquired pursuant to a Restricted Stock Award remain subject to
Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of
other than pursuant to an Ownership Change Event or as provided in Section 8.8. The Committee, in its discretion,
may provide in any Award Agreement evidencing a Restricted Stock Award that, if the satisfaction of Vesting
Conditions with respect to any shares subject to such Restricted Stock Award would otherwise occur on a day on
which the sale of such shares would violate the provisions of the Trading Compliance Policy, then satisfaction of the
Vesting Conditions automatically shall be determined on the next trading day on which the sale of such shares would
not violate the Trading Compliance Policy. Upon request by the Company, each Participant shall execute any
agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly
present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on
such certificates of appropriate legends evidencing any such transfer restrictions.
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8.6
Voting Rights; Dividends and Distributions. Except as provided in this Section, Section
8.5 and any Award Agreement, during any period in which shares acquired pursuant to a Restricted Stock Award
remain subject to Vesting Conditions, the Participant shall have all of the rights of a stockholder of the Company
holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions
paid with respect to such shares; provided, however, that such dividends and distributions shall vest and become
nonforfeitable only if the underlying shares of Stock subject to the Restricted Stock Award become vested (including,
but not limited to, the satisfaction of any performance related Vesting Condition). In the event of a dividend or
distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital
structure of the Company as described in Section 4.3, any and all new, substituted or additional securities or other
property (other than regular, periodic cash dividends) to which the Participant is entitled by reason of the Participant’s
Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares subject to the
Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.
8.7
Effect of Termination of Service. Unless otherwise provided by the Committee in the
Award Agreement evidencing a Restricted Stock Award, if a Participant’s Service terminates for any reason, whether
voluntary or involuntary (including the Participant’s death or Disability), then (a) the Company shall have the option
to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a
Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s
termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant
pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s
termination of Service. The Company shall have the right to assign at any time any repurchase right it may have,
whether or not such right is then exercisable, to one or more persons as may be selected by the Company.
8.8
Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock
pursuant to a Restricted Stock Award shall not be subject in any manner to anticipation, alienation, sale, exchange,
transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s
beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to a Restricted
Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant
or the Participant’s guardian or legal representative.
9.
RESTRICTED STOCK UNIT AWARDS.
Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of
Restricted Stock Units subject to the Award, in such form as the Committee shall from time to time establish. Award
Agreements evidencing Restricted Stock Units may incorporate all or any of the terms of the Plan by reference and
shall comply with and be subject to the following terms and conditions:
Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted
upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or
more Performance Goals described in Section 10.4.
9.1
9.2
Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall
be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall be services
actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by
applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered
to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock issued
upon settlement of the Restricted Stock Unit Award.
9.3
Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting
Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria,
including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the
Committee and set forth in the Award Agreement evidencing such Award. The Committee, in its discretion, may
provide in any Award Agreement evidencing a Restricted Stock Unit Award that, if the satisfaction of Vesting
Conditions with respect to any shares subject to the Award would otherwise occur on a day on which the sale of such
shares would violate the provisions of the Trading Compliance Policy, then the satisfaction of the Vesting Conditions
automatically shall be determined on the first to occur of (a) the next trading day on which the sale of such shares
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would not violate the Trading Compliance Policy or (b) the later of (i) last day of the calendar year in which the
original vesting date occurred or (ii) the last day of the Company’s taxable year in which the original vesting date
occurred.
9.4
Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no
voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of
such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent
of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any
Restricted Stock Unit Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the
payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with
respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is
terminated. Such Dividend Equivalent Rights, if any, shall be paid by crediting the Participant with additional whole
Restricted Stock Units as of the date of payment of such cash dividends on Stock. The number of additional Restricted
Stock Units (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount
of cash dividends paid on such date with respect to the number of shares of Stock represented by the Restricted Stock
Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Such
additional Restricted Stock Units shall be subject to the same terms and conditions, including any Vesting Conditions,
and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the
Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or
any other adjustment made upon a change in the capital structure of the Company as described in Section 4.3,
appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right
to receive upon settlement any and all new, substituted or additional securities or other property (other than regular,
periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon
settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately
subject to the same Vesting Conditions as are applicable to the Award.
9.5
Effect of Termination of Service. Unless otherwise provided by the Committee and set
forth in the Award Agreement evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates for any
reason, whether voluntary or involuntary (including the Participant’s death or Disability), then the Participant shall
forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions
as of the date of the Participant’s termination of Service.
9.6
Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on
the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such
other date determined by the Committee, in its discretion (but in any event within the Short-Term Deferral Period,
except as otherwise provided by the Committee or consistent with the requirements of Section 409A), and set forth in
the Award Agreement, one (1) share of Stock (and/or any other new, substituted or additional securities or other
property pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming vested or
otherwise to be settled on such date, subject to the withholding of applicable taxes, if any. If permitted by the
Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any
portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section, and such
deferred issuance date(s) and amount(s) elected by the Participant shall be set forth in the Award Agreement.
Notwithstanding the foregoing, the Committee, in its discretion, may provide for settlement of any Restricted Stock
Unit Award by payment to the Participant in cash of an amount equal to the Fair Market Value on the payment date
of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.
9.7
Nontransferability of Restricted Stock Unit Awards. The right to receive shares pursuant
to a Restricted Stock Unit Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer,
assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary,
except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit
Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or
the Participant’s guardian or legal representative.
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10.
PERFORMANCE AWARDS.
Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall from
time to time establish. Award Agreements evidencing Performance Awards may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the following terms and conditions:
10.1
Types of Performance Awards Authorized. Performance Awards may be granted in the
form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award
shall specify the number of Performance Shares or Performance Units subject thereto, the Performance Award
Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions
and restrictions of the Award.
10.2 Initial Value of Performance Shares and Performance Units. Unless otherwise provided
by the Committee in granting a Performance Award, each Performance Share shall have an initial monetary value
equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.3, on the
effective date of grant of the Performance Share, and each Performance Unit shall have an initial monetary value
established by the Committee at the time of grant. The final value payable to the Participant in settlement of a
Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent
to which Performance Goals established by the Committee are attained within the applicable Performance Period
established by the Committee.
10.3 Establishment of Performance Period, Performance Goals and Performance Award
Formula. In granting each Performance Award, the Committee shall establish in writing the applicable Performance
Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the
Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Award to
be paid to the Participant. The Company shall notify each Participant granted a Performance Award of the terms of
such Award, including, if applicable, the Performance Period, Performance Goal(s) and Performance Award Formula.
10.4 Measurement of Performance Goals. Performance Goals shall be established by the
Committee on the basis of targets to be attained (“Performance Targets”) with respect to one or more measures of
business or financial performance (each, a “Performance Measure”):
(a)
Performance Measures. Performance Measures shall be calculated in
accordance with a methodology established by the Committee. Performance Measures may be calculated with respect
to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes or such
division or other business unit as may be selected by the Committee. Performance Measures may be one or more
performance criteria determined by the Committee, which may include, but are not limited to, the following: (i)
revenue; (ii) sales; (iii) expenses; (iv) operating income; (v) gross margin; (vi) operating margin; (vii) earnings before
any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization; (vii) pre-tax
profit; (ix) net operating income; (x) net income; (xi) economic value added; (xii) free cash flow; (xiii) operating cash
flow; (xiv) balance of cash, cash equivalents and marketable securities; (xv) stock price; (xvi) earnings per share;
(xvii) return on stockholder equity; (xviii) return on capital; (xix) return on assets; (xx) return on investment; (xxi)
total stockholder return; (xxii) employee satisfaction; (xxiii) employee retention; (xxiv) market share; (xxv) customer
satisfaction; (xxvi) product development; (xxvii) research and development expenses; (xxviii) completion of an
identified special project; and (xxix) completion of a joint venture or other corporate transaction.
(b)
Performance Targets. Performance Targets may include a minimum, maximum,
target level and intermediate levels of performance, with the final value of a Performance Award determined under
the applicable Performance Award Formula by the level attained during the applicable Performance Period. A
Performance Target may be stated as an absolute value, an increase or decrease in a value, or as a value determined
relative to an index, budget or other standard selected by the Committee.
10.5 Settlement of Performance Awards.
Determination of Final Value. As soon as practicable following the completion
of the Performance Period applicable to a Performance Award, the Committee shall determine the extent to which the
(a)
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applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant
and to be paid upon its settlement in accordance with the applicable Performance Award Formula.
(b)
Discretionary Adjustment of Award Formula. In its discretion, anthe Committee
may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative
adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant to reflect
such Participant’s individual performance in his or her position with the Company or such other factors as the
Committee may determine. In determining amounts payable under Awards intended to qualify as Performance-Based
Compensation (other than an Option or Stock Appreciation Right), unless otherwise provided under an Award
Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the
Committee, to reduce (but not increase) some or all of the value of the Award that would otherwise be paid to the
Participant upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the
Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase
in the amount payable upon settlement of another Participant’s Award that is intended to qualify as Performance-
Based Compensation.
(c)
Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s
Award Agreement, payment of the final value, if any, of a Performance Award held by a Participant who has taken in
excess of thirty (30) days in unpaid leaves of absence during a Performance Period shall be prorated on the basis of
the number of days of the Participant’s Service during the Performance Period during which the Participant was not
on an unpaid leave of absence.
Notice to Participants. As soon as practicable following the Committee’s
determination and certification in accordance with Sections 10.5(a) and (b), the Company shall notify each Participant
of the determination of the Committee.
(d)
(e)
Additional Limitations for Performance-Based Compensation. Notwithstanding
any other provision of the Plan or any Award, with respect to any Award which is intended to continue to qualify as
Performance-Based Compensation (as described in Section 162(m)(4)(C) of the Code prior to its repeal) (or which
was not subject to the deduction limitation of Section 162(m) of the Code) pursuant to the transition relief rules in the
Tax Cuts and Jobs Act of 2017, to the extent any of the provisions of the Plan or any Award (or any amendments
hereto pursuant to this amendment and restatement of the Plan) would cause such Awards to fail to so qualify or be
so exempt, any such provisions shall not apply to such Awards to the extent necessary to ensure the such Awards
continue to so qualify or be so exempt. In addition, any Award which is intended to continue to qualify as
Performance-Based Compensation (as described in Section 162(m)(4)(C) of the Code prior to its repeal) (or to
otherwise not be subject to the deduction limitation of Section 162(m) of the Code) pursuant to the transition relief
rules in the Tax Cuts and Jobs Act of 2017 shall be subject to any additional limitations as the Committee determines
necessary for such Award to continue to so qualify or be so exempt. To the extent permitted by applicable law, and
the Plan and any such Awards shall be deemed amended to the extent necessary to conform to such requirements.
10.6 Payment in Settlement of Performance Awards. As soon as practicable following the
Committee’s determination and certification in accordance with Sections 10.5(a) and (b), but in any event within the
Short-Term Deferral Period (except as otherwise provided by the Committee or consistent with the requirements of
Section 409A), payment shall be made to each eligible Participant (or such Participant’s legal representative or other
person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the
Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination
thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a
Performance Award, payment shall be made in a lump sum. If permitted by the Committee, the Participant may elect,
consistent with the requirements of Section 409A, to defer receipt of all or any portion of the payment to be made to
the Participant pursuant to this Section, and such deferred payment date(s) elected by the Participant shall be set forth
in the Award Agreement. If any payment is to be made on a deferred basis, the Committee may, but shall not be
obligated to, provide for the payment during the deferral period of Dividend Equivalent Rights or interest. If payment
is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the
Performance Award by the Fair Market Value of a share of Stock determined by the method specified in the Award
Agreement. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable
shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to
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Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of
Sections 8.5 through 8.8 above.
10.7 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no
voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance
of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement
evidencing any Performance Share Award that the Participant shall be entitled to Dividend Equivalent Rights with
respect to the payment of cash dividends on Stock during the period beginning on the date the Award is granted and
ending, with respect to each share subject to the Award, on the earlier of the date on which the Performance Shares
are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the
Participant in the form of additional whole Performance Shares as of the date of payment of such cash dividends on
Stock. The number of additional Performance Shares (rounded down to the nearest whole number) to be so credited
shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to
the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the
Fair Market Value per share of Stock on such date. Dividend Equivalent Rights shall be accumulated and paid to the
extent that Performance Shares become nonforfeitable, as determined by the Committee. Settlement of Dividend
Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as determined by the Committee,
and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.6. In the
event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a
change in the capital structure of the Company as described in Section 4.3, appropriate adjustments shall be made in
the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new,
substituted or additional securities or other property (other than regular, periodic cash dividends) to which the
Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Performance Share
Award, and all such new, substituted or additional securities or other property shall be immediately subject to the
same Performance Goals and Vesting Conditions as are applicable to the Award.
10.8 Effect of Termination of Service. Unless otherwise provided by the Committee and set
forth in the Award Agreement evidencing a Performance Award or in the Participant’s employment agreement, if any,
referencing such Awards, the effect of a Participant’s termination of Service on the Performance Award shall be as
follows:
(a)
Death or Disability. If the Participant’s Service terminates because of the death
or Disability of the Participant before the completion of the Performance Period applicable to the Performance Award,
the final value of the Participant’s Performance Award shall be determined by the extent to which the applicable
Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on
the number of months of the Participant’s Service during the Performance Period. Payment shall be made following
the end of the Performance Period in any manner permitted by Section 10.6.
Other Termination of Service. If the Participant’s Service terminates for any
reason except death or Disability before the completion of the Performance Period applicable to the Performance
Award, such Award shall be forfeited in its entirety.
(b)
10.9
Nontransferability of Performance Awards. Prior to settlement in accordance with the
provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale,
exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the
Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to
a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such
Participant or the Participant’s guardian or legal representative.
11.
CASH-BASED AWARDS AND OTHER STOCK-BASED AWARDS.
Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in
such form as the Committee shall from time to time establish. Award Agreements evidencing Cash-Based Awards
and Other Stock-Based Awards may incorporate all or any of the terms of the Plan by reference and shall comply with
and be subject to the following terms and conditions:
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11.1 Grant of Cash-Based Awards. Subject to the provisions of the Plan, the Committee, at any
time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms and
conditions, including the achievement of performance criteria, as the Committee may determine.
11.2 Grant of Other Stock-Based Awards. The Committee may grant other types of equity-
based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale
of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures convertible into
common stock or other forms determined by the Committee) in such amounts and subject to such terms and conditions
as the Committee shall determine. Other Stock-Based Awards may be made available as a form of payment in the
settlement of other Awards or as payment in lieu of compensation to which a Participant is otherwise entitled. Other
Stock-Based Awards may involve the transfer of actual shares of Stock to Participants, or payment in cash or otherwise
of amounts based on the value of Stock and may include, without limitation, Awards designed to comply with or take
advantage of the applicable local laws of jurisdictions other than the United States.
11.3 Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall
specify a monetary payment amount or payment range as determined by the Committee. Each Other Stock-Based
Award shall be expressed in terms of shares of Stock or units based on such shares of Stock, as determined by the
Committee. The Committee may require the satisfaction of such Service requirements, conditions, restrictions or
performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be
established by the Committee and set forth in the Award Agreement evidencing such Award. If the Committee
exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based
Awards that will be paid to the Participant will depend on the extent to which the performance criteria are met.
11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards. Payment
or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance
with the terms of the Award, in cash, shares of Stock or other securities or any combination thereof as the Committee
determines. To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-
Based Award shall be made in compliance with the requirements of Section 409A.
11.5 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no
voting rights with respect to shares of Stock represented by Other Stock-Based Awards until the date of the issuance
of such shares of Stock (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), if any, in settlement of such Award. However, the Committee, in its discretion, may
provide in the Award Agreement evidencing any Other Stock-Based Award that the Participant shall be entitled to
Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on
the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date
the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be subject
to the same Vesting Conditions and performance criteria, if any, as are applicable to the underlying Award and shall
be paid in accordance with the provisions set forth in Section 9.4. Dividend Equivalent Rights shall not be granted
with respect to Cash-Based Awards. In the event of a dividend or distribution paid in shares of Stock or other property
or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.3,
appropriate adjustments shall be made in the Participant’s Other Stock-Based Award so that it represents the right to
receive upon settlement any and all new, substituted or additional securities or other property (other than regular,
periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon
settlement of such Award, and all such new, substituted or additional securities or other property shall be immediately
subject to the same Vesting Conditions and performance criteria, if any, as are applicable to the Award.
11.6 Effect of Termination of Service. Each Award Agreement evidencing a Cash-Based Award
or Other Stock-Based Award shall set forth the extent to which the Participant shall have the right to retain such Award
following termination of the Participant’s Service. Such provisions shall be determined in the discretion of the
Committee, need not be uniform among all Cash-Based Awards or Other Stock-Based Awards, and may reflect
distinctions based on the reasons for termination, subject to the requirements of Section 409A, if applicable.
11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the
payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any
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manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by
creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and
distribution. The Committee may impose such additional restrictions on any shares of Stock issued in settlement of
Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation,
minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements
of any stock exchange or market upon which such shares of Stock are then listed and/or traded, or under any state
securities laws or foreign law applicable to such shares of Stock.
12.
DEFERRED COMPENSATION AWARDS.
12.1
Establishment of Deferred Compensation Award Programs. This Section 12 shall not be
effective unless and until the Committee determines to establish a program pursuant to this Section. If the Committee
determines that any such program may constitute an “employee pension benefit plan” within the meaning of
Section 3(2) of ERISA, the Committee shall adopt and implement such program through a separate subplan to this
Plan. Eligibility to participate in such subplan shall be limited to Directors and a select group of management or
highly compensated employees, and the Committee shall take all additional actions required to qualify such subplan
as a “top-hat” unfunded deferred compensation plan, including filing with the U.S. Department of Labor within 120
days following the adoption of such subplan a notice pursuant to Department of Labor Regulations Section 2520.104-
23.
12.2 Terms and Conditions of Deferred Compensation Awards. Deferred Compensation
Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish.
Award Agreements evidencing Deferred Compensation Awards may incorporate all or any of the terms of the Plan
by reference and, except as provided below, shall comply with and be subject to the terms and conditions applicable
to the appropriate form of Award as set forth in the applicable section of this Plan.
(a)
Limitation on Elections. Notwithstanding any Participant’s prior election to
reduce cash compensation pursuant to a program established in accordance with this Section 12, no Deferred
Compensation Award may be granted to the Participant after termination of the Plan or termination of the Participant’s
Service, and any such cash compensation shall be paid at the normal time and in accordance with the terms of the
applicable cash compensation arrangement.
Election Irrevocable. A Participant’s election to reduce cash compensation
pursuant to a program established in accordance with this Section 12 shall become irrevocable on the last day of the
calendar year prior to the year in which the services are to be rendered with respect to which such cash compensation
would otherwise become payable, or at the time otherwise required by Section 409A.
(b)
subject to such Vesting Conditions as the Committee determines.
(c)
Vesting. Deferred Compensation Awards may be fully vested at grant or may be
13.
STANDARD FORMS OF AWARD AGREEMENT.
13.1
Award Agreements. Each Award shall comply with and be subject to the terms and
conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from
time to time. No Award or purported Award shall be a valid and binding obligation of the Company unless evidenced
by a fully executed Award Agreement, which execution may be evidenced by electronic means.
13.2
Authority to Vary Terms. The Committee shall have the authority from time to time to
vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an
individual Award or in connection with the authorization of a new standard form or forms; provided, however, that
the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not
inconsistent with the terms of the Plan.
14.
CHANGE IN CONTROL.
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409A, if applicable, the Committee may provide for any one or more of the following:
14.1 Effect of Change in Control on Awards. Subject to the requirements and limitations of Section
(a)
Accelerated Vesting. In its discretion, the Committee may provide in the grant of
any Award or at any other time may take such action as it deems appropriate to provide for acceleration of the
exercisability, vesting and/or settlement in connection with a Change in Control of each or any outstanding Award or
portion thereof and shares acquired pursuant thereto upon such conditions, including termination of the Participant’s
Service prior to, upon, or following such Change in Control, and to such extent as the Committee shall determine.
(b)
Assumption, Continuation or Substitution. In the event of a Change in Control,
the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case
may be (the “Acquiror”), may, without the consent of any Participant, assume or continue the Company’s rights and
obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or
substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to
the Acquiror’s stock, as applicable. For purposes of this Section, if so determined by the Committee in its discretion,
an Award denominated in shares of Stock shall be deemed assumed if, following the Change in Control, the Award
confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for
each share of Stock subject to the Award immediately prior to the Change in Control, the consideration (whether
stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective
date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such
consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror,
provide for the consideration to be received upon the exercise or settlement of the Award, for each share of Stock
subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share
consideration received by holders of Stock pursuant to the Change in Control. Any Award or portion thereof which
is not assumed, substituted for, or otherwise continued by the Acquiror in connection with the Change in Control nor
exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be
outstanding effective as of the time of consummation of the Change in Control.
(c)
Cash-Out of Outstanding Stock-Based Awards. The Committee may, in its
discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in Control,
each or any Award denominated in shares of Stock or portion thereof outstanding immediately prior to the Change in
Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested
share (and each unvested share, if so determined by the Committee) of Stock subject to such canceled Award in
(i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control, or
(iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair Market
Value of the consideration to be paid per share of Stock in the Change in Control, reduced (but not below zero) by the
exercise or purchase price per share, if any, under such Award. In the event such determination is made by the
Committee, an Award having an exercise or purchase price per share equal to or greater than the Fair Market Value
of the consideration to be paid per share of Stock in the Change in Control may be canceled without payment of
consideration to the holder thereof. Except as otherwise provided by the Committee, payment pursuant to this Section
(reduced by applicable withholding taxes, if any) shall be made to Participants in respect of the vested portions of
their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested
portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards.
14.2 Federal Excise Tax Under Section 4999 of the Code.
(a)
Excess Parachute Payment. In the event that any acceleration of vesting pursuant
to an Award and any other payment or benefit received or to be received by a Participant would subject the Participant
to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting,
payment or benefit as an “excess parachute payment” under Section 280G of the Code, the Participant, subject to
compliance with applicable law (including, but not limited to the rules imposed by Section 409A), may elect to reduce
the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.
Determination by Independent Accountants. To aid the Participant in making any
election called for under Section 14.2(a), no later than the date of the occurrence of any event that might reasonably
(b)
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be anticipated to result in an “excess parachute payment” to the Participant as described in Section 14.2(a), the
Company may request a determination in writing by independent public accountants selected by the Company (the
“Accountants”). As soon as practicable thereafter, the Accountants shall determine and report to the Company and
the Participant the amount of such acceleration of vesting, payments and benefits which would produce the greatest
after-tax benefit to the Participant. For the purposes of such determination, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the
Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably
request in order to make their required determination. The Company shall bear all fees and expenses the Accountants
charge in connection with their services contemplated by this Section.
15.
COMPLIANCE WITH SECURITIES LAW.
The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with
all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of
any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be
exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at
the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award, or (b) in
the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance
with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of
the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s
legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company
of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have
been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and
to make any representation or warranty with respect thereto as may be requested by the Company.
16.
COMPLIANCE WITH SECTION 409A.
16.1 Awards Subject to Section 409A. The Company intends that Awards granted pursuant to
the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed. The provisions
of this Section 16 shall apply to any Award or portion thereof that constitutes or provides for payment of Section 409A
Deferred Compensation. To the extent that the Committee determines that any Award granted under the Plan is
Section 409A Deferred Compensation, the Plan, and the Award Agreement evidencing such Award shall incorporate
the terms and conditions required by Section 409A. In that regard, to the extent any Award under the Plan or any other
compensatory plan or arrangement of the Company or any of the Participating Companies is Section 409A Deferred
Compensation, and such Award or other amount is payable on account of a Participant’s termination of Service (or
any similarly defined term), then such Award or amount shall only be paid to the extent such termination of Service
qualifies as a “separation from service” as defined in Section 409A,
16.2 Installment Payments. It is the intent of this Plan that any right of a Participant to receive
installment payments (within the meaning of Section 409A) shall, for all purposes of Section 409A, be treated as a
right to a series of separate payments.
16.3 Required Delay in Payment to Specified Employee Pursuant to Separation from Service.
Notwithstanding any provision of the Plan or an Award Agreement to the contrary, except as otherwise permitted by
Section 409A, no payment in settlement of an Award providing for Section 409A Deferred Compensation may be
made to a Participant who is a “specified employee” (as defined by Section 409A) on account of his or her termination
of Service (or any similarly defined term) before the date (the “Delayed Payment Date”) that is six (6) months after
the date of such Participant’s separation from service, or, if earlier, the date of the Participant’s death. All such
amounts that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated
and paid on the Delayed Payment Date.
16.4 Payment Upon Change in Control. Notwithstanding any provision of the Plan or an Award
Agreement to the contrary, to the extent that any amount constituting Section 409A Deferred Compensation would
become payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event
constituting a Change in Control would also constitute a change in ownership or effective control of the Company or
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a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A.
Any Award which constitutes Section 409A Deferred Compensation and which would vest and otherwise become
payable upon a Change in Control as a result of the failure of the Acquiror to assume, continue or substitute for such
Award in accordance with Section 14.1(b) shall vest to the extent provided by such Award but shall be converted
automatically at the effective time of such Change in Control into a right to receive, in cash on the date or dates such
award would have been settled in accordance with its then existing settlement schedule (or as required by Section
409A), an amount or amounts equal in the aggregate to the intrinsic value of the Award at the time of the Change in
Control.
16.5 Prohibition of Acceleration of Payments. Notwithstanding any provision of the Plan or an
Award Agreement to the contrary, this Plan does not permit the acceleration of the time or schedule of any payment
under an Award providing Section 409A Deferred Compensation, except as permitted by Section 409A.
16.6 No Representation Regarding Section 409A Compliance. Notwithstanding any other
provision of the Plan, the Company makes no representation that Awards shall be exempt from or comply with Section
409A. No Participating Company shall be liable for any tax, penalty or interest imposed on a Participant by Section
409A.
17.
TAX WITHHOLDING.
17.1
Tax Withholding in General. The Company shall have the right to deduct from any and all
payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise,
to make adequate provision for, the federal, state, local and foreign taxes (including social insurance), if any, required
by law to be withheld by any Participating Company with respect to an Award or the shares acquired pursuant thereto.
The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established
pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company
Group’s tax withholding obligations have been satisfied by the Participant.
17.2 Withholding in or Directed Sale of Shares. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award,
or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as
determined by the Company, equal to all or any part of the tax withholding obligations of any Participating Company.
The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations
shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company may
require a Participant to direct a broker, upon the vesting, exercise or settlement of an Award, to sell a portion of the
shares subject to the Award determined by the Company in its discretion to be sufficient to cover the tax withholding
obligations of any Participating Company and to remit an amount equal to such tax withholding obligations to such
Participating Company in cash.
18.
AMENDMENT, SUSPENSION OR TERMINATION OF PLAN.
The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the
Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may
be issued under the Plan (except by operation of the provisions of Section 4.3), (b) no change in the class of persons
eligible to receive Incentive Stock Options, (c) any amendment to Section 3.6, and (d) no other amendment of the Plan
that would require approval of the Company’s stockholders under any applicable law, regulation or rule, including the
rules of any stock exchange or quotation system upon which the Stock may then be listed or quoted. No amendment,
suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the
Committee. Except as provided by the next sentence, no amendment, suspension or termination of the Plan may
adversely affect any then outstanding Award without the consent of the Participant. Notwithstanding any other
provision of the Plan to the contrary, the Committee may, in its sole and absolute discretion and without the consent
of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as it deems
necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or future law,
regulation or rule applicable to the Plan, including, but not limited to, Section 409A.
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19.
MISCELLANEOUS PROVISIONS.
19.1 Repurchase Rights. Shares issued under the Plan may be subject to one or more repurchase
options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is
granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not
such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the
Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of
shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer
restrictions.
19.2 Forfeiture Events.
(a)
The Committee may specify in an Award Agreement that the Participant’s rights,
payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment
upon the occurrence of specified events, in addition to any otherwise applicable vesting or performance conditions of
an Award. Such events may include, but shall not be limited to, termination of Service for Cause or any act by a
Participant, whether before or after termination of Service, that would constitute Cause for termination of Service.
(b)
If the Company is required to prepare an accounting restatement due to the
material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under
the securities laws, any Participant who knowingly or through gross negligence engaged in the misconduct, or who
knowingly or through gross negligence failed to prevent the misconduct, and any Participant who is one of the
individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, shall reimburse the
Company for (i) the amount of any payment in settlement of an Award received by such Participant during the twelve-
(12-) month period following the first public issuance or filing with the United States Securities and Exchange
Commission (whichever first occurred) of the financial document embodying such financial reporting requirement,
and (ii) any profits realized by such Participant from the sale of securities of the Company during such twelve- (12-)
month period. In addition, to the extent claw-back or similar provisions applicable to Awards are required by
applicable law, listing standards and/or policies adopted by the Company, Awards granted under the Plan shall be
subject to such provisions.
the Company equivalent to that information generally made available to the Company’s common stockholders.
19.3 Provision of Information. Each Participant shall be given access to information concerning
19.4 Rights as Employee, Consultant or Director. No person, even though eligible pursuant to
Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a
Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain
an Employee, Consultant or Director or interfere with or limit in any way any right of a Participating Company to
terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than
the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean
that the Company is the Employee’s employer or that the Employee has an employment relationship with the
Company.
19.5 Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect
to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made
for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except
as provided in Section 4.3 or another provision of the Plan.
19.6 Delivery of Title to Shares. Subject to any governing rules or regulations, the Company
shall issue or cause to be issued the shares of Stock acquired pursuant to an Award and shall deliver such shares to or
for the benefit of the Participant by means of one or more of the following: (a) by delivering to the Participant evidence
of book entry shares of Stock credited to the account of the Participant, (b) by depositing such shares of Stock for the
benefit of the Participant with any broker with which the Participant has an account relationship, or (c) by delivering
such shares of Stock to the Participant in certificate form.
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exercise or settlement of any Award.
19.7
Fractional Shares. The Company shall not be required to issue fractional shares upon the
19.8
Retirement and Welfare Plans. Neither Awards made under this Plan nor shares of Stock
or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits
payable to any Participant under any Participating Company’s retirement plans (both qualified and non-qualified) or
welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in
computing a Participant’s benefit. In addition, unless a written employment agreement or other service agreement
references Awards, a general reference to “benefits” in such agreement shall not be deemed to refer to Awards granted
hereunder.
19.9
Beneficiary Designation. Subject to local laws and procedures, each Participant may file
with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the
Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company,
and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime.
If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such
designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective
designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining
unpaid benefits to the Participant’s legal representative.
19.10 Severability. If any one or more of the provisions (or any part thereof) of this Plan shall
be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal
and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the
Plan shall not in any way be affected or impaired thereby.
19.11 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit,
impair, or otherwise affect the Company’s or another Participating Company’s right or power to make adjustments,
reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve,
liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right or power of the Company or
another Participating Company to take any action which such entity deems to be necessary or appropriate.
19.12 Unfunded Obligation. Participants shall have the status of general unsecured creditors of
the Company. Any amounts payable to Participants pursuant to the Plan shall be considered unfunded and unsecured
obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of
1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any
trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times
beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its
payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account
shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company
and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors
in any assets of any Participating Company. The Participants shall have no claim against any Participating Company
for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the
Plan.
19.13 Choice of Law. Except to the extent governed by applicable federal law, the validity,
interpretation, construction and performance of the Plan and each Award Agreement shall be governed by the laws of
the State of Delaware, without regard to its conflict of law rules.
Proxy Statement | Page 84
APPENDIX B
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CYTORI THERAPEUTICS, INC.
Cytori Therapeutics, Inc., a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, does hereby certify:
FIRST: The name of the corporation is Cytori Therapeutics, Inc. (the “Corporation”).
SECOND:
On March 19, 2018, the Board of Directors of the Corporation duly adopted
resolutions approving the following amendment of the Amended and Restated Certificate of Incorporation
(the “Certificate of Incorporation”), declaring said amendment to be advisable and providing for such
consideration of such amendment at the Corporation’s annual meeting of the stockholders.
THIRD:
On May 18, 2018, the Corporation’s annual meeting of the stockholders was duly
called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State
of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor
of the amendment.
FOURTH:
Article IV.A of the Amended and Restated Certificate of Incorporation of the
Corporation be hereby amended and restated to read in its entirety as follows:
“This Corporation is authorized to issue two classes of stock to be designated, respectively,
‘Common Stock’ and ‘Preferred Stock.’ The total number of shares which the Corporation
is authorized to issue is _________ Million (________) shares, __________ Million
(_________) shares of which shall be Common Stock (the ‘Common Stock’) and Five
Million (5,000,000) shares of which shall be Preferred Stock (‘Preferred Stock’). The
Common Stock and Preferred Stock shall each have a par value of $0.001 per share.
Upon the filing and effectiveness (the "Effective Time"), pursuant to the General
Corporation Law of the State of Delaware, of this Certificate of Amendment to the
Certificate of Incorporation of the Corporation, each ________ (_______) shares of
Common Stock either issued and outstanding or held by the Corporation in its treasury
immediately prior to the Effective Time shall, automatically and without any action on the
part of the respective holders thereof, be combined and converted into one (1) share of
Common Stock (the "Reverse Stock Split"). No fractional shares shall be issued in
connection with the Reverse Stock Split. Stockholders who would otherwise be entitled to
receive fractional shares shall be entitled to the rounding up of the fractional share to the
nearest whole number. Each certificate that immediately prior to the Effective Time
represented shares of Common Stock ("Old Certificates"), shall thereafter represent that
number of shares of Common Stock into which the shares of Common Stock represented
by the Old Certificate shall have been combined, subject to the elimination of fractional
share interests as described above.”
FIFTH: This amendment to the Corporation’s Amended and Restated Certificate of Incorporation
shall be effective on and as of the date of filing of this Certificate of Amendment with the Secretary of State
of the State of Delaware.
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***************************************
IN WITNESS WHEREOF, Cytori Therapeutics, Inc. has caused this Certificate of Amendment to
be signed by the undersigned, thereunto duly appointed, this __th day of ___, 2018.
CYTORI THERAPEUTICS, INC.
By:
Name: Marc H. Hedrick
Title: President and Chief Executive Officer
Proxy Statement | Page 86
CORPORATE OFFICERS
MARC H. HEDRICK, M.D.
President and Chief Executive Officer
TIAGO GIRAO
Vice President of Finance and Chief Financial Officer
JOHN HARRIS*
Vice President and General Manager of Cell Therapy
BOARD OF DIRECTORS
RICHARD J. HAWKINS
Chairman of the Board
MARC H. HEDRICK, M.D.
President and Director
GREGG A. LAPOINTE
Director
GARY A. LYONS
Director
RONALD A. MARTELL
Director
* On February 5, 2018, Mr. Harris tendered his resignation from Cytori effective
May 1, 2018.
CORPORATE HEADQUARTERS
Cytori Therapeutics, Inc.
3020 Callan Road
San Diego, CA 92121
United States
Tel: +1.858.458.0900
cytori.com
Cytori Therapeutics KK
Otemachi Park Building, 7F
Otemachi 1-1-1
Tokyo-to, Chiyoda-ku
Japan 100-0004
Tel: +81.3.6870.7500
STOCKHOLDER INFORMATION
OUTSIDE CORPORATE COUNSEL
Latham & Watkins LLP
INDEPENDENT ACCOUNTANTS
BDO USA LLP / San Diego, CA
TRANSFER AGENT
Broadridge Financial
51 Mecedez Way
Edgewood, NY 11717
Tel: +1.855.793.5068
NOTICE OF ANNUAL MEETING
May 18, 2018, 9 AM PT
Cytori Therapeutics, Inc.
3020 Callan Road
San Diego, CA 92121
Cautionary Statement Regarding Forward-Looking Statements
This report includes forward-looking statements that involve known
and unknown risks and uncertainties. All statements, other than his-
torical facts are forward looking statements. Such statements, includ-
ing statements regarding: status and results of potential, ongoing and
completed clinical trials; regulatory status and strategies, including
submission timelines and outcomes; manufacture of our products;
our financial condition, forecasts and operating results, including
statements regarding revenue, expenses and cash burn; our ability to
generate product or development revenues and the sources of such
revenues; future opportunities (including potential markets and mar-
ket sizes); and our pre-commercialization activities (including partner-
ing efforts and early access to our cell therapy); are subject to risks and
uncertainties that could cause our actual results and financial position
to differ materially. Some of these risks include: the novelty of our
cell therapy technology and early stage product pipeline; the level of
future interest in our products and technologies; pre-clinical, clinical
and regulatory uncertainties such as those associated with the ACT-
OA Trial, STAR, SCLERADEC-I and SCLERADEC-II, ATI-1123 and ATI-0918
clinical trials (including risks regarding timing and completion of
enrollment, collection and results of clinical data, and regulatory
review of clinical data for approval purposes); final clinical outcomes;
our continuing ability to access the capital on acceptable terms (or at
all); our ability to service our debt and other material obligations; our
abilites to meet cost and revenue goals; our ability to identify strategic
partners to help develop and commercialize our products;
dependence on third party approvals and performance; our ability to
integrate and develop acquired assets; potential litigation; potential
threats or challenges to our intellectual property (and ownership
thereof ); performance and acceptance of our products in the
marketplace; presence or intro- duction of competing technologies
and products (whether or not deemed by the market to be superior
to ours); unexpected costs and expenses; our reliance on key
personnel; the right of the U.S. Federal Government to cut or
terminate further support of the thermal burn injury program; and
other risks and uncertainties described under the “Risk Factors” in the
Annual Report on Form 10-K enclosed herewith and Cytori’s other
filings with the Securities and Exchange Commission.
There may be events in the future that we are unable to predicts, or
over which we have no control, and our business, financial condition,
results of operations and prospects may change in the future. Except
as required by law, we assume no responsibility to update or revise
any forward-looking statements to reflect events, trends or circum-
stances after the date of this report.
Cytori and the Cytori Logo are trademarks or registered trademarks of Cytori Therapeutics, Inc. in the United States and other select countries.
© 2018 Cytori Therapeutics, Inc. All rights reserved.
CORP-206-LIT-INT_A-0417