| Summary of Significant Accounting Policies | Note 1. Summary of Significant Accounting Policies
Nature of Business.
StemCells, Inc., a Delaware corporation, is a biopharmaceutical
company that operates in one segment, the research, development,
and commercialization of stem cell therapeutics and related
technologies.
The accompanying financial data as of March 31, 2016 and for
the three months ended March 31, 2016 and 2015 have been
prepared by us, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States (U.S. GAAP) have
been condensed or omitted pursuant to these rules and regulations.
The December 31, 2015 condensed consolidated balance sheet was
derived from audited financial statements, but does not include all
disclosures required by U.S. GAAP. However, we believe that the
disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the notes thereto included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2015.
We have incurred significant operating losses since inception. We
expect to incur additional operating losses over the foreseeable
future. We have very limited liquidity and capital resources and
must obtain significant additional capital and other resources in
order to provide funding for our product development efforts, the
acquisition of technologies, businesses and intellectual property
rights, preclinical and clinical testing of our products, pursuit
of regulatory approvals, acquisition of capital equipment,
laboratory and office facilities, establishment of production
capabilities, general and administrative expenses and other working
capital requirements. We rely on our cash reserves, proceeds from
equity and debt offerings, credit facilities, proceeds from the
transfer or sale of intellectual property rights, equipment,
facilities or investments, government grants and funding from
collaborative arrangements, to fund our operations. If we exhaust
our cash reserves and are unable to obtain adequate financing, we
may be unable to meet our operating obligations and we may be
required to initiate bankruptcy proceedings. The financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Reverse Stock Split
We effected a one-for-twelve reverse stock split on May 6,
2016. As a result of the reverse stock split, each twelve shares of
the Company’s common stock automatically combined into and
became one share of Company common stock. Any fractional shares
which would otherwise be due as a result of the reverse split were
rounded up to the nearest whole share. Concurrent with the reverse
stock split, we reduced the authorized number of common shares from
225 million to 200 million. The reverse stock split will
automatically and proportionately adjust, based on the
one-for-twelve split ratio, all issued and outstanding shares of
our common stock, as well as common stock underlying stock options,
warrants and other derivative securities outstanding at the time of
the effectiveness of the reverse stock split. The exercise price on
outstanding equity based-grants will proportionately increase,
while the number of shares available under our equity-based plans
will also be proportionately reduced. Share and per share data
(except par value) for the periods presented reflect the effects of
this reverse stock split. References to numbers of shares of common
stock and per share data in the accompanying financial statements
and notes thereto have been adjusted to reflect the reverse stock
split on a retroactive basis.
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of StemCells, Inc., and our wholly-owned subsidiaries,
including StemCells California, Inc., Stem Cell Sciences Holdings
Ltd, and Stem Cell Sciences (UK) Ltd (SCS). All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make judgments, assumptions and
estimates that affect the amounts reported in our condensed
consolidated financial statements and accompanying notes. Actual
results could differ materially from these estimates.
Significant estimates include the following:
• the grant date fair value of
stock-based awards recognized as compensation expense (see Note 6,
“Stock-Based Compensation”);
• the fair value of warrants recorded
as a liability (see Note 9, “Warrant Liability”).
Financial Instruments
Cash and Cash Equivalents
Cash equivalents are money market accounts, money market funds and
investments with maturities of 90 days or less from the date of
purchase.
Receivables
Our receivables generally consist of interest income on our
financial instruments and royalties due from licensing
agreements.
Warrant Liability
We account for our warrants in accordance with U.S. GAAP which
defines how freestanding contracts that are indexed to and
potentially settled in a company’s own stock should be
measured and classified. Authoritative accounting guidance
prescribes that only warrants issued by us under contracts that
cannot be net-cash settled, and are both indexed to and settled in
our common stock, can be classified as equity.
As part of our December 2011 financing, we issued Series A Warrants
with a five year term to purchase 666,667 shares at $16.80 per
share and Series B Warrants with a ninety trading day term to
purchase 666,667 units at $15.00 per unit. Each unit underlying the
Series B Warrants consisted of one share of our common stock and
one Series A Warrant. In the first and second quarter of 2012, an
aggregate of 225,000 Series B Warrants were exercised. For the
exercise of these warrants, we issued 225,000 shares of our common
stock and 225,000 Series A Warrants. The remaining 441,667 Series B
Warrants expired unexercised by their terms on May 2, 2012.
The Series A Warrants contain full ratchet anti-dilution price
protection so that, in most situations, upon the issuance of any
common stock or securities convertible into common stock at a price
below the then-existing exercise price of the Series A Warrants,
the Series A exercise price will be reset to the lower common stock
sales price. As a result of our April 2015 financing, the exercise
price of the outstanding Series A warrants were reduced from $16.80
per share to $8.40 per share. Subsequently, as a result of our sale
of shares of our common stock under a sales agreement entered into
in 2009 and amended in 2012, the exercise price of the outstanding
Series A warrants was reduced from $8.40 per share to $6.24 per
share and as a result of our March 2016 financing, the exercise
price of these warrants was reduced to approximately $3.60 per
share. As terms of the Series A Warrants do not meet the specific
conditions for equity classification, we are required to classify
the fair value of these warrants as a liability, with subsequent
changes in fair value to be recorded as income (loss) due to change
in fair value of warrant liability. The fair value of the Series A
Warrants is determined using a Monte Carlo simulation model (see
Note 9, “Warrant Liability”). The fair value is
affected by changes in inputs to these models including our stock
price, expected stock price volatility, the contractual term, and
the risk-free interest rate. The use of a Monte Carlo simulation
model requires input of additional assumptions including the
progress of our research and development (R&D) programs and its
effect on potential future financings. We will continue to classify
the fair value of the warrants as a liability until the warrants
are exercised, expire or are amended in a way that would no longer
require these warrants to be classified as a liability. The
estimated fair value of our 2011 Series A warrant liability at
March 31, 2016, was approximately $512,000.
In March 2016, we raised gross proceeds of approximately $8,000,000
through an underwritten public offering of 2,222,250 units, at a
price of $3.60 per unit, before deducting underwriting discounts
and other offering expenses. Each unit consists of a fixed
combination of one share of our common stock, a Series A Warrant to
purchase 0.50 of a share of our common stock, and a Series B
Warrant to purchase 0.75 of a share of our common stock. Each
Series A Warrant has an exercise price of $3.60 per share, is
immediately exercisable, and will expire two years from the date of
issuance. Each Series B Warrant has an exercise price of $5.04 per
share, will become exercisable upon stockholder approval of an
increase in our authorized capital and the one-year anniversary of
the issuance date, whichever is later, and will expire on the fifth
anniversary of the date they become exercisable. In connection with
the offering, we granted the underwriters a 45-day option to
purchase up to an additional 333,338 shares of our common stock
and/or warrants to purchase up to an additional 416,672 shares of
our common stock to cover over-allotments, if any. The option was
exercised in part and we issued an additional 166,473 of Series A
warrants and 249,709 of Series B Warrants. The Series A and Series
B Warrants contain full ratchet anti-dilution price protection for
two years so that, in most situations, upon the issuance of any
common stock or securities convertible into common stock at a price
below the then-existing exercise price of the respective warrants,
the exercise price of these warrants will be reset to the lower
common stock sales price. The initial shares and warrants were
offered under our effective shelf registration statement previously
filed with the SEC. We intend to file a subsequent registration
statement to register the common shares issuable when the Series B
Warrants become exercisable. As terms of the Series A and Series B
Warrants do not meet the specific conditions for equity
classification, we are required to classify the fair value of these
warrants as a liability, with subsequent changes in fair value to
be recorded as income (loss) due to change in fair value of warrant
liability. The fair value of the Series A and Series B Warrants is
determined using a Monte Carlo simulation model (see Note 9,
“Warrant Liability”). The fair value is affected by
changes in inputs to these models including our stock price,
expected stock price volatility, the contractual term, and the
risk-free interest rate. The use of a Monte Carlo simulation model
requires input of additional assumptions including the progress of
our R&D programs and its effect on potential future financings.
We will continue to classify the fair value of the warrants as a
liability until the warrants are exercised, expire or are amended
in a way that would no longer require these warrants to be
classified as a liability. The estimated fair value of our warrant
liability for the 2016 Series A and 2016 Series B warrants at
March 31, 2016, was approximately $1,761,000 and $3,887,000
respectively.
Intangible Assets (Patent and License Costs)
Other intangible assets, net were approximately $42,000 at
March 31, 2016. Intangible assets with finite useful lives are
amortized generally on a straight-line basis over the periods
benefited. Intangible assets deemed to have indefinite lives are
not amortized but are subject to annual impairment tests.
Intangible assets are also reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Prior to fiscal year 2001, we
capitalized certain patent costs, which are being amortized over
the estimated life of the patent and would be expensed at the time
such patents are deemed to have no continuing value. Since 2001,
all patent costs are expensed as incurred. License costs are
capitalized and amortized over the estimated life of the license
agreement.
Revenue Recognition
We currently recognize revenue resulting from the licensing and use
of our technology and intellectual property. Licensing agreements
may contain multiple elements, such as upfront fees, payments
related to the achievement of particular milestones and royalties.
Revenue from upfront fees for licensing agreements that contain
multiple elements are generally deferred and recognized on a
straight-line basis over the term of the agreement. Fees associated
with substantive at risk performance-based milestones are
recognized as revenue upon completion of the scientific or
regulatory event specified in the agreement, and royalties received
are recognized as earned. Revenue from licensing agreements is
recognized net of a fixed percentage due to licensors as
royalties.
Stock-Based Compensation
U.S. GAAP requires us to recognize expense related to the fair
value of our stock-based payment awards, including employee stock
options and restricted stock units. Under the provisions of U.S.
GAAP, the fair value of our employee stock-based payment awards is
estimated at the date of grant using the Black-Scholes-Merton
(Black-Scholes) option-pricing model and is recognized as expense
ratably over the requisite service period. The requisite service
period is the period over which the awards vest. Stock-based awards
may vest over a period of time from the date of grant or upon the
attainment of certain established performance milestones. For
awards with performance milestones, the expense is recorded over
the service period when the achievement of the milestone is
probable. The Black-Scholes option-pricing model requires the use
of certain assumptions, the most significant of which are our
estimates of the expected volatility of the market price of our
stock and the expected term of the award. Our estimate of the
expected volatility is based on historical volatility. The expected
term represents our estimated period during which our stock-based
awards remain outstanding. We estimate the expected term based on
historical experience of similar awards, giving consideration to
the contractual terms of the awards, vesting requirements, and
expectation of future employee behavior, including post-vesting
terminations. See Note 6, “Stock-Based Compensation”
for further information.
Per Share Data
Basic net income or loss per share is computed by dividing net
income or loss by the weighted average number of shares of common
stock outstanding during the period. Diluted net income or loss per
share is computed based on the weighted average number of shares of
common stock and other dilutive securities. To the extent these
securities are anti-dilutive, they are excluded from the
calculation of diluted earnings per share.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net loss per share
computations:
2016 2015
Net loss $ (9,561,405 ) $ (9,350,701 )
Weighted average shares outstanding used to compute basic and
diluted net income or loss per share 9,805,478 5,768,331
Basic and diluted net loss per share $ (0.98 ) $ (1.62 )
The following outstanding potentially dilutive securities were
excluded from the computation of diluted net income or loss per
share because the effect would have been anti-dilutive as of
March 31:
2016 2015
Options 155,831 23,020
Restricted stock units 810,946 832,044
Warrants 6,883,814 1,956,516
Total 7,850,591 2,811,580
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income or loss and
other comprehensive income or loss (OCL). OCL includes certain
changes in stockholders’ equity that are excluded from net
income or loss. Specifically, when applicable, we include in OCL
changes in unrealized gains and losses on foreign currency
translations. Accumulated other comprehensive income was $46,913 as
of March 31, 2016, and accumulated other comprehensive income
was $47,359, as of December 31, 2015.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-12, “Accounting for
Share-Based Payments When the Terms of an Award Provide That a
Performance Target Could Be Achieved after the Requisite Service
Period”
In August 2014, the FASB issued ASU 2014-15, “Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern
In January 2016, the FASB issued ASU 2016-01, “Recognition and
Measurement of Financial Assets and Financial
Liabilities,”
In February 2016, the FASB issued ASU 2016-02, “Leases”. “Leases” “Leases” |
