| 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 September 30, 2016 and
for the three and nine months ended September 30, 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.
Wind-down of operations
In May 2016, we decided to terminate our Phase II Pathway Study in
spinal cord injury following an in-depth review of data from the
study and after obtaining the concurrence of the study’s
Interim Analysis Data Monitoring Committee. While the results
showed overall improvement in patients treated with our proprietary
cells, the magnitude of the effect and the perceived trend of the
effect over time did not justify continuing the study or exploring
the variability in the initial patient observations, given the
financial resources available to us. Following this, in May 2016,
our Board of Directors approved a plan to wind down our current
operations, having considered the decision to terminate the Pathway
Study, our available strategic alternatives and our current cash
position. We are evaluating opportunities to monetize our
intellectual property, including data collected in its studies and
trade secrets, as well as the transfer of our proprietary HuCNS-SC
cells and other assets through a potential sale. We will not
proceed with our earlier plans to conduct a rights offering, for
which we had filed a registration statement with the SEC. As part
of the wind down of our operations, we conducted a reduction of our
work force impacting all of our remaining full-time employees,
consisting of approximately 50 employees and exited our facilities,
as of August 1, 2016. Effective May 31, 2016, we recorded
all expenses committed to the wind-down of our operations as
wind-down expense. We recorded in aggregate, approximately
$3,806,000 in wind-down expenses for the nine-month period ended
September 30, 2016 (see Note 10, “Accrued Wind-down
Expenses”).
We have incurred significant operating losses since inception and
have an accumulated deficit of approximately $468,000,000 through
September 30, 2016. As of September 30, 2016, we had cash
and cash equivalents of approximately $2,079,000. We expect to
incur additional operating losses over the foreseeable future. As
of the date of this report, we have four employees and insufficient
funds to cover future company operations. We have very limited
liquidity and capital resources and must obtain additional capital
and other resources through additional financing or business
transactions with potential to provide funds required to restart
and continue operations. There are no assurances that these
transactions will be realized in whole or in part. These issues,
raise substantial doubt about the ability of the Company to
continue as a going concern. 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
our common stock automatically combined into and became one share
of our 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 automatically and
proportionately adjusted, 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 was proportionately increased, while the number
of shares available under our equity-based plans was also
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.
Proposed Merger with Microbot Medical Ltd.
On August 15, 2016, StemCells entered into an Agreement and
Plan of Merger and Reorganization (the “Merger
Agreement”) with CIRD Israel Ltd., an Israeli corporation and
wholly-owned subsidiary of StemCells (“Merger Sub”) and
Microbot Medical Ltd., a private medical device company organized
under the laws of the State of Israel (“Microbot”).
Pursuant to the terms and subject to the conditions set forth in
the Merger Agreement, Merger Sub will be merged with and into
Microbot, Merger Sub will cease to exist and Microbot will survive
as a wholly-owned subsidiary of StemCells (the “Merger”
or the “Microbot Merger”). The respective boards of
directors of StemCells and Microbot have approved the Merger
Agreement and the transactions contemplated thereby.
At the effective time of the Microbot Merger (the “Effective
Time”), each outstanding share of Microbot capital stock will
be converted into the right to receive that number of shares of
StemCells common stock as determined pursuant to the exchange ratio
described in the Merger Agreement (the “Exchange
Ratio”). In addition, at the Effective Time: (i) all
outstanding options to purchase shares of Microbot stock will be
assumed by StemCells and converted into options to purchase shares
of StemCells common stock, in each case appropriately adjusted
based on the Exchange Ratio; and (ii) all outstanding warrants
to purchase shares of the capital stock of Microbot will be assumed
by StemCells and converted into warrants to purchase shares of
StemCells common stock, in each case appropriately adjusted based
on the Exchange Ratio. No fractional shares of StemCells common
stock will be issued in the Microbot Merger. The Merger Agreement
has been filed with the SEC as an exhibit to the Company’s
Form 8-K dated August 15, 2016. Following the consummation of
the Microbot Merger, former stockholders of Microbot are expected
to own approximately 95% of the combined company and current
stockholders of StemCells are expected to own approximately 5% of
the combined company, in each case based on the fully diluted
shares of each company prior to the consummation of the Microbot
Merger.
In connection with the Microbot Merger, StemCells will seek to
amend its certificate of incorporation to: (a) effect a
reverse stock split of StemCells’ common stock if necessary
to comply with the listing requirements of the NASDAQ Capital
Market; (b) increase the number of authorized shares of
StemCells common stock; and (c) change the name of StemCells
to “Microbot Medical Inc.” or another name designated
by Microbot.
The Merger Agreement provides that, immediately following the
Effective Time, the board of directors of StemCells will be
designated by Microbot.
The completion of the Microbot Merger is subject to various
customary conditions, including, among other things: (a) the
approval of the respective stockholders of StemCells and Microbot;
(b) subject to certain materiality exceptions, the accuracy of
the representations and warranties made by each of StemCells and
Microbot and the compliance by each of StemCells and Microbot with
their respective obligations under the Merger Agreement;
(c) approval for the listing of shares of StemCells common
stock to be issued in the Microbot Merger on the NASDAQ Capital
Market; (d) approval of the transactions contemplated by the
Merger Agreement by the Office of Chief Scientist at the Israeli
Ministry of Economy; and (e) that StemCells’s cash
position, net of debt and certain other liabilities, is not less
than $0, excluding any balance under the Note (as defined
below).
The Merger Agreement contains customary representations, warranties
and covenants, including covenants obligating each of StemCells and
Microbot to continue to conduct its respective business in the
ordinary course, to provide reasonable access to each other’s
information and to use reasonable best efforts to cooperate and
coordinate to make any filings or submissions that are required to
be made under any applicable laws or requested to be made by any
government authority in connection with the Merger. The Merger
Agreement also contains a customary “no solicitation”
provision pursuant to which, prior to the completion of the
Microbot Merger, neither StemCells nor Microbot may solicit or
engage in discussions with any third party regarding another
acquisition proposal unless it has received an unsolicited, bona
fide written proposal that the recipient’s board of directors
determines is or would reasonably be expected to result in a
Superior Proposal (as defined in the Merger Agreement).
The Merger Agreement contains certain termination rights in favor
of each of StemCells and Microbot.
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 7,
“Stock-Based Compensation”);
• expenses accrued to wind-down current
operations (see Note 10, “Accrued Wind-down Expenses”);
and
• the fair value of warrants recorded
as a liability (see Note 11, “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 part of our obligations under the Merger Agreement with
Microbot, in August 2016, we negotiated with certain institutional
holders of our 2016 Series A and Series B Warrants to have such
holders surrender their 2016 Series B Warrants in exchange for a
reduced exercise price of $0.30 per share on their existing 2016
Series A Warrants and the elimination of the anti-dilution price
protection in the 2016 Series A Warrants. As a result of the
exchange, the exercise price for all outstanding 2011 Series A
Warrants and 2016 Series A and Series B Warrants was reset to $0.30
per share. Subsequent to the reset of the exercise price, an
aggregate of 531,814 (from an outstanding aggregate of 578,081)
2011 Series A Warrants were exercised. For the exercise of these
warrants, we issued 531,814 shares of our common stock. 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 Black-Scholes model (see Note 11, “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.
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 September 30, 2016, was
approximately $55,000.
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 consisted 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 had an exercise price of $3.60 per share, was
immediately exercisable, and will expire two years from the date of
issuance. Each Series B Warrant had 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. As part of our obligations under the
Merger Agreement with Microbot, in August 2016, we negotiated with
certain institutional holders of our 2016 Series A and Series B
Warrants to have such holders surrender their 2016 Series B
Warrants in exchange for a reduced exercise price of $0.30 per
share on their existing 2016 Series A Warrants and the elimination
of the anti-dilution price protection in the 2016 Series A
Warrants. As a result of the exchange, the exercise price for all
outstanding 2011 Series A Warrants and 2016 Series A and
Series B Warrants was reset to $0.30 per share. Subsequent to the
reset of the exercise price, an aggregate of 1,187,190 (from an
outstanding aggregate of 1,277,609) 2016 Series A Warrants were
exercised and an aggregate of 1,546,360 (from an outstanding
aggregate of 1,916,407) 2016 Series B Warrants were surrendered.
For the exercise of these warrants, we issued 1,187,190 shares of
our common stock. 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 Black-Scholes model (see Note 11, “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.
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
September 30, 2016, was approximately $115,000 and $482,000
respectively.
Intangible Assets
Prior to fiscal year 2001, we capitalized certain patent costs,
which are being amortized over the estimated life of the patents
and would be expensed at the time such patents are deemed to have
no continuing value. Since 2001, all patent costs have been
expensed as incurred. License costs are capitalized and amortized
over the estimated life of the related license agreement. In May
2016, our Board of Directors approved a plan to wind down our
current operations, having considered the decision to terminate the
Pathway Study, our available strategic alternatives and the current
cash position. We are evaluating opportunities to monetize our
intellectual property, including data collected in its studies and
trade secrets, as well as the transfer of our proprietary HuCNS-SC
cells and other assets through a potential sale. As these
intellectual properties are no longer in use to further our R&D
programs, effective the third quarter of 2016, capitalized costs
are no longer being amortized.
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.
In April 2013, we entered into an agreement with the California
Institute for Regenerative Medicine (“CIRM”) under
which CIRM would have provided up to approximately $19.3 million as
a forgivable loan, in accordance with mutually agreed upon terms
and conditions and CIRM regulations. The CIRM loan helped fund
preclinical development of our HuCNS-SC cells for Alzheimer’s
disease. Between July 2013 and August 2014, we received in
aggregate, approximately $9.6 million as disbursements of the loan
provided under the CIRM Loan Agreement. However, in December 2014,
as findings under this preclinical study in Alzheimer’s
disease did not meet certain pre-determined criteria for continued
funding of this program by CIRM, the parties terminated the loan
agreement and we wound down this preclinical study which had been
funded in part by the CIRM loan agreement. In February 2015, we
repaid CIRM approximately $679,000 of the aggregate loan proceeds
received. Under the terms of the CIRM loan agreement, principal
amount of approximately $8,917,000 and accrued interest of
approximately $243,000 were forgiven. However, authoritative
accounting guidance requires certain conditions (which includes a
legal release from the creditor) to be met before a liability can
be extinguished and derecognized. In May 2016, we issued a letter
to CIRM constituting notice that we elected to convert our loan
into a grant pursuant to the CIRM’s Loan Administration
Policy, as amended effective April 25, 2016, and as if the
forgiven loan balance had been total allowable project costs funded
by CIRM. In the second quarter of 2016, we re-classified the
principal amount of approximately $8,917,000 as “Other
income” and the accrued interest of approximately $243,000 as
“Gain on extinguishment of a loan” in our Condensed
Consolidated Statement of Operations.
Stock-Based Compensation
Compensation expense for stock-based payment awards to employees is
based on their grant date fair value as calculated and amortized
over their vesting period. See Note 7, “Stock-Based
Compensation” for further information.
We use the Black-Scholes model to calculate the fair value of
stock-based awards.
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:
Three months ended September 30, Nine months ended September
30,
2016 2015 2016 2015
Net loss $ (4,247,870 ) $ (9,642,647 ) $ (11,293,817 ) $ (27,455,062 )
Weighted average shares outstanding used to compute basic and
diluted net loss per share 13,972,198 9,039,863 11,829,390 7,592,238
Basic and diluted net loss per share $ (0.30 ) $ (1.07 ) $ (0.95 ) $ (3.62 )
The following outstanding potentially dilutive securities were
excluded from the computation of diluted net loss per share because
the effect would have been anti-dilutive as of
September 30:
2016 2015 *
Options 20,091 232,852
Restricted stock units 133,476 771,877
Warrants 1,142,772 3,689,821
Total 1,296,339 4,694,550
* Adjusted for the 1-for-12 reverse
stock split as discussed in Note 1.
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
$47, 386 and $47,359 as of September 30, 2016 and
December 31, 2015, respectively.
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”
In June 2016, the FASB issued ASU
2016-013 , “Measurement of Credit Losses on Financial
Instruments”
In August 2016, the FASB issued ASU
2016-015 , “Classification of Certain Cash Receipts
and Cash Payments” |
