e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: March 31, 2011
Commission File Number: 0-19871
(Exact name of registrant as specified in its charter)
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DELAWARE
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94-3078125 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
identification No) |
3155 PORTER DRIVE
PALO ALTO, CA 94304
(Address of principal executive offices including zip code)
(Registrants telephone number, including area 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 twelve months (or
for such shorter periods that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ Noo
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
o 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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At May 5, 2011, there were 137,827,907 shares of Common Stock, $.01 par value, issued and
outstanding.
STEMCELLS, INC.
INDEX
NOTE REGARDING REFERENCES TO US AND OUR COMMON STOCK
Throughout this Form 10-Q, the words we, us, our, and StemCells refer to StemCells, Inc.,
including our directly and indirectly wholly-owned subsidiaries. Common stock refers to the
common stock, $.01 par value, of StemCells, Inc.
2
PART I-FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
STEMCELLS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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March 31, 2011 |
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December 31, 2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
13,066,185 |
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$ |
19,707,821 |
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Marketable securities, current |
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8,556,966 |
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190,804 |
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Trade receivables |
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82,650 |
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118,890 |
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Other receivables |
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224,936 |
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151,144 |
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Prepaid assets |
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619,463 |
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610,980 |
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Other
assets, current |
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389,039 |
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389,039 |
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Total current assets |
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22,939,239 |
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21,168,678 |
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Property, plant and equipment, net |
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2,401,423 |
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2,626,821 |
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Other
assets, non-current |
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1,930,544 |
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1,931,871 |
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Goodwill |
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1,957,325 |
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1,877,315 |
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Other intangible assets, net |
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3,018,275 |
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2,996,888 |
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Total assets |
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$ |
32,246,806 |
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$ |
30,601,573 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,158,187 |
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$ |
1,098,962 |
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Accrued expenses and other current liabilities |
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1,586,184 |
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2,828,168 |
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Accrued wind-down expenses, current |
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1,356,729 |
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1,310,571 |
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Deferred revenue, current |
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34,260 |
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45,885 |
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Capital lease obligation, current |
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69,494 |
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67,847 |
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Deferred rent, current |
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604 |
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Bonds payable, current |
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180,000 |
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176,250 |
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Total current liabilities |
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4,385,458 |
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5,527,683 |
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Capital lease obligation, non-current |
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17,979 |
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Bonds payable, non-current |
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476,250 |
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522,500 |
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Fair value of warrant liability |
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4,888,973 |
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6,671,929 |
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Deposits and other long-term liabilities |
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291,807 |
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276,439 |
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Accrued wind-down expenses, non-current |
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1,650,598 |
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1,989,800 |
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Deferred rent, non-current |
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397,923 |
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1,227 |
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Deferred revenue, non-current |
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109,181 |
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113,387 |
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Total liabilities |
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12,200,190 |
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15,120,944 |
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Commitments and contingencies (Note 7) |
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Stockholders equity: |
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Common stock, $0.01 par value; 250,000,000
shares authorized; issued and outstanding
137,743,512 at March 31, 2011 and 127,312,870
at December 31, 2010 |
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1,377,434 |
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1,273,128 |
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Additional paid-in capital |
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335,391,550 |
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325,359,265 |
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Accumulated deficit |
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(317,018,721 |
) |
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(311,271,486 |
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Accumulated other comprehensive income |
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296,353 |
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119,722 |
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Total stockholders equity |
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20,046,616 |
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15,480,629 |
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Total liabilities and stockholders equity |
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$ |
32,246,806 |
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$ |
30,601,573 |
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See Notes to Condensed Consolidated Financial Statements.
3
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three months ended |
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March 31, |
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2011 |
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2010 |
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Revenue: |
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Revenue from licensing agreements and grants |
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$ |
72,092 |
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$ |
113,849 |
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Revenue from product sales |
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149,375 |
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116,424 |
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Total revenue |
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221,467 |
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230,273 |
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Cost of product sales |
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54,524 |
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43,762 |
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Gross profit |
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166,943 |
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186,511 |
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Operating expenses: |
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Research and development |
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5,525,677 |
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5,037,514 |
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Selling, general and administrative |
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2,075,729 |
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2,584,742 |
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Wind-down expenses |
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75,137 |
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165,335 |
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Total operating expenses |
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7,676,543 |
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7,787,591 |
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Loss from operations |
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(7,509,600 |
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(7,601,080 |
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Other income (expense): |
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Change in fair value of warrant liability |
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1,782,955 |
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1,516,349 |
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Interest income |
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1,372 |
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594 |
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Interest expense |
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(20,207 |
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(25,500 |
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Other expense |
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(1,755 |
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(14,438 |
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Total other
income, net |
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1,762,365 |
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1,477,005 |
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Net loss |
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$ |
(5,747,235 |
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$ |
(6,124,075 |
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Basic and diluted net loss per share |
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$ |
(0.04 |
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$ |
(0.05 |
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Shares used to compute basic and diluted loss per share |
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136,799,125 |
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118,959,136 |
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See Notes to Condensed Consolidated Financial Statements.
4
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three months ended |
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March 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,747,235 |
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$ |
(6,124,075 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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305,041 |
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418,307 |
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Stock-based compensation |
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934,464 |
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1,018,972 |
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Gain on disposal of fixed assets |
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(31 |
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Change in fair value of warrant liability |
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(1,782,955 |
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(1,516,349 |
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Changes in operating assets and liabilities: |
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Other receivables |
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(71,021 |
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300,765 |
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Trade receivables |
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41,473 |
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41,568 |
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Prepaid and other current assets |
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(5,766 |
) |
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(138,508 |
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Other assets, non-current |
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3,012 |
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(17,588 |
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Accounts payable and accrued expenses |
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(1,183,647 |
) |
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(1,614,964 |
) |
Accrued wind-down expenses |
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(293,044 |
) |
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(201,175 |
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Deferred revenue |
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(15,921 |
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74,198 |
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Deferred rent |
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397,300 |
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(49,437 |
) |
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Net cash used in operating activities |
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(7,418,330 |
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(7,808,286 |
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Cash flows from investing activities: |
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Purchase of marketable securities |
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(8,382,861 |
) |
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Purchases of property, plant and equipment |
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(16,637 |
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(78,871 |
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Proceeds from sale of property, plant and equipment |
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35,427 |
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Net cash used in investing activities |
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(8,364,071 |
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(78,871 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net of issuance costs |
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9,399,003 |
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1,044,907 |
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Proceeds from the exercise of stock options |
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880 |
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636 |
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Payments related to net share issuance of stock based awards |
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(197,757 |
) |
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(360,793 |
) |
Repayment of capital lease obligations |
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(16,333 |
) |
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(19,713 |
) |
Repayment of bonds payable |
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(42,500 |
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(38,750 |
) |
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Net cash provided by financing activities |
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9,143,293 |
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626,287 |
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Decrease in cash and cash equivalents |
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(6,639,108 |
) |
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(7,260,870 |
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Effects of foreign exchange rate changes on cash |
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(2,528 |
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(20,120 |
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Cash and cash equivalents, beginning of period |
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19,707,821 |
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38,617,977 |
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Cash and cash equivalents, end of period |
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$ |
13,066,185 |
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$ |
31,336,987 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
20,207 |
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$ |
25,500 |
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See Notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2011 and 2010
Note 1. Summary of Significant Accounting Policies
Nature of Business
StemCells, Inc., a Delaware corporation, is a biopharmaceutical company that operates in one
segment, the research, development, and commercialization of stem cell therapeutics and related
technologies.
The accompanying financial data as of and for the three months ended March 31, 2011 and 2010
have been prepared by us, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States (U.S. GAAP) have been condensed or omitted pursuant to these rules and regulations.
The December 31, 2010 condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by U.S. GAAP. However, we believe that
the disclosures are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2010.
We have incurred significant operating losses since inception. We expect to incur additional
operating losses over the foreseeable future. We have very limited liquidity and capital resources
and must obtain significant additional capital and other resources in order to provide funding for
our product development efforts, the acquisition of technologies, businesses and intellectual
property rights, preclinical and clinical testing of our products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities, establishment of production
capabilities, selling, general and administrative expenses and other working capital requirements.
We rely on our cash reserves, proceeds from equity and debt offerings, proceeds from the transfer
or sale of intellectual property rights, equipment, facilities or investments, government grants
and funding from collaborative arrangements, to fund our operations. If we exhaust our cash
reserves and are unable to obtain adequate financing, we may be unable to meet our operating
obligations and we may be required to initiate bankruptcy proceedings. The financial statements do
not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of StemCells, Inc., and
our wholly-owned subsidiaries, StemCells California, Inc., StemCells Property Holding LLC, Stem
Cell Sciences Holdings Ltd; Stem Cell Sciences (UK) Ltd; and Stem Cell Sciences (Australia) Pty
Ltd. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make judgments, assumptions and estimates that affect the amounts reported in our condensed
consolidated financial statements and accompanying notes. Actual results could differ materially
from these estimates.
Significant estimates include the following:
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the grant date fair value of stock-based awards recognized as compensation expense
(see Note 5, Stock-Based Compensation); |
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accrued wind-down expenses (see Note 6, Wind-Down Expenses); |
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the fair value of warrants recorded as a liability (see Note 8, Warrant
Liability); and |
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the fair value of goodwill and other intangible assets (see Note 4, Goodwill and
Other Intangible Assets). |
6
Financial Instruments
Cash and Cash Equivalents
Cash equivalents are money market accounts, money market funds and investments with maturities
of 90 days or less from the date of purchase.
Marketable Securities
Our existing marketable securities are designated as available-for-sale securities. These
securities are carried at fair value (see Note 2, Financial Instruments), with the unrealized
gains and losses reported as a component of stockholders equity. Management determines the
appropriate designation of its investments (current or non-current) in marketable securities at the
time of purchase and reevaluates such designation as of each balance sheet date. The cost of
securities sold is based upon the specific identification method.
If the estimated fair value of a security is below its carrying value, we evaluate whether we
have the intent and ability to retain our investment for a period of time sufficient to allow for
any anticipated recovery to the cost of the investment, and whether evidence indicating that the
cost of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Other-than-temporary declines in estimated fair value of all marketable securities are
charged to Other income (expense), net in the accompanying condensed consolidated statements of
operations. No such impairment was recognized during the three months ended March 31, 2011 or 2010.
Trade and Other Receivables
Our receivables generally consist of interest income on our financial instruments, revenue
from licensing agreements and grants, revenue from product sales, and rent from our sub-lease
tenants.
Warrant Liability
Authoritative accounting guidance prescribes that warrants issued under contracts that could
require net-cash settlement should be classified as liabilities and contracts that only provide for
settlement in shares should be classified as equity. In order for a contract to be classified as
equity, specific conditions must be met. These conditions are intended to identify situations in
which net cash settlement could be forced upon the issuer. We issued warrants as part of both our
November 2008 and November 2009 financings (see Note 8, Warrant Liability). As the contracts
include the possibility of net-cash settlement, we are required to classify the fair value of the
warrants issued as a liability, with subsequent changes in fair value to be recorded as income
(loss) on change in fair value of warrant liability. We use the Black-Scholes-Merton
(Black-Scholes) option pricing model to estimate fair value of warrants issued. In using this
model, we make certain assumptions about risk-free interest rates, dividend yields, volatility and
expected term of the warrants. Risk-free interest rates are derived from the yield on U.S. Treasury
debt securities. Dividend yields are based on our historical dividend payments, which have been
zero to date. Volatility is derived from the historical volatility of our common stock as traded on
Nasdaq. The expected term of the warrants is based on the time to expiration of the warrants from
the date of measurement.
Goodwill and Other Intangible Assets
Goodwill and intangible assets are primarily from a business acquisition accounted for under
the purchase method. Goodwill and intangible assets deemed to have indefinite lives are not
amortized but are subject to annual impairment tests. We test goodwill for impairment on an annual
basis or more frequently if we believe indicators of impairment exist. Intangible assets with
finite useful lives are amortized generally on a straight-line basis over the periods benefited.
Intangible assets with finite useful lives are reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable. Prior to fiscal
year 2001, we capitalized certain patent costs, which are being amortized over the estimated lives
of the patents and would be expensed at the time such patents are deemed to have no continuing
value. Since 2001, all patent costs are expensed as incurred. License costs are capitalized and
amortized over the estimated life of the license agreement.
7
Revenue Recognition
We currently recognize revenue resulting from the licensing and use of our technology and
intellectual property, from government grants, and from product sales. Licensing agreements may
contain multiple elements, such as upfront fees, payments related to the achievement of particular
milestones and royalties. Revenue from upfront fees for licensing agreements that contain multiple
elements are generally deferred and recognized on a straight-line basis over the term of the
agreement. Fees associated with substantive at risk performance-based milestones are recognized as
revenue upon completion of the scientific or regulatory event specified in the agreement, and
royalties received are recognized as earned. Revenue from licensing agreements are recognized net
of a fixed percentage due to licensors as royalties. Grant revenue from government agencies are
funds received to cover specific expenses and are recognized as earned upon either the incurring of
reimbursable expenses directly related to the particular research plan or the completion of certain
development milestones as defined within the terms of the relevant collaborative agreement or
grant. Revenue from product sales are recognized when the product is shipped and the order
fulfilled.
Stock-Based Compensation
Compensation expense for stock-based payment awards to employees is based on their grant date
fair value as calculated and amortized over their vesting period. See Note 5, Stock-Based
Compensation for further information.
We use the Black-Scholes model to calculate the fair value of stock-based awards.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share is computed based
on the weighted-average number of shares of common stock and other dilutive securities. To the
extent these securities are anti-dilutive, they are excluded from the calculation of diluted
earnings per share.
The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:
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|
|
Three months ended March 31, |
|
|
2011 |
|
2010 |
Net loss |
|
$ |
(5,747,235 |
) |
|
$ |
(6,124,075 |
) |
Weighted average shares outstanding
used to compute basic and diluted
net loss per share |
|
|
136,799,125 |
|
|
|
118,959,136 |
|
Basic and diluted net loss per share |
|
$ |
(0.04 |
) |
|
$ |
(0.05 |
) |
The following outstanding potentially dilutive common stock equivalents were excluded from the
computation of diluted net loss per share because the effect would have been anti-dilutive as of
March 31:
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2011 |
|
2010 |
Options |
|
|
10,505,290 |
|
|
|
9,830,870 |
|
Restricted stock units |
|
|
4,279,305 |
|
|
|
1,777,151 |
|
Warrants |
|
|
14,344,828 |
|
|
|
14,344,828 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29,129,173 |
|
|
|
25,952,849 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
Comprehensive loss is comprised of net losses and other comprehensive loss or income (OCL).
OCL includes certain changes in stockholders equity that are excluded from net losses.
Specifically, we include in OCL changes in unrealized gains and losses on our marketable securities
and unrealized gains and losses on foreign currency translations. Accumulated other comprehensive
income was $296,353 as of March 31, 2011 and $119,722 as of December 31, 2010.
8
The activity in OCL was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(5,747,235 |
) |
|
$ |
(6,124,075 |
) |
Net change in unrealized
gains and losses on
marketable securities |
|
|
(16,699 |
) |
|
|
(40,265 |
) |
Net change in unrealized
gains and losses on foreign
currency translations |
|
|
193,330 |
|
|
|
(310,218 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,570,604 |
) |
|
$ |
(6,474,558 |
) |
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued amendments to the
guidance on goodwill impairment testing. When a goodwill impairment test is performed, an entity
must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it
does, an entity must perform an additional test to determine whether goodwill has been impaired and
to calculate the amount of that impairment (Step 2). In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The amendments are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. We adopted this new standard on January 1, 2011 and it is not expected
to have a material effect on our consolidated financial condition and results of operations.
In December 2010, the FASB issued amendments to the guidance for the reporting of business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The amendments specify that if a public
entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. We adopted this new
standard on January 1, 2011 and it is not expected to have a material effect on our consolidated
financial condition and results of operations.
Note 2. Financial Instruments
The following table summarizes the fair value of our cash, cash equivalents and
available-for-sale marketable securities held in our current investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Fair Value |
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
392,335 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
392,335 |
|
Cash equivalents |
|
|
12,673,850 |
|
|
|
|
|
|
|
|
|
|
|
12,673,850 |
|
Marketable debt securities, current |
|
|
8,382,861 |
|
|
|
|
|
|
|
(4,166 |
) |
|
|
8,378,695 |
|
Marketable equity securities, current |
|
|
74,456 |
|
|
|
103,815 |
|
|
|
|
|
|
|
178,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities |
|
$ |
21,523,502 |
|
|
$ |
103,815 |
|
|
$ |
(4,166 |
) |
|
$ |
21,623,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,001,868 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,001,868 |
|
Cash equivalents |
|
|
18,705,953 |
|
|
|
|
|
|
|
|
|
|
|
18,705,953 |
|
Marketable equity securities, current |
|
|
74,456 |
|
|
|
116,348 |
|
|
|
|
|
|
|
190,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities |
|
$ |
19,782,277 |
|
|
$ |
116,348 |
|
|
$ |
|
|
|
$ |
19,898,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Gross unrealized gains and losses on cash equivalents were not significant at March 31, 2011
and December 31, 2010. At March 31, 2011, our cash equivalents were primarily money market funds
consisting mainly of U.S. Treasury debt securities.
Our investment in marketable debt securities, are short term investments that consist
primarily of commercial paper and corporate debt securities,
Our investment in marketable equity securities consists of ordinary shares of ReNeuron Group
Plc (ReNeuron), a publicly listed U.K. corporation. In July 2005, we entered into an agreement with
ReNeuron under which we granted ReNeuron a license that allows ReNeuron to exploit its c-mycER
conditionally immortalized adult human neural stem cell technology for therapy and other purposes.
We received shares of ReNeuron common stock, as well as a cross-license to the exclusive use of
ReNeurons technology for certain diseases and conditions, including lysosomal storage diseases,
spinal cord injury, cerebral palsy, and multiple sclerosis. The agreement also provides for full
settlement of any potential claims that either we or ReNeuron might have had against the other in
connection with any putative infringement of certain of each partys patent rights prior to the
effective date of the agreement. In July and August 2005, we received approximately 8,836,000
ordinary shares of ReNeuron common stock, net of approximately 104,000 shares that were transferred
to NeuroSpheres, Ltd., an Alberta corporation (NeuroSpheres), and subsequently, as a result of
certain anti-dilution provisions in the agreement, we received approximately 1,261,000 more shares,
net of approximately 18,000 shares that were transferred to NeuroSpheres. In February 2007, we sold
5,275,000 shares for net proceeds of approximately $3,075,000. We recognized approximately $716,000
as realized gain from this transaction. In the first quarter of 2009, we sold 2,900,000 shares of
ReNeuron and received net proceeds of approximately $510,000 for a realized gain of approximately
$398,000. At March 31, 2011 and December 31, 2010, we owned 1,921,924 shares of ReNeuron with a
carrying and fair market value of approximately $178,000 and $191,000 respectively.
Changes in the fair market value of our ReNeuron shares as a result of changes in market price
per share or the exchange rate between the U.S. dollar and the British pound are accounted for as
an unrealized gain or loss under other comprehensive income (loss) if deemed temporary and are
not recorded as other income (expense), net until the shares are disposed of and a gain or loss
realized. If the fair value of a security is below its carrying value, we evaluate whether we have
the intent and ability to retain our investment for a period of time sufficient to allow for any
anticipated recovery to the cost of the investment, and whether evidence indicating that the cost
of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Other-than-temporary declines in estimated fair value of all marketable securities are
charged to other income (expense), net. For the three- month periods ended March 31, 2011 and
2010, we recorded an unrealized loss of approximately $13,000 and $40,000 respectively.
Note 3. Fair Value Measurement
The following tables present our assets and liabilities that are measured at fair value on a
recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has
three levels based on the reliability of the inputs used to determine fair value.
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 Directly or indirectly observable inputs other than in Level 1, that include quoted
prices for similar assets or liabilities in active markets or quoted prices for identical or
similar assets or liabilities in markets that are not active.
Level 3 Unobservable inputs which are supported by little or no market activity that reflects
the reporting entitys own assumptions about the assumptions that market participants would use in
pricing the asset or liability.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
Our cash equivalents, marketable securities, bonds payable and warrant liability are
classified within Level 1 or Level 2. This is because our cash equivalents and marketable
securities are valued primarily using quoted market prices, our bonds payable are valued using
alternative pricing sources and models utilizing market observable inputs and our warrant liability
is valued using an option pricing model that uses assumptions with observable inputs such as
risk-free interest rates that are derived from the yield on U.S. Treasury debt securities,
volatility and price based on our common stock as traded on Nasdaq.
10
We currently do not have any Level 3 financial assets or liabilities.
The following table presents financial assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement |
|
|
|
|
|
|
at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
in Active Markets |
|
|
Other |
|
|
|
|
|
|
For |
|
|
Observable |
|
|
As of |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
March 31, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
2011 |
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
12,673,850 |
|
|
$ |
|
|
|
$ |
12,673,850 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt and equity
securities |
|
|
8,556,966 |
|
|
|
|
|
|
|
8,556,966 |
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
21,230,816 |
|
|
|
|
|
|
$ |
21,230,816 |
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bond payable |
|
$ |
|
|
|
$ |
656,250 |
|
|
$ |
656,250 |
|
Warrant liability |
|
|
|
|
|
|
4,888,973 |
|
|
|
4,888,973 |
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
|
|
|
$ |
5,545,223 |
|
|
$ |
5,545,223 |
|
|
|
|
|
|
|
|
|
|
|
Note 4. Goodwill and Other Intangible Assets
On April 1, 2009, we acquired the operations of Stem Cell Sciences Plc (SCS) for an aggregate
purchase price of approximately $5,135,000. The acquired operations includes proprietary cell
technologies relating to embryonic stem cells, induced pluripotent stem (iPS) cells, and
tissue-derived (adult) stem cells; expertise and infrastructure for providing cell-based assays for
drug discovery; a cell culture products business; and an intellectual property portfolio with
claims relevant to cell processing, reprogramming and manipulation, as well as to gene targeting
and insertion.
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated life of |
|
|
|
Allocated purchase |
|
|
intangible assets |
|
|
|
Price |
|
|
in years |
|
Net tangible assets |
|
$ |
36,000 |
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Customer relationships and developed technology |
|
|
1,310,000 |
|
|
|
6 to 9 |
|
In-process research and development |
|
|
1,340,000 |
|
|
|
13 to 19 |
|
Trade name |
|
|
310,000 |
|
|
|
15 |
|
Goodwill |
|
|
2,139,000 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development assets relate to: 1) the acquisition of certain
intellectual property rights not expected to expire until 2027 related to our program focused on
developing genetically engineered rat models of human disease (our Transgenic Rat Program); and
2) the acquisition of certain technology related to the commercialization of our SC Proven cell
culture products and the development and commercialization of cell-based assay platforms for use in
drug discovery and development (our Assay Development Program).
At the time of valuation (April 2009), the technology related to our Transgenic Rat Program
was in its nascent stage, and therefore we concluded that the remaining 19 years of legal life of
the intellectual property was appropriate as the remaining useful life for this technology.
11
As for our Assay Development Program, at the time of valuation (April 2009), we expected to
achieve proof of concept by 2012. Due to the foundational nature of our Assay Development Program
patents and technologies, we expect the technologies to remain useful and relevant within the
industry for at least 10 years following commercial launch of a product or service under our Assay
Development Program. Because these technologies are not expected to begin generating revenue until
2011-2012, we estimated the remaining useful life for these technologies to be approximately 13
years from the valuation date.
Trade name relates to the SC Proven trademark of our cell culture products which we expect
to market for 15 years from the date of acquisition, based on which, we estimated a remaining
useful life of 15 years from the valuation date.
The following table presents changes in goodwill:
|
|
|
|
|
Balance as of December 31, 2010 |
|
$ |
1,877,315 |
|
Foreign currency translation |
|
|
80,010 |
|
|
|
|
|
Balance as of March 31, 2011 |
|
$ |
1,957,325 |
|
|
|
|
|
The components of our other intangible assets at March 31, 2011 are summarized below:
|
|
|
|
|
|
|
Net Carrying |
|
Other Intangible Asset Class |
|
Amount |
|
Customer relationships and developed technology |
|
$ |
1,085,812 |
|
In-process research and development |
|
|
1,294,290 |
|
Trade name |
|
|
299,373 |
|
Patents |
|
|
338,800 |
|
|
|
|
|
Total other intangible assets |
|
$ |
3,018,275 |
|
Amortization expense was approximately $92,000 in the first quarter of 2011.
The expected future
annual amortization expense for each of the next five years based on current balances of our intangible
assets is as follows:
|
|
|
|
|
For the year ending December 31: |
|
|
|
2011 |
|
$ |
365,213 |
|
2012 |
|
$ |
365,213 |
|
2013 |
|
$ |
365,213 |
|
2014 |
|
$ |
365,213 |
|
2015 |
|
$ |
365,213 |
|
Note 5. Stock-Based Compensation
We currently grant stock-based awards under three equity incentive plans. As of March 31,
2011, we had 24,844,121 shares authorized to be granted under the three plans. Under these plans we
may grant various types of equity awards to our employees, directors and consultants, at prices
determined by our Board of Directors, including incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, restricted stock units, and performance-based
shares. Incentive stock options may only be granted to employees under these plans with a grant
price not less than the fair market value of the stock on the date of grant. We use these plans to
grant shares to employees for the employer match of employee 401(k) plan contributions.
Our stock-based compensation expense for the three and three months ended March 31 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Research and development expense |
|
$ |
438,042 |
|
|
$ |
546,608 |
|
Selling, general and administrative expense |
|
|
496,422 |
|
|
|
472,364 |
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense and effect on net loss |
|
$ |
934,464 |
|
|
$ |
1,018,972 |
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per share |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
As of March 31, 2011, we had approximately $5,557,000 of total unrecognized compensation
expense related to unvested awards of stock options and restricted stock units granted under our
various equity incentive plans that we expect to recognize over a weighted-average vesting period
of 2.5 years.
Stock Options
Generally, stock options granted to employees have a maximum term of ten years, and vest over
a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly
over the remaining three-year service period. We may grant options
12
with different vesting terms from time to time. Upon employee termination of service, any
unexercised vested option will be forfeited three months following termination or the expiration of
the option, whichever is earlier. Unvested options are forfeited on termination.
A summary of our stock option activity for the three months ended March 31, 2011 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
Number of options |
|
exercise price ($) |
Balance at December 31, 2010 |
|
|
10,982,415 |
|
|
|
2.02 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,519 |
) |
|
|
0.25 |
|
Cancelled |
|
|
(473,607 |
) |
|
|
2.71 |
|
|
|
|
|
|
|
|
|
|
Outstanding options at March 31, 2011 |
|
|
10,505,289 |
|
|
|
2.00 |
|
|
|
|
|
|
|
|
|
|
A summary of changes in unvested options for the three months ended March 31, 2011 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
|
Weighted-average |
|
grant |
|
|
Number of options |
|
exercise price ($) |
|
date fair value ($) |
Unvested options at December 31, 2010 |
|
|
3,365,161 |
|
|
|
1.30 |
|
|
|
1.03 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(311,696 |
) |
|
|
1.71 |
|
|
|
1.36 |
|
Cancelled |
|
|
(24,457 |
) |
|
|
1.27 |
|
|
|
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options at March 31, 2011 |
|
|
3,029,008 |
|
|
|
1.25 |
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of shares vested was approximately $424,000 in the three months ended
March 31, 2011.
Restricted Stock Units
We have granted restricted stock units (RSUs) to certain employees which entitle the holders
to receive shares of our common stock upon vesting of the RSUs. The fair value of restricted stock
units granted are based upon the market price of the underlying common stock as if it were vested
and issued on the date of grant.
A summary of changes in unvested restricted stock units for the three months ended March 31,
2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant |
|
|
Number of RSUs |
|
date fair value ($) |
Unvested restricted stock units at December 31, 2010 |
|
|
4,665,055 |
|
|
|
1.23 |
|
Granted |
|
|
290,000 |
|
|
|
0.95 |
|
Vested and converted to common shares |
|
|
(595,750 |
) |
|
|
1.27 |
|
Cancelled |
|
|
(80,000 |
) |
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
Balance unvested at March 31, 2011 (1) |
|
|
4,279,305 |
|
|
|
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
55,000 of these restricted stock units vest and convert into shares of our common stock after
one year from the date of grant. 2,050,000 of these restricted stock units vest and convert
into shares of our common stock over a three year period from the date of grant: one-third of
the award will vest on each grant date anniversary following the grant. 2,069,305 of these
restricted stock units vest and convert into shares of our common stock over a four year
period from the date of grant: one-fourth of the award will vest on each grant date
anniversary following the grant. 105,000 of these restricted stock units will vest and convert
into shares of our common stock subject to attainment of certain performance criteria and will
be forfeited if not met. |
Stock Appreciation Rights
In July 2006, we granted cash-settled Stock Appreciation Rights (SARs) to certain employees
that give the holder the right, upon exercise, to the difference between the price per share of our
common stock at the time of exercise and the exercise price of the SARs.
The SARs have a maximum term of ten years with an exercise price of $2.00, which is equal to
the market price of our common stock at the date of grant. The SARs vest 25% on the first
anniversary of the grant date and 75% vest monthly over the remaining
13
three-year service period. Compensation expense is based on the fair value of SARs which is
calculated using the Black-Scholes option pricing model. The stock-based compensation expense and
liability are re-measured at each reporting date through the earlier date of settlement or
forfeiture of the SARs.
A summary of the changes in SARs for the three months ended March 31, 2011 is as follows:
|
|
|
|
|
|
|
Number of SARs |
Outstanding at December 31, 2010 |
|
|
1,354,088 |
|
Granted |
|
|
|
|
Exercised |
|
|
|
|
Forfeited and expired |
|
|
|
|
Outstanding SARs at March 31, 2011 |
|
|
1,354,088 |
|
|
|
|
|
|
SARs exercisable at March 31, 2011 |
|
|
1,354,088 |
|
|
|
|
|
|
For the three months ended March 31, 2011, we re-measured the liability related to the SARs
and reduced compensation expense by approximately $189,000. For the same period in 2010, we reduced
compensation expense by approximately $51,000.
The compensation expense recognized for the three months ended March 31, 2011 may not be
representative of compensation expense for future periods and its resulting effect on net loss and
net loss per share attributable to common stockholders, due to changes in the fair value
calculation which is dependent on the stock price, volatility, interest and forfeiture rates,
additional grants and subsequent periods of vesting. We will continue to recognize compensation
cost each period, which will be the change in fair value from the previous period through the
earlier date of settlement or forfeiture of the SARs.
Note 6. Wind-Down Expenses
Rhode Island
In October 1999, we relocated to California from Rhode Island and established a wind down
reserve for the estimated lease payments and operating costs of our scientific and administrative
facility in Rhode Island. Even though we intend to dispose of the facility at the earliest possible
time, we cannot determine with certainty a fixed date by which such disposal will occur. In light
of this uncertainty, we periodically re-evaluate and adjust the reserve. We consider various
factors such as our lease payments through to the end of the lease, operating expenses, the current
real estate market in Rhode Island, and estimated subtenant income based on actual and projected
occupancy.
The summary of the changes to our wind-down reserve related to this facility for 2011 and 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
January 1 to |
|
|
January 1 to |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Accrued wind-down reserve at beginning of period |
|
$ |
2,644,000 |
|
|
$ |
3,572,000 |
|
Less actual expenses recorded against estimated
reserve during the period |
|
|
(317,000 |
) |
|
|
(1,219,000 |
) |
Additional expense recorded to revise estimated
reserve at period-end |
|
|
75,000 |
|
|
|
291,000 |
|
|
|
|
|
|
|
|
Revised reserve at period-end |
|
|
2,402,000 |
|
|
|
2,644,000 |
|
Add deferred rent at period-end |
|
|
605,000 |
|
|
|
656,000 |
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end
(current and non-current) |
|
$ |
3,007,000 |
|
|
$ |
3,300,000 |
|
|
|
|
|
|
|
|
Accrued wind-down expenses, current |
|
$ |
1,356,000 |
|
|
$ |
1,311,000 |
|
Accrued wind-down expenses, non-current |
|
|
1,651,000 |
|
|
|
1,989,000 |
|
|
|
|
|
|
|
|
Total accrued wind-down expenses |
|
$ |
3,007,000 |
|
|
$ |
3,300,000 |
|
|
|
|
|
|
|
|
Australia
On April 1, 2009, as part of our acquisition of the SCS operations, we acquired certain
operations near Melbourne, Australia. In order to reduce operating complexity and expenses, we made
the decision to close our site in Australia and consolidate personnel and
14
programs to our Cambridge, U.K. and Palo Alto, California sites. At June 30, 2009, we
established a reserve of approximately $310,000 for the estimated costs to close down and exit our
Australia operations. The reserve reflects the estimated cost to terminate our facility lease in
Australia (which provided for an original termination date of December 31, 2010), employee
termination benefits and other liabilities associated with the wind-down and relocation of our
operations in Australia. As of December 31, 2010, the facility lease agreement has been terminated
and our operations in Australia have been relocated to Cambridge, U.K. and Palo Alto, California.
We recorded actual expenses, net of foreign currency translation changes of approximately $241,000
against this reserve. At December 31, 2010, we concluded that all costs related to the close down
and exit of our Australia operations have been recorded against the reserve and we closed the
reserve by crediting the remaining reserve balance of $69,000 to wind-down expense.
Note 7. Commitments and Contingencies
Leases
Capital Leases
We entered into direct financing transactions with the State of Rhode Island and received
proceeds from the issuance of industrial revenue bonds totaling $5,000,000 to finance the
construction of our pilot manufacturing facility in Rhode Island. The related lease agreements are
structured such that lease payments fully fund all semiannual interest payments and annual
principal payments through maturity in August 2014. The interest rate for the remaining bond series
is 9.5%. The bond contains certain restrictive covenants which limit, among other things, the
payment of cash dividends and the sale of the related assets. The outstanding principal was
approximately $656,000 at March 31, 2011 and $699,000 at December 31, 2010.
Operating Leases
We lease various real properties under operating leases that generally require us to pay
taxes, insurance, maintenance, and minimum lease payments. Some of our leases have options to
renew.
Operating Leases California
We currently lease space in an approximately 68,000 square foot facility located at the
Stanford Research Park in Palo Alto, California. The facility includes space for animals,
laboratories, offices, and a GMP (Good Manufacturing Practices) suite. Prior to September 2010, we
leased approximately 68,000 square feet of the facility, and were required to provide a letter of
credit for approximately $778,000, which served as a security deposit for the duration of the lease
term. The letter of credit issued by our financial institution is collateralized by a certificate
of deposit for the same amount, which was reflected as restricted cash in other assets, non-current
on our condensed consolidated balance sheets. In September 2010, we amended our lease to reduce the
area leased to 51,200 square feet, to change the expiry date of the lease term from August 31, 2011
to June 30, 2011, and to reduce the letter of credit that serves as a security deposit to
approximately $389,000 from approximately $778,000. The difference of approximately $389,000 was
transferred from our restricted cash account to our cash and cash equivalents account. In
connection with this September 2010 lease amendment, we terminated a space-sharing agreement
covering approximately 10,451 square feet of this facility. In February 2011, we amended our lease
to extend the term expiry date from June 30, 2011 to August 31, 2011. At March 31, 2011, the
aggregate remaining rent payment under the amended lease is approximately $700,000. We recognize
operating lease expense on a straight-line basis. At March 31, 2011, we had prepaid rent balance of
approximately $15,000. At December 31, 2010, we had a prepaid rent balance of approximately
$42,000.
In September 2010, we entered into a two-year sublease agreement with Caliper Life Sciences,
Inc., for approximately 13,200 square feet in a facility located in Mountain View, California. We
will pay approximately $695,000 in aggregate as rent over the term of the lease. The lease contains
escalating rent payments, which we recognize as operating lease expense on a straight-line basis.
Deferred rent was approximately $2,000 as of March 31, 2011, and approximately $1,000 as of
December 31, 2010.
In December 2010, we entered into a commercial lease agreement with BMR-Gateway Boulevard LLC
(BMR), as landlord, for approximately 43,000 square feet of office and research space at BMRs
Pacific Research Center in Newark, California. The initial term of the lease is approximately
eleven and one-half years, and we expect to relocate our corporate headquarters and core research
activities to this facility in August 2011. Initial base rent is expected to be approximately $2.20
per rentable square foot, with yearly increases throughout the term, and subject to certain
adjustments for draws upon the tenant allowances among other things. We will
15
pay approximately $14,906,000 in aggregate as rent over the term of the lease, which we
recognize as operating lease expense on a straight-line basis. Deferred rent was approximately
$396,000 as of March 31, 2011. We anticipate that we will be constructing laboratories, offices and
related infrastructure within the leased space during the first several months of the lease. As
part of the lease, BMR has agreed to provide various financial allowances so that we can build
initial and future laboratories, offices and other improvements, subject to customary terms and
conditions relating to landlord-funded tenant improvements. As part of the lease, we have, until
January 2013, an option to lease up to an additional 30,000 square feet in the building.
Operating Leases Rhode Island
We entered into a fifteen-year lease agreement for a scientific and administrative facility
(SAF) in Rhode Island in connection with a sale and leaseback arrangement in 1997. The lease term
expires June 30, 2013 and includes escalating rent payments which we recognize on a straight-line
basis. Deferred rent expense for this facility was approximately $605,000 at March 31, 2011 and
$656,000 at December 31, 2010, and is included as part of the wind-down accrual on the accompanying
condensed consolidated balance sheets.
For the year 2011, we expect to pay approximately $1,172,000 in operating lease payments and
estimated operating expenses of approximately $625,000, before receipt of sub-tenant income and we
expect to receive, in aggregate, approximately $364,000 in sub-tenant rent and operating expenses.
As a result of the above transactions, our estimated cash outlay net of sub-tenant rent for the SAF
will be approximately $1,433,000 for 2011.
Operating Leases United Kingdom
In January 2011, we amended the existing lease agreements of our wholly-owned subsidiary, Stem
Cell Sciences (U.K.) Ltd, effectively reducing our leased space from approximately 5,000 square
feet to approximately 1,900 square feet of office and lab space. We expect to pay approximately
55,000 GBP as rental payments for 2011. StemCells, Inc. is the guarantor of Stem Cell Sciences
(U.K.) Ltds obligations under the existing lease.
With the exception of the operating leases discussed above, we have not entered into any off
balance sheet financial arrangements and have not established any special purpose entities. We have
not guaranteed any debts or commitments of other entities or entered into any options on
non-financial assets.
Contingencies
In July 2006, we filed suit against Neuralstem, Inc. in the Federal District Court for the
District of Maryland, alleging that Neuralstems activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres,
specifically U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug
screening), U.S. Patent No. 7,101,709 (claiming the use of human neural stem cells for screening
biological agents), U.S. Patent No. 5,851,832 (claiming methods for proliferating human
neural stem cells), and U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural
stem cells).
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstems activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the 505 and 418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. In August
2008, the California court transferred our lawsuit against Neuralstem to Maryland for resolution on
the merits. In July 2009, the Maryland District Court granted our motion to consolidate these two
cases with the litigation we initiated against Neuralstem in 2006. In August 2009, the Maryland
District Court approved a scheduling order submitted by the parties for discovery and trial.
In March 2011, Neuralstem moved to dismiss our infringement causes of action, claiming that it
had obtained a non-exclusive license for the litigated patents from an individual who is not a
named inventor on the patents. We believe this motion is baseless, both as a matter of law and
fact, and we will move for summary judgment on this issue once we have a procedural opportunity to
do so.
16
In addition to the actions described above, in April 2008, we filed an opposition to
Neuralstems European Patent No. 0 915 968 (methods of isolating, propagating and differentiating
CNS stem cells), because the claimed invention is believed by us to be unpatentable over prior art,
including the patents exclusively licensed by us from NeuroSpheres. In December 2010, the European
Patent Office ruled that all composition claims in Neuralstems
968 European patent were invalid
and unpatentable over prior art including several of the NeuroSpheres
patents licensed to us. Neuralstem has appealed this decision.
Effective 2008, as part of an indemnification agreement with NeuroSpheres, we are entitled to
offset all litigation costs incurred in this patent infringement suit, against amounts that would
otherwise be owed to NeuroSpheres under our exclusive license agreements with NeuroSpheres, such as
annual maintenance fees, milestones and royalty payments. Under the terms of our license
agreements, we are required to make annual payments of $50,000 to NeuroSpheres, and we expect to
make these annual payments through the remaining life of the patent which, at December 31, 2010,
was approximately 14 years. We have therefore capitalized $700,000 (14 years at $50,000 per year)
to offset litigation costs. The amount capitalized is not dependent on the achievement of any
milestones or related to any other contingent payments which may become due under the arrangement.
We will reduce this asset by $50,000 per year in lieu of the cash payments due to NeuroSpheres. As
the $50,000 annual payments are fully creditable against royalties due to Neurospheres, we have
classified the capitalized amount as prepaid royalties under Other assets, non-current on our
accompanying Consolidated Balance Sheets. We have concluded that the estimated balance of $700,000,
as of March 31, 2011, is a fair estimate and realizable against future milestone and royalty
payments to NeuroSpheres, and that litigation costs incurred above this amount will be expensed as
incurred. Management will reevaluate this estimate on a quarterly basis based on actual costs and
other relevant factors.
Note 8. Warrant Liability
We use the Black-Scholes option pricing model to estimate fair value of warrants issued. In
using this model, we make certain assumptions about risk-free interest rates, dividend yields,
volatility and expected term of the warrants. Risk-free interest rates are derived from the yield
on U.S. Treasury debt securities. Dividend yields are based on our historical dividend payments,
which have been zero to date. Volatility is derived from the historical volatility of our common
stock as traded on Nasdaq. The expected term of the warrants is based on the time to expiration of
the warrants from the date of measurement.
In November 2008, we sold 13,793,104 units to institutional investors at a price of $1.45 per
unit, for gross proceeds of $20,000,000. The units, each of which consisted of one share of common
stock and a warrant to purchase 0.75 shares of common stock at an exercise price of $2.30 per
share, were offered as a registered direct offering under a shelf registration statement previously
filed with, and declared effective by, the SEC. We received total proceeds, net of offering
expenses and placement agency fees, of approximately $18,637,000. We recorded the fair value of the
warrants to purchase 10,344,828 shares of our common stock as a liability. The fair value of the
warrant liability will be revalued at the end of each reporting period, with the change in fair
value of the warrant liability recorded as a gain or loss in our condensed consolidated statements
of operations. The fair value of the warrants will continue to be classified as a liability until
such time as the warrants are exercised, expire or an amendment of the warrant agreement renders
these warrants to be no longer classified as a liability.
The assumptions used for the Black-Scholes option pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
To Calculate |
|
|
Fair Value of Warrant |
|
|
Liability at |
|
|
March 31, 2011 |
|
December 31, 2010 |
Expected life (years) |
|
|
3.1 |
|
|
|
3.4 |
|
Risk-free interest rate |
|
|
1.2 |
% |
|
|
1.2 |
% |
Expected volatility |
|
|
83.5 |
% |
|
|
83.6 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
At December 31, |
|
Change in Fair Value |
|
|
2011 |
|
2010 |
|
of Warrant Liability |
Fair value of warrant liability |
|
$ |
3,150,413 |
|
|
$ |
4,408,449 |
|
|
$ |
(1,258,035 |
) |
In November 2009, we sold 10,000,000 units to institutional investors at a price of $1.25 per
unit, for gross proceeds of $12,500,000. The units, each of which consisted of one share of common
stock and a warrant to purchase 0.4 shares of common stock
17
at an exercise price of $1.50 per share, were offered as a registered direct offering under a
shelf registration statement previously filed with, and declared effective by, the SEC. We received
total proceeds, net of offering expenses and placement agency fees, of approximately $11,985,000.
We recorded the fair value of the warrants to purchase 4,000,000 shares of our common stock as a
liability. The fair value of the warrant liability will be revalued at the end of each reporting
period, with the change in fair value of the warrant liability recorded as a gain or loss in our
condensed consolidated statements of operations. The fair value of the warrants will continue to be
classified as a liability until such time as the warrants are exercised, expire or an amendment of
the warrant agreement renders these warrants to be no longer classified as a liability.
The assumptions used for the Black-Scholes option pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
To Calculate |
|
|
Fair Value of Warrant Liability at |
|
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
Expected life (years) |
|
|
4.1 |
|
|
|
4.3 |
|
Risk-free interest rate |
|
|
1.7 |
% |
|
|
1.6 |
% |
Expected volatility |
|
|
78.4 |
% |
|
|
77.5 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
At December 31, |
|
Change in Fair Value |
|
|
2011 |
|
2010 |
|
of Warrant Liability |
Fair value of warrant liability |
|
$ |
1,738,560 |
|
|
$ |
2,263,480 |
|
|
$ |
(524,920 |
) |
Note 9. Common Stock
In January 2011, we sold 10,000,000 shares of our common stock to selected institutional
investors at a price of $1.00 per share. We received net proceeds, after deducting offering
expenses and fees, of approximately $9,400,000. The investors were also granted an option to
purchase an additional 6,000,000 shares at $1.00 per share. The option was not exercised and
expired on February 18, 2011. The shares were offered under our effective shelf registration
statement filed with the SEC on June 25, 2008.
Note 10. Subsequent Events
In May 2011, we eliminated 20 full-time positions in our US-based workforce, primarily in the
research and general and administrative areas. We estimate this reduction in force will generate
annual expense reductions of approximately $2.3 million, primarily from savings in salaries and
benefits and reductions in laboratory supply costs. We expect to record a one-time charge for
severance and related expenses of approximately $300,000 in the second quarter ending June 30,
2011.
18
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act that involve substantial risks and
uncertainties. Such statements include, without limitation, all statements as to expectation or
belief and statements as to our future results of operations; the progress of our research, product
development and clinical programs; the need for, and timing of, additional capital and capital
expenditures; partnering prospects; costs of manufacture of products; the protection of, and the
need for, additional intellectual property rights; effects of regulations; the need for additional
facilities; and potential market opportunities. Our actual results may vary materially from those
contained in such forward-looking statements because of risks to which we are subject, including
the fact that additional trials will be required to confirm the safety and demonstrate the efficacy
of our HuCNS-SC cells for the treatment of spinal cord injury, Pelizeaus-Merzbacher disease (PMD),
age-related macular degeneration or any other disease; uncertainty as to whether the U.S. Food and
Drug Administration (FDA), Swissmedic, or other regulatory authorities will permit us to proceed
with clinical testing of proposed products despite the novel and unproven nature of our
technologies; the risk that our clinical trials or studies could be substantially delayed beyond
their expected dates or cause us to incur substantial unanticipated costs; uncertainties in our
ability to obtain the capital resources needed to continue our current research and development
operations and to conduct the research, preclinical development and clinical trials necessary for
regulatory approvals; the uncertainty regarding our ability to obtain a corporate partner or
partners, if needed, to support the development and commercialization of our potential cell-based
therapeutics products; the uncertainty regarding the outcome of our clinical trials or studies we
may conduct in the future; the uncertainty regarding the validity and enforceability of our issued
patents; the risk that we may not be able to manufacture additional master and working cell banks
when needed; the uncertainty whether any products that may be generated in our cell-based
therapeutics programs will prove clinically safe and effective; the uncertainty whether we will
achieve significant revenue from product sales or become profitable; uncertainties regarding our
obligations with respect to our former encapsulated cell therapy facilities in Rhode Island;
obsolescence of our technologies; competition from third parties; intellectual property rights of
third parties; litigation risks; and other risks to which we are subject. All forward-looking
statements attributable to us or to persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements and risk factors set forth in Risk Factors in Part I, Item
1A of our Form 10-K for the year ended December 31, 2010.
Overview
The Company
We are engaged in researching, developing, and commercializing stem cell therapeutics and
enabling tools and technologies for stem cell-based research and drug discovery and development.
Our research and development (R&D) programs are primarily focused on identifying and developing
potential cell-based therapeutics which can either restore or support organ function. In
particular, since we relocated our corporate headquarters to California in 1999, our R&D efforts
have been directed at refining our methods for identifying, isolating, culturing, and purifying the
human neural stem cell and human liver engrafting cells (hLEC) and developing these as potential
cell-based therapeutics for the central nervous system (CNS) and the liver, respectively. In our
CNS Program, our HuCNS-SC® product candidate (purified human neural stem cells) is
currently in clinical development for spinal cord injury and Pelizeaus-Merzbacher Disease (PMD), a
myelination disorder in the brain. In April 2011, we initiated a Phase I/II clinical trial of our
HuCNS-SC cells in Switzerland for the treatment of chronic spinal cord injury. We received approval
to conduct this trial from Swissmedic in December 2010. In the United States, we completed in
February 2011 patient accrual in our Phase I clinical trial in PMD. Data from this trial is
expected to be reported in early 2012. We previously completed a Phase I clinical trial in
infantile and late infantile neuronal ceroid lipofuscinosis (NCL, also known as Batten disease),
and the data from that trial showed that our HuCNS-SC cells were well tolerated and
non-tumorigenic, and that there was evidence of engraftment and long-term survival of the
transplanted HuCNS-SC cells. In October 2010, we initiated a Phase Ib clinical trial in infantile
and late infantile NCL, but in April 2011, we terminated this Phase Ib trial due to lack of patient
accrual. In addition, we plan to submit an IND to conduct a Phase I/II clinical trial in
age-related macular degeneration in late 2011. In our Liver Program, we are focused on identifying
and developing liver cells as potential therapeutics for a range of liver diseases. We have
identified a subset of our human liver engrafting cells (hLEC) which we believe may be a candidate
for product development, and we are working to characterize this subset. For a brief description of
our significant therapeutic research and development programs see Overview Research and
Development Programs in the Business Section of Part I, Item 1 of our Form 10-K for the year ended
December 31, 2010. We have also conducted research on several other cell types and in other areas,
which could lead to other possible product candidates, process improvements or further research
activities.
19
We are also engaged in developing and commercializing applications of our technologies to
enable research, which we believe represent current and nearer-term commercial opportunities. Our
portfolio of technologies includes cell technologies relating to embryonic stem cells, induced
pluripotent stem (iPS) cells, and tissue-derived (adult) stem cells; expertise and infrastructure
for providing cell-based assays for drug discovery; a cell culture products and antibody reagents
business; and an intellectual property portfolio with claims relevant to cell processing,
reprogramming and manipulation, as well as to gene targeting and insertion. Much of these enabling
technologies were acquired in April 2009 as part of our acquisition of the operations of Stem Cell
Sciences Plc (SCS).
We have not derived any revenue or cash flows from the sale or commercialization of any
products except for license revenue for certain of our patented cells and sales of cell culture
products for use in research. As a result, we have incurred annual operating losses since inception
and expect to incur substantial operating losses in the future. Therefore, we are dependent upon
external financing from equity and debt offerings and revenue from collaborative research
arrangements with corporate sponsors to finance our operations. We have no such collaborative
research arrangements at this time and there can be no assurance that such financing or partnering
revenue will be available when needed or on terms acceptable to us.
Before we can derive revenue or cash inflows from the commercialization of any of our
therapeutic product candidates, we will need to: (i) conduct substantial in vitro testing and
characterization of our proprietary cell types, (ii) undertake preclinical and clinical testing for
specific disease indications; (iii) develop, validate and scale-up manufacturing processes to
produce these cell-based therapeutics, and (iv) obtain required regulatory approvals. These steps
are risky, expensive and time consuming.
Overall, we expect our R&D expenses to be substantial and to increase for the foreseeable
future as we continue the development and clinical investigation of our current and future product
candidates. However, expenditures on R&D programs are subject to many uncertainties, including
whether we develop our product candidates with a partner or independently. We cannot forecast with
any degree of certainty which of our current product candidates will be subject to future
collaboration, when such collaboration agreements will be secured, if at all, and to what degree
such arrangements would affect our development plans and capital requirements. In addition, there
are numerous factors associated with the successful commercialization of any of our cell-based
therapeutics, including future trial design and regulatory requirements, many of which cannot be
determined with accuracy at this time given the stage of our development and the novel nature of
stem cell technologies. The regulatory pathways, both in the United States and internationally, are
complex and fluid given the novel and, in general, clinically unproven nature of stem cell
technologies. At this time, due to such uncertainties and inherent risks, we cannot estimate in a
meaningful way the duration of, or the costs to complete, our R&D programs or whether, when or to
what extent we will generate revenues or cash inflows from the commercialization and sale of any of
our therapeutic product candidates. While we are currently focused on advancing each of our product
development programs, our future R&D expenses will depend on the determinations we make as to the
scientific and clinical prospects of each product candidate, as well as our ongoing assessment of
the regulatory requirements and each product candidates commercial potential.
Given the early stage of development of our therapeutic product candidates, any estimates of
when we may be able to commercialize one or more of these products would not be meaningful.
Moreover, any estimate of the time and investment required to develop potential products based upon
our proprietary HuCNS-SC and hLEC technologies will change depending on the ultimate approach or
approaches we take to pursue them, the results of preclinical and clinical studies, and the content
and timing of decisions made by the FDA, Swissmedic and other regulatory authorities. There can be
no assurance that we will be able to develop any product successfully, or that we will be able to
recover our development costs, whether upon commercialization of a developed product or otherwise.
We cannot provide assurance that any of these programs will result in products that can be marketed
or marketed profitably. If certain of our development-stage programs do not result in commercially
viable products, our results of operations could be materially adversely affected.
The research markets served by our tools and technologies products are highly competitive,
complex and dynamic. Technological advances and scientific discoveries have accelerated the pace of
change in biological research, and stem cell technologies have been evolving particularly fast. We
compete mainly by focusing on specialty media and antibody reagent products and cell-based assays,
which are custom designed for use in stem cell-based research, where we believe our expertise,
intellectual property and reputation give us competitive advantage. We believe that, in this
particular market niche, our products and technologies offer customers specific advantages over
those offered by our competitors. We compete by offering innovative, quality-controlled products,
consistently made and designed to produce reproducible results. We continue to make investments in
research and development, quality management, quality improvement, and product innovation. We
cannot assure you that we will have sufficient resources to continue
to make such investments. For the three-month period ended March 31, 2011, we generated revenues from the sale of specialty
cell culture
20
products of approximately $149,000. There can be no assurance that we will be able to continue
to generate such revenues in the future.
Significant Events
In January 2011, we sold 10,000,000 shares of our common stock to selected institutional
investors at a price of $1.00 per share. We received net proceeds, after deducting offering
expenses and fees, of approximately $9,400,000. The investors were also granted an option to
purchase an additional 6,000,000 shares at $1.00 per share. The option was not exercised and
expired on February 18, 2011. The shares were offered under our effective shelf registration
statement filed with the SEC on June 25, 2008.
In January, 2011 we launched STEM24 and STEM133, two new antibody reagents that have
utility for the isolation and detection of a range of different human cell types.
In February 2011, the fourth and final patient in our Phase I clinical trial in PMD, was
enrolled and transplanted with our HuCNS-SC human neural stem cells. This clinical trial, which is
being conducted in collaboration with UCSF Benioff Childrens Hospital, is the first to evaluate
neural stem cells as a potential treatment for a myelination disorder.
In March 2011, we launched nine new products and three related kits to facilitate stem cell
research. Our new line of purified nucleic acid and protein stem cell lysate products will enable
stem cell researchers to more accurately test and validate stem cell lines and associated genes and
gene products. These new reagents are serum-free and are produced by purification of the DNA, RNA
or protein content of the lysates of homogenous mouse stem cell lines. Prior to the launch of these
reagents, researchers have had to rely on crude lysates created from mixed cell populations, which
often contain contaminants such as animal-serum components and other factors that can significantly
impair the reliability of analytical performance.
In March 2011, we launched three new cell culture supplements for the derivation, culture and
differentiation of human and mouse embryonic stem (ES) cells, induced pluripotent stem (iPS) cells,
and tissue-derived neural stem (NS) cells. The research community demands reliable and
cost-effective options for the reagents they routinely use to capture, define and instruct stem
cell behavior. These new supplements satisfy this demand by providing researchers with additional
choices to use either a defined, serum-free, or a defined, serum-free and animal component-free
(AF) version of culture supplements that are considered to be fundamental reagents for stem cell
research.
In April 2011, we discontinued our Phase Ib clinical trial in NCL, a rare and fatal
neurodegenerative disorder in children, due to lack of patient accrual. In 2009, we completed a
Phase I safety trial of our HuCNS-SC cells in six patients with advanced stages of NCL. The Phase
Ib trial was initiated in October 2010, and was designed to evaluate the HuCNS-SC cells in patients
with less neuronal degeneration than the patients in our Phase I NCL trial. However, no eligible
patients were identified or enrolled despite diligent efforts by the clinical investigators.
In April 2011, we entered into a collaboration with Frank LaFerla, Ph.D., a world renowned
leader in Alzheimers disease research, to study the therapeutic potential of our HuCNS-SC human
neural stem cells in Alzheimers disease. Dr. LaFerlas published research has shown that mouse
neural stem cells enhance memory in a mouse model of Alzheimers disease. The goal of this
collaboration is to replicate these results using our human neural stem cells.
Critical Accounting Policies and the Use of Estimates
The accompanying discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements and the related disclosures, which
have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated
financial statements requires management to make estimates, assumptions, and judgments that affect
the reported amounts in our condensed consolidated financial statements and accompanying notes.
These estimates form the basis for making judgments about the carrying values of assets and
liabilities. We base our estimates and judgments on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, and we have established
21
internal controls related to the preparation of these estimates. Actual results and the timing
of the results could differ materially from these estimates.
Stock-Based Compensation
U.S. GAAP requires us to recognize expense related to the fair value of our stock-based
payment awards, including employee stock options and restricted stock units. Under the provisions
of U.S. GAAP, employee stock-based payment is estimated at the date of grant based on the awards
fair value using the Black-Scholes-Merton (Black-Scholes) option-pricing model and is recognized as
expense ratably over the requisite service period. The Black-Scholes option-pricing model requires
the use of certain assumptions, the most significant of which are our estimates of the expected
volatility of the market price of our stock and the expected term of the award. Our estimate of the
expected volatility is based on historical volatility. The expected term represents our estimated
period during which our stock-based awards remain outstanding. We estimate the expected term based
on historical experience of similar awards, giving consideration to the contractual terms of the
awards, vesting requirements, and expectation of future employee behavior, including post-vesting
terminations.
We review our valuation assumptions at each grant date and, as a result, our assumptions in
future periods may change. As of March 31, 2011, we expect to recognize approximately $5,557,000 of
compensation expense related to unvested stock-based awards over a weighted-average period of 2.5
years. See also Note 5, Stock-Based Compensation, in the notes to condensed consolidated
financial statements of Part I, Item 1 of this Form 10-Q for further information.
Wind-down expenses Rhode Island
In connection with exiting our research and manufacturing operations in Lincoln, Rhode Island,
and the relocation of our corporate headquarters and remaining research laboratories to California
in October 1999, we provided a reserve for our estimate of the exit cost obligation. The reserve
reflects estimates of the ongoing costs of our former scientific and administrative facility in
Lincoln, which we hold on a lease that terminates on June 30, 2013. We are seeking to sublease,
assign, sell, or otherwise divest ourselves of our interest in the facility at the earliest
possible time, but we cannot determine with certainty a fixed date by which such events will occur,
if at all.
In determining the facility exit cost reserve amount, we are required to consider our lease
payments through to the end of the lease term and estimate other relevant factors such as facility
operating expenses, real estate market conditions in Rhode Island for similar facilities, occupancy
rates, and sublease rental rates projected over the course of the leasehold. We re-evaluate the
estimate each quarter, taking account of changes, if any, in each underlying factor. The process is
inherently subjective because it involves projections over time from the date of the estimate
through the end of the lease and it is not possible to determine any of the factors, except the
lease payments, with certainty over that period.
Management forms its best estimate on a quarterly basis, after considering actual sublease
activity, reports from our broker/realtor about current and predicted real estate market conditions
in Rhode Island, the likelihood of new subleases in the foreseeable future for the specific
facility and significant changes in the actual or projected operating expenses of the property. We
discount the projected net outflow over the term of the leasehold to arrive at the present value,
and adjust the reserve to that figure. The estimated vacancy rate for the facility is an important
assumption in determining the reserve because changes in this assumption have the greatest effect
on estimated sublease income. In addition, the vacancy rate estimate is the variable most subject
to change, while at the same time it involves the greatest judgment and uncertainty due to the
absence of highly predictive information concerning the future of the local economy and future
demand for specialized laboratory and office space in that area. The average vacancy rate of the
facility over the last eight years (2003 through 2010) was approximately 74%, varying from 62% to
89%. As of March 31, 2011, based on current information available to management, the vacancy rate
is projected to be approximately 69% for 2011, and approximately 70% from 2012 through the end of
the lease. These estimates are based on actual occupancy as of March 31, 2011, predicted lead time
for acquiring new subtenants, historical vacancy rates for the area, and assessments by our
broker/realtor of future real estate market conditions. If the assumed vacancy rate for the
remainder of the lease had been 5% higher or lower at March 31, 2011, then the reserve would have
increased or decreased by approximately $74,000. Similarly, a 5% increase or decrease in the
operating expenses for the facility would have increased or decreased the reserve by approximately
$64,000, and a 5% increase or decrease in the assumed average rental charge per square foot would
have decreased or increased the reserve by approximately $22,000. Management does not wait for
specific events to change its estimate, but instead uses its best efforts to anticipate them on a
quarterly basis. See
22
Note 6 Wind-Down Expenses, in the notes to condensed consolidated financial statements of
Part I, Item 1 of this Form 10-Q for further information.
Wind-down expenses Australia
On April 1, 2009, as part of our acquisition of the SCS operations, we acquired certain
operations near Melbourne, Australia. In order to reduce operating complexity and expenses, we made
the decision to close our site in Australia and consolidate personnel and programs to our
Cambridge, U.K. and Palo Alto, California sites. At June 30, 2009, we established a reserve of
approximately $310,000 for the estimated costs to close down and exit our Australia operations. The
reserve reflects the estimated cost to terminate our facility lease in Australia (which provided
for an original termination date of December 31, 2010), employee termination benefits and other
liabilities associated with the wind-down and relocation of our operations in Australia. As of
December 31, 2010, the facility lease agreement has been terminated and our operations in Australia
have been relocated to Cambridge, U.K. and Palo Alto, California. We recorded actual expenses, net
of foreign currency translation changes of approximately $241,000 against this reserve. At December
31, 2010, we concluded that all costs related to the close down and exit of our Australia
operations have been recorded against the reserve and we closed the reserve by crediting the
remaining reserve balance of $69,000 to wind-down expense.
Business Combinations
The operating results of acquired companies or operations are included in our consolidated
financial statements starting on the date of acquisition. Goodwill is recorded at the time of an
acquisition and is calculated as the difference between the aggregate consideration paid for an
acquisition and the fair value of the net tangible and intangible assets acquired. Accounting for
acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase
price to the fair value of the net tangible and intangible assets acquired, including in-process
research and development. Goodwill and intangible assets deemed to have indefinite lives are not
amortized but are subject to annual impairment tests. If the assumptions and estimates used to
allocate the purchase price are not correct, or if business conditions change, purchase price
adjustments or future asset impairment charges could be required. We test goodwill for impairment
on an annual basis or more frequently if we believe indicators of impairment exist. Impairment
evaluations involve management estimates of asset useful lives and future cash flows. Significant
management judgment is required in the forecasts of future operating results that are used in the
evaluations. It is possible, however, that the plans and estimates used may be incorrect. If our
actual results, or the plans and estimates used in future impairment analysis, are lower than the
original estimates used to assess the recoverability of these assets, we could incur impairment
charges in a future period.
Warrant Liability
We use the Black-Scholes option pricing model to estimate fair value of warrants issued. In
using this model, we make certain assumptions about risk-free interest rates, dividend yields,
volatility and expected term of the warrants. Risk-free interest rates are derived from the yield
on U.S. Treasury debt securities. Dividend yields are based on our historical dividend payments,
which have been zero to date. Volatility is derived from the historical volatility of our common
stock as traded on Nasdaq. The expected term of the warrants is based on the time to expiration of
the warrants from the date of measurement. The fair value of the warrant liability will be revalued
at the end of each reporting period, with the change in fair value of the warrant liability
recorded as a gain or loss in our condensed consolidated statements of operations. The fair value
of the warrants will continue to be classified as a liability until such time as the warrants are
exercised, expire or an amendment of the warrant agreement renders these warrants to be no longer
classified as a liability.
Results of Operations
Our results of operations have varied significantly from year to year and quarter to quarter
and may vary significantly in the future due to the occurrence of material recurring and
nonrecurring events, including without limitation the receipt and payment of recurring and
nonrecurring licensing payments, the initiation or termination of clinical studies, research
collaborations and development programs for both cell-based therapeutic products and research
tools, unpredictable or unanticipated manufacturing and supply costs, unanticipated capital
expenditures necessary to support our business, expenses arising out of the integration of the
acquired SCS operations, developments in on-going patent protection and litigation, the on-going
expenses to lease and maintain our Rhode Island facilities, and the increasing costs associated
with operating our California and Cambridge, U.K. facilities.
23
We acquired the operations of SCS on April 1, 2009, and have consolidated such operations
since that date.
Revenue and Cost of Product Sales
Revenue for the three-month period ended March 31, 2011, as compared with the same period in
2010, is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, March 31 |
|
|
Change in 2011 versus 2010 |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreements and grants |
|
$ |
72,092 |
|
|
$ |
113,849 |
|
|
$ |
(41,757 |
) |
|
|
(37 |
)% |
Product sales |
|
|
149,375 |
|
|
|
116,424 |
|
|
|
32,951 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
221,467 |
|
|
|
230,273 |
|
|
|
(8,806 |
) |
|
|
(4 |
)% |
Cost of product sales |
|
|
54,524 |
|
|
|
43,762 |
|
|
|
(10,762 |
) |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
$ |
166,943 |
|
|
$ |
186,511 |
|
|
$ |
(19,568 |
) |
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue in the first quarter of 2011 was approximately $221,000, which was flat compared
to the total revenue of approximately $230,000 in the first quarter of 2010.
First quarter ended March 31, 2011 versus first quarter ended March 31, 2010. In the first
quarter of 2011, revenue from product sales was approximately $33,000, or 28%, higher as compared
to the same period in 2010. This increase was primarily attributable to both increased unit volumes
and new product launches in our SC Proven line of media and reagents. Licensing and grant revenue
decreased by approximately $42,000, or 37%, in 2011 compared to 2010, which was primarily
attributable to the completion and termination of several projects funded by grants in 2010.
Operating Expenses
Operating expenses for the three-month period ended March 31, 2011, as compared with the same
period in 2010, are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, March 31 |
|
|
Change in 2011 versus 2010 |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development |
|
$ |
5,525,677 |
|
|
$ |
5,037,514 |
|
|
$ |
488,163 |
|
|
|
10 |
% |
Selling, general & administrative |
|
|
2,075,729 |
|
|
|
2,584,742 |
|
|
|
(509,013 |
) |
|
|
(20 |
)% |
Wind-down expenses |
|
|
75,137 |
|
|
|
165,335 |
|
|
|
(90,198 |
) |
|
|
(55 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
7,676,543 |
|
|
$ |
7,787,591 |
|
|
$ |
(111,048 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
Our R&D expenses consist primarily of salaries and related personnel expenses, costs
associated with clinical trials and regulatory submissions; costs associated with preclinical
activities such as toxicology studies; costs associated with cell processing and process
development; certain patent-related costs such as licensing; facilities related costs such as
depreciation; lab equipment and supplies. Clinical trial expenses include payments to vendors such
as clinical research organizations, contract manufacturers, clinical trial sites, laboratories for
testing clinical samples and consultants. Cumulative R&D costs incurred since we refocused our
activities on developing cell-based therapeutics (fiscal years 2000 through the three months ended
March 31, 2011) were approximately $138 million. Over this period, the majority of these cumulative
costs were related to: (i) characterization of our proprietary HuCNS-SC cells, (ii) expenditures
for toxicology and other preclinical studies, preparation and submission of applications to
regulatory agencies to conduct clinical trials and obtaining regulatory clearance to initiate such
trials, all with respect to our HuCNS-SC cells, (iii) preclinical studies and development of our
human liver engrafting cells, (iv) costs associated with cell processing and process development,
and (v) costs associated with our clinical studies.
We use and manage our R&D resources, including our employees and facilities, across various
projects rather than on a project-by-project basis for the following reasons. The allocations of
time and resources change as the needs and priorities of individual projects and programs change,
and many of our researchers are assigned to more than one project at any given time. Furthermore,
we are exploring multiple possible uses for each of our proprietary cell types, so much of our R&D
effort is complementary to and
24
supportive of each of these projects. Lastly, much of our R&D effort is focused on
manufacturing processes, which can result in process improvements useful across cell types. We also
use external service providers to assist in the conduct of our clinical trials, to manufacture
certain of our product candidates and to provide various other R&D related products and services.
Many of these costs and expenses are complementary to and supportive of each of our programs.
Because we do not have a development collaborator for any of our product programs, we are currently
responsible for all costs incurred with respect to our product candidates.
R&D expenses totaled approximately $5,526,000 in the first quarter of 2011 compared with
$5,038,000 in the first quarter of 2010.
First quarter ended March 31, 2011 versus first quarter ended March 31, 2010. R&D expenses
increased approximately $488,000, or 10%, in 2011 compared to 2010. This increase was primarily
attributable to (i) an increase of approximately $188,000 in expenses related to our clinical
trials, (ii) an increase of approximately $108,000 in expenses related to continuing preclinical
studies of our HuCNS-SC cells for spinal cord injury, retinal disorders and other potential
indications, and (iii) an increase of approximately $363,000 of facility costs allocated to R&D.
These increased expenses were partially offset by a decrease in personnel expenses of approximately
$80,000, primarily attributable to lower stock-based compensation expense and a decrease of
approximately $91,000 in other expenses.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses are primarily comprised of salaries,
benefits and other staff related costs associated with sales and marketing, finance, legal, human
resources, information technology, and other administrative personnel, facilities and overhead
costs, external legal and other external general and administrative services.
SG&A expenses totaled approximately $2,076,000 in the first quarter of 2011 compared with
approximately $2,585,000 in the first quarter of 2010.
First quarter ended March 31, 2011 versus first quarter ended March 31, 2010. SG&A expenses
decreased approximately $509,000, or 20%, in 2011 compared to 2010. This decrease was primarily
attributable to (i) a decrease of approximately $210,000 in
legal fees, primarily patent related litigation fees, (ii) a decrease of
approximately $207,000 in operating expenses at our U.K. operations as we consolidated our
activities at the site, (iii) a decrease of approximately $147,000 in personnel expenses primarily
attributable to a decrease in stock-based compensation expense, and (iv) a decrease in other
expenses of approximately $32,000. These decreased expenses were partially offset by an increase of
approximately $87,000 in stock listing fees and expenses related to investor relations.
Wind-down Expenses
|
|
|
|
|
|
|
|
|
|
|
Three months ended, |
|
|
March 31 |
|
|
2011 |
|
2010 |
Wind-down
expenses |
|
$ |
75,137 |
|
|
$ |
165,335 |
|
Rhode Island
In 1999, in connection with exiting our former research facility in Rhode Island, we created a
reserve for the estimated lease payments and operating expenses related to it. The reserve has been
re-evaluated and adjusted based on assumptions relevant to real estate market conditions and the
estimated time until we could either fully sublease, assign or sell our remaining interests in the
property. The reserve was approximately $2,644,000 at December 31, 2010. Payments net of subtenant
income of approximately $317,000 for the first quarter of 2011 were recorded against this reserve.
At March 31, 2011, we re-evaluated the estimate and adjusted the reserve to approximately
$2,402,000 by recording additional wind-down expenses of approximately $75,000. For the similar
period in 2010, payments recorded against the reserve were approximately $315,000 in the first
quarter of 2010, and to adjust the reserve, we recorded additional wind-down expenses of
approximately $165,000. Expenses for this facility will fluctuate based on changes in tenant
occupancy rates and other operating expenses related to the lease. Even though it is our intent to
sublease, assign, sell, or otherwise divest ourselves of our interests in the facility at the
earliest possible time, we cannot determine with certainty a fixed date by which such events will
occur. In light of this uncertainty, based on estimates, we will periodically re-evaluate and
adjust the reserve, as necessary. See Note 6 Wind-down expenses, in the notes to condensed
consolidated financial statements of Part I, Item 1 of this Form 10-Q for further information.
25
Australia
On April 1, 2009, as part of our acquisition of the SCS operations, we acquired certain
operations near Melbourne, Australia. In order to reduce operating complexity and expenses, we made
the decision to close our site in Australia and consolidate personnel and programs to our
Cambridge, U.K. and Palo Alto, California sites. At June 30, 2009, we established a reserve of
approximately $310,000 for the estimated costs to close down and exit our Australia operations. The
reserve reflects the estimated cost to terminate our facility lease in Australia (which provided
for an original termination date of December 31, 2010), employee termination benefits and other
liabilities associated with the wind-down and relocation of our operations in Australia. As of
December 31, 2010, the facility lease agreement has been terminated and our operations in Australia
have been relocated to Cambridge, U.K. and Palo Alto, California. We recorded actual expenses, net
of foreign currency translation changes of approximately $241,000 against this reserve. At December
31, 2010, we concluded that all costs related to the close down and exit of our Australia
operations have been recorded against the reserve and we closed the reserve by crediting the
remaining reserve balance of $69,000 to wind-down expense.
Other Income (Expense)
Other income totaled approximately $1,762,000 in the first quarter of 2011 compared with other
income of $1,477,000 in the same period of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, |
|
|
Change in 2011 versus |
|
|
|
March 31 |
|
|
2010 |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability |
|
$ |
1,782,955 |
|
|
$ |
1,516,349 |
|
|
$ |
266,606 |
|
|
|
18 |
% |
Interest income |
|
|
1,372 |
|
|
|
594 |
|
|
|
778 |
|
|
|
131 |
% |
Interest expense |
|
|
(20,207 |
) |
|
|
(25,500 |
) |
|
|
5,293 |
|
|
|
(21 |
)% |
Other expense, net |
|
|
(1,755 |
) |
|
|
(14,438 |
) |
|
|
12,683 |
|
|
|
(88 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
1,762,365 |
|
|
$ |
1,477,005 |
|
|
$ |
285,360 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
As part of both our November 2008 and November 2009 financings, we issued warrants with five
year terms to purchase 10,344,828 and 4,000,000 shares of our common stock at $2.30 and $1.50 per
share, respectively. As the contracts include the possibility of net-cash settlement, we are
required to classify the fair value of the warrants issued as a liability, with subsequent changes
in fair value to be recorded as income (loss) on change in fair value of warrant liability. The
fair value of the warrants is determined using the Black-Scholes option pricing model and is
affected by changes in inputs to that model including our stock price, expected stock price
volatility, the contractual term, and the risk-free interest rate. Our estimate of the expected
volatility is based on historical volatility. The expected term of the warrants is based on the
time to expiration of the warrants from the date of measurement. Risk-free interest rates are
derived from the yield on U.S. Treasury debt securities. We will continue to classify the fair
value of the warrants as a liability until the warrants are exercised, expire or are amended in a
way that would no longer require these warrants to be classified as a liability. See Note 8
Warrant Liability in the notes to condensed consolidated financial statements of Part I, Item 1
of this Form 10-Q for further information.
Interest Income
Interest income in the three month period ended March 31, 2011 and 2010 were not significant
due to low average yields.
Interest Expense
Interest expense in the first quarter of 2011 decreased by approximately $5,000 or 21% when
compared to the same period in 2010. Interest expense is primarily for outstanding debt and capital
lease balances. See Note 7 Commitment and Contingencies, in the notes to condensed consolidated
financial statements of Part I, Item 1 of this Form 10-Q for further information.
Other income (expense), net
26
Other income for the three month period in 2011 and 2010 is primarily state franchise tax
expense.
Liquidity and Capital Resources
Since our inception, we have financed our operations through the sale of common and preferred
stock, the issuance of long-term debt and capitalized lease obligations, revenue from collaborative
agreements, research grants, license fees, and interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
Change |
|
|
2011 |
|
2010 |
|
$ |
|
% |
Cash and cash equivalents |
|
$ |
13,066,185 |
|
|
$ |
19,707,821 |
|
|
$ |
(6,641,636 |
) |
|
|
(33 |
)% |
In summary, our cash flows were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Change in 2011 versus 2010 |
|
|
2011 |
|
2010 |
|
$ |
|
% |
Net cash used in operating activities |
|
$ |
(7,418,330 |
) |
|
$ |
(7,808,286 |
) |
|
$ |
389,956 |
|
|
|
(5 |
)% |
Net cash used in investing activities |
|
$ |
(8,364,071 |
) |
|
$ |
(78,871 |
) |
|
$ |
(8,285,200 |
) |
|
|
** |
|
Net cash provided by financing activities |
|
$ |
9,143,293 |
|
|
$ |
626,287 |
|
|
$ |
8,517,006 |
|
|
|
** |
|
Net Cash Used in Operating Activities
Net cash used in operating activities in the first three months of 2011 decreased by
approximately $390,000, or 6%, when compared to the same period of 2010. Cash used in operating
activities is primarily driven by our net loss as adjusted for non-cash charges and differences in
the timing of operating cash flows.
Net Cash Used in Investing Activities
The increase of approximately $8,285,000, from 2010 to 2011 for net cash used in investing
activities, was primarily attributable to the purchase of short-term marketable debt securities of
approximately $8,383,000 in the first three months of 2011 as compared to none in 2010.
Net Cash Provided by Financing Activities
Net cash provided by financing activities in the first three months of 2011 increased by
approximately $8,517,006 compared to the same period in 2010. In January 2011, we raised gross
proceeds of $10,000,000 through the sale of 10,000,000 shares of our common stock to selected
institutional investors at a price of $1.00 per share. We received net proceeds, after deducting
offering expenses and fees, of approximately $9,400,000. The investors were also granted an option
to purchase an additional 6,000,000 shares at $1.00 per share. The option was not exercised and
expired on February 18, 2011. The shares were offered under our effective shelf registration
statement previously filed with the SEC.
We have incurred significant operating losses and negative cash flows since inception. We have
not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain
profitability in the future. We do not expect to be profitable in the next several years, but
rather expect to incur additional operating losses. We have limited liquidity and capital resources
and must obtain significant additional capital resources in order to sustain our product
development efforts, for acquisition of technologies and intellectual property rights, for
preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities, establishment of production
capabilities, for selling, general and administrative expenses and other working capital
requirements. We rely on cash balances and proceeds from equity and debt offerings, proceeds from
the transfer or sale of our intellectual property rights, equipment, facilities or investments, and
government grants and funding from collaborative arrangements, if obtainable, to fund our
operations.
We intend to pursue opportunities to obtain additional financing in the future through equity
and debt financings, grants and
27
collaborative research arrangements. In June 2008, we filed with the SEC a universal shelf
registration statement, declared effective in July 2008, which permits us to issue up to $100
million worth of registered debt and equity securities. As of April 29, 2011, we had approximately
$41 million under this universal shelf registration statement available for issuing debt or equity
securities; approximately $30 million of this $41 million has been reserved for the potential
exercise of the warrants issued in connection with our November 2008 and November 2009 financings.
In November 2010, we filed with the SEC, and the SEC declared effective, a universal shelf
registration statement which permits us to issue up to $100 million worth of registered debt and
equity securities. As of April 29, 2011, we had approximately $90 million under this universal
shelf registration statement available for issuing debt or equity securities. Under these effective
shelf registrations, we have the flexibility to issue registered securities, from time to time, in
one or more separate offerings or other transactions with the size, price and terms to be
determined at the time of issuance. Registered securities issued using this shelf may be used to
raise additional capital to fund our working capital and other corporate needs, for future
acquisitions of assets, programs or businesses, and for other corporate purposes.
The source, timing and availability of any future financing will depend principally upon
market conditions, interest rates and, more specifically, on our progress in our exploratory,
preclinical and future clinical development programs. Funding may not be available when needed
at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things,
to delay, scale back or eliminate some or all of our research and product development programs,
planned clinical trials, and/or our capital expenditures or to license our potential products or
technologies to third parties. In addition, the decline in economic activity, together with the
deterioration of the credit and capital markets, could have an adverse impact on potential sources
of future financing.
On March 3, 2011, we were notified by NASDAQ that the closing bid price of our common stock
had been below $1.00 per share for 30 consecutive business days, and therefore we did not meet the
requirements for continued listing on the NASDAQ Global Market. In accordance with NASDAQ rules, we
have 180 calendar days, or until August 30, 2011, to regain compliance with this minimum bid price
requirement. We can regain compliance if the closing bid price of our common stock is $1.00 per
share or higher for a minimum of ten consecutive business days during this initial 180-day
compliance period. If compliance is not achieved by August 30, 2011, NASDAQ will provide written
notification to us that our securities are subject to delisting. We will continue to monitor the
closing bid price for our common stock and consider our available options to regain compliance with
the NASDAQ minimum bid price requirement, which may include applying for an extension of the
compliance period or an appeal to a NASDAQ Listing Qualifications Panel. However, there can be no
assurance that we will be able to regain or maintain compliance with the minimum bid price rule or
other listing criteria or that an appeal, if taken, would be successful.
Commitments
See Note 7, Commitments and Contingencies in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.
Off-Balance Sheet Arrangements
We have certain contractual arrangements that create potential risk for us and are not
recognized in our Consolidated Balance Sheets. Discussed below are those off-balance sheet
arrangements that have or are reasonably likely to have a material current or future effect on our
financial condition, changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Operating Leases
We lease various real properties under operating leases that generally require us to pay
taxes, insurance, maintenance, and minimum lease payments. Some of our leases have options to
renew.
Operating Leases California
We currently lease space in an approximately 68,000 square foot facility located at the
Stanford Research Park in Palo Alto, California. The facility includes space for animals,
laboratories, offices, and a GMP (Good Manufacturing Practices) suite. Prior to September 2010, we
leased approximately 68,000 square feet of the facility, and were required to provide a letter of
credit for approximately $778,000, which served as a security deposit for the duration of the lease
term. The letter of credit issued by our financial institution is collateralized by a certificate
of deposit for the same amount, which was reflected as restricted cash in other
28
assets, non-current on our condensed consolidated balance sheets. In September 2010, we
amended our lease to reduce the area leased to 51,200 square feet, to change the expiry date of the
lease term from August 31, 2011 to June 30, 2011, and to reduce the letter of credit that serves as
a security deposit to approximately $389,000 from approximately $778,000. The difference of
approximately $389,000 was transferred from our restricted cash account to our cash and cash
equivalents account. In connection with this September 2010 lease amendment, we terminated a
space-sharing agreement covering approximately 10,451 square feet of this facility. In February
2011, we amended our lease to extend the term expiry date from June 30, 2011 to August 31, 2011. At
March 31, 2011, the aggregate remaining rent payment under the amended lease is approximately
$700,000. We recognize operating lease expense on a straight-line basis. At March 31, 2011, we had
prepaid rent balance of approximately $15,000. At December 31, 2010, we had a prepaid rent balance
of approximately $42,000.
In September 2010, we entered into a two-year sublease agreement with Caliper Life Sciences,
Inc., for approximately 13,200 square feet in a facility located in Mountain View, California. We
will pay approximately $695,000 in aggregate as rent over the term of the lease. The lease contains
escalating rent payments, which we recognize as operating lease expense on a straight-line basis.
Deferred rent was approximately $2,000 as of March 31, 2011, and approximately $1,000 as of
December 31, 2010.
In December 2010, we entered into a commercial lease agreement with BMR-Gateway Boulevard LLC
(BMR), as landlord, for approximately 43,000 square feet of office and research space at BMRs
Pacific Research Center in Newark, California. The initial term of the lease is approximately
eleven and one-half years, and we expect to relocate our corporate headquarters and core research
activities to this facility in August 2011. Initial base rent is expected to be approximately $2.20
per rentable square foot, with yearly increases throughout the term, and subject to certain
adjustments for draws upon the tenant allowances among other things. We will pay approximately
$14,906,000 in aggregate as rent over the term of the lease, which we recognize as operating lease
expense on a straight-line basis. Deferred rent was approximately $396,000 as of March 31, 2011. We
anticipate that we will be constructing laboratories, offices and related infrastructure within the
leased space during the first several months of the lease. As part of the lease, BMR has agreed to
provide various financial allowances so that we can build initial and future laboratories, offices
and other improvements, subject to customary terms and conditions relating to landlord-funded
tenant improvements. As part of the lease, we have, until January 2013, an option to lease up to an
additional 30,000 square feet in the building.
Operating Leases Rhode Island
We entered into a fifteen-year lease agreement for a scientific and administrative facility in
Rhode Island in connection with a sale and leaseback arrangement in 1997. The lease term expires
June 30, 2013 and includes escalating rent payments which we recognize on a straight-line basis.
Deferred rent expense for this facility was approximately $605,000 at March 31, 2011 and $656,000
at December 31, 2010, and is included as part of the wind-down accrual on the accompanying
condensed consolidated balance sheets.
For the year 2011, we expect to pay approximately $1,172,000 in operating lease payments and
estimated operating expenses of approximately $625,000, before receipt of sub-tenant income. For
the year 2011, we expect to receive, in aggregate, approximately $364,000 in sub-tenant rent and
operating expenses. As a result of the above transactions, our estimated cash outlay net of
sub-tenant rent for the SAF will be approximately $1,433,000 for 2011.
Operating Leases United Kingdom
In January 2011, we amended the existing lease agreements of our wholly-owned subsidiary, Stem
Cell Sciences (U.K.) Ltd, effectively reducing our leased space from approximately 5,000 square
feet to approximately 1,900 square feet of office and lab space. We expect to pay approximately
55,000 GBP as rental payments for 2011. StemCells, Inc. is the guarantor of Stem Cell Sciences
(U.K.) Ltds obligations under the existing lease.
With the exception of leases discussed above, we have not entered into any off balance sheet
financial arrangements and have not established any special purpose entities. We have not
guaranteed any debts or commitments of other entities or entered into any options on non-financial
assets.
Contractual Obligations
In the table below, we set forth our legally binding and enforceable contractual cash
obligations at March 31, 2011:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in |
|
|
|
Obligations |
|
|
Payable in (April to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
|
|
at March |
|
|
December) |
|
|
Payable in |
|
|
Payable in |
|
|
Payable in |
|
|
Payable in |
|
|
and |
|
|
|
31, 2011 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Beyond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
payments(1) |
|
$ |
19,007,956 |
|
|
$ |
2,244,339 |
|
|
$ |
2,561,875 |
|
|
$ |
1,936,422 |
|
|
$ |
1,255,600 |
|
|
$ |
1,307,200 |
|
|
$ |
9,702,520 |
|
Capital lease (equipment) |
|
|
73,373 |
|
|
|
55,044 |
|
|
|
18,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Payable (principal
& interest)(2) |
|
|
796,740 |
|
|
|
181,629 |
|
|
|
240,666 |
|
|
|
237,593 |
|
|
|
136,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
19,878,069 |
|
|
$ |
2,481,012 |
|
|
$ |
2,820,870 |
|
|
$ |
2,174,015 |
|
|
$ |
1,392,452 |
|
|
$ |
1,307,200 |
|
|
$ |
9,702,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease payments exclude space-sharing and sub-lease income (see Off-Balance Sheet
Arrangements Operating Leases above for further information), but include rent payments
for our Rhode Island facility that are included as part of our Accrued wind-down expenses in
our condensed consolidated financial statements. See Note 6, Wind-down expenses and Note 7,
Commitments and Contingencies in the notes to condensed consolidated financial statements of
Part I, Item 1 of this Form 10-Q for further information. |
|
(2) |
|
See Note 7, Commitments and Contingencies in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information. |
Under license agreements with NeuroSpheres, Ltd., we obtained an exclusive patent license
covering all uses of certain neural stem cell technology. We made up-front payments to NeuroSpheres
of 65,000 shares of our common stock and $50,000, and will make additional cash payments as stated
milestones are achieved. Effective in 2004, we were obligated to pay annual payments of $50,000,
creditable against certain royalties. Effective in 2008, as part of the indemnification agreement
with NeuroSpheres described above, we offset the annual $50,000 obligation against litigation costs
incurred under that agreement.
We periodically enter into licensing agreements with third parties to obtain exclusive or
non-exclusive licenses for certain technologies. The terms of certain of these agreements require
us to pay future milestone payments based upon achievement of certain developmental, regulatory or
commercial milestones. We do not anticipate making any milestone payments under any of our
licensing agreements for 2011. Milestone payments beyond fiscal year 2011 cannot be predicted or
estimated, due to the uncertainty of achieving the required developmental, regulatory or commercial
milestones.
We do not have any material unconditional purchase obligations or commercial commitments
related to capital expenditures, clinical development, clinical manufacturing, or other external
services contracts at March 31, 2011.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued amendments to the
guidance on goodwill impairment testing. When a goodwill impairment test is performed, an entity
must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it
does, an entity must perform an additional test to determine whether goodwill has been impaired and
to calculate the amount of that impairment (Step 2). In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The amendments are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. We adopted this new standard on January 1, 2011 and it is not expected
to have a material effect on our consolidated financial condition and results of operations.
In December 2010, the FASB issued amendments to the guidance for the reporting of business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. The amendments specify that if a public
entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. We adopted this new
standard on January 1, 2011 and it is not expected to have a material effect on our consolidated
financial condition and results of operations.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
30
Our market risks at March 31, 2011 have not changed materially from those discussed in Item 7A
of our Form 10-K for the year ended December 31, 2010 on file with the U.S. Securities and Exchange
Commission.
See also Note 2, Financial Assets, in the notes to condensed consolidated financial
statements in Part I, Item 1 of this Form 10-Q.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
In response to the requirement of the Sarbanes-Oxley Act of 2002, as of the end of the period
covered by this report, our chief executive officer and chief financial officer, along with other
members of management, reviewed the effectiveness of the design and operation of our disclosure
controls and procedures. Such controls and procedures are designed to ensure that information
required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to management, including the chief executive officer
and the chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, the chief executive officer and chief financial officer have
concluded that the Companys disclosure controls and procedures are effective.
During the most recent quarter, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, these controls of the Company.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2006, we filed suit against Neuralstem, Inc. in the Federal District Court for the
District of Maryland, alleging that Neuralstems activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres,
specifically U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug
screening), U.S. Patent No. 7,101,709 (claiming the use of human neural stem cells for screening
biological agents), U.S. Patent No. 5,851,832 (claiming methods for proliferating human
neural stem cells), and U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural
stem cells).
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstems activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the 505 and 418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. In August
2008, the California court transferred our lawsuit against Neuralstem to Maryland for resolution on
the merits. In July 2009, the Maryland District Court granted our motion to consolidate these two
cases with the litigation we initiated against Neuralstem in 2006. In August 2009, the Maryland
District Court approved a scheduling order submitted by the parties for discovery and trial.
In March 2011, Neuralstem moved to dismiss our infringement causes of action, claiming that it
had obtained a non-exclusive license for the litigated patents from an individual who is not a
named inventor on the patents. We believe this motion is baseless, both as a matter of law and
fact, and we will move for summary judgment on this issue once we have a procedural opportunity to
do so.
In addition to the actions described above, in April 2008, we filed an opposition to
Neuralstems European Patent No. 0 915 968 (methods of isolating, propagating and differentiating
CNS stem cells), because the claimed invention is believed by us to be unpatentable over prior art,
including the patents exclusively licensed by us from NeuroSpheres. In December 2010, the European
Patent Office ruled that all composition claims in Neuralstems
968 European patent were invalid
and unpatentable over prior art including several of the NeuroSpheres
patents licensed to us. Neuralstem has appealed this decision.
31
There have been no material change from the risk factors disclosed in Part I, Item 1A, of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None.
|
|
|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
None.
|
|
|
Exhibit 31.1
|
|
Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.2
|
|
Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1
|
|
Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2
|
|
Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
STEMCELLS, INC.
(name of Registrant)
|
|
May 10, 2011 |
/s/ Rodney K. B. Young
|
|
|
Rodney K. B. Young |
|
|
Chief Financial Officer |
|
33
Exhibit Index
|
|
|
Exhibit 31.1
|
|
Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.2
|
|
Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1
|
|
Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2
|
|
Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
34