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: June 30, 2007
Commission File Number: 0-19871
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
| |
|
|
| DELAWARE
|
|
94-3078125 |
|
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
identification No) |
3155 PORTER DRIVE
PALO ALTO, CA 94304
(Address of principal executive offices including zip code)
(650) 475-3100
(Registrant’s 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 No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
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 July 24, 2007, there were 80,068,593 shares of Common Stock, $.01 par value, issued and
outstanding.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
June 30, 2007 |
|
|
December 31, 2006 |
|
| |
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
49,182,102 |
|
|
$ |
51,795,529 |
|
Receivables |
|
|
370,117 |
|
|
|
482,850 |
|
Other current assets |
|
|
1,193,709 |
|
|
|
1,119,467 |
|
Marketable securities |
|
|
— |
|
|
|
4,132,646 |
|
|
|
|
|
|
|
|
| |
Total current assets |
|
|
50,745,928 |
|
|
|
57,530,492 |
|
| |
Marketable securities |
|
|
2,273,443 |
|
|
|
3,133,632 |
|
Property, plant and equipment, net |
|
|
3,422,746 |
|
|
|
3,596,150 |
|
Other assets, net |
|
|
2,568,343 |
|
|
|
2,596,543 |
|
|
|
|
|
|
|
|
| |
Total assets |
|
$ |
59,010,460 |
|
|
$ |
66,856,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
699,184 |
|
|
$ |
620,765 |
|
Accrued expenses |
|
|
1,710,243 |
|
|
|
2,053,902 |
|
Accrued wind-down expenses, current portion |
|
|
1,052,826 |
|
|
|
1,252,483 |
|
Deferred revenue, current portion |
|
|
16,826 |
|
|
|
16,826 |
|
Capital lease obligations, current portion |
|
|
17,005 |
|
|
|
— |
|
Bonds payable, current portion |
|
|
140,833 |
|
|
|
205,833 |
|
|
|
|
|
|
|
|
| |
Total current liabilities |
|
|
3,636,917 |
|
|
|
4,149,809 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, non-current portion |
|
|
34,100 |
|
|
|
— |
|
Bonds payable, non-current portion |
|
|
1,080,416 |
|
|
|
1,145,416 |
|
Deposits and other long-term liabilities |
|
|
466,211 |
|
|
|
547,392 |
|
Accrued wind-down expenses, non-current portion |
|
|
5,345,340 |
|
|
|
5,497,774 |
|
Deferred rent |
|
|
850,598 |
|
|
|
959,732 |
|
Deferred revenue, non-current portion |
|
|
172,278 |
|
|
|
180,691 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
11,585,860 |
|
|
|
12,480,814 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 125,000,000
shares authorized; 80,051,767 and 78,046,304
shares issued and outstanding at June 30,
2007 and December 31, 2006, respectively |
|
|
800,517 |
|
|
|
780,462 |
|
Additional paid in capital |
|
|
261,556,025 |
|
|
|
255,299,508 |
|
Accumulated deficit |
|
|
(214,935,687 |
) |
|
|
(204,891,945 |
) |
Accumulated other comprehensive income |
|
|
3,745 |
|
|
|
3,187,978 |
|
|
|
|
|
|
|
|
| |
Total stockholders’ equity |
|
|
47,424,600 |
|
|
|
54,376,003 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
59,010,460 |
|
|
$ |
66,856,817 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements .
3
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Six months ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from grants |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
37,550 |
|
Revenue from licensing agreements |
|
|
7,840 |
|
|
|
20,535 |
|
|
|
13,786 |
|
|
|
24,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total revenue |
|
|
7.840 |
|
|
|
20,535 |
|
|
|
13,786 |
|
|
|
62,085 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,498,204 |
|
|
|
3,187,513 |
|
|
|
8,517,342 |
|
|
|
5,879,394 |
|
General and administrative |
|
|
1,408,657 |
|
|
|
1,412,513 |
|
|
|
3,673,205 |
|
|
|
3,089,837 |
|
Wind-down expenses |
|
|
134,045 |
|
|
|
174,901 |
|
|
|
355,810 |
|
|
|
331,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating expenses |
|
|
6,040,906 |
|
|
|
4,774,927 |
|
|
|
12,546,357 |
|
|
|
9,300,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss from operations |
|
|
(6,033,066 |
) |
|
|
(4,754,392 |
) |
|
|
(12,532,571 |
) |
|
|
(9,238,164 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
|
— |
|
|
|
103,359 |
|
|
|
550,467 |
|
|
|
103,359 |
|
Realized gain on sale of marketable securities |
|
|
— |
|
|
|
— |
|
|
|
717,621 |
|
|
|
— |
|
Interest income |
|
|
655,531 |
|
|
|
703,551 |
|
|
|
1,309,137 |
|
|
|
1,043,365 |
|
Interest expense |
|
|
(34,055 |
) |
|
|
(38,505 |
) |
|
|
(67,372 |
) |
|
|
(77,098 |
) |
Other |
|
|
(12,400 |
) |
|
|
(3,372 |
) |
|
|
(21,024 |
) |
|
|
(13,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total other income (expense) |
|
|
609,076 |
|
|
|
765,033 |
|
|
|
2,488,829 |
|
|
|
1,055,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
($ |
5,423,990 |
) |
|
($ |
3,989,359 |
) |
|
($ |
10,043,742 |
) |
|
($ |
8,182,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss per share basic and diluted |
|
($ |
0.07 |
) |
|
($ |
0.05 |
) |
|
($ |
0.13 |
) |
|
($ |
0.11 |
) |
Weighted average shares used to compute net loss
per share basic and diluted |
|
|
79,787,273 |
|
|
|
77,105,128 |
|
|
|
79,180,107 |
|
|
|
71,306,311 |
|
See accompanying notes to condensed consolidated financial statements.
4
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Six months ended |
|
| |
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |
Net loss |
|
|
($10,043,742 |
) |
|
|
($8,182,485 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
568,532 |
|
|
|
528,755 |
|
Stock-based compensation expense |
|
|
1,415,173 |
|
|
|
1,040,263 |
|
Loss on disposal of fixed assets |
|
|
— |
|
|
|
1,197 |
|
Non-cash income from license and settlement agreement |
|
|
(550,467 |
) |
|
|
(103,359 |
) |
Gain on sale of marketable securities |
|
|
(717,621 |
) |
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
112,733 |
|
|
|
(361,935 |
) |
Other current assets |
|
|
(74,242 |
) |
|
|
(803,084 |
) |
Other assets |
|
|
— |
|
|
|
106,271 |
|
Accounts payable and accrued expenses |
|
|
(265,240 |
) |
|
|
(58,665 |
) |
Accrued wind-down expenses |
|
|
(352,091 |
) |
|
|
(236,486 |
) |
Deferred revenue |
|
|
(8,413 |
) |
|
|
— |
|
Deferred rent |
|
|
(109,134 |
) |
|
|
200,942 |
|
Deposits and other long-term liabilities |
|
|
(81,181 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10,105,693 |
) |
|
|
(7,868,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of marketable securities |
|
|
3,076,691 |
|
|
|
— |
|
Purchase of property, plant and equipment |
|
|
(307,554 |
) |
|
|
(1,111,357 |
) |
Acquisition of other assets |
|
|
(49,375 |
) |
|
|
(68,375 |
) |
|
|
|
|
|
|
|
| |
Net cash
provided by (used in) investing activities |
|
|
2,719,762 |
|
|
|
(1,179,732 |
) |
|
|
|
|
|
|
|
| |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |
Proceeds from issuance of common stock |
|
|
3,547,376 |
|
|
|
33,421,534 |
|
Proceeds from the exercise of stock options |
|
|
210,273 |
|
|
|
123,186 |
|
Proceeds from the exercise of warrants |
|
|
1,093,750 |
|
|
|
994,896 |
|
Proceeds of capital lease obligations |
|
|
51,105 |
|
|
|
— |
|
Repayment of debt obligations |
|
|
(130,000 |
) |
|
|
(125,000 |
) |
|
|
|
|
|
|
|
| |
Net cash provided by financing activities |
|
|
4,772,504 |
|
|
|
34,414,616 |
|
|
|
|
|
|
|
|
| |
Increase (decrease) in cash and cash equivalents |
|
|
(2,613,427 |
) |
|
|
25,366,298 |
|
Cash and cash equivalents, beginning of period |
|
|
51,795,529 |
|
|
|
34,540,908 |
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents, end of period |
|
$ |
49,182,102 |
|
|
$ |
59,907,206 |
|
|
|
|
|
|
|
|
| |
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
67,372 |
|
|
$ |
91,756 |
|
Stock issued for licensing agreements |
|
$ |
10,000 |
(1) |
|
|
— |
|
|
|
|
| (1) |
|
Under terms of a license agreement with the
California Institute of Technology (Cal Tech), annual
fees of $5,000 were due on each of two patents to which
StemCells holds a license from Cal Tech, payable in cash
or stock at the Company’s choice. The Company elected
to pay the fees in stock and issued 3,865 unregistered
shares to Cal Tech. |
See accompanying notes to condensed consolidated financial statements
5
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2007 and 2006
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The terms “StemCells,” the “Company,” “our,” “we” and “us” as used in this report refer to
StemCells, Inc. The accompanying unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
the accompanying financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. Results of operations for the six months
ended June 30, 2007 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2007.
The balance sheet at December 31, 2006 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required for complete
financial statements in accordance with accounting principles generally accepted in the United
States of America. For the complete financial statements, refer to the audited financial
statements and footnotes thereto as of December 31, 2006, included on Form 10-K.
The Company has incurred significant operating losses and negative cash flows since inception.
It has not achieved profitability and may not be able to realize sufficient revenues to achieve or
sustain profitability in the future. The Company has limited capital resources and will need to
raise additional capital from time to time to sustain its product development efforts, acquisition
of technologies and intellectual property rights, preclinical and clinical testing of anticipated
products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office
facilities, establishment of production capabilities, general and administrative expenses and other
working capital requirements. To fund its operations, the Company relies on cash balances,
proceeds from equity and debt offerings, proceeds from the transfer or sale of intellectual
property rights, equipment, facilities or investments, and on government grants and collaborative
arrangements. The Company cannot be certain that such funding will be available when needed. 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements. Actual
results could differ from these estimates. Significant estimates include the following:
| |
• |
|
Accrued wind-down expenses (See Note 4). |
| |
| |
• |
|
The grant date fair value of share-based awards recognized as compensation expense in
accordance with the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004) “Share-Based Payment” (SFAS 123R). See “Stock-Based Compensation” below. |
Marketable securities
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115 “Accounting
for Certain Investments in Debt and Equity Securities,” the Company has classified its investment
in equity securities as available-for-sale marketable securities in the accompanying consolidated
financial statements (See Note 2). The marketable securities are stated at fair market value, with
unrealized gains and losses reported in other comprehensive income.
6
Management reviews securities with unrealized losses for other than temporary impairment. A
decline in the fair value of securities that is deemed other than temporary is charged to earnings
when so deemed.
Net Loss Per Share
The Company has computed net loss per common share according to the SFAS No. 128 “Earnings Per
Share,” which requires disclosure of basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, warrants and convertible securities, and is
computed using the weighted average number of common shares outstanding during the period. Diluted
earnings per share includes the impact of potentially dilutive securities and is computed using the
weighted average of common and diluted equivalent stock options, warrants and convertible
securities outstanding during the period. Stock options, warrants and convertible securities that
are anti-dilutive are excluded from the calculation of diluted loss per common share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Six months ended |
| |
|
June 30, |
|
June 30, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net loss |
|
($ |
5,423,990 |
) |
|
($ |
3,989,359 |
) |
|
($ |
10,043,742 |
) |
|
($ |
8,182,485 |
) |
| |
Weighted average
shares used in
computing net loss
per share, basic
and diluted. |
|
|
79,787,273 |
|
|
|
77,105,128 |
|
|
|
79,180,107 |
|
|
|
71,306,311 |
|
Net loss per share,
basic and diluted. |
|
($ |
0.07 |
) |
|
($ |
0.05 |
) |
|
($ |
0.13 |
) |
|
($ |
0.11 |
) |
The Company has excluded outstanding stock options and warrants from the calculation of
diluted loss per common share because all such securities are anti-dilutive for all applicable
periods presented. These outstanding securities consist of the following potential common shares:
| |
|
|
|
|
|
|
|
|
| |
|
Outstanding at June 30, |
| |
|
2007 |
|
2006 |
Outstanding options |
|
|
9,037,194 |
|
|
|
7,048,220 |
|
Outstanding warrants |
|
|
1,355,000 |
|
|
|
1,930,658 |
|
Total |
|
|
10,392,194 |
|
|
|
8,978,878 |
|
Comprehensive Income (Loss)
The only component of other comprehensive income is unrealized gains and losses on available
for sale securities (See Note 2). The following table summarizes the components of the Company’s
comprehensive income for the three and six months ended June 30, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended June 30, |
|
Six months ended June 30, |
| As of June 30, |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net loss |
|
|
($5,423,990 |
) |
|
|
($3,989,359 |
) |
|
|
($10,043,742 |
) |
|
|
($8,182,485 |
) |
Other
comprehensive loss
(unrealized loss on
marketable securities) |
|
|
(332,099 |
) |
|
|
(422,939 |
) |
|
|
(3,184,232 |
) |
|
|
(1,723,266 |
) |
Comprehensive income (loss) |
|
|
($5,756,089 |
) |
|
|
($4,412,298 |
) |
|
|
($13,227,974 |
) |
|
|
($9,905,751 |
) |
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R. SFAS 123R
requires all share-based payments to employees, or to non-employee directors as compensation for
service on the Board of Directors, to be recognized as compensation expense in the consolidated
financial statements based on the fair values of such payments. The Company maintains shareholder
approved stock-based compensation plans, pursuant to which it grants stock-based compensation to
its employees, and to non-employee directors for Board
7
service. These grants are primarily in the form of options that allow a grantee to purchase a
fixed number of shares of the Company’s common stock at a fixed exercise price equal to the market
price of the shares at the date of the grant (“qualified stock option grants”) with a contractual
term of ten years. The options may vest on a single date or in tranches over a period of time, but
normally they do not vest unless the grantee is still employed by or a director of the Company on
the vesting date. The compensation expense for these grants will be recognized over the requisite
service period which is typically the period over which the stock-based compensation awards vest.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
107 (SAB 107), which provides guidance on the implementation of SFAS 123R. The Company applied the
principles of SAB 107 in conjunction with its adoption of SFAS 123R.
The Company adopted SFAS 123R effective January 1, 2006, using the modified-prospective
transition method. Under this transition method, compensation expense will be recognized based on
the grant date fair value estimated in accordance with the provisions of SFAS 123R for all new
grants effective January 1, 2006, and for options granted prior to but not vested as of December
31, 2005. The following table summarizes the stock option related compensation expense recognized
by the company in accordance with SFAS 123R, for the three and six month period in 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended June 30, |
|
Six months ended June 30, |
| |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Compensation
expense for stock
options granted |
|
$ |
644,000 |
|
|
$ |
519,000 |
|
|
$ |
1,262,000 |
|
|
$ |
908,000 |
|
The stock option related compensation expense was recognized on a straight line basis over the
vesting period of each grant net of estimated forfeitures. The Company’s estimated forfeiture
rates are based on its historical experience within separate groups of employees. The estimated
fair value of the options granted during 2007 and prior years was calculated using a Black Scholes
Merton option pricing model (Black Scholes model). The following summarizes the weighted average
fair value per share of options granted during the period and assumptions used in the Black Scholes
model to calculate the fair value:
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended |
| |
|
June 30, |
| |
|
2007 |
|
2006 |
Weighted average fair value per share of options
granted |
|
$ |
2.01 |
|
|
$ |
2.43 |
|
Assumptions: |
|
|
|
|
|
|
|
|
Risk – free interest rate(1) |
|
|
4.68 |
% |
|
|
5.08 |
% |
Volatility(2) |
|
|
98.17 |
% |
|
|
110.76 |
% |
Dividend yield(3) |
|
|
0 |
% |
|
|
0 |
% |
Expected term (years until
exercise)(4) |
|
|
6.25 |
|
|
|
6.25 |
|
|
|
|
| (1) |
|
The risk-free interest rate is based on U.S. Treasury debt securities with
maturities close to the expected term of the option. |
8
| |
(2) |
|
Expected volatility is based on historical volatility of the Company’s stock
factoring in daily share price observations. In computing expected volatility, the
length of the historical period used is equal to the length of the expected term of the
option. |
| |
| |
(3) |
|
No cash dividends have been declared on the Company’s common stock since the
Company’s inception, and the Company currently does not anticipate paying cash
dividends over the expected term of the option. |
| |
| |
(4) |
|
The expected term is equal to the average of the contractual life of the stock
option and its vesting period. |
At June 30, 2007, approximately $5,905,000 of unrecognized compensation expense related to
stock options is expected to be recognized over a weighted average period of approximately 1.4
years. The resulting effect on net loss and net loss per share attributable to common stockholders
is not likely to be representative of the effects in future periods, due to changes in forfeiture
rates, additional grants and subsequent periods of vesting.
The Company has four active stock option plans that were authorized to award 14,000,000 shares
in aggregate. A total of 4,555,344 shares were available for grant from these four plans at June
30, 2007.
The following table summarizes information about stock option activity for the three months
ended June 30, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
| |
|
|
|
|
|
|
|
|
|
average |
|
|
| |
|
|
|
|
|
Weighted |
|
remaining |
|
|
| |
|
Number of |
|
average |
|
contractual |
|
Aggregate |
| |
|
options |
|
exercise price |
|
term years) |
|
intrinsic value |
Outstanding at March 31, 2007 |
|
|
8,607,859 |
|
|
$ |
2.88 |
|
|
|
6.16 |
|
|
$ |
4,181,124 |
|
Granted |
|
|
459,500 |
|
|
$ |
2.48 |
|
|
|
9.88 |
|
|
$ |
— |
(1) |
Exercised |
|
|
(5,999 |
) |
|
$ |
1.56 |
|
|
|
|
|
|
$ |
6,719 |
|
Forfeited |
|
|
(24,166 |
) |
|
$ |
3.19 |
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
9,037,194 |
|
|
$ |
2.86 |
|
|
|
6.10 |
|
|
$ |
3,211,096 |
(1) |
Exercisable at June 30, 2007 |
|
|
5,095,220 |
|
|
$ |
3.10 |
|
|
|
3.94 |
|
|
$ |
2,392,703 |
(1) |
Vested and expected to vest
at June 30, 2007 (2) |
|
|
8,377,155 |
|
|
$ |
2.88 |
|
|
|
5.95 |
|
|
$ |
3,104,360 |
(1) |
|
|
|
| (1) |
|
The intrinsic values are calculated using the Company’s closing stock price of
$ 2.31 on June 30, 2007. |
| |
| (2) |
|
These calculations include options already vested at June 30, 2007 and options expected
to vest net of estimated forfeitures after June 30, 2007. |
A summary of the changes to the Company’s unvested options during the three-month period ended
June 30, 2007 is presented below:
9
| |
|
|
|
|
|
|
|
|
| |
|
Number of securities |
|
|
| |
|
underlying unvested |
|
Weighted average |
| Unvested Options |
|
options |
|
grant date fair value |
Unvested options at March 31, 2007 |
|
|
3,722,000 |
|
|
$ |
2.12 |
|
Granted this period |
|
|
459,500 |
|
|
$ |
2.01 |
|
Vested this period |
|
|
(219,526 |
) |
|
$ |
2.45 |
|
Forfeited this period |
|
|
(20,000 |
) |
|
$ |
2.34 |
|
Unvested options at June 30, 2007 |
|
|
3,941,974 |
|
|
$ |
2.09 |
|
The Company accounts for stock options granted to non-employees in accordance with SFAS 123
and Emerging Issues Task Force (EITF) 96-18 — “Accounting For Equity Instruments That Are Issued To
Other Than Employees For Acquiring, Or In Conjunction With Selling, Goods Or Services,” and
accordingly, recognizes as expense the estimated fair value of such options as calculated using the
Black Scholes model. The fair value is re-measured at each reporting date during the service
period and is amortized over the vesting period of each option or the recipient’s contractual
arrangement, if shorter.
Stock Appreciation Rights
In July 2006, the Company, pursuant to the 2006 Equity Incentive Plan, granted cash-settled
Stock Appreciation Rights (SARs) to certain employees. The SARs give the holder the right, upon
exercise, to the difference between the price per share of the Company’s common stock at the time
of exercise and the exercise price of the SAR. The exercise price of the SARs is equal to the
market price of the Company’s common shares at the date of grant. The SARs vest on the same
schedule as the Company’s qualified options issued to employees, i.e., 25% on the first anniversary
of the grant date and then
1/48th
every month thereafter. The Company recognizes
compensation expense for the SARs over the requisite service period which is typically the period
over which the awards vest. Compensation expense is based on the fair value of SARs which is
calculated using the Black Scholes model. The share-based compensation liability for the cost of
the requisite service that has been rendered to the reporting date is re-measured at each reporting
date through the date of settlement. The following table presents the activity of the Company’s
SARs awards for the six month periods ended June 30, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average Exercise |
|
|
|
|
|
|
Average Exercise |
|
| |
|
SARs |
|
|
Price |
|
|
SARs |
|
|
Price |
|
Outstanding at January 1 |
|
|
1,564,599 |
|
|
$ |
2.00 |
|
|
|
— |
|
|
|
— |
|
Granted |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Canceled |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30 |
|
|
1,564,599 |
|
|
$ |
2.00 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable at June 30 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month period ended June 30, 2007, we recorded approximately $55,000 as
compensation expense related to SARs granted. At June 30, 2007, approximately $1,654,000 of
unrecognized compensation expense related to SARs is expected to be recognized over a weighted
average period of approximately 1.65 years. The resulting effect on net loss and net loss per share
attributable to common stockholders is not likely to be
10
representative of the effects in future
periods, 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.
Revenue Recognition
Revenues from collaborative agreements and grants 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 collaborative
agreement. The Company currently recognizes revenues resulting from the licensing and use of our
technology and intellectual property. Such 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 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.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent
derecognition of tax positions, financial statement classification, recognition of interest and
penalties, accounting in interim periods, and disclosure and transition requirements. The Company
adopted the provisions of FIN 48 on January 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards 5, “Accounting for
Contingencies”. As required by FIN 48, the Company recognizes the financial statement benefit of a
tax position only after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax
authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the
statute of limitations remained open. The amount of unrecognized tax benefits as of January 1, 2007
was zero. There have been no material changes in unrecognized tax benefits since January 1, 2007.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state
jurisdictions. As of January 1, 2007, due to the carry forward of unutilized net operating losses
and research and development credits, the Company is subject to U.S. Federal income tax
examinations for the tax years 1992 through 2006, and to state income tax examinations for the tax
years 1999 through 2006.
The Company recognizes accrued interest related to unrecognized tax benefits in interest
expense and penalties in operating expense. No amounts were accrued for the payment of interest and
penalties at January 1, 2007. The Company’s adoption of FIN 48 did not have a material effect on
the Company’s financial condition, results of operations or cash flows (See Note 7).
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS
157), which defines fair value, establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. The Company is currently evaluating the requirements of SFAS
157; however, it does not believe that its adoption will have a material effect on its consolidated
financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS 159).
SFAS 159 provides companies with an option to report selected financial assets and liabilities at
fair value. SFAS 159’s objectives are to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring
11
related assets and liabilities
differently. SFAS 159 is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007. The Company is currently evaluating the potential impact, if
any, that the adoption of SFAS159 will have on its condensed consolidated financial statements.
In June 2007, the Financial Accounting Standards Board ratified a consensus opinion reached by
the Emerging Issues Task Force (EITF) on EITF Issue 07-3, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities.” The
guidance in EITF Issue 07-3 requires the Company to defer and capitalize nonrefundable advance
payments made for goods or services to be used in research and development activities until the
goods have been delivered or the related services have been performed. If the goods are no longer
expected to be delivered nor the services expected to be performed, the Company would be required
to expense the related capitalized advance payments. The consensus in EITF Issue 07-3 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2007
and is to be applied prospectively to new contracts entered into on or after December 15, 2007.
Early adoption is not permitted. Retrospective application of EITF Issue 07-3 is also not
permitted. The Company intends to adopt EITF Issue 07-3 effective January 1, 2008. The impact of
applying this consensus will depend on the terms of the Company’s future research and development
contractual arrangements entered into on or after December 15, 2007.
NOTE 2. RENEURON LICENSE AND SETTLEMENT AGREEMENT
In July 2005, the Company entered into a license and settlement agreement with
ReNeuron Limited, a wholly owned subsidiary of ReNeuron Group plc, a publicly listed UK corporation
(collectively referred to as “ReNeuron”). As part of the agreement, the Company granted ReNeuron a
license that allows ReNeuron to exploit their “c-mycER” conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. In return for the license, StemCells
received a 7.5% fully-diluted equity interest in ReNeuron, subject to certain anti-dilution
provisions, and a cross-license to the exclusive use of ReNeuron’s 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 StemCells or ReNeuron might have had against the other in connection with any putative
infringement of certain of each party’s patent rights prior to the effective date of the agreement.
As of December 31, 2006, the Company held 9,274,837 shares of ReNeuron common stock with fair
value of approximately $7,266,000. In February 2007, the Company sold 5,275,000 ordinary shares of
ReNeuron for net proceeds of approximately $3,077,000. The Company recorded approximately $718,000
as realized gain for this transaction. In February 2007, ReNeuron issued additional shares of
common stock to the Company as a consequence of certain anti-dilution provisions in the agreement.
StemCells was entitled to approximately 822,000 shares net of approximately 12,000 shares
transferred to Neurospheres Ltd., (Neurospheres) an Alberta corporation from which StemCells has
licensed some of the patent rights that are subject to the agreement with ReNeuron. The Company
recorded approximately $550,000 as other income for the additional shares. As of June 30, 2007, the
Company owned approximately 4,822,000 ordinary shares of ReNeuron with a fair market value of
approximately $2,273,000.
Changes in market value as a result of changes in market price per share or the exchange rate
between the US dollar and the British pound are accounted for under “other comprehensive income
(loss)” if deemed temporary and are not recorded as “other income or loss” until the shares are
disposed of and a gain or loss realized. The unrealized gain as of June 30, 2007 is approximately
$4,000. A decline in the fair value of securities that is deemed other than temporary would be
charged to operations.
NOTE 3. LEASES
The Company had undertaken 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 a pilot manufacturing facility related to its former encapsulated cell
technology. The related leases are structured such that lease payments will fully fund all
semiannual interest payments and annual principal payments through maturity in August 2014.
Interest rates vary with the respective bonds’ maturities, ranging currently from 8.2% to 9.5%.
The outstanding principal at June 30, 2007 was approximately $1,221,000. The bonds contain certain
restrictive covenants, which limit among other things, the payment of cash dividends and the sale
of the related assets.
The Company entered into a fifteen-year lease for a laboratory facility in Rhode Island in
connection with a sale and leaseback arrangement in 1997. The lease has escalating rent payments
and accordingly, the Company is recognizing rent expense on a straight-line basis. At December 31,
2006 and June 30, 2007, the Company had deferred rent liability for this facility of approximately
$1,238,000 and $1,253,000 respectively; the deferred rent liability is presented as part of the
wind-down accrual.
Although the Company previously discontinued activities relating to encapsulated cell
technology, the Company remains obligated under the leases for the pilot manufacturing facility and
the laboratory facility. The Company has succeeded in subleasing the pilot manufacturing facility
and part of the laboratory facility. The aggregate income received by the Company is significantly
less than the Company’s aggregate obligations under the leases, and the Company’s continued receipt
of rental income is dependent on the financial ability of the occupants to comply with their
obligations under the subleases. The Company continues to seek to sublet the vacant portions
12
of
the Rhode Island facilities, to assign or sell its interests in all of these properties, or to
otherwise arrange for the
termination of its obligations under the lease obligations on these facilities. There can be
no assurance, however, that the Company will be able to dispose of these properties in a reasonable
time, if at all, or to terminate its lease obligations without the payment of substantial
consideration.
As of February 1, 2001, the Company entered into a 5-year lease for 40,000 square feet of an
approximately 68,000 square foot facility located in the Stanford Research Park in Palo Alto,
California. The facility includes space for animals, laboratories and offices. On December 19,
2002, the Company negotiated an amendment to the lease, which resulted in reducing the average
annual rent over the remaining term of the lease from approximately $3.7 million to $2.0 million.
As part of the amendment, the Company issued a letter of credit on January 2, 2003 for $503,079,
which was an addition to the letter of credit in the amount of $275,000 issued at commencement of
the lease, to serve as a deposit for the duration of the lease. The Company negotiated an
amendment to the lease effective April 1, 2005, which extends the term of the lease through March
31, 2010, includes a reduction in the rent per square foot, and provides for an expansion of the
leased premises by approximately 28,000 additional square feet. The average annual rent due from
the Company under its lease for the period commencing April 1, 2005 to March 31, 2010 is
approximately $2 million before subtenant income. The lease has escalating rent payments, which
the Company is recognizing on a straight-line basis. At June 30, 2007, the Company had deferred
rent liability for this facility of approximately $851,000. At June 30, 2007, the Company has a
space-sharing agreement covering in total approximately 11,000 square feet of this facility. The
Company receives the amount of base rent plus the proportionate share of the operating expenses
that it pays for such space over the term of these agreements.
NOTE 4. RELOCATION TO CALIFORNIA FROM RHODE ISLAND
In October 1999, the Company relocated to California from Rhode Island and established a wind
down reserve for the estimated lease payments and operating costs of the Rhode Island facilities
through an expected disposal date of June 30, 2000. The Company did not fully sublet the Rhode
Island facilities in 2000. Even though the Company intends to dispose of the facility at the
earliest possible time, the Company’s management cannot determine with certainty a fixed date by
which such disposal will occur. In light of this uncertainty, the Company periodically
re-evaluates and adjusts the reserve. The Company considers various factors such as the Company’s
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. At
December 31, 2006, the reserve was approximately $5,512,000. For the three and six -month periods
ended June 30, 2007, the Company incurred approximately $ 342,000 and $723,000 respectively in
operating expenses, which was recorded against the reserve. After evaluating the afore-mentioned
factors, the Company re-valued the reserve to approximately $5,145,000 at June 30, 2007 by
recording an additional $222,000 and $134,000 at March 31, 2007 and June 30, 2007, respectively as
wind-down expenses.
Wind-down reserve
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
January to |
|
April to |
|
January to |
|
January to |
| |
|
March 31, |
|
June 30, |
|
June 30, |
|
December |
| |
|
2007 |
|
2007 |
|
2007 |
|
31, 2006 |
| |
|
|
Accrued wind-down reserve at
beginning of period |
|
$ |
5,512,000 |
|
|
$ |
5,353,000 |
|
|
$ |
5,512,000 |
|
|
$ |
6,098,000 |
|
Less actual expenses recorded
against estimated reserve
during the period |
|
|
(381,000 |
) |
|
|
(342,000 |
) |
|
|
(723,000 |
) |
|
|
(1,295,000 |
) |
Additional expense recorded to
revise estimated reserve at
period-end |
|
|
222,000 |
|
|
|
134,000 |
|
|
|
356,000 |
|
|
|
709,000 |
|
| |
|
|
Revised reserve at period-end |
|
|
5,353,000 |
|
|
|
5,145,000 |
|
|
|
5,145,000 |
|
|
|
5,512,000 |
|
Add deferred rent at period end
(See Note 3) |
|
|
1,246,000 |
|
|
|
1,253,000 |
|
|
|
1,253,000 |
|
|
|
1,238,000 |
|
| |
|
|
Total accrued wind-down
expenses at period-end (current
and non current portion) |
|
$ |
6,599,000 |
|
|
$ |
6,398,000 |
|
|
$ |
6,398,000 |
|
|
$ |
6,750,000 |
|
| |
|
|
Accrued wind-down expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
$ |
1,363,000 |
|
|
$ |
1,053,000 |
|
|
$ |
1,053,000 |
|
|
$ |
1,252,000 |
|
| |
|
|
Non current portion |
|
|
5,236,000 |
|
|
|
5,345,000 |
|
|
|
5,345,000 |
|
|
|
5,498,000 |
|
| |
|
|
Total Accrued wind-down expenses |
|
$ |
6,599,000 |
|
|
$ |
6,398,000 |
|
|
$ |
6,398,000 |
|
|
$ |
6,750,000 |
|
| |
|
|
13
NOTE 5. GRANTS
In September 2004, the National Institutes of Health (NIH) awarded the Company a Small
Business Technology Transfer grant of $464,000 for studies in Alzheimer’s disease, consisting of
approximately $308,000 for the first year and approximately $156,000 for the remainder of the grant
term, September 30, 2005 through March 31, 2006. The studies have been conducted by Dr. George A.
Carlson of the McLaughlin Research Institute (MRI) in Great Falls, Montana, which will receive
approximately $222,000 of the total award. The remaining $242,000 has been recognized by the
Company as grant revenue as and when resources were expended for this study. For the six-month
period ended June 30, 2006, the Company recognized approximately $38,000, after which; the Company
had drawn down in full its share of the grant. The Company had no grant revenue for the six-month
period ended June 30, 2007.
NOTE 6. STOCKHOLDERS’ EQUITY
On December 29, 2006, the Company filed a Prospectus Supplement announcing the entry of a
sales agreement with Cantor Fitzgerald & Co. (Cantor) under which up to 10,000,000 shares may be
sold from time to time under a shelf registration statement. For the six-month period ended June
30, 2007, the Company sold approximately 1,217,000 shares under this sales agreement at an average
price of $3.13 per share and received net proceeds of approximately $3,614,000. Cantor is paid
compensation equal to 5.0% of the gross proceeds pursuant to the terms of the agreement.
In April 2007, a warrant issued as part of a June 16, 2004 financing arrangement, was
exercised to purchase an aggregate of 575,658 shares of the Company’s common stock at $1.90 per
share. The Company issued 575,658 shares of its common stock and received proceeds of
approximately $1,094,000.
NOTE 7. INCOME TAXES
At December 31, 2006, the Company had net operating loss carryforwards for Federal income
tax purposes of approximately $118,560,000 expiring in the years 2007 through 2026 and net
operating loss carry forwards for state income tax purposes of approximately $11,747,000 which
expire in the years 2009 through 2016. The Company did not provide for a tax benefit, because it
is more likely than not, that any such benefit would not be realized.
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and the results of our operations for
the three and six-month periods ended June 30, 2007 and 2006 should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the related footnotes
thereto.
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
uncertainty as to whether the U.S. Food and Drug Administration (FDA) will permit us to proceed
with clinical testing of proposed products despite the novel and unproven nature of our technology;
the risk that our initial clinical trial and any other trial could be substantially delayed beyond
its expected dates or cause us to incur substantial unanticipated costs; uncertainties regarding
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 cell-based therapeutics
programs; the uncertainty regarding the outcome of our Phase I clinical trial in NCL and any other
trials we may conduct in the future; the uncertainty regarding the validity and enforceability of
our issued patents; the uncertainty whether any products that may be generated in our cell-based
therapeutics programs will prove clinically effective and not cause tumors or other side effects;
the uncertainty whether we will achieve revenues from product sales or become profitable;
uncertainties regarding our obligations in regard to our former encapsulated cell therapy
facilities in Rhode Island; obsolescence of our technology; competition from third parties;
intellectual property rights of third parties and litigation 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
Item 1A (Risk Factors) and elsewhere in our Form 10-K for the year ended December 31, 2006 and the
risk factors set forth in Part II, Item 1A (Risk Factors) and elsewhere in this Form 10-Q.
Overview
Since our inception in 1988, we have been primarily engaged in research and development
of human therapeutic products. Since the second half of 1999, our sole focus has been on our stem
cell technology. We are currently conducting a Phase I clinical trial of our HuCNS-SC™ product
(purified human neural stem cells) as a treatment for infantile and late infantile neuronal ceroid
lipofuscinosis (NCL), a fatal neurodegenerative disease often referred to as Batten disease. Our
Neural Program is also continuing basic research and preclinical development work for additional
potential indications in the CNS field. In our Liver Program, we are engaged in preclinical
development work on our human liver engrafting cell and plan to advance our liver program into
clinical development as rapidly as we can. Our pancreas program is still in the discovery stage
and further evaluation of the therapeutic potential of our candidate human pancreatic
stem/progenitor cell will be required.
We have not derived any revenues from the sale of any products apart from license revenue for
the research use of certain of our patented cells and media, and we do not expect to receive
revenues from product sales for at least several years. We have not commercialized any product and
in order to do so we must, among other things, substantially increase our research and development
expenditures as research continues, product development efforts accelerate and clinical trials are
initiated. We had expenditures for screening and enrolling patients and for preparing HuCNS-SC
doses for our Phase I clinical trial and will incur additional similar expenditures for any future
clinical trials. We previously had expenditures for toxicology and other studies in preparation for
submitting the Investigational New Drug application (IND) for our Phase I trial for NCL to the FDA
and getting it cleared by the FDA, and will incur additional similar expenditures for any future
INDs. We have incurred annual operating losses
15
since inception and expect to incur substantial operating losses in the future. As a result,
we are dependent upon external financing from equity and debt offerings and revenues from
collaborative research arrangements with corporate sponsors to finance our operations. There are no
such collaborative research arrangements at this time and there can be no assurance that such
financing or partnering revenues will be available when needed or on terms acceptable to us.
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 research collaborations, the
on-going expenses to lease and maintain our facilities in Rhode Island and the increasing costs
associated with our facility in California. To expand and provide high quality systems and support
to our Research and Development programs, as well as to enhance our internal controls over
financial reporting, we will need to hire more personnel, which will lead to higher operating
expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements:
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements. Actual
results could differ from these estimates. The significant estimates include the accrued wind-down
expenses related to our Rhode Island facilities and the grant date fair value of share based awards
recognized as compensation expense in accordance with the provisions of SFAS 123R.
Stock-Based Compensation
In December 2004, FASB issued SFAS 123R “Share-Based Payment,” which is a revision of SFAS 123
“Accounting for Stock-Based Compensation” and amends SFAS No. 95 “Statement of Cash Flows.” SFAS
123R supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related
implementation guidance. SFAS 123R covers a wide range of share-based compensation arrangements
including stock options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. The new standard is effective as of the beginning of
the first interim or annual reporting period that begins after December 15, 2005. We adopted SFAS
123R effective January 1, 2006. Adoption of the expensing requirements has increased our losses.
Research and Development Costs
We expense all research and development costs as incurred. Research and development costs
include costs of personnel, external services, supplies, facilities and miscellaneous other costs.
Wind-down and Exit Costs
In connection with the wind-down of our former encapsulated cell technology operations, our
research and manufacturing operations in Lincoln, Rhode Island, and the relocation of our remaining
research and development activities and corporate headquarters to California in October 1999, we
provided a reserve for our estimate of the exit cost obligation in accordance with EITF 94-3 “Other
Cost to Exit an Activity.” The reserve reflects estimates of the ongoing costs of our former
research 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 the
Company’s 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
16
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 for years 2001 through 2006 was approximately 67%, varying from 49% to 80%. As of June
30, 2007, based on current information available to management, the vacancy rate is projected to be
91% for the remainder of 2007, and approximately 75% for 2008 and 70% from 2009 through the end of
the lease. These estimates are based on actual occupancy in 2007, expiration of subleases in 2007
and 2008, 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 2008 to the end of the Lease had been five percentage points higher or lower at
June 30, 2007, then the reserve would have increased or decreased by approximately $236,000.
Similarly, a 5% increase or decrease in the operating expenses for the facility from 2007 would
have increased or decreased the reserve by approximately $117,000, and a 5% increase or decrease in
the assumed average rental charge per square foot would have increased or decreased the reserve by
approximately $71,000. Management does not wait for specific events to change its estimate, but
instead uses its best efforts to anticipate them on a quarterly basis.
The wind-down reserve at the end of December 31, 2006 was $5,512,000. For the three and
six-month period ended June 30, 2007 we recorded actual expenses against this reserve of
approximately $342,000 and $723,000 respectively. Based on management’s evaluation of the factors
mentioned, and particularly the projected vacancy rates described above, we adjusted the reserve to
$5,145,000 by recording an additional $134,000 and $356,000 for the three and six-month periods
ended June 30, 2007.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Additionally, FIN 48 provides guidance on subsequent
derecognition of tax positions, financial statement classification, recognition of interest and
penalties, accounting in interim periods, and disclosure and transition requirements. We adopted
the provisions of FIN 48 on January 1, 2007. Previously, we had accounted for tax contingencies in
accordance with Statement of Financial Accounting Standards 5, “Accounting for Contingencies”. As
required by FIN 48, we recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority. At the
adoption date, we applied FIN 48 to all tax positions for which the statute of limitations remained
open. The amount of unrecognized tax benefits as of January 1, 2007 was zero. There have been no
material changes in unrecognized tax benefits since January 1, 2007. As of January 1, 2007, due to
the carry forward of unutilized net operating losses and research and development credits, the
Company is subject to U.S. Federal income tax examinations for the tax years 1992 through 2006, and
to state income tax examinations for the tax years 1999 through 2006.
17
We recognize accrued interest related to unrecognized tax benefits in interest expense and
penalties in operating expense. No amounts were accrued for the payment of interest and penalties
at January 1, 2007. Our adoption of FIN 48 did not have a material effect on our financial
condition, results of operations or cash flows (See Note 7).
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS
157), which defines fair value, establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and for interim
periods within those fiscal years. We are currently evaluating the requirements of SFAS 157;
however, we do not believe that its adoption will have a material effect on our consolidated
financial statements.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (SFAS 159).
SFAS 159 provides companies with an option to report selected financial assets and liabilities at
fair value. SFAS 159’s objectives are to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets and liabilities
differently. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning
after November 15, 2007. We are currently evaluating the potential impact, if any, that the
adoption of SFAS159 will have on our condensed consolidated financial statements
In June 2007, the Financial Accounting Standards Board ratified a consensus opinion reached by
the Emerging Issues Task Force (EITF) on EITF Issue 07-3, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development Activities.” The
guidance in EITF Issue 07-3 requires us to defer and capitalize nonrefundable advance payments made
for goods or services to be used in research and development activities until the goods have been
delivered or the related services have been performed. If the goods are no longer expected to be
delivered nor the services expected to be performed, we would be required to expense the related
capitalized advance payments. The consensus in EITF Issue 07-3 is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2007 and is to be applied
prospectively to new contracts entered into on or after December 15, 2007. Early adoption is not
permitted. Retrospective application of EITF Issue 07-3 is also not permitted. We intend to adopt
EITF Issue 07-3 effective January 1, 2008. The impact of applying this consensus will depend on the
terms of our future research and development contractual arrangements entered into on or after
December 15, 2007.
RESULTS OF OPERATIONS
Three months ended June 30, 2007 and 2006
Revenue
Revenue for the three-month period ended June 30, 2007, as compared with the same period in
2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from licensing agreements |
|
$ |
7,840 |
|
|
$ |
20,535 |
|
|
|
($12,695 |
) |
|
|
(62 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total revenue |
|
$ |
7,840 |
|
|
$ |
20,535 |
|
|
|
($12,695 |
) |
|
|
(62 |
%) |
Revenue for the three months ended June 30, 2007 and 2006 are solely comprised of amounts
received from various licensees as part of our licensing agreements with them.
Operating Expenses
Operating expenses for the three-month period ended June 30, 2007, as compared with the same
period in 2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
4,498,204 |
|
|
$ |
3,187,513 |
|
|
$ |
1,310,691 |
|
|
|
41 |
% |
General and administrative |
|
|
1,408,657 |
|
|
|
1,412,513 |
|
|
|
(3,856 |
) |
|
|
— |
% |
Wind-down expenses |
|
|
134,045 |
|
|
|
174,901 |
|
|
|
(40,856 |
) |
|
|
(23 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses |
|
$ |
6,040,906 |
|
|
$ |
4,774,927 |
|
|
$ |
1,265,979 |
|
|
|
27 |
% |
18
Research and development expenses totaled approximately $4,498,000 for the three months ended
June 30, 2007, compared with approximately $3,188,000 for the same period in 2006. The increase of
$1,311,000, or approximately 41%, from 2006 to 2007 was primarily attributable to expansion of our
operations in cell processing and clinical development, which consisted of an increase in personnel
costs of approximately $298,000 and an increase in external services and clinical study costs of
approximately $670,000 with the remainder due to increases in supplies, rent and other operating
expenses. At June 30, 2007, we had 42 full-time employees working in research and development and
laboratory support services as compared to 36 at June 30, 2006.
General and administrative expenses were approximately $1,409,000 for the three months ended
June 30, 2007, compared with approximately $1,413,000 for the same period in 2006. For the three
months ended June 30, 2007, there was a net increase in expenses, as compared to the same period in
2006, of approximately $188,000, of which approximately $128,000 was attributable to an increase in
stock based compensation expense for grant of stock options and stock appreciation rights. This
increase was offset by approximately $192,000 received from a subtenant in connection with the
early termination of their sublease, resulting in a net decrease of approximately $4,000 in 2007 as
compared to 2006.
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. At December 31, 2006, the reserve was approximately $5,512,000. For the three
months ended June 30, 2007, expenses of approximately $342,000 net of subtenant income were
recorded against this reserve (See Note 4). At June 30, 2007, we re-evaluated the estimate and
adjusted the reserve to approximately $5,145,000 by recording an additional $134,000 as wind-down
expenses. Wind-down expenses recorded against the reserve for the same period in 2006 were
approximately $298,000 and additional expenses recorded to adjust the reserve were approximately
$175,000. 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.
Other Income
Other income for the three-month period ended June 30, 2007, as compared with the same period
in 2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
|
— |
|
|
$ |
103,359 |
|
|
|
($103,359 |
) |
|
|
(100 |
)% |
Interest income |
|
|
655,531 |
|
|
|
703,551 |
|
|
|
(48,020 |
) |
|
|
(7 |
)% |
Interest expense |
|
|
(34,055 |
) |
|
|
(38,505 |
) |
|
|
4,450 |
|
|
|
(12 |
)% |
Other |
|
|
(12,400 |
) |
|
|
(3,372 |
) |
|
|
(9,028 |
) |
|
|
268 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
$ |
609,076 |
|
|
$ |
765,033 |
|
|
|
($155,957 |
) |
|
|
(20 |
)% |
Interest income for the three months ended June 30, 2007 and 2006 was approximately $655,000
and $704,000, respectively. The decrease in interest income for the 2007 period was primarily
attributable to a lower average investment balance when compared to the three-month period in 2006.
Interest expense for the three months ended June 30, 2007 and 2006 was approximately $34,000
and $39,000 respectively. The decrease in interest expense in 2007 was attributable to lower
outstanding debt and capital lease balances in 2007 compared to 2006. Other income (expense)
comprises primarily of state franchise tax paid.
19
Six months ended June 30, 2007 and 2006
Revenue
Revenue for the six-month period ended June 30, 2007, as compared with the same period in
2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
grants and
licensing
agreements |
|
$ |
13,786 |
|
|
$ |
62,085 |
|
|
|
($48,299 |
) |
|
|
(78 |
%) |
| |
|
|
Total revenue |
|
$ |
13,786 |
|
|
$ |
62,085 |
|
|
|
($48,299 |
) |
|
|
(78 |
%) |
For the six months ended June 30, 2007 and 2006, revenue from grants and licensing agreements
totaled approximately $14,000 and $62,000 respectively. The decrease in revenue from 2006 to 2007
was primarily attributable to the completed draw down by March 31, 2006 of a September 2004 Small
Business Technology Transfer grant for studies in Alzheimer’s disease. The grant of $464,000 for
studies in Alzheimer’s disease consisted of approximately $308,000 for the first year and
approximately $156,000 for the remainder of the grant term, June 30, 2005 through June 30, 2006.
Operating Expenses
Operating expenses for the six-month period ended June 30, 2007, as compared with the same
period in 2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
8,517,342 |
|
|
$ |
5,879,394 |
|
|
$ |
2,637,948 |
|
|
|
45 |
% |
General and administrative |
|
|
3,673,205 |
|
|
|
3,089,837 |
|
|
|
583,368 |
|
|
|
19 |
% |
Wind-down expenses |
|
|
355,810 |
|
|
|
331,018 |
|
|
|
24,792 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Total operating expenses |
|
$ |
12,546,357 |
|
|
$ |
9,300,249 |
|
|
$ |
3,246,108 |
|
|
|
35 |
% |
Research and development expenses totaled approximately $8,517,000 for the six months ended
June 30, 2007, compared with approximately $5,879,000 for the same period in 2006. The increase of
$2,638,000, or approximately 45%, from 2006 to 2007 was primarily attributable to expansion of our
operations in cell processing and clinical development, which consisted of an increase in personnel
costs of approximately $652,000 and an increase in external services and clinical study costs of
approximately $1,417,000 with the remainder due to increases in supplies, rent and other operating
expenses. At June 30, 2007, we had 42 full-time employees working in research and development and
laboratory support services as compared to 36 at June 30, 2006.
General and administrative expenses were approximately $3,673,000 for the six months ended
June 30, 2007, compared with approximately $3,090,000 for the same period in 2006. The increase of
$583,000, or approximately 19%, from 2006 to 2007 was primarily attributable to an increase in
personnel costs of approximately $513,000, of which approximately $411,000 was attributable to an
increase in stock based compensation expense for grant of stock options and stock appreciation
rights. The increase was also attributable to an increase in external services of $407,000
primarily for legal and recruiting fees. The increase in the afore mentioned expenses was
partially offset by a net decrease in other operating expenses and approximately $192,000 received
from a subtenant in connection with the early termination of their sublease.
20
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. At December
31, 2006, the reserve was approximately $5,512,000. For the six months ended June 30, 2007,
expenses of $723,000 net of subtenant income were recorded against this reserve (See Note 4). In
the six month-period ended June 30, 2007, we re-evaluated the estimate at June 30, 2007 and
adjusted the reserve to approximately $5,145,000 by recording in aggregate, an additional $356,000
as wind-down expenses. Wind-down expenses recorded against the reserve for the same period in 2006
were approximately $582,000 and additional expenses recorded to adjust the reserve were
approximately $331,000. 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.
Other Income
Other income for the six-month period ended June 30, 2007, as compared with the same period in
2006, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
Change from previous year |
| |
|
|
|
|
|
|
|
|
|
$ |
|
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
$ |
550,467 |
|
|
$ |
103,359 |
|
|
$ |
447,108 |
|
|
|
433 |
% |
Realized gain on sale of marketable
securities |
|
|
717,621 |
|
|
|
— |
|
|
|
717,621 |
|
|
|
* |
|
Interest income |
|
|
1,309,137 |
|
|
|
1,043,365 |
|
|
|
265,772 |
|
|
|
25 |
% |
Interest expense |
|
|
(67,372 |
) |
|
|
(77,098 |
) |
|
|
9,726 |
|
|
|
(13 |
)% |
Other |
|
|
(21,024 |
) |
|
|
(13,947 |
) |
|
|
(7,077 |
) |
|
|
51 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
$ |
2,488,829 |
|
|
$ |
1,055,679 |
|
|
$ |
1,433,150 |
|
|
|
136 |
% |
|
|
|
| * Percentage change cannot be calculated |
Income under licenses and settlement agreement for the six months ended June 30, 2007 were for
the value of additional shares received from ReNeuron (See Note 2). As a consequence of the
anti-dilution provisions included in the agreement between StemCells and ReNeuron, StemCells was
entitled to approximately 822,000 shares net of approximately 12,000 shares to be transferred to
Neurospheres. We recorded approximately $550,000 as other income for the fair value of the
additional shares received. For the six months ended June 30 2006, we recorded approximately
$103,000 as other income for approximately 439,000 additional shares received from ReNeuron as a
consequence of the anti-dilution provisions within the agreement and net of shares due to
Neurospheres.
Interest income for the six months ended June 30, 2007 and 2006 was approximately $1,309,000
and $1,043,000, respectively. The increase in interest income in 2007 was primarily attributable
to a higher yield on a higher investment balance.
Interest expense for the six months ended June 30, 2007 and 2006 was approximately $67,000 and
$77,000 respectively. The decrease in interest expense in 2007 was attributable to lower
outstanding debt and capital lease balances in 2007 compared to 2006. Other income (expense)
comprises primarily of state franchise tax paid.
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, revenues from
collaborative agreements, research grants and interest income.
21
We had cash and cash equivalents totaling $49,182,102 at June 30, 2007. Cash equivalents are
invested in US Treasury debt securities with maturities of less than 90 days. The table below
summarizes our cash flows for the respective six-month periods.
Financing arrangements for the six months ended June 30, 2007 include the following:
| |
• |
|
On April 26, 2007, a warrant issued as part of a June 16, 2004 financing arrangement,
was exercised to purchase an aggregate of 575,658 shares of our common stock at $1.90
per share. We issued 575,658 shares of our common stock and received proceeds of
approximately $1,094,000 |
| |
| |
• |
|
In February 2007, we sold 5,275,000 ordinary shares of ReNeuron for net proceeds of
approximately $3,077,000. After the afore mentioned sale, and as at June 30, 2007, we
owned approximately 4,822,000 ordinary shares of ReNeuron with a fair market value of
approximately $2,273,000. |
| |
| |
• |
|
On December 29, 2006, we filed a Prospectus Supplement announcing the entry of a
sales agreement with Cantor under which up to 10,000,000 shares may be sold from time
to time under a shelf registration statement. In January and April 2007, we sold a
total of 1,217,000 of our common shares under this agreement for gross proceeds of
approximately $3,805,000. Cantor is paid compensation equal to 5.0% of the gross
proceeds pursuant to the terms of the agreement. |
Financing arrangements in the previous three years include the following:
| |
• |
|
On April 6, 2006, we sold 11,750,820 shares of our common stock to a limited number
of institutional investors at a price of $3.05 per share, for gross proceeds of
approximately $35,840,000. The shares were offered as a registered direct offering under
an effective 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 $33,422,000. No warrants were issued as part of this financing
transaction. |
| |
| |
• |
|
In March 2006, a warrant issued as part of a June 16, 2004 financing arrangement was
exercised to purchase an aggregate of 526,400 shares of our common stock at $1.89 per
share. We issued 526,400 shares of our common stock and received proceeds of
approximately $995,000. |
| |
| |
• |
|
In 2005, an aggregate of 2,958,348 warrants were exercised. For the exercise of these
warrants, we issued 2,842,625 shares of our common stock and received proceeds of
approximately $5,939,000. |
| |
| |
• |
|
On October 26, 2004, we entered into an agreement with institutional investors with
respect to the registered direct placement of 7,500,000 shares of our common stock at a
purchase price of $3.00 per share, for gross proceeds of $22,500,000. C.E. Unterberg,
Towbin LLC (Unterberg) and Shoreline Pacific, LLC (Shoreline) served as placement agents
for the transaction. We sold these shares under a shelf registration statement
previously filed with and declared effective by the SEC. For acting as our placement
agent Unterberg and Shoreline received fees of approximately $1,350,000 and expense
reimbursement of approximately $40,000. No warrants were issued as part of this
financing transaction. |
| |
| |
• |
|
On June 16, 2004, we entered into a definitive agreement with institutional and other
accredited investors with respect to the private placement of approximately 13,160,000
shares of our common stock at a purchase price of $1.52 per share, for gross proceeds of
approximately $20,000,000. Investors also received warrants exercisable for five years
to purchase approximately 3,290,000 shares of common stock at an exercise price of $1.90
per share. Unterberg served as placement agent for the transaction. For acting as our
placement agent, Unterberg received fees totaling $1,200,192, expense reimbursement of
approximately $25,000 and a five year warrant to purchase 526,400 shares of our common
stock at an exercise price of $1.89 per share. |
22
Future Contractual Cash Obligations
We continue to have outstanding obligations in regard to our former facilities in Lincoln,
Rhode Island, and expect to pay in 2007, based on past experience and current assumptions,
approximately $1,500,000 in lease payments and other operating expenses net of sub-tenant income.
We have subleased a portion of these facilities and are actively seeking to sublease, assign or
sell our remaining interests in these facilities. Failure to do so within a reasonable period of
time will have a material adverse effect on our liquidity and capital resources.
The following table summarizes our future contractual cash obligations (including both Rhode
Island and California leases, but excluding interest income and sub-lease income):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
July to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in |
| |
|
|
|
|
|
December |
|
Payable in |
|
Payable in |
|
Payable in |
|
Payable in |
|
2012 and |
| |
|
Total |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
beyond |
| |
|
|
Capital lease
payments |
|
$ |
1,723,529 |
|
|
$ |
134,435 |
|
|
$ |
244,531 |
|
|
$ |
244,572 |
|
|
$ |
242,560 |
|
|
$ |
242,321 |
|
|
$ |
615,110 |
|
Operating lease
payments |
|
|
13,440,292 |
|
|
|
1,590,956 |
|
|
|
3,469,017 |
|
|
|
3,536,843 |
|
|
|
1,767,304 |
|
|
|
1,171,875 |
|
|
|
1,904,297 |
|
| |
|
|
Total contractual
cash obligations |
|
$ |
15,163,821 |
|
|
$ |
1,725,391 |
|
|
$ |
3,713,548 |
|
|
$ |
3,781,415 |
|
|
$ |
2,009,864 |
|
|
$ |
1,414,196 |
|
|
$ |
2,519,407 |
|
| |
|
|
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 revenues 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 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 collaborative research arrangements. We have a shelf
registration statement which, as of June 30, 2007, covered shares of our common stock up to a value
of approximately $61 million that could be available for financings. On December 29, 2006, we filed
a Prospectus Supplement announcing the entry of a sales agreement with Cantor Fitzgerald & Co.
under which up to 10,000,000 shares may be sold from time to time under the shelf registration
statement. As of June 30, 2007, we sold 1,217,000 of these shares for gross proceeds of
approximately $3,805,000. 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 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.
With the exception of operating leases for facilities, 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.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In July 2005, the Company entered into a license and settlement agreement with
ReNeuron Limited, a wholly owned subsidiary of ReNeuron Group plc, a publicly listed UK corporation
(collectively referred to as “ReNeuron”). As part of the agreement, the Company granted ReNeuron a
license that allows ReNeuron to exploit their “c-mycER” conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. In return for the license, StemCells
received a 7.5% fully-diluted equity interest in ReNeuron, subject to certain anti-dilution
provisions, and a cross-license to the exclusive use of ReNeuron’s 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 StemCells or ReNeuron might have had against the other in connection with any putative
infringement of certain of each party’s patent rights prior to the effective date of the agreement.
The agreement is Exhibit 10.71 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005. An amendment to the agreement was entered on April 3, 2006, a copy of which was
attached as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2006. As of December 31, 2006, the Company held 9,274,837 shares of ReNeuron common stock with
fair value of approximately $7,266,000. In February 2007, the Company sold 5,275,000 ordinary
shares of ReNeuron for net proceeds of approximately $3,077,000. The Company recorded
approximately $718,000 as realized gain for this transaction. In February 2007, ReNeuron issued
additional shares of common stock as a consequence of certain anti-dilution provisions in the
agreement. StemCells was entitled to approximately 822,000 shares net of approximately 12,000
shares to be transferred to Neurospheres. The Company recorded approximately $550,000 as other
income for the fair value of the additional shares received. As of June 30, 2007, the Company owned
approximately 4,822,000 ordinary shares of ReNeuron with a fair market value of approximately
$2,273,000.
Changes in market value as a result of changes in market price per share or the exchange rate
between the US dollar and the British pound are accounted for under “other comprehensive income
(loss)” if deemed temporary and are not recorded as “other income or loss” until the shares are
disposed of and a gain or loss realized. The unrealized gain as of June 30, 2007 is approximately
$4,000. A decline in the fair value of securities that is deemed other than temporary would be
charged to earnings.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
| |
|
|
|
|
|
|
|
|
|
Share price at |
|
Exchange Rate at |
|
Market Value in |
|
Future |
| Company/Stock |
|
|
|
|
|
No. of Shares at |
|
June 30, 2007 in |
|
June 30, 2007 |
|
USD at June 30, |
|
Cash |
| Symbol |
|
Exchange |
|
Associated Risks |
|
June 30, 2007 |
|
GBP (£) |
|
1 GBP = USD |
|
2007 |
|
Flows |
ReNeuron Group
|
|
AIM (AIM is the
|
|
- Lower share price |
|
|
4,821,924 |
|
|
|
0.2350 |
|
|
|
2.0063 |
|
|
$ |
2,273,443 |
|
|
|
(1 |
) |
plc/RENE
|
|
London Stock
|
|
- Foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange’s
|
|
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative
|
|
- Liquidity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Market)
|
|
- Bankruptcy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
It is our intention to liquidate this investment when we can do so at prices
acceptable to us. Although we are not legally restricted from selling the stock, the share
price is subject to change and the volume traded has often been very small since the stock was
listed on the AIM on August 12, 2005. The performance of ReNeuron Group plc stock since its
listing does not predict its future value. |
Other than the above, no significant changes have occurred in our quantitative and qualitative
information about market risks disclosed in our Annual Report on Form 10-K for the fiscal year
ending December 31, 2006.
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
24
procedures are designed to ensure that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s 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 Company’s
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 its activities violate claims in four of our patents.
Neuralstem has filed a motion for dismissal or summary judgment, citing Title 35, Section 271(e)(1)
of the United States Code, which says that it is not an act of patent infringement to make, use or
sell a patented invention “solely for uses reasonably related to the development and submission of
information” to the FDA. Neuralstem argues that because it does not have any therapeutic products
on the market yet, the activities complained of fall within the protection of Section 271(e)(1) —
that is, basically, that the suit is premature. This issue will be decided after discovery is
complete.
In January 2007, Neuralstem petitioned the U.S. Patent and Trademark Office (PTO) to reexamine
two of the patents in our infringement action against Neuralstem. In April 2007, Neuralstem
petitioned the U.S. PTO to reexamine the remaining two patents in the suit. These requests were
granted and, in June 2007, the parties voluntarily agreed to stay the pending litigation while the
U.S. PTO considers these reexaminations.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A,
of our Annual Report on Form 10-K for the fiscal year ending December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Under terms of a license agreement with Cal Tech, annual fees of $5,000 were due on
each of two patents to which StemCells holds a license from Cal Tech, payable in cash or stock at
the Company’s choice. The Company elected to pay the fees in stock and issued 3,865 unregistered
shares to Cal Tech.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2007, we held our Annual Meeting of Stockholders. Dr. John Schwartz and Mr.
Eric Bjerkholt were re-elected to the Board as Class I directors, with terms expiring in 2010. The
remaining members of the Board, whose terms continued after the Annual Meeting, are Ricardo Levy,
Ph.D., Martin McGlynn, Desmond H. O’Connell, Jr., Roger Perlmutter, M.D., Ph.D., and Irving
Weissman, M.D. The shareholders also ratified the selection of Grant Thornton LLP as StemCells’
independent public accountants for the fiscal year ending
December 31, 2007 and approved an amendment to the
Company’s 2006 Equity Incentive Plan to provide for an annual increase in the number of shares of
common stock available for issuance under the Plan on each January 1 (beginning January 1, 2008)
equal to 4% of the outstanding shares on that date.
25
The number of proxies finally tabulated represented 71,303,325 of the 80,044,569 eligible shares,
or 89.08 percent of eligible shares. The votes on each of the proposals were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Authority |
|
|
|
|
| |
|
For |
|
Withheld |
|
Against |
|
Abstain |
Election of John
Schwartz, Ph.D., as
director |
|
|
69,553,303 |
|
|
|
1,750,022 |
|
|
|
— |
|
|
|
— |
|
Election of Eric
Bjerkholt, as
director |
|
|
69,555,049 |
|
|
|
1,748,276 |
|
|
|
— |
|
|
|
— |
|
Ratification of
Grant Thornton LLP
as independent
accountants for 2007 |
|
|
70,210,333 |
|
|
|
— |
|
|
|
709,012 |
|
|
|
383,980 |
|
Amendment of 2006
Equity Incentive
Plan |
|
|
8,406,484 |
|
|
|
— |
|
|
|
3,497,699 |
|
|
|
359,506 |
|
ITEM 5. OTHER INFORMATION
There were no matters required to be disclosed in a current report on Form 8-K during the
fiscal quarter covered by this report that were not so disclosed.
ITEM 6. EXHIBITS
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
26
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)
|
|
| July 27, 2007 |
/s/ Rodney K. B. Young
|
|
| |
Rodney K. B. Young |
|
| |
Chief Financial Officer |
|
| |
27