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TOPIC: The Lincoln Park deal research:DOV and FAS won't like it...

The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 12:08 #8428

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here is my summary:

The Lincoln Park deal brings unwanted dilution but the opportunity for much needed cash – according to Hedrick and the company’s press release – up to $20 million! Great headline. But – it’s highly misleading.

The company will sell to Lincoln Park up to 6 million shares at a 3% discount from market over a period of 2.5 years. To raise the full $20 million, the average price of the shares would need to be $3.44 (less 3% fee = $3.33 x 6m shares = $20m). That is 228% higher than the shares trade today. If the stock were to stay on average in the current range – say $1.50 net to the company, they could raise a maximum of $ 9 million (which is also noted in the company’s S1 filing with the SEC and to which the SEC fee was based upon). This is not even close to the $20m headline.

BUT, it’s not so straightforward. First is the NASDAQ 20% rule wherein the company can not sell discounted stock in any single transaction for more than 20% of the pre-deal outstanding share capital of the company without shareholder approval. Therefore they can only offer 4,315,814 shares (21,579,071 outstanding shares pre-deal X 20%) before shareholder approval which will no doubt be part of the slate for their next shareholder’s meeting which will likely take place next summer.

The 4,315,814 shares includes the 127,419 shares already granted to Lincoln Park and must account for the 382,258 additional shares to be paid to LP as a fee for the transaction. So the actual number of shares the company might be able to sell to LP is between 3.8m and 4.2m or again at an average $1.50 to the company the most Cytori can current raise under this agreement is ~ $5.7 - $6.3m – NOT $20m.

The next hurdle is that the company can only “put” shares to LP from time to time and with certain limits. Currently the company trades on average around 180k shares per day (which likely includes some double counting but we will ignore that for now). According to the agreement with LP, Cytori can not put more than 30% of the average daily trading volume to LP in any given day. If the average price for the day was $1.50 – they would sell shares to LP for $1.445 (97% of $1.50) and if the average volume is 180k shares – they can put 54,000 shares and raise a total of $78,000. Cytori can only put shares every other trading day. With 20 trading days per month on average, they can bring in $780k per month through this vehicle assuming that the share price stays in this range and that the volume remains stable. Historically, neither of these have held with the stock price dropping in nearly every quarter (often dramatically) since Calhoun left and Hedrick took the helm. The volume has also been drying up and just a few weeks ago, the average daily volume was around 100k shares per day – down from million of shares per day on a pre-split adjusted comparison over the last few years.

It has been suggested on this board that LP will become a significant long-term holder of the stock. This seems unlikely and is inconsistent with agreement. By it’s very nature, this agreement was structured to allow LP to trade the stock and churn cash in order to generate fees. If you google LP you can find they have historically been in hot water for short selling companies despite an agreement (much like this one) not to do so. . So – to effectively get around this little dilemma, they creatively designed in a solution which essentially allows them to short sell the free shares so they can actually appear to be a long fund.

Cytori grants to LP 127,419 shares on day one. They will continue to grant additional shares (not sure what the conditions are to this as it wasn’t disclosed that I could find) of up to 382,258 additional shares. Why do this?

Answer: LP can now front sell into the market up to 127k shares before having to “buy” these shares from Cytori.

Here’s an example. Monday Cytori notifies LP that they want to “put” the maximum shares to LP on Wednesday. LP can then sell shares into the market on Tuesday and or Wednesday to raise the money to buy these shares back from Cytori. As long as they can sell their shares for the average price of the shares trading on Wednesday, they will make money (3% fee plus whatever they were able to sell above the average price for that day). The shares they buy from Cytori effectively “reload” their treasure shares. (note: the average daily volume would need to be greater than 425k shares for them to use their full 127k initial share grant and there are maximum daily purchase caps to help protect them on this as well).

The reason the street doesn’t like these structured purchase deals is because they create an “overhang” on the share price. It’s crystal clear that Cytori needs capital likely even to get through Q1 without busting loan covenants so it’s expected that they will be pushing these sales as hard as possible to bring in the maximum amount of cash they can get. This selling pressure (these shares are effectively sold through to the street) will keep at best a lid on the current share price and more than likely will cause the share price to erode over time (independent of all the other forces on the stock).

So why do this and not a traditional PIPE or financing? The fact is they just aren’t capable of raising money in the market. Last year, they went to raise money from Wall St. and they found no takers. Institutional investment funds are the primary target of these transactions but often hedge funds become the major source of capital (and demand onerous terms like discounts and warrants). Institutional funds have charters that limit them to purchasing companies that have a market capitalization above a certain threshold – like $1b or $5b – and some are lower like $500m or maybe $250m. But those institutional funds that are able to buy shares in companies with market caps in the $100m or $75m or $50m range are pretty rare. Finding one that can invest in sub $50m is nearly impossible (Cytori is around $30m). Further, these institutional funds have share price limits as well – some can only invest in companies with a share price > $5 and others >$4. Anything in the <$3 becomes pretty difficult and certainly down under $1 is nearly impossible (as where Cytori was this time last year and facing delisting. Institutional investors also look to liquidity – meaning – how much dollar volume of the company’s shares trade on any given day. This is calculated as average price x average volume – so for Cytori with 180k avg volume and $1.50 average price – the company trades on average $270k worth of stock per day. If a fund was looking to invest say $5 million – they would then calculate the number of days it would take to get out of that position ($5m / $270k = 18.5 trading days) and then they multiple that by 5 as they certainly would not expect to consume all of the shares traded in any given day and would likely only participate in 20%. So in this case, a $5m investment could take up to 5 months to get out of. This of course does NOT meet any of the liquidity provisions of institutional funds who would be looking for liquidity on their investment in a number of days and not months.

Finally, there is the investment thesis itself. Would I invest in this company, technology and management. Have they delivered? And importantly, what are the forward catalysts that would stimulate me to invest now? In Cytori’s case, I doubt there is an institutional investor on the planet who would invest in Hedrick. His track record is consistent – he’s lost shareholder value in every single period since he took over – every quarter, year to date, fiscal year and full tenure. Overall his shareholder performance has taken the stock from roughly $45 on his first day ($3 x 1 for 15 split) down to $1.50 – a 97% loss in shareholder value (effectively $0.1 per share today pre-split value). And the company lacks any meaningful near-term catalysts. The only major announcement pending is data from the Scleroderma trial which will likely not be released until late Summer (the last patient follow up will be in June and it will likely take a few months to crunch and validate the data). The company doesn’t have the capital to invest in other things in between so it’s a waiting and hoping game. The cost of course is enormous – average of $5.2m per quarter in cash operating losses plus starting this month you can add another $780k per month for interest and principal payments on the company’s term loan – so the actual burn will be closer to $7.5m. With an estimated $10m in the bank at year-end – they would likely break the $5m loan covenant mid Q1 technically – so being able to raise money through this current offering is critical and needed despite the most recent quarterly call and SEC filings that announce they can get to data next summer without additional financing – simply not true. And the expected revenue from MAP program – nothing there either – that’s a zero. Doctor of Value better start doctoring his numbers again…

Under Hedrick, it’s been the hedge funds that have bought in the offerings – but at a heavy cost of warrants, assumed stock price manipulation and shorting. This was all a great game for these hedge funds led by Sabby – as long as the liquidity was there to support the trading. With the liquidity gone, it’s no longer interesting even for these (imo criminal) vultures. That led to the Rights Offering last summer which sold ~8 million shares and ~4m warrants – or the equivalent of 180 million pre-split shares and warrants. This transaction has the potential to dilute another 6.5m shares or the equivalent of around 100m pre-slit shares. After this transaction completes, Marc will have taken the share count (including warrants) to nearly 480m pre-slit shares – a 666% dilution. It’s official, Marc is the devil.lol

i look forward to your comments (dov,fas and others)..

all this is my opinion (however i did some research)..please proof me that i'm wrong with facts...
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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 12:26 #8429

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Dis, you have provided a lot of factual material - how did you get it all entered in the 15 minute limit (lol)?

The reality is that I think that you are way off base in your opinions - firstly, the Company will not need additional funds until sometime in Q-2 (not Q-1) and secondly the Company entered into this agreement for two important reasons, namely to bargain from a position of improved liquidity in its current partnership negotiations and to have the LP agreement serve as a fallback position in case enough partnership cash has not been received by Q-2.

IIMO, the LP agreement was an excellent deal for CYTX at this point in time.

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 12:34 #8430

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RS,

you are so blind (or you have another role here to play) that i take your posts here on the message board not really serious...

Just look at the MAP program – they expected significant revenues by now in Europe bc patients would be lining up for this – right? THEY HAVENT EVEN TREATED 1 PAYING PATIENT UNDER THIS PROGRAM YET!!! That should be screaming sirens and flashing red lights – but no one seems to care.

you will be probably see this as a positive sign that they haven't treated any patients...

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 12:44 #8431

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Have you been on vacation dis ?
The filing was 12/29 and your just reaching your conclusions now ? LOL
Look, you are mostly 100% correct. So what !
To keep it short and simple....as I have said, the ultimate pricing will determine the worth of the deal.

RS...you are splitting hairs on the Q1 vs Q2 subject. The loan is the issue.

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 13:03 #8433

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HF, that's what I do, split hairs - I love barbers - do you have much hair left? LOL

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 13:11 #8434

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Dis,

I agree with your assessment regarding the structure of the deal, LPC's motives behind it, and the likely way in which it will play out regarding the pressure on the stock. You are 100% correct that LPC has a history of doing this countless times over the last decade, and they specialize in companies who have no other less toxic financing options.

I see a couple silver linings though:
1. The company desperately needed money, and this will keep them afloat. Favorable partnerships are possible with good Phase III data, and this gets us there. I think this is the main reason for the mild euphoria that some of us board members are experiencing.
2. LPC's deals tend to follow a trajectory of price appreciation immediately after the agreement is announced, followed by long term decline after that. So if the share price goes up in the short term (along with increased volume), then this deal will actually be more advantageous for the company and allow them to raise more than your projections. Buy the rumor sell the news may play in our favor prior to the STAR results.

I agree that DOV and other's numbers are far too optimistic regarding MAP numbers and general company performance, but at the same time there are members on this board who are far too doom and gloom. The train was already off the tracks when Hedrick took over, he had about as many options as someone strapped to an electric chair does. So the fact that shares still trade and no bankruptcy lawyers have cashed a check is a victory for me. Phase 3 results or bust at this point. :vegas:

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 15:25 #8438

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I thought the detail from Cytori’s SEC filing with some thoughtful analysis would be most helpful – sorry it was so long. Let me simplify my thoughts on this:

1. Cytori needs money TODAY to avoid breaking loan covenants in actual terms in February or March so this is a good deal for them as they don’t have any other options.
2. They can raise only about $9m total at current prices under this filing – but only about $5.3m can be raised BEFORE shareholder approval of anything over 20% of the pre-deal outstanding share count
3. The headline of $20m is highly misleading and brings up questions of integrity and transparency that all should be concerned about (what else are they trying to hide?)
4. LP is a deal shop and will not be a holder of this stock except the free treasury shares they will use to pre-sell the shares Cytori wants them to purchase as a means to avoid technical short trading. Be aware – this has the same effect of short selling.
5. Everyone is hoping for a strategic partnership, but that doesn’t appear likely – the OA data was poor, the cardiac and breast work is old and no one is interested, the sclera data doesn’t exist yet and that’s their only value driver so if they sell that – what’s left? So can they partner off other investigator trials like incontinence? Doubtful – anecdotal evidence is very hard to sell imho.
6. While Cytori needs the money, it is still a significant dilution (>30%)

My goal is just to share my understanding and analysis of the facts and not be positive or negative. They need this deal to stay afloat to get to data this summer so if it accomplishes that goal – it’s worth it. But at the same time – for the blue sky people on this board – LP is not an institutional investor, will not be holding or accumulating shares as a long term investor. They certainly won’t be raising anywhere near $20m – more like $5-9m if they are lucky. They will still need more money, or to significantly reduce their burn (meaning let a bunch of people go – that’s where most of the cost is).

Finally, I find it laughable that people are still defending Hedrick when his performance has to be among the worst in history – although a few of his board members are likely right there with him including the new guy who has crashed and burned his last four companies. And to say Hedrick inherited a mess in a no option situation – really?? The company had a $250m market cap and had just brought in $24m from Lorem, three month BEFORE Hedrick took over. By the way – that deal only sold 8m shares – no fees and no warrants. This great deal would bring in maybe $9m at best for the equivalent of 100m shares. But – hey don’t blame the current management – they keep telling us that the last 3 years are not their fault. At what point do you stop blaming the past management and wonder why did they all leave under Hedrick? JMHO

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 15:41 #8439

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Dis, once again your opinions are "way out there" and I can't imagine why you have come "out of the blue" to recitate in a voluminous and negative manner (to many of us that still have hope in this Company) as to why the future looks so bleak for CYTX - it's your right to do so, but "are you trying to protect us from ourselves" or is there some other motive? Hmmm!

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 16:33 #8440

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Again I don't disagree with your assessment of this financing at all. Not great but needed, and the true result only time will tell based on pricing of the shares delivered.

Regarding your comments about Hedrick, here are the facts:
4/1/2014 - Hedrick was appointed as CEO
8/1/2014 - Athena trial suspended, which was the beginning of the end of reasonable share prices/market caps

Things that happened before Hedrick took over:
-Athena was enrolling.
-Breast Reconstruction was an absolute failure.
-$20 million loan acquired, which was the most egregious and damaging financial decision management ever made.
-Years of lies and dilution from Calhoun and Co. Every partner/investor who ever gave money lost. Hence Hedrick was working with a very bad company reputation on Wall Street by the time he had to go asking for money.

Since he and Thiago took over, massive cost cuts, tough staffing reductions, realignment of corporate priorities, execution of Phase 2 trial for OA and Phase 3 trial for Sclera, continued progress with Barda, etc. So judged by share price, yes he has been the worst thing ever. But judged by his power to actually influence the direction of the company, I still think he deserves a chance. JMHO
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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 16:44 #8441

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"are you trying to protect us from ourselves" or is there some other motive? Hmmm!

Sometimes I think that we have to force ourselves to look at something as it is. And investigating it and communicating the results of that investigation are part of the exercise. Conclusions are just thoughts based on ones survey of the way in which they perceive the information they are attempting to understand. They can change. They are especially vulnerable when expressed in a forum such as this.

Each of us has the ability (and probably duty) to examine the ideas set forth by others and make their own determination as to their value. Expressing your opinion after making a case only increases the pool of information with which we can make intelligent decisions.

I am so happy that there is such a healthy variation of opinions expressed here.

Again I have to thank Fas for creating and maintaining such a diverse and intelligent forum!

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 16:55 #8442

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Irrational, your defense of Hedrick is interesting, but wrong - he was right there from the beginning with Calhoun (hand and hand) - all the missteps over the years, he has to share with Calhoun - we are stuck with him for now (and I think that CYTX will be successful despite him), but imo a new CEO with good credentials and stem-cell experience would double this stock the moment it was announced.

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The Lincoln Park deal research:DOV and FAS won't like it... 06 Jan 2017 17:24 #8443

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Rodney,

I've met all of the executives in person from this management team and the previous, so I am aware that Hedrick has been on board from the beginning. Thanks for your valuable insights.

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The Lincoln Park deal research:DOV and FAS won't like it... 07 Jan 2017 06:56 #8446

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Rodney ,I am trying to provide a realistic and accurate assessment. That it’s doom and gloom is not my bias but more the reality. Like many on the board, I have lost a significant amount of money over the years in this stock. When I hear people trying to color up the situation or re-write the past, I want to step up and add some balance and provide transparency. Everything I present on the deal can be verified in their S1 filing and through thoughtful analysis of the deal and situation. I would love to see this company not only survive but thrive. I would love to see a partnership – any partnership that even brings in a small amount of cash because at least it would prove the model that it is partnerable and this team can deliver something other than selling hundreds of millions of shares. Frankly your assessment of this stock is often way off base and not thoughtful. Sorry if that insults you which isn’t my intent, but I think anyone looking at the facts and the situation will see and appreciate the accuracy and reality of my posts. Tell me where my facts or assessment is wrong?
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The Lincoln Park deal research:DOV and FAS won't like it... 07 Jan 2017 11:13 #8447

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dis,

My compliments on a very well written and totally factual summary of the Lincoln Park deal. Your scenario is based on the stock price staying at the $1.50 price or lower between now and mid-July when the STAR results will be released. If there are no partnership deals announced between now and then, your scenario is quite likely.

What I like about the LPC deal is that it permits Cytori to meter out the minimum number of shares required to get to the STAR data as opposed to a PIPE that would maximize dilution all up front and give the shareholders no hope of raising money after the data at higher stock prices.

A few weeks ago I watched a video of four female patients treated in the SCLERADEC 1 trial. Each patient was interviewed at three months, six months, and one year after treatment. This video was also shown at the Maxim Investor Day a few months ago. All four of these patients were ecstatic over how much improvement they had seen. They felt their hand function had essentially returned to normal and the improvement happened very quickly. It was validating to see patients describe the results while showing their hands rather than a few bar grafts with test scores.

Most investors probably don’t know that ten of the twelve patients treated in the SCLERADEC 1 trial had very good results and two showed very little improvement. There is a point where not even stem cells can repair the damage. The “P” Values achieved in the trial included the results of all 12 patients. A P-Value of < 0.05 means there is a > 95% probability the stem cells are responsible for the observed outcomes. This is the threshold benchmark, which must be achieved to gain FDA approval. Here is a summary of the SCLERADEC 1 results:

Cochin Hand Function P < 0.001
Raynaud’s Condition P < 0.001
Scleroderma Health Assessment P < 0.002
Pain at 6 months P < 0.001
Pain at 12 months P = 0.052
Pain at 24 months P = 0.01
Pinch Strength 24 months P = 0.004
Grip Strength 24 months P = 0.05
Modified Rodnan Skin Score P = 0.005
Vascular Suppression Score 12 months P < 0.001

Everyone knows the STAR Trial was modeled after the SCLERADEC 1 Trial. What you may not know is that the Key Inclusion Criteria and the Key Exclusion Criteria made sure that all STAR patients fell within the center of the bell curve established by the SCLERADEC 1 trial. In addition, all of the Primary and Secondary Outcome Measures established for the STAR Trial achieved P-Values of < 0.002 in the SCLERADEC Trial (which included two non-responders). Odds strongly favor excellent STAR results.

Based on the 12-month data from the SCLERADEC 1 trial, the FDA approved a pivotal Phase III trial. In other words, the FDA waived their requirement for a Pilot trial in this country based on the French data. On November 9, 2016, the FDA granted Cytori Orphan Drug Designation for ECCS-50 produced at bed-side or cryopreserved. This designation provides certain incentives, which may include tax credits towards the cost of clinical trials and waivers from FDA user fees. If ECCS-50 subsequently receives first FDA approval for scleroderma of the hand, the product is entitled to exclusivity for seven years. I seem to remember the total cost of the STAR Trial was approximately $6 million, but I do not want to speculate on the value of any potential tax credits nor do I want to speculate on the broadness of the exclusivity protection.

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The Lincoln Park deal research:DOV and FAS won't like it... 07 Jan 2017 11:51 #8450

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Thanks Ruben for an excellent piece of work, well analyzed and presumably all correct.

I must admit- on the day this announcement came out, I was very pleased with "the damage control" of what seems to be an up-beat announcement with Cytori pretty much in control on the deal. After browsing just 5 minutes through the S-1 - the sentence "Cytori has issued shares of common stock to LPC as a commitment fee and will issue additional shares of common stock on a pro-rata basis only when and if shares are sold to LPC." brought back reality to me. This aint cheap either and it beats me why needed in case the Cowens ATM still has validity. In my memory there was no time limit in that agreement.

Also- I do not share DOV´s optimism of LPC being an investor instead of a "flipper". We had a similar thing with Seaside, which was presented as an investor also.

Key thing for me to note is -

1. Hedrick AGAIN DID NOT DELIVER ON HIS PROMISE THAT THE RIGHTS OFFERING WOULD BE THE LAST CAPITAL ROUND.

2. DOV´s statement that this deal was not made for a share price of 1,50$. I absolutely concur with and this means that THIS TIME Hedrick does have to deliver otherwise- as you Ruben has perfectly well analyzed- it will be lights out at Callan Road (and that has nothing to do with a potential move to another building)

Anyway- I am still on my break from this board, since involved with fasting and detoxification of my body which is quite strenuous- I am very excited and pleased that we all can keep the peace despite very opposite views.
Thanks to all.

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Board moderator and Site-owner. I still regret the day I started analysing the prospects of MacroPore (now Cytori) back in 2004- a left-over from the tech-bubble at that time from the century change in my portfolio- and became addicted to Cytori´s fat cell technology. :cry:

The Lincoln Park deal research:DOV and FAS won't like it... 07 Jan 2017 12:29 #8451

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Dis, thanks for the sort of "olive branch" approach in your last post - however, when you say that my assessment of this stock is way off base and not thoughtful, that is simply your opinion and is probably based on your obsession with the dismal history of CYTX performance rather than giving weight to what the future could bring if we avoid the missteps and greed of the past.

PS - I have also lost a ton of money on CYTX, but there is no point in dwelling on the past - I believe in the future - good luck to you!

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The Lincoln Park deal research:DOV and FAS won't like it... 07 Jan 2017 12:58 #8452

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Fas, in response to your comment that Hedrick reneged on his promise that the Rights Offering would be the last capital round, I must note that he has not reneged yet - the LP deal was put in place as back-up insurance in case enough cash was not raised from partnership deal(s) - imo, it will not be used!

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The Lincoln Park deal research:DOV and FAS won't like it... 09 Jan 2017 09:12 #8458

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Dis has it right. I had started a similar, less in depth post, on this topic a week ago or so but never finished. LP is not a long term investor and the up front commitment fee has probably been converted into cash already. However, this is the best deal that Cytori could have done so they can't be faulted for it. Where are the IDIS revenues? Main problem, no one wants to partner with an autologous model company. KOOL is the only exception and the had to give up control.

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The Lincoln Park deal research:DOV and FAS won't like it... 09 Jan 2017 09:35 #8460

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WST states that "no one wants to partner with an autologous model company". That is an absurd statement and can only come from someone who has given up on CYTX and no longer owns the stock (and is "all in" on ATHX). I happen to own both, but I am convinced that CYTX has much greater potential in the long run than ATHX.

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The Lincoln Park deal research:DOV and FAS won't like it... 09 Jan 2017 10:25 #8461

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Like many on this board and most on the Athersys boards, I really don't care what you think. It is clear that the autologous model is a commercial handicap. Tigenix changed models. Capricor converted. WHY? Cytx didn't have the foresight and/or resources to adjust so they needed to be perfect. They were anything but.

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