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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended:
March 31, 2002 Commission File Number: 0-19871
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STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 [X] No [ ]
At April 25, 2001 there were 24,238,808 shares of Common Stock, $.01 par value,
issued and outstanding.
This amendment on Form 10-Q/A amends the Quarterly Report of the Company on
Form 10-Q previously filed for the quarter ended March 31, 2002. This
Quarterly Report on Form 10-Q/A is filed in connection with the Company's
restatement of its consolidated statements of operations for the year ended
December 31, 2001 and its unaudited consolidated statements of operations for
the quarters ended March 31, 2001 and June 30, 2001. The restatement is being
made in order to record additional deemed dividends for the beneficial
conversion feature of the Company's 6% Cumulative Convertible Preferred
Stock. The additional deemed dividends arise as a result of the change to the
effective conversion price resulting from the issuance in 2001 of adjustable
warrants in connection with the common stock financing transaction with
Millennium Partners, LP. Accordingly, in its restated financial statements,
the Company has recorded additional deemed dividends of $331,000 for the
quarter ended March 31, 2001, $471,000 for the quarter ended June 30, 2001
and $802,000 for the year ended December 31, 2001.
STEMCELLS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (Unaudited) ...................................... 3
Condensed Consolidated Balance Sheets March 31, 2002 and
December 31, 2001 ..................................................... 3
Condensed Consolidated Statements of Operations three months ended
March 31, 2002 and 2001 ............................................... 4
Condensed Consolidated Statements of Cash Flows three months ended
March 31, 2002 and 2001 ............................................... 5
Notes to Condensed Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 19
PART II. OTHER INFORMATION ..................................................... 19
Item 1. Legal Proceedings ..................................................... 19
Item 4. Submission of Matters to a Vote of Security-Holders ................... 19
Item 6. Exhibits and Reports on Form 8-K ...................................... 19
SIGNATURES .....................................................................
2
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited) (a)
Assets
Current assets:
Cash and cash equivalents ................................... $ 10,628,723 $ 13,697,195
Accrued interest receivable ................................. 1,362 4,638
Other Receivable ............................................ 75,997 49,590
Other current assets ........................................ 175,229 361,636
------------- -------------
Total current assets ............................................ 10,881,311 14,113,059
Property held for sale ...................................... 3,203,491 3,203,491
1,164,157 1,219,319
Property, plant and equipment, net
Other assets, net ........................................... 2,659,370 2,267,207
------------- -------------
Total assets .................................................... $ 17,908,329 $ 20,803,076
============= =============
Liabilities, redeemable convertible preferred stock and
Stockholders' Equity
Current liabilities:
Accounts payable ............................................ $ 317,931 $ 578,270
Accrued expenses ............................................ 661,982 499,165
Current maturities of capitalized lease obligations ......... 261,667 289,167
------------- -------------
Total current liabilities ....................................... 1,241,580 1,366,602
Capitalized lease obligations, less current maturities .......... 2,259,583 2,315,833
Deposits ........................................................ 187,396 129,897
Deferred rent ................................................... 1,423,412 1,120,005
------------- -------------
Total Liabilities ............................................... 5,111,971 4,932,337
Redeemable Convertible Preferred Stock, $0.01 par value;
1,000,000 shares authorized issuable in series: 3% Cumulative
Convertible Preferred Stock, 5000 shares issued and
4,000 shares outstanding at March 31, 2002 and
December 31, 2001 (aggregate liquidation preference of
$5,000,000) ................................................. 1,699,683 1,379,682
6% Cumulative Convertible Preferred Stock, 2,626 designated
as 6%, 1,500 shares issued and outstanding at March 31, 2002
and December 31, 2001 (aggregate liquidation preference
of $1,500,000) .............................................. 1,283,250 1,283,250
Stockholders' equity:
Common stock, $.01 par value; 45,000,000 shares authorized;
24,238,808 and 24,220,021 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively ....... 242,388 242,200
Additional paid in capital .................................... 147,819,336 149,180,388
Accumulated deficit ........................................... (136,754,808) (133,944,684)
Deferred compensation ......................................... (1,493,491) (2,270,097)
------------- -------------
Total stockholders' equity ............................. 9,813,425 13,207,807
------------- -------------
Total liabilities redeemable convertible preferred
stock and stockholders' equity ..................... $ 17,908,329 $ 20,803,076
============= =============
(a) Derived from the Company's audited financial statements as of
December 31, 2001
See accompanying notes to condensed consolidated financial statements.
3
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Three Months Ended
March 31,
2002 2001
(RESTATED)
------------ -----------
Revenue from grants ................................. $ 111,299 $ 100,000
Operating expenses:
Research and development ............................ 1,536,996 1,644,257
General and administrative .......................... 1,339,373 996,862
------------ -----------
2,876,369 2,641,119
------------ -----------
Loss from operations .................................... (2,765,070) (2,541,119)
Other income (expense):
Investment income .................................. 17,521 79,041
Interest expense ................................... (58,624) -
Gain on sale of investments ........................ - 2,550,230
Other income (expense) ............................. (3,953) 180,389
------------ -----------
Total other income (expense), net ....................... (45,056) 2,809,660
------------ -----------
Net income (loss) ....................................... (2,810,126) 268,541
Deemed dividend to preferred shareholders ............... (320,001) (331,498)
------------ -----------
Net Income (loss) applicable to common shareholders ..... $ (3,130,127) $ (62,957)
============ ===========
Basic earnings per share:
Net income (loss) per share ......................... $(0.13) *
Weighted average shares - ........................... 24,220,952 20,989,127
Diluted earnings per share:
Net income (loss) per share ......................... $(0.13) *
Weighted average shares ............................. 24,220,952 22,405,358
* Less than $(0.01) per share.
See accompanying notes to condensed consolidated financial statements.
4
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited) Three Months Ended
March 31,
2002 2001
------------ -----------
Cash flows from operating activities:
Net income (loss) ....................................................... $(2,810,126) $ 268,541
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ....................................... 96,247 142,554
Amortization of deferred compensation ............................... (288,915) 67,287
Compensation expense relating to the grant of stock options ......... 35,215 60,933
Gain on sale of investments -- (2,550,230)
Net changes in operating assets and liabilities ......................... 11,101 (1,812,084)
----------- -----------
Net cash used in operating activities ................................... (2,956,478) (3,822,999)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments -- 2,550,230
Purchase of property, plant and equipment ........................... (17,688) (114,734)
Acquisition of other assets -- (126,391)
----------- -----------
Net cash (used in) provided by investing activities ..................... (17,688) 2,309,105
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options ......................... 107 26,605
Expenses relating to the issuance of common stock ................... (10,663) --
Principal payments under capitalized lease obligations .............. (83,750) (82,500)
----------- -----------
Net cash (used in) provided by financing activities ..................... (94,306) (55,895)
----------- -----------
Net decrease in cash and cash equivalents ............................... (3,068,472) (1,569,789)
Cash and cash equivalents, beginning of period .......................... 13,697,195 6,068,947
----------- -----------
Cash and cash equivalents, end of period ................................ $10,628,723 $ 4,499,158
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid ....................................................... $ 58,624 $ 64,460
See accompanying notes to condensed financial statements.
5
PART I - ITEM 1. - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2002 and 2001
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 three months ended March
31, 2002 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 2002.
The balance sheet at December 31, 2001 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. For the complete
financial statements, refer to the audited financial statements and footnotes
thereto as of December 31, 2001, included on Form 10-K.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its unaudited consolidated statements of operations
for the quarter ended March 31, 2001. The restatement is being made in order
to record additional deemed dividends for the beneficial conversion feature
of the 6% Cumulative Convertible Preferred Stock which should have been
recorded in connection with the subsequent reduction to the effective
conversion price resulting from the issuance in that quarter of adjustable
warrants to Millennium Partners, LP in connection with a common stock
financing transaction. Accordingly, in its restated financial statements, the
Company has recorded additional deemed dividends of $331,498 for the quarter
ended March 31, 2001.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed using the weighted average of common and
diluted equivalent stock options and warrants outstanding during the period.
Stock options and warrants that are antidilutive are excluded from the
calculation of diluted income per common share. The Company excluded all stock
options and warrants from the calculation of diluted loss per common share for
the three-month period ended March 31, 2002, as these securities are
antidilutive during that period.
6
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income. The only component of other comprehensive income is
unrealized gains and losses on available for sale securities. For the three
months ended March 31, 2002 and 2001, net income (loss) was ($2,810,126) and
$268,541 respectively. For the three months ended March 31, 2002 and 2001, total
comprehensive loss was $2,810,126 and $7,675,143 respectively. For the three
months ended March 31, 2001 other comprehensive loss includes $5,393,454 in
unrealized losses on available for sale securities. There were no unrealized
gains or losses on available for sale securities for the three months ended
March 31, 2002.
7
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. Payments received in
advance of research performed are designated as deferred revenue. The Company
recognizes non-refundable upfront license fees and certain other related fees on
a straight-line basis over the development period. Fees associated with
substantive at risk, performance based milestones are recognized as revenue upon
their completion, as defined in the respective agreements. Incidental assignment
of technology rights are recognized as revenue at the time of receipt.
8
NOTE 2. INVESTMENTS
At December 31, 2000, the Company owned 126,193 shares of Modex
Therapeutics Ltd. ("Modex"), a Swiss biotechnology company traded on the Swiss
Exchange. On January 9, 2001, the Company sold 22,616 Modex shares for a net
price of 182.00 Swiss francs per share, which converts to $112.76 per share, for
total proceeds of $2,550,230. On April 30, 2001, the Company sold its remaining
shares in Modex for a net price of 87.30 Swiss Francs per share, which converts
to approximately $50.51 per share, for total proceeds of approximately
$5,232,168, net of commissions and fees. The Company no longer holds any shares
of Modex.
NOTE 3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT
PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of an encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999 AstraZeneca terminated the collaboration, as allowed under the
terms of the original collaborative agreement signed in 1995.
9
As a result of termination, management determined in July 1999 to
restructure research operations to abandon all further encapsulated cell
technology research and to concentrate resources on the research and development
of its proprietary platform of stem cell technologies. The Company wound down
its research and manufacturing operations in Lincoln, Rhode Island, and
relocated its remaining research and development activities, and its corporate
headquarters, to the facilities of its wholly owned subsidiary, StemCells
California, Inc., in California, in October 1999. As a result, the Company sold
excess furniture and equipment in December 1999 and has subleased a major
portion of the facilities it formerly occupied in Rhode Island; the Company is
actively seeking to sell or assign its interest in these facilities. In December
2000, the Company had a reserve of $1.7 million related to the carrying costs
for the Rhode Island facilities through 2001. In the year 2001 the Company paid
$1.7 million of expenses, which were recorded against the reserve. Even though
the Company intends to dispose of these facilities at the earliest possible
time, it cannot determine with certainty a fixed date by which such disposal
will occur. In light of this uncertainty, for the year 2002 and beyond, the
Company will record further costs as operating expenses as incurred. For the
three months ended March 31, 2002 the Company recorded $298,000 of expenses
related to the Rhode Island facilities as general and administrative expenses.
NOTE 4. LEASES
As of February 1, 2001, the Company entered into a 5-year lease for a
40,000 square foot facility located in the Stanford Research Park in Palo Alto,
CA. The new facility includes space for animals, laboratories, offices, and a
GMP (Good Manufacturing Practices) suite. GMP facilities can be used to
manufacture materials for clinical trials. The rent will average approximately
$3.15 million per year over the term of the lease. In addition the Company has
issued a letter of credit amounting to $275,000 to serve as a deposit for the
duration of the lease. The lease has a rent escalation clause and accordingly,
the Company is recognizing rent expense on a straight-line basis. At March 31,
2002, the Company had $436,310 in deferred rent expense for this facility. In
May 2001, the Company entered into a space-sharing agreement effective February
1, 2001, covering approximately 11,000 square feet of the 40,000 square foot
facility. The Company will receive an average of approximately $800,000 per year
plus a proportionate share of the operating expenses over the term of the lease.
The Company entered into an additional space sharing agreement effective
September 2001 covering approximately 1,973 square feet, from which it will
receive an average of approximately $170,000 plus operating expenses as charged
over the term of the lease.
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 its pilot manufacturing
facility. 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. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants that 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 scientific and
administrative facility ("SAF") in connection with a sale and leaseback
arrangement in 1997. The lease has a rent escalation clause and accordingly, the
Company is recognizing rent expense on a straight-line basis. At March 31, 2002,
the Company had $987,102 in deferred rent expense for this facility.
The Company continues to lease the facilities in Lincoln, Rhode Island
obtained in connection with its former encapsulated cell technology, but have
now succeeded in subleasing the majority of those facilities: the 21,000
square-foot pilot manufacturing facility, the 3,000 square-foot cell processing
facility and a major portion of the approximately 65,000 square foot SAF. As
part of the subleasing agreement, the Company has issued two letters of credit:
one for $106,560 with an expiration date of March 31, 2003, and the other for
$159,000 which will automatically decrease to $106,053 in March 31, 2005 and
$52,947 in March 2006, with a final expiration date of March 31, 2007. The
Company continues to seek to sublet the remainder of the SAF and to assign or
sell its interests in these properties. There can be no assurance however, that
the Company will be able to dispose of these properties in a reasonable time, if
at all.
10
NOTE 5. GRANTS
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the National Institutes of Health's Small Business Innovation
Research (SBIR) office. The grant, which supports joint work with virologist Dr.
Jeffrey Glenn at Stanford University, is aimed at characterizing the human cells
that can be infected by human hepatitis viruses and developing a small animal
model using the cells that are most infectable by these viruses to develop
screening assays and identify novel drug for the disease. In the year 2001, the
Company received $300,000, of which $150,367 represents the Company's share of
the joint effort and has been recognized as revenue. The remainder, $149,633,
was paid to Stanford University as its share of the joint effort. On March 26,
2002 the Company received $204,682 as part payment for the second year, of which
$55,049 was recognized as revenue and the balance of $149,633 was paid to
Stanford University as its share of the joint effort.
On September 30 2001, the Company was awarded a four-year, $225,000 per
year, grant from the National Institute of Diabetes & Digestive & Kidney
Disorders of the National Institutes of Health for the Company's liver stem cell
program which focuses on identifying liver stem and progenitor cells for the
treatment of liver diseases. The grant is subject to the availability of funds
and satisfactory progress of the project. In 2001, the Company received and
recognized as revenue $56,250 related to this award. For the three months ended
March 31, 2002, the Company received and recognized as revenue $56,250.
11
NOTE 6. STOCKHOLDERS' EQUITY
3% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On December 4, 2001, the Company issued 5,000 shares of 3% cumulative
convertible preferred stock to Riverview Group, L.L.C., (Riverview Group), a
wholly owned subsidiary of Millennium Partners, L.P. plus a 5-year warrant to
purchase 350,877 shares of common stock at $3.42 per share. The Company received
net proceeds of $4,727,515. This preferred stock is convertible into shares of
the Company's common stock at a conversion price of $2.00 per share at the
option of Riverview Group. The conversion price is subject to adjustment for
stock splits, dividends, distributions, reclassifications and similar events.
The conversion price may be below the trading market price at the time of the
conversion. The final closing on the NASDAQ National Market of the Company's
common stock on December 4, 2001 was $2.90 per share. The preferred stock
contains a mandatory redemption feature where the Company will redeem
unconverted preferred stock on December 4, 2003. The Company has valued the
warrants and the beneficial conversion feature reflecting the December 4, 2001
commitment date and the most beneficial per share discount available to the
preferred shareholders. As the preferred shares contain a stated redemption,
such value of $3,185,000, including issuance costs of $272,485, is recorded as a
discount to the preferred shares. The preferred shares will be accreted to its
mandatory redemption amount and the accretion will result in a deemed dividend.
The deemed dividend has been reflected as an adjustment to net loss applicable
to common stockholders. An accretion adjustment of $320,001 was recorded for the
three months ended March 31, 2002. The Company filed a registration statement on
Form S-3 covering the shares of common stock underlying the 3% Cumulative
Convertible Preferred Stock, and the SEC declared it effective on January 10,
2002. On December 7, 2001, Riverview Group converted 1,000 shares of its 3%
cumulative convertible preferred stock for 500,125 shares of the Company's
common stock. The holders of the preferred stock have liquidation rights equal
to their original investment plus accrued but unpaid dividends.
12
NOTE 7. SUBSEQUENT EVENTS
On April 12, 2002, the holders of the 1,500 shares of 6% cumulative
convertible preferred stock issued by the Company on April 13, 2000 elected to
extend the Mandatory Conversion Date for such shares to October 2, 2002. The
Mandatory Conversion Date was originally April 13, 2002 but, by virtue of a
delay in effective registration of the underlying common shares, the
shareholders had the right to extend the date. As of April 13, 2002, the
conversion price of the 6% cumulative convertible preferred stock was $1.94 per
share.
13
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the our financial condition and the results of
our operations for the three months ended March 31, 2002 and 2001 should be read
in conjunction with the accompanying unaudited condensed consolidated financial
statements and the related footnotes thereto.
This report includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "possibly," "expect,"
"anticipate," "project," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition, or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there will be events in the future that
we have not been able to accurately predict or control and that may cause our
actual results to differ materially from those discussed. For example,
contaminations at our facilities, changes in the pharmaceutical or biotechnology
industries, competition and changes in government regulations or general
economic or market conditions could all have significant effects on our results.
These factors should be considered carefully and readers should not place undue
reliance on our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Cautionary Factors Relevant to Forward Looking Information" and "Business"
sections included in our Form 10-K report as of December 31, 2001 could harm our
business, operating results and financial condition. All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements and risk factors
contained or referred to herein.
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology.
We have not derived any revenues from the sale of any products, 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 and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses 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.
In 2001, we entered into two significant financing agreements: In May, we
entered into an equity line enabling us to draw up to $30,000,000 subject to
various restrictions, and we did draw down $4,000,000 in July; and in December,
we issued 3% convertible preferred stock for $5,000,000. In addition, under the
terms of the financing agreement we entered into in 2000 with Millennium
Partners, LP, Millennium exercised its final option to purchase $2,000,000 of
our common stock; that agreement has now terminated. (See "Liquidity and Capital
Resources" below for further detail on each of these transactions.)
In addition, we received two grants from the National Institutes of Health,
one for work on hepatitis to be carried out jointly by us and Stanford
University, and one focusing on the effort to identify liver stem and progenitor
cells for the treatment of liver diseases. Although the grants are relatively
small ($300,000 a year for two years and $225,000 a year for four years,
respectively), and dependent on availability of funds and satisfactory progress,
we are very pleased by this recognition of our work by the agency.
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
14
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 move to a larger facility in California. To expand and
provide high quality systems and support to our Research and Development
programs, we will need to hire more personnel, which will lead to higher
operating expenses.
We believe the following critical accounting policies affect the 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, that requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could differ from these
estimates.
STOCK-BASED COMPENSATION
Our employee stock option plan is accounted for under Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." We
grant qualified stock options for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant. In accordance with APB 25, we recognize no compensation expense for
qualified stock option grants. We also issue non-qualified stock options for a
fixed number of shares to employees with an exercise price less than the fair
market value of the shares at the date of grant. When such options vest, we
recognize the difference between the exercise price and fair market value as
compensation expense in accordance with APB 25.
We account for certain stock options granted to non-employees in accordance
with FAS NO. 123--ACCOUNTING FOR STOCK-BASED COMPENSATION and 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, recognize as expense the estimated fair value of such options as
calculated using the Black-Scholes valuation model. The estimated fair value is
re-determined each quarter using the methodologies allowable by FAS No. 123, and
the cost is amortized over the vesting period of each option or the recipient's
contractual arrangement, if shorter.
LONG-LIVED ASSETS
We routinely evaluate the carrying value of our long-lived assets. We
record impairment losses on long-lived assets used in operations when events and
circumstances indicate that assets may be impaired and the undiscounted cash
flows estimated to be generated by the assets are less than the carrying amount
of those assets. If an impairment exists, the charge to operations is measured
as the excess of the carrying amount over the fair value of the assets.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
For the three months ended March 31, 2002 revenue from grants totaled
approximately $111,000, compared to $100,000 for the three months ended March
31, 2001.
Research and development expenses totaled $1,537,000 for the three months
ended March 31, 2002, compared with $1,644,000 for the same period in 2001. The
decrease of $107,000 or 7% from 2001 to 2002 was primarily attributable to the
effect of the lower valuation of non-qualified stock options on compensation
cost, offset
15
by costs related to an increase in personnel to facilitate the expansion of our
research programs and initiate development. At March 31, 2002 we had 28 full
time employees for research and development and laboratory support services,
compared with 21 full time employees at March 31, 2001
General and administrative expenses were $1,339,000 for the three months
ended March 31, 2002, compared with $997,000 for the same period in 2001. The
increase of $342,000 or 26%, from 2001 to 2002 was primarily attributable to the
inclusion of $298,000 in expenses of our Rhode Island facilities in general and
administrative expenses. For the same period in year 2001, $400,000 in expenses
was booked against a wind-down reserve. At December 31, 2000,we had created this
wind-down reserve of $1,780,000 related to the carrying costs for the Rhode
Island facilities through 2001. As we cannot predict the exact disposal date of
these properties, effective 2002 we record these expenses as normal general and
administrative expenses.
On January 9, 2001, we sold 22,616 Modex shares for a net price of 182.00
Swiss Francs per share, which converted to $112.76 per share, for total proceeds
and a realized gain of $2,550,230 for the three months ended March 31, 2001. On
April 30, 2001, the Company sold its remaining shares, and the Company no longer
holds any shares of Modex.
Interest income for the three months ended March 31, 2002 and 2001 was
$18,000 and $79,000 respectively. Interest expense was $59,000 for the three
months ended March 31, 2002. For the three months ended March 31, 2001, interest
expense was $65,000 and was charged against the wind-down reserve, as the
expense was part of the bond payments related to the Rhode Island facilities.
The decrease in 2002 was attributable to lower outstanding debt and capital
lease balances in 2002 compared to 2001.
For the three months ended March 31, 2002, we recorded a deemed dividend
of $320,001 related to the 3% Cumulative Convertible Preferred Stock which
includes the accretion of common stock warrants, the accretion of the
beneficial conversion feature and the accretion of related issuance costs.
For the three months ended March 31, 2001, as restated, we recorded a deemed
dividend of $331,498 related to the 6% Cumulative Convertible Preferred Stock
to reflect the increase in the beneficial conversion feature resulting from
the decrease in the effective conversion price. The aggregate accretion value
associated with the warrants, beneficial conversion feature and issuance
costs were included in the calculation of net loss applicable to common
stockholders.
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.
We had unrestricted cash and cash equivalents totaling $10,629,000 at March
31, 2002. Cash equivalents are invested in US Treasuries and money market funds
with maturities of less than 90 days.
16
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 of our common stock. This facility, sometimes termed an equity line,
is subject to restrictions and other obligations which limit how often we can
exercise a draw down and the amount of each draw down. We, at our sole
discretion, may initiate a draw down on this facility from time to time, and
Sativum is obligated to purchase shares of our common stock at a 6% discount to
a volume weighted average market price over the 20 trading days following the
draw-down notice, except those trading days, if any, when the market price is
less than the amount we have specified in the draw-down notice as the minimum
price at which we are willing to sell. We delivered a draw down notice to
Sativum Investments Limited, dated as of July 11, 2001, exercising our right to
draw down up to $5,000,000 at a market-based share price not less than $5.00 per
share beginning July 12, 2001. Sativum purchased a total of 707,947 shares of
our common stock at an average purchase price of $5.65 per share, net of
Sativum's discount of six percent. Because the market based price of our common
stock was less than $5.00 for 4 trading days during the draw down period,
pursuant to the terms of our with Sativum agreement, our $5,000,000 request was
reduced to $4,000,000. Our placement agents, Pacific Crest Securities, Inc. and
Granite Financial Group, Inc., received $80,000 and $40,000, respectively, as
placement fees in connection with this draw down, resulting in net proceeds to
us of $3,603,407, after paying escrow fees and other associated costs. In
connection with our execution of the common stock purchase agreement with
Sativum, we issued three three-year warrants to purchase an aggregate of 350,000
shares of our common stock at $2.38 per share to Sativum (250,000 shares),
Pacific Crest Securities Inc. (75,000 shares) and Granite Financial Group, Inc.
(25,000 shares). Our placement agents have exercised their warrants in full and
we have received payment of $238,050 for the shares issued to them.
On December 4, 2001, we issued 5,000 shares of 3% Cumulative Convertible
Preferred Stock to Riverview Group, L.L.C., a wholly owned subsidiary of
Millennium Partners. This preferred stock is convertible into shares of our
common stock at a conversion price of $2.00 per share of common stock; there is
a mandatory redemption provision in the preferred stock under which any
preferred stock remaining on December 4, 2003, is redeemed on that date. The
conversion price may be below the trading market price of the stock at the time
of conversion. In connection with the preferred stock agreement, we issued to
Riverview Group a warrant to purchase 350,877 shares of our common stock at a
price of $3.42 per share. The warrant expires on December 4, 2005. We paid
Cantor Fitzgerald & Co., our financial advisor in connection with the
transaction, a fee of $200,000 and issued them a warrant for 146,199 shares
exercisable at $3.42 per share. We received total proceeds of $4,727,515 net of
the fee to Cantor Fitzgerald and other associated costs.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,000,000 for 2002, net of subtenant 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. Our total operating lease commitments for the
years 2002 to 2013 are $25,141,000, and our total capital lease commitments for
the years 2002 to 2014 amounts to $4,107,000.
We have limited liquidity and capital resources and must obtain significant
additional capital resources in the future 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 and for general
and administrative expenses. Our ability to obtain additional capital will be
substantially dependent on our ability to obtain partnering support for our stem
cell technology and, in the near term, on our ability to realize
17
proceeds from the sale, assignment or sublease of our facilities in Rhode
Island. Failure to do so will have a material effect on our liquidity and
capital resources. Until our operations generate significant revenues from
product sales, we must rely on cash reserves 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. 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. While our cash requirements may vary, we currently
expect that our existing capital resources will be sufficient to fund our
operations through December of 2002. Lack of necessary funds may require us to
delay, scale back or eliminate some or all of our research and product
development programs and/or our capital expenditures or to license our potential
products or technologies to third parties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No significant changes in our quantitative and qualitative disclosures from
the Form 10-K
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
None
PART II - ITEM 4
None
PART II - ITEM 5
OTHER INFORMATION
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
None
19
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)
August 2, 2002 /s/ George Koshy
----------------------------
Controller and Acting Chief
Financial Officer (Duly
authorized officer, principal
financial officer and principal
accounting officer)
Certification
To the extent required by the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies, to their knowledge, that (i) this report fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and (ii) the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of the registrant.
/s/ Martin McGlynn
---------------------------------------------
Martin McGlynn
President and Chief Executive Officer
/s/ George Koshy
---------------------------------------------
George Koshy
Controller and Acting Chief Financial Officer
August 2, 2002