PSTV 10-Q Quarter ended March 31, 2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

DELAWARE		33-0827593
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3020 CALLAN ROAD, SAN DIEGO, CALIFORNIA		92121
(Address of principal executive offices)		(Zip Code)

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 x No o

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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 o	Accelerated Filer x	Non-Accelerated Filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of April 30, 2012, there were 58,686,448 shares of the registrant’s common stock outstanding.

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CYTORI THERAPEUTICS, INC.

INDEX

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011 (unaudited)	3
		Consolidated Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2012 and 2011 (unaudited)	4
		Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)	5
		Notes to Consolidated Condensed Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3.	Defaults Upon Senior Securities	34
	Item 4.	Reserved	34
	Item 5.	Other Information	34
	Item 6.	Exhibits	35

CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

		As of March 31, 2012				As of December 31, 2011
Assets
Current assets:
Cash and cash equivalents		$	34,399,000			$	36,922,000
Accounts receivable, net of reserves of $187,000 and of $474,000 in 2012 and 2011, respectively			1,425,000				2,260,000
Inventories, net			3,374,000				3,318,000
Other current assets			1,135,000				837,000
Total current assets			40,333,000				43,337,000
Property and equipment, net			2,367,000				1,711,000
Restricted cash and cash equivalents			350,000				350,000
Investment in joint venture			200,000				250,000
Other assets			1,794,000				1,772,000
Intangibles, net			136,000				192,000
Goodwill			3,922,000				3,922,000
Total assets		$	49,102,000			$	51,534,000
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses		$	6,046,000			$	5,334,000
Current portion of long-term obligations			4,911,000				2,487,000
Total current liabilities			10,957,000				7,821,000
Deferred revenues, related party			3,520,000				3,520,000
Deferred revenues			5,176,000				5,244,000
Warrant liability			757,000				627,000
Option liability			1,640,000				1,910,000
Long-term deferred rent			498,000				504,000
Long-term obligations, net of discount, less current portion			19,704,000				21,962,000
Total liabilities			42,252,000				41,588,000
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; -0- shares issued and outstanding in 2012 and 2011			—				—
Common stock, $0.001 par value; 95,000,000 shares authorized; 58,428,606 and 56,594,683 shares issued and outstanding in 2012 and 2011, respectively			58,000				57,000
Additional paid-in capital			258,566,000				252,338,000
Accumulated deficit			(251,774,000	)			(242,449,000	)
Total stockholders’ equity			6,850,000				9,946,000
Total liabilities and stockholders’ equity		$	49,102,000			$	51,534,000

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

		For the Three Months Ended March 31,
		2012				2011
Product revenues		$	1,481,000			$	1,362,000
Cost of product revenues			853,000				842,000
Gross profit			628,000				520,000
Development revenues:
Development, related party			—				1,231,000
Research grants and other			3,000				4,000
			3,000				1,235,000
Operating expenses:
Research and development			2,836,000				3,047,000
Sales and marketing			2,376,000				3,226,000
General and administrative			3,924,000				3,544,000
Change in fair value of warrant liability			130,000				3,471,000
Change in fair value of option liability			(270,000	)			(290,000	)
Total operating expenses			8,996,000				12,998,000
Operating loss			(8,365,000	)			(11,243,000	)
Other income (expense):
Interest income			2,000				2,000
Interest expense			(865,000	)			(738,000	)
Other expense, net			(47,000	)			(47,000	)
Equity loss from investment in joint venture			(50,000	)			(46,000	)
Total other expense			(960,000	)			(829,000	)
Net loss		$	(9,325,000	)		$	(12,072,000	)
Basic and diluted net loss per common share		$	(0.16	)		$	(0.23	)
Basic and diluted weighted average common shares			57,484,990				51,994,708

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CYTORI THERAPEUTICS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the Three Months Ended March 31,
		2012				2011
Cash flows from operating activities:
Net loss		$	(9,325,000	)		$	(12,072,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			220,000				194,000
Amortization of deferred financing costs and debt discount			237,000				240,000
Increase (decrease) in allowance for doubtful accounts			(24,000	)			21,000
Change in fair value of warrant liability			130,000				3,471,000
Change in fair value of option liability			(270,000	)			(290,000	)
Stock-based compensation			942,000				881,000
Equity loss from investment in joint venture			50,000				46,000
Increases (decreases) in cash caused by changes in operating assets and liabilities:
Accounts receivable			859,000				278,000
Inventories			(56,000	)			(174,000	)
Other current assets			(298,000	)			(130,000	)
Other assets			(22,000	)			(922,000	)
Accounts payable and accrued expenses			(83,000	)			(854,000	)
Deferred revenues, related party			—				(1,231,000	)
Deferred revenues			(68,000	)			(10,000	)
Long-term deferred rent			(6,000	)			(12,000	)
Net cash used in operating activities			(7,714,000	)			(10,564,000	)
Cash flows from investing activities:
Purchases of property and equipment			(25,000	)			(131,000	)
Net cash used in investing activities			(25,000	)			(131,000	)
Cash flows from financing activities:
Principal payments on long-term obligations			(71,000	)			—
Proceeds from exercise of employee stock options and warrants			947,000				674,000
Proceeds from sale of common stock			4,396,000				—
Costs from sale of common stock			(56,000	)			—
Net cash provided by financing activities			5,216,000				674,000
Net decrease in cash and cash equivalents			(2,523,000	)			(10,021,000	)
Cash and cash equivalents at beginning of period			36,922,000				52,668,000
Cash and cash equivalents at end of period		$	34,399,000			$	42,647,000
Supplemental disclosure of cash flows information:
Cash paid during period for:
Interest		$	625,000			$	499,000
Supplemental schedule of non-cash operating, investing and financing activities:
Capital equipment lease		$	—			$	101,000
Net increase in purchases of property and equipment included in accounts payable			795,000				—

SEE NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CYTORI THERAPEUTICS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

March 31, 2012

(UNAUDITED)

1.	Basis of Presentation

Our accompanying unaudited consolidated condensed financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.  Our consolidated condensed balance sheet at March 31, 2012 has been derived from the audited financial statements at December 31, 2011, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of Cytori Therapeutics, Inc., and our subsidiaries (the Company) have been included.  Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These financial statements should be read in conjunction with the consolidated financial statements and notes therein included in our annual report on Form 10-K for the year ended December 31, 2011.

2.	Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, evaluating goodwill for impairment, valuing our put option arrangement with Olympus Corporation, valuing warrants, determining the assumptions used in measuring share-based compensation expense and valuing allowances for doubtful accounts and inventories.

Actual results could differ from these estimates.  Current economic conditions, including illiquid credit markets and volatile equity markets, contribute to the inherent uncertainty of such estimates.  Management’s estimates and assumptions are reviewed regularly, and the effects of revisions are reflected in the consolidated financial statements in the periods they are determined to be necessary.

3.	Capital Availability

We incurred net losses of $9,325,000 and $12,072,000 for the three months ended March 31, 2012 and 2011, respectively.  We have an accumulated deficit of $251,774,000 as of March 31, 2012.  Additionally, we have used net cash of $7,714,000 and $10,564,000 to fund our operating activities for the three months ended March 31, 2012 and 2011, respectively . To date, these operating losses have been funded primarily from outside sources of invested capital.

Management recognizes the need to generate positive cash flows in future periods and/or to obtain additional capital from various sources. In the continued absence of positive cash flows from operations, no assurance can be given that we can generate sufficient revenue to cover operating costs or that additional financing will be available to us and, if available, on terms acceptable to us in the future.

During 2011, we expanded our commercialization activities while simultaneously pursuing available financing sources to support operations and growth.  We have had, and we will likely continue to have, an ongoing need to raise additional cash from outside sources to fund our operations for remainder of 2012 and beyond.  If we cannot do so when required, we would need to reduce our research, development, and administrative operations, including reductions of our employee base, in order to offset lack of available funding.   We continue to evaluate available financing opportunities as part of our normal course of business.

4.	Recent Accounting Pronouncements

In May 2011, the FASB revised the fair value measurement and disclosure requirements to align the requirements under GAAP and International Financial Reporting Standards (“IFRS”). The guidance clarifies the FASB’s intent about the application of existing fair value measurements and requires enhanced disclosures, most significantly related to unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The guidance is effective prospectively during interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.

5.	Warrant Liability

Warrants with exercise price reset features (down-round protection) are accounted for as liabilities, with changes in fair value included in net earnings (loss).  The fair value of the liability associated with the warrants with this reset feature increased to $757,000 as of March 31, 2012, which resulted in a $130,000 loss from the change in fair value of warrants for the three months ended March 31, 2012.

Since these warrants do not qualify for hedge accounting, all future changes in the fair value of the warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These warrants are not traded in an active securities market, and as such, we estimated the fair value of these warrants using an option pricing model with the following assumptions:

		As of March 31, 2012				As of December 31, 2011
Expected term		1.37 years				1.61 years
Common stock market price		$	2.49			$	2.20
Risk-free interest rate			0.26	%			0.19	%
Expected volatility			71.61	%			69.98	%
Resulting fair value (per warrant)		$	0.38			$	0.32

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining contractual term of the warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is closest to the expected term of the warrants.   The fair value of these warrants also incorporates our assumptions about future equity issuances and their impact to the down-round protection feature.

6.	Long-term Debt

On September 9, 2011 we entered into a Second Amendment to the Amended and Restated Loan and Security Agreement (loan agreement) with General Electric Capital Corporation (GECC), Silicon Valley Bank (SVB) and Oxford Finance Corporation (together, the “Lenders”), pursuant to which the Lenders increased the prior term loan made to the Company to a principal amount of $25.0 million (Term Loan), subject to the terms and conditions set forth in the loan agreement.  The Term Loan accrues interest at a fixed rate of 9.87% per annum.  Pursuant to the loan agreement, we are required to make (i) twelve (12) equal consecutive monthly principal payments of $20,833 on the first day of each calendar month, commencing on October 1, 2011, (ii) twenty-nine (29) equal consecutive monthly principal payments of $825,000 on the first day of each calendar month, commencing on October 1, 2012, and (iii) and one (1) final principal payment of $825,000 on March 1, 2015. In addition, the maturity date of the Term Loan has been extended until March 1, 2015, and at maturity of the Term Loan, the Company will make a final payment fee equal to 5% ($1,250,000) of the Term Loan.  We may incur additional fees if we elect to prepay the Term Loan.  In connection with the Term Loan, on September 9, 2011, we issued to the Lenders warrants to purchase up to an aggregate of 132,891 shares of our common stock at an exercise price of $3.01 per share.  These warrants are immediately exercisable and will expire on September 9, 2018.

The Term Loan amended the Amended and Restated Loan and Security Agreement, of which an aggregate balance of approximately $15.6 million remained outstanding along with a prorated final payment fee of $419,000. The net proceeds of the Term Loan, after payment of lender fees and expenses, were approximately $8.6 million.

We accounted for this amendment as debt modification since the terms of the amended Term Loan and the Original Term Loan were not substantially different and as present value of cash flows of the modified instrument (using a net method of comparing the present value of cash flows related to the lowest common principal balance between the old and the new loans) was within 10% of the original debt instrument.  Accordingly, the fees associated with the amended Term Loan of $300,000, final payment fee of $1,250,000, and the existing unamortized debt discount from the Original Term Loan of $332,000 will be amortized as an adjustment of interest expense over the term of the Amended Term Loan using the effective interest method.

We allocated the aggregate proceeds of the Term Loan between the warrants and the debt obligations based on their relative fair values.  The fair value of the warrants issued to the Lenders is calculated utilizing the Black-Scholes option-pricing model. We are amortizing the relative fair value of the warrants as a discount of $267,000 over the term of the loan using the effective interest method, with an effective interest rate of 13.63%. If the maturity of the debt is accelerated due to an event of default, then the amortization would be accelerated. The Term Loan is collateralized by the tangible assets of the company, including a security interest in substantially all of its existing and after-acquired assets, excluding its intellectual property assets; provided however, that if the Company does not maintain certain cash ratios, the security interest automatically will be deemed to include the Company’s intellectual property assets.  As of March 31, 2012, we were in compliance with our financial and non-financial covenants.

7.	Revenue Recognition

Product Sales

We recognize revenue from product sales when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.

For all sales, we use a binding purchase order or a signed agreement as evidence of an arrangement.  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 that include multiple deliverables, such as sales of our StemSource® Cell Bank (cell bank), we allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method.  Stem cell banks typically consist of a complex array of equipment, proprietary knowledge, and services, including one or more StemSource® devices, a cryogenic freezer, measuring and monitoring equipment, and a database patient tracking system. In addition, we typically provide consulting services, installation and training services concurrent with the installation of the cell bank.  Web hosting and technical and maintenance services are generally provided for a period of up to one year subsequent to the date of sale.  FASB authoritative guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence (“VSOE”); (b) third-party evidence (“TPE”); or (c) management estimates.  For our cell bank sales, we establish relative selling prices for all deliverables based on vendor-specific quotes for comparable services when available.  In the absence of VSOE, we use competitors’ products or services considered largely interchangeable with our own or management’s best estimate.  A substantial amount of consulting services are provided to customers before the equipment installation and training has been completed, and therefore we treat this as a separate unit of accounting.  The equipment with installation and initial training activities are treated as separate units of accounting.  Also of standalone value to customers is the transfer of the proprietary knowledge, most notably in the form of standard operating procedures, and any license or exclusivity rights associated with the agreements.  Revenue for the various deliverables is calculated and recognized based on the relative selling prices of each deliverable.  Future services such as web hosting and ongoing maintenance are deferred and recognized into income during the year following the installation.

Concentration of Significant Customers

For the three months ended March 31, 2012, two direct customers comprised 31% of our revenue recognized for the quarter.  Our Asia-Pacific, North America and Australia region sales accounted for 69% of our revenue recognized for the three months ended March 31, 2012.  Additionally, two direct customers accounted for 29% of total outstanding accounts receivable as of March 31, 2012.

For the three months ended March 31, 2011, one direct customer and one distributor comprised 29% of our revenue recognized for the quarter.  Our Asia-Pacific region sales accounted for 30% of our revenue recognized for the three months ended March 31, 2011.  Additionally, one distributor and two direct customers accounted for 43% of total outstanding accounts receivable as of March 31, 2011.

Research and Development

We earn revenue for performing tasks under research and development agreements with both commercial enterprises, such as Olympus and Senko, and governmental agencies like the National Institutes of Health (“NIH”).  Revenue earned under development agreements is classified as either research grant or development revenues depending on the nature of the arrangement.  Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants are recorded as research grant and other within development revenues.  Research grant 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.  Additionally, research and development arrangements we have with commercial enterprises such as Olympus and Senko are considered a key component of our central and ongoing operations.  Accordingly, when recognized, the inflows from such arrangements are presented as revenues in our statements of operations.

We received funds from Olympus and Olympus-Cytori, Inc. during 2005 and 2006.   We recorded upfront fees totaling $28,311,000 as deferred revenues, related party.  In exchange for these proceeds, we agreed to (a) provide Olympus-Cytori, Inc. an exclusive and perpetual license to our Celution® System device technology and certain related intellectual property, and (b) provide future development contributions related to commercializing the Celution® System platform.  The license and development services are not separable and as a result the recognition of this deferred amount requires achievement of service related milestones, under a proportional performance methodology.  If and as such revenues are recognized, deferred revenue will be decreased.  Proportional performance methodology was elected due to the nature of our development obligations and efforts in support of the Joint Venture (“JV”), including product development activities and regulatory efforts to support the commercialization of the JV products. The application of this methodology uses the achievement of R&D milestones as outputs of value to the JV.  We received up-front, non-refundable payments in connection with these development obligations, which we have broken down into specific R&D milestones that are definable and substantive in nature, and which will result in value to the JV when achieved.  As our research and development efforts progress, we periodically evaluate,  and modify if necessary, the milestone points in our proportional performance model to ensure that revenue recognition accurately reflects our best estimate of substantive value deliverable to the JV.  Revenue will be recognized as the above mentioned R&D milestones are completed.  Of the amounts received and deferred, we recognized development revenues of $1,231,000 for the three months ended March 31, 2011.  There was no development revenues recognized for the three months ended March 31, 2012.  All related development costs are expensed as incurred and are included in research and development expense on our statements of operations.  To date under the contract, of the $28,311,000 originally deferred, we have recognized a total of $24,791,000 through March 31, 2012.

Under a Distribution Agreement with Senko, we granted to Senko an exclusive license to sell and distribute certain Thin Film products in Japan.  We have also earned or will be entitled to earn additional payments under the Distribution Agreement based on achieving certain defined and substantive research and development milestones. There was no development revenue recognized related to this agreement during the three months ended March 31, 2012 and 2011, respectively.

8.	Inventories

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

Inventories consisted of the following:

		March 31,				December 31,
		2012				2011
Raw materials		$	1,518,000			$	1,503,000
Work in process			838,000				790,000
Finished goods			1,018,000				1,025,000
		$	3,374,000			$	3,318,000

9.	Share-Based Compensation

Stock Options

During the first quarter of 2012, we issued to our directors and executive officers options to purchase an aggregate of up to 690,000 shares of our common stock, with four-year vesting for our officers and two-year vesting for our directors. The grant date fair value of the awards granted to our officers was $2.10 per share and to our directors was $1.35 per share. The resulting share-based compensation expense of $1,373,000, net of estimated forfeitures, will be recognized as expense over the respective vesting periods.

During the first quarter of 2011, we issued to our directors, executive officers and certain non-executive employees options to purchase an aggregate of up to 692,500 shares of our common stock, with four-year vesting for our officers and employees and two-year vesting for our directors. The grant date fair value of the awards granted to our officers and employees was $3.46 and to our directors was $3.15 per share. The resulting share-based compensation expense of $2,375,000, net of estimated forfeitures, will be recognized as expense over the respective vesting periods.

Restricted Stock Awards

During the first quarter of 2012, we issued to our executive officers 190,000 shares of restricted stock.  The stock award is scheduled to fully vest on January 10, 2013, subject to the officer’s continued employment with the Company through the vesting date.  The resulting share-based compensation expense of $654,000 will be recognized as expense over the respective vesting period.

Performance-Based Restricted Stock Awards

We granted 246,225 performance-based restricted stock awards under the 2004 Equity Incentive Plan in February 2011.  The awards provide certain employees until January 1, 2012 to achieve certain performance goals established by the Compensation Committee. The performance goals were weighted based on the following achievements: obtaining certain FDA clearance or approval (40%), achieving a targeted revenue increase for the fiscal year ended December 31, 2011 (20%), and entering into a major collaboration for development and/or commercialization of the Company’s products (40%).  To the extent that any of the performance goals were partially achieved, the Compensation Committee maintained the discretion to continue the vesting of all or a portion of the awards following January 1, 2012.  Once earned, the awards would have remained unvested until January 1, 2013. Termination of employment prior to vesting would have resulted in the forfeiture of any earned (as well as unearned) awards. Effective January 2012, the outstanding awards were terminated in their entirety based upon the decision by the Compensation Committee that performance criteria had not been met as of January 1, 2012.  No compensation expense was recognized related to these awards during the three months ended March 31, 2012 and 2011.

In January 2012, we granted 276,375 performance-based restricted stock awards under the 2004 Equity Incentive Plan.  The awards provide certain employees until December 31, 2012 to achieve certain performance goals established by the Compensation Committee. The performance goals are weighted based on the following achievements: entering into a major collaboration for development and/or commercialization of the Company’s products (40%), obtaining certain FDA clearance or approvals, which include FDA approval for and initiation of the ATHENA feasibility trial in chronic myocardial ischemia (40%), obtaining CE mark for certain products (15%), and achieving a targeted revenue increase for the fiscal year ended December 31, 2012 (5%).  To the extent that any of the performance goals are partially achieved, the Compensation Committee maintains the discretion to continue the vesting of all or a portion of the awards following December 31, 2012.  Once earned, the awards will remain unvested until January 10, 2014. Termination of employment prior to vesting will result in the forfeiture of the awards.  No compensation expense was recognized related to these awards during the three months ended March 31, 2012.

The following table summarizes activity with respect to the performance based restricted stock awards during the three months ended March 31, 2012:

		Restricted Stock Awards				Weighted Average Grant- Date Fair Value
Outstanding at January 1, 2012			246,225			$	5.82
Granted			276,375			$	3.44
Vested			0
Cancelled/forfeited			(246,225	)		$	5.82
Outstanding at March 31, 2012			276,375			$	3.44
Vested at March 31, 2012			0

10.	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, warrants, restricted stock and performance based restricted stock awards for all periods presented.

We have excluded all potentially dilutive securities from the calculation of diluted loss per share attributable to common stockholders for the three months ended March 31, 2012 and 2011, as their inclusion would be antidilutive.  Potentially dilutive common shares excluded from the calculations of diluted loss per share were 18,544,087 and 19,649,383 for the three month periods ended March 31, 2012 and 2011, respectively.

11.	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 was estimated based on current schedules of pre-clinical and clinical studies in progress. As of March 31, 2012, we have pre-clinical research study obligations of $60,000 (which are expected to be fully completed within a year) and clinical research study obligations of $12,600,000 ($4,100,000 of which are expected to be completed within a year). Should the timing or the budgets of the pre-clinical and clinical trials change, the timing and amounts of the payments for these obligations would also change.

We have entered into several lease agreements for our headquarters office location as well as international office locations and corporate housing for our employees on international assignments. As of March 31, 2012, we have remaining lease obligations of $10,259,000 ($1,785,000 of which are expected to be completed within a year).

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.

Refer to note 6 for a discussion of our commitments and contingencies related to our long-term obligations.

Refer to note 12 for a discussion of our commitments and contingencies related to our transactions with Olympus, including (a) our obligation to the Joint Venture in future periods and (b) certain put and call rights embedded in the arrangements with Olympus.

12.	Transactions with Olympus Corporation

Initial Investment by Olympus Corporation in Cytori

In 2005, we entered into a common stock purchase agreement with Olympus in which we received $11,000,000 in cash proceeds.  We received an additional $11,000,000 from Olympus in August 2006 for the issuance of approximately 1,900,000 shares of our common stock at $5.75 per share.  We received an additional $6,000,000 from Olympus in August 2008 for the issuance of 1,000,000 unregistered shares of our common stock at $6.00 per share and 500,000 common stock warrants (with an original exercise price of $8.50 per share) under a private placement offering.

As of March 31, 2012, Olympus holds approximately 6.9% of our issued and outstanding shares.  Additionally, Olympus has a right, which it has not yet exercised, to designate a director to serve on our Board of Directors.

Formation of the Olympus-Cytori Joint Venture

In 2005, we entered into a joint venture and other related agreements (the “Joint Venture Agreements”) with Olympus.  The Joint Venture is owned equally by Olympus and us.  We have determined that the Joint Venture is a variable interest entity or VIE, but that Cytori is not the VIE’s primary beneficiary.  Accordingly, we have accounted for our interests in the Joint Venture using the equity method of accounting, since we can exert significant influence over the Joint Venture’s operations.  At March 31, 2012, the carrying value of our investment in the Joint Venture is $200,000.  We are under no obligation to provide additional funding to the Joint Venture, but may choose to do so.  We made no cash contributions to the Joint Venture during the three months ended March 31, 2012 and 2011.

Put/Calls and Guarantees

The Shareholders’ Agreement between Cytori and Olympus provides that in certain specified circumstances of our insolvency or if we experience a change in control, Olympus will have the rights to (i) repurchase our interests in the Joint Venture at the fair value of such interests or (ii) sell its own interests in the Joint Venture to Cytori (the “Put”) at the higher of (a) $22,000,000 or (b) the Put’s fair value.

At March 31, 2012 and December 31, 2011, the estimated fair value of the Put was $1,640,000 and $1,910,000, respectively.  Fluctuations in the Put value are recorded in the consolidated condensed statements of operations as a component of change in fair value of option liabilities. The estimated fair value of the Put has been recorded as a long-term liability in the caption option liability in our consolidated condensed balance sheets.

The valuations of the Put were completed using an option pricing theory based simulation analysis (i.e., a Monte Carlo simulation).  The valuations are based on assumptions as of the valuation date with regard to the market value of Cytori and the estimated fair value of the Joint Venture, the expected correlation between the values of Cytori and the Joint Venture, the expected volatility of Cytori and the Joint Venture, the bankruptcy recovery rate for Cytori, the bankruptcy threshold for Cytori, the probability of a change of control event for Cytori, and the risk free interest rate.

The following assumptions were employed in estimating the value of the Put:

		March 31, 2012				December 31, 2011
Expected volatility of Cytori			76.45	%			76.07	%
Expected volatility of the Joint Venture			76.45	%			76.07	%
Bankruptcy recovery rate for Cytori			28.00	%			28.00	%
Bankruptcy threshold for Cytori		$	7,138,000			$	8,594,000
Probability of a change of control event for Cytori			3.08	%			3.33	%
Expected correlation between fair values of Cytori and the Joint Venture in the future			99.00	%			99.00	%
Risk free interest rate			2.23	%			1.89	%

The Put has no expiration date.  Accordingly, we will continue to recognize a liability for the Put and mark it to market each quarter until it is exercised or until the arrangements with Olympus are amended.

13.	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:

The following table provides a summary of the recognized assets and liabilities that we measure at fair value on a recurring basis:

		Balance as of				Basis of Fair Value Measurements
		March 31, 2012				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	26,646,000			$	26,646,000			$	—			$	—
Liabilities:
Put option liability		$	(1,640,000	)		$	—			$	—			$	(1,640,000	)
Warrant liability		$	(757,000	)		$	—			$	—			$	(757,000	)

		Balance as of				Basis of Fair Value Measurements
		December 31, 2011				Level 1				Level 2				Level 3
Assets:
Cash equivalents		$	30,646,000			$	30,646,000			$	—			$	—
Liabilities:
Put option liability		$	(1,910,000	)		$	—			$	—			$	(1,910,000	)
Warrant liability		$	(627,000	)		$	—			$	—			$	(627,000	)

We use quoted market prices to determine the fair value of our cash equivalents, which consist of money market funds that are classified in Level 1 of the fair value hierarchy.

We value our put liability using an option pricing theory based simulation analysis (i.e., a Monte Carlo simulation) (see note 12). Because some of the inputs 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, the put option liability is classified as Level 3 in the fair value hierarchy.

The following table summarizes the change in our Level 3 put option liability value:

		Three months ended
Put option liability		March 31, 2012
Beginning balance		$	(1,910,000	)
Decrease in fair value recognized in operating expenses			270,000
Ending balance		$	(1.640,000	)

Common stock purchase warrants issued in connection with our August 2008 private equity placement do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the option pricing model.  Some of the significant inputs are observable in active markets, such as common stock market price, volatility, and risk free rate.  The fair value of these warrants also incorporate our assumptions about future equity issuances and their impact to the down-round protection feature. Because some of the inputs 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, the warrant liability is classified as Level 3 in the fair value hierarchy.

The following table summarizes the change in our Level 3 warrant liability value:

		Three months ended
Warrant liability		March 31, 2012
Beginning balance		$	(627,000	)
Decrease (increase)  in fair value recognized in operating expenses			(130,000	)
Ending balance		$	(757,000	)

No other assets or liabilities are measured at fair value on a recurring basis, or have been measured at fair value on a non-recurring basis subsequent to initial recognition, on the accompanying consolidated condensed balance sheet as of March 31, 2012.

14.	Fair Value

Financial Instruments

We disclose fair value information about all financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. The disclosures of estimated fair value of financial instruments at March 31, 2012 and December 31, 2011, were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, accounts receivable, inventories, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value due to the short-term nature of these instruments.

We utilize quoted market prices to estimate the fair value of our fixed rate debt, when available.  If quoted market prices are not available, we calculate the fair value of our fixed rate debt based on a currently available market rate assuming the loans are outstanding through maturity and considering the collateral. In determining the current market rate for fixed rate debt, a market spread is added to the quoted yields on federal government treasury securities with similar terms to the debt.

At March 31, 2012 and December 31, 2011, the aggregate fair value and the carrying value of the Company’s fixed rate long-term debt were as follows:

		March 31, 2012								December 31, 2011
		Fair Value				Carrying Value				Fair Value				Carrying Value
Fixed rate long-term debt		$	24,306,000			$	24,512,000			$	24,211,000			$	24,341,000

Carrying value is net of debt discount of $1,613,000 and $1,847,000 as of March 31, 2012 and December 31, 2011, respectively.

15.	Stockholders’ Equity

Common Stock

On December 13, 2010 we raised $10,000,000 in gross proceeds from a sale of 1,428,571 shares of unregistered common stock to Astellas Pharma Inc. for $7.00 per share in a private stock placement.  Pursuant to the terms of the purchase agreement, we granted Astellas Pharma Inc. a two year right of first refusal to enter into a development and commercialization collaboration with us regarding the use of our technology, on a worldwide basis, for the treatment of liver conditions. In addition, we have agreed to use reasonable efforts to file a registration statement with the Securities and Exchange Commission to register the shares of common stock for resale upon the request of Astellas Pharma Inc.  We also granted Astellas Pharma Inc. a non-voting observer seat on our Board of Directors and the right to designate a representative member to our Scientific Advisory Board.  The $10,000,000 in total proceeds we received exceeded the market value of our stock at the completion of the purchase agreement.  The $2,526,000 difference between the proceeds received and the fair market values of our common stock was recorded as a component of deferred revenues in the accompanying balance sheets.  This difference was recorded as deferred revenue since, conceptually, the excess proceeds represent a value paid by Astellas Pharma Inc. attributable to the scientific advisory board seat, the non-voting observer seat on our Board of Directors, and the two year right of first refusal  to enter into a development and commercialization collaboration with us regarding the use of our technology, on a worldwide basis, for the treatment of liver conditions, rather than an additional equity investment in Cytori.  The recognition of this deferred amount is expected to occur upon the earlier of the expiration of the two year period or the termination of the agreement.

On July 11, 2011, we entered into a common stock purchase agreement with Seaside 88, LP relating to the offering and sale of a total of up to 6,326,262 shares of our common stock.  The agreement requires us to issue and Seaside to buy 1,326,262 shares of our common stock at an initial closing and 250,000 shares of our common stock once every two weeks, commencing 30 days after the initial closing, for up to an additional 20 closings, subject to the satisfaction of customary closing conditions. At the initial closing, the offering price was $4.52, which equaled to 88% of our common stock’s volume-weighted average trading prices, or VWAP, during the ten-day trading period immediately prior to the initial closing date, raising approximately $6,000,000 in gross proceeds. At subsequent closings, the offering price will equal 90.25% of our common stock’s volume-weighted average trading prices during the ten-day trading period immediately prior to each subsequent closing date.  We raised approximately $17,684,000 in gross proceeds from the sale of 5,576,262 shares in our scheduled closings through March 31, 2012.

Warrant Adjustments

Our March 2009 offering of 4,771,174 shares of our common stock and warrants to purchase up to a total of 6,679,644 additional shares of our common stock with an exercise price of $2.59 per share, our May 2009 equity offering of 1,864,783 shares of our common stock and warrants to purchase up to a total of 3,263,380 additional shares of our common stock with an exercise price of $2.62 per share, our closings with Seaside 88, LP through March 31, 2012, our October 2010 offering of 4,600,000 shares of our common stock and our December 2010 sale of 1,428,571 shares of our common stock triggered an adjustment to the exercise price and number of shares issuable under the warrants issued to investors in our August 2008 private placement financing.  As a result, as of March 31, 2012, the common stock warrants issued on August 11, 2008 are currently exercisable for 2,014,512 shares of our common stock at an exercise price of $5.75 per share.

Other Related Party Transactions

As of March 31, 2012 and December 31, 2011, Green Hospital Supply, Inc., our distribution partner in Japan and a related party, was a beneficial owner of 5.1% and 5.3%, respectively, of our outstanding shares of common stock.

During the three months ended March 31, 2012 and 2011, we incurred approximately $27,000 and $28,000 in royalty costs in connection with our sales of our Celution® 800/CRS System products to the European and Asia-Pacific reconstructive surgery market, pursuant to our License and Royalty Agreement and the Amended License/Commercial Agreement with the Olympus-Cytori, Inc. joint venture, respectively.  Additionally, during the three months ended March 31, 2012, we purchased second generation Celution ® Systems and consumable sets from Olympus-Cytori, Inc. joint venture, at a formula-based transfer price aggregating to $1,048, 0000.  As of March 31, 2012 and December 31, 2011, Olympus Corporation was a beneficial owner of 6.9% and 7.1%, respectively, of our outstanding shares of common stock and a beneficial owner of 50% of Olympus-Cytori, Inc. joint venture.

16.	Subsequent Events

We have evaluated events after the balance sheet date of March 31, 2012 and up to the date we filed this report.

Subsequent to the quarter ended March 31, 2012, we completed one scheduled closing with Seaside 88, LP during the period of April 1, 2012 through our filing date raising in aggregate approximately $549,000 in gross proceeds from the sale of 250,000 shares of our common stock in connection with the agreement we entered into with Seaside 88, LP on July 11, 2011.  Effective, April 30 th , 2012, we terminated the agreement with Seaside 88, LP and we will not sell the remaining and final 500,000 shares that would otherwise have been sold under this agreement.