UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended:
March 31, 2001 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)
525 Del Rey Avenue, Suite C, Sunnyvale, CA 94086
(Former address of principal executive offices) (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 March 31, 2001 there were 21,458,211 shares of Common Stock, $.01 par value,
issued and outstanding.
STEMCELLS, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets March 31, 2001 and December 31, 3
2000
Condensed Consolidated Statements of Operations three months ended 4
March 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows three months ended 5
March 31, 2001 and 2000
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 9
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES
2
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001
(UNAUDITED) DECEMBER 31, 2000
------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 4,499,158 $ 6,068,947
Short-term restricted investments 8,412,650 16,356,334
Accrued interest receivable 9,706 16,725
Prepaid rent 909,415 --
Other current assets 473,696 524,509
------------- -------------
Total current assets 14,304,625 22,966,515
Property held for sale 3,203,491 3,203,491
Property, plant and equipment, net 1,442,089 1,451,061
Other assets net 2,556,457 2,173,912
------------- -------------
Total assets $ 21,506,661 $ 29,794,979
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 237,856 $ 526,191
Accrued expenses 785,064 837,358
Accrued wind-down costs 1,380,947 1,780,579
Current maturities of capitalized lease obligations 333,333 332,083
------------- -------------
Total current liabilities 2,737,200 3,476,211
Capitalized lease obligations, less current maturities 2,521,250 2,605,000
Deposits 26,000 26,000
Deferred rent 760,508 705,746
Stockholders' equity
Convertible preferred stock, $.01 par value; 1,000,000 shares authorized,
2,626 designated as 6% Cumulative Convertible Preferred Stock 1,500 shares
issued and outstanding at March 31, 2000, none at December 31, 2000 1,500,000 1,500,000
Common stock, $.01 par value; 45,000,000 shares authorized;
21,458,211 and 20,956,887 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 214,612 209,569
Additional paid in capital 137,608,696 138,150,067
Accumulated deficit (130,229,646) (130,498,187)
Accumulated other comprehensive income 8,412,650 16,356,334
Deferred compensation (2,044,609) (2,735,761)
------------- -------------
Total stockholders' equity 15,461,703 22,982,022
------------- -------------
Total liabilities and stockholders' equity $ 21,506,661 $ 29,794,979
============= =============
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,
2001 2000
------------ ------------
Revenue from grants $ 100,000 $ --
Operating expenses:
Research and development 1,644,257 906,632
General and administrative 996,862 657,714
Wind-down expenses -- 234,386
------------ ------------
2,641,119 1,798,732
------------ ------------
Loss from operations (2,541,119) (1,798,732)
Other income (expense):
Investment income 79,041 73,332
Interest expense -- (68,858)
Gain on sale of investments 2,550,230 --
Other income 180,389 --
------------ ------------
Total other income, net 2,809,660 4,474
------------ ------------
Net income (loss) $ 268,541 $ (1,794,258)
------------ ------------
Basic Earnings Per Share
Net income (loss) per share $ 0.01 $ (0.09)
Shares - basic net income (loss) per
share 20,989,127 19,329,517
Diluted Earnings Per Share
Net income (loss) per share $ 0.01 $ (0.09)
Shares - diluted income per share 22,405,358 19,329,517
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,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 268,541 ($1,794,258)
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Depreciation and amortization 142,554 204,449
Gain on sale of investments (2,550,230) --
Compensation expense relating to the grant of stock
options 128,220 43,750
Net changes in operating assets and liabilities (1,812,084) (1,776,812)
----------- -----------
Net cash used in operating activities (3,822,999) (3,322,870)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments 2,550,230 --
Purchase of property, plant and equipment (114,734) (7,542)
Acquisition of other assets (126,391) --
Proceeds from sales of technology -- 2,800,000
----------- -----------
Net cash provided by investing activities 2,309,105 2,792,458
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants 26,605 352,557
Principal payments under capitalized lease obligations (82,500) (80,000)
----------- -----------
Net cash provided by (used by) financing activities (55,895) 272,557
----------- -----------
Net decrease in cash and cash equivalents (1,569,789) (257,855)
Cash and cash equivalents, beginning of period 6,068,947 4,760,064
----------- -----------
Cash and cash equivalents, end of period $ 4,499,158 $ 4,502,209
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 64,460 $ 68,858
See accompanying notes to condensed financial statements.
5
PART I - ITEM 1. - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2001 and 2000
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, the company's name was changed to Stem Cells, Inc. from
CytoTherapeutics, Inc. by vote of the shareholders at the Annual Meeting. 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, 2001 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 2001.
The balance sheet at December 31, 2000 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, 2000, included on form 10-K as amended.
NOTE 2. 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 per share is computed using the weighted average of common and diluted
equivalent stock options and warrants outstanding during the period. We excluded
all stock options and warrants from the calculation of diluted loss per common
share for the period ended March 31, 2000, because these securities are
antidilutive during that period.
NOTE 3. COMPREHENSIVE LOSS
The only component of other comprehensive loss is unrealized gains and
losses on available for sale securities. For the three months ended March 31,
2001 and 2000, total comprehensive loss was $7,675,143 and $1,794,258
respectively.
NOTE 4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT
PROGRAM
As previously reported, in 1999 the Company restructured its operations
to abandon all further encapsulated cell technology research and concentrate its
resources on the research and development of its proprietary platform of stem
cell technologies. The Company relocated its remaining research and development
activities and its corporate headquarters to California, and has been seeking to
dispose of its former science and administrative and pilot manufacturing
facilities in Rhode Island. In December 2000, the company had a reserve of
$1,780,000 related to the carrying costs for the Rhode Island facilities through
2001. On February 2001, the Company subleased portions of the facilities and are
actively seeking to sublease, assign or sell our remaining interests in the
properties. However, there can be no assurance that the Company will be able to
dispose of these facilities in a reasonable time, if at all. At March 31,2001
the reserve was $1,381,000.
- --------------------------------------------------------------------------------
Reserve as at 12/31/2000 Payments Reserve as at 03/31/01
- --------------------------------------------------------------------------------
$1,780,579 $399,632 $1,380,947
- --------------------------------------------------------------------------------
6
NOTE 5. INVESTMENTS
At March 31, 2001, the Company owned 103,577 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 $2,550,000. In connection with this sale, the Company agreed not to resell
any more of its Modex shares until April 12, 2001. Accordingly, with an
established market value, the investment is recorded as available-for-sale at an
estimated fair market value. On March 31, 2001 the market price of Modex stock
was 141.00 Swiss francs, or $81.22 using exchange rates on that date, which
represented an estimated fair market value of $8,412,650 for the remaining
shares. The unrealized gain was reported in other comprehensive income. The
Company liquidated the remaining 103,577 Modex shares on April 30, 2001 for
$5,232,168 net of commissions and other fees. See note 9.
NOTE 6. SALE OF SECURITIES
On August 3, 2000, the Company completed a $4 million common stock
financing transaction with Millennium Partners, LP (the "Fund"). The Fund
purchased the Company's common stock at $4.33 per share. As set forth in an
adjustable warrant issued to the Fund on the closing date, the Fund may be
entitled to receive additional shares of common stock on eight dates beginning
six months from the closing and every three months thereafter. The adjustable
warrant may be exercised at any time prior to the thirtieth day after the last
of such dates. On the first adjustment date, January 27, 2001, the Fund became
entitled to 463,369 additional shares, and it has exercised its warrant as to
such shares. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of the Company's common stock over a
period prior to each date. The exercise price per share under the adjustable
warrant is $.01. The Company will have the right, under certain circumstances,
to cap the number of additional shares by purchasing part of the entitlement
from the Fund at a purchase price based on the market price of such shares. The
Fund also received a five-year warrant to purchase up to 101,587 shares of
common stock at $4.725 per share. This warrant is callable at any time by
StemCells at $7.875 per underlying share. The calculated value of this callable
warrant using the Black-Scholes method is $376,888, which the Company accounts
for as stock issuance cost that has no impact on stockholders' equity. The
Company has accounted for the sale of the stock and warrants by adding that
portion of the proceeds equal to the par value of the new shares to common stock
and the balance, including the value of the warrants, to additional paid in
capital. In addition, any repurchase of the shares by the Company would also be
accounted for through additional paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the Fund,
the Company granted the Fund an option to purchase up to an additional $3
million of its common stock and a callable warrant and an adjustable warrant.
The Fund can exercise this option in whole or in part at any time prior to
August 3, 2001. The price per share of common stock to be issued upon exercise
of the option will be based on the average market price of the common stock for
a five-day period prior to the date on which the option is exercised. On August
23, 2000, the Fund exercised $1,000,000 of its option to purchase additional
common stock. The Fund purchased the Company's common stock at $5.53 per share,
which amount was based upon the average market price of the common stock for the
five-day period prior to August 23, 2000. An adjustable warrant similar to the
one issued on August 3, 2000 was issued to the Fund on August 30, 2000, but was
cancelled on November 1, 2000 by agreement of the Company and the Fund. The Fund
also received a five -year warrant to purchase up to 19,900 shares of common
stock at $6.03 per share. This warrant is callable by the Company at any time at
$10.05 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $139,897, which the Company accounts for as stock
issuance cost that has no impact on stockholders' equity.
The adjustable warrant contains provisions regarding the adjustment or
replacement of the warrants in the event of stock splits, mergers, tender offers
and other similar events. The adjustable warrant also limits the number of
shares that can be beneficially owned by the Fund to 9.99% of the total number
of outstanding shares of Common Stock.
NOTE 7. LEASES
7
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,
California. The new facility includes animal space, 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
$3.2 million per year over the term of the lease. The company paid $1.2 million
upfront related to this new lease. Approximately $909,000 of this payment has
been recorded as prepaid rent and is being amortized over seven months. The
Company continues to lease the facilities in Lincoln, Rhode Island obtained in
connection with its former encapsulated cell technology, but has now succeeded
in subleasing parts of those facilities: the 3,000 square-foot cell processing
facility and approximately one-third of its former scientific and administrative
facility ("SAF"). The Company continues to seek to sublet the remainder of the
approximately 65,000 square foot SAF and the 21,000 square-foot pilot
manufacturing facility, or to assign or sell its interests in these properties.
There can be no assurance however, that we will be able to dispose of these
properties in a reasonable time, if at all.
NOTE 8. GRANT
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH's Small Business Innovation Research (SBIR) office. The
grant, which will support 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 to develop 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. The company received and recognized as
revenue $100,000 from a prior SBIR grant relating to the neural program.
NOTE 9. SUBSEQUENT EVENTS
On April 30, 2001, StemCells sold its remaining 103,577 shares of Modex
Therapeutics at 87.3 Swiss francs per share, or $50.51 per share at the exchange
rate on that date, for total proceeds of $5,232,168 net of commissions and other
fees. In addition, on April 30, 2001, in consideration for $300,000 received
from Modex and the assistance of Modex in executing the sale of StemCells
holding of Modex shares, StemCells agreed to assign to Modex the rights
concerning future payments under the Asset Purchase and License Agreement
between StemCells, Inc. and Neurotech SA, by which Neurotech SA purchased the
Company's former encapsulated cell therapy technology.
On April 27, 2001, the Company reached an agreement to terminate as of
May 15, 2001, without cost, its lease on part of its former Sunnyvale
headquarters.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"). The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. As the
Company had no derivative instruments and does not currently engage in hedging
activities, the adoption of Statement No. 133 on January 1, 2001 had no impact
on StemCells results, operations or financial statement.
8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company for the three months ended March 31, 2001 and 2000
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/A report, as of December 31, 2000 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.
In1999, by contrast, our corporate headquarters, most of our employees, and the
main focus of our operations were primarily devoted to a different
technology--encapsulated cell therapy, or ECT. Since that time, we terminated a
clinical trial of the ECT then in progress, we wound down our other operations
relating to the ECT, we terminated the employment of those who worked on the
ECT, we sold the ECT and we relocated from Rhode Island to California. The year
2000 was a year of transition, in which we completed the consolidation and
restructuring of our operations. Comparisons with the previous year's results
are correspondingly less meaningful than they may be under other circumstances.
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.
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, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, and the initiation or
termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
For the three months ended March 31, 2001, revenues from grants totaled
$100,000. There was no such revenue for the three months ended March 31, 2000.
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 and a realized gain of $2,550,000. In connection with this sale, the
Company agreed not to resell any more of its Modex shares until April 12, 2001.
Research and development expenses totaled $1,644,257 for the three months
ended March 31, 2001, compared with $906,632 for the same period in 2000. The
increase of $737,625 or 81% from 2000 to 2001 was primarily attributable to the
related costs of an increase in personnel from 11 full time employees to 19 full
time employees to facilitate the expansion of our research programs and initiate
development and the cost of leasing a larger facility.
General and administrative expenses were $996,862 for the three months
ended March 31, 2001, compared with $657,714 for the same period in 2000. The
increase of $339,148, or 52%, from 2000 to 2001 was primarily attributable to
the related costs of an increase in personnel from 5 full time employees to 8
full time employees, which included the hiring of senior management personnel as
part of the restructuring and consolidation of our operations in California and
the cost of leasing a larger facility.
Wind-down expenses related to our ECT research, our Rhode Island
operations and the transfer of our headquarters to Sunnyvale, California for the
three months ended March 31, 2000 were $234,386. In December 2000, we created a
reserve of $1,780,578 related to the carrying costs for the Rhode Island
facilities through 2001. At March 31, 2001 the reserve was $1,381,946.
Interest income for the three months ended March 31, 2001 and 2000 was
$79,041 and $73,332 respectively. Interest expense of $64,460 for the three
months ended March 31, 2001 was booked against the wind-down reserve created in
2000 for the whole of 2001, as the expense was part of the bond payments related
to the Rhode Island facilities. Interest expense for the same period in 2000 was
$68,858. The decrease in 2001 was attributable to lower outstanding debt and
capital lease balances in 2001 compared to 2000.
Other income for the three months ended March 31, 2001 was $180,389,
which was a refund from the Citizens Bank of Rhode Island for an overpayment of
property taxes in prior years.
Net income (loss) for the three months ended March 31, 2001 was $268,541
or $0.01 per share, as compared to net loss of ($1,794,258) or ($0.09) per
share, for the comparable period in 2000. The decrease in net loss of $2,062,800
or 115% from the same period in 2000 was primarily attributable to a realized
gain of $2,550,230 from the sale of a portion of our Modex investment, offset by
an increase in expenses attributable to an increase in personnel and the costs
associated with our move to a larger facility.
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 cash and cash equivalents totaling $4,499,000 at March 31, 2001.
Cash equivalents are invested in money market funds. We also held shares of
Modex Therapeutics Ltd ("Modex"), a Swiss biotechnology company that completed
an initial public offering on June 23, 2000, and is publicly traded on the Swiss
Neue Market exchange. We realized a gain in connection with the sale of a
portion of our investment in Modex in the second quarter 2000 and first quarter
of 2001 of $1,427,000 and $2,550,000 respectively. Our Modex stock had a fair
market value of $8,412,000 on March 31, 2001. The fair market value of our Modex
stock has varied significantly
10
since the Modex public offering based on increases and decreases in the reported
per share price, in Swiss francs, of the Modex stock and on foreign currency
exchange rates. We had been prohibited under a lock-up agreement entered into at
the time of Modex's secondary offering from selling any of our Modex holdings
until December 23, 2000. On January 9, 2001, we 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 $2,550,000. In connection with this sale, we agreed not to
sell any more of our remaining 103,577 Modex shares until April 12, 2001. On
April 30, 2001, StemCells sold its remaining 103,577 shares of Modex
Therapeutics at 87.3 Swiss francs per share, or $50.51 per share at the exchange
rate on that date, for total proceeds of $5,232,168 net of commissions and other
fees. In addition, on April 30, 2001, the Company sold Modex Therapeutics its
rights to future payments under the agreement between the Company and Neurotech
S.A. by which it sold its former encapsulated cell therapy technology to
Neurotech. StemCells received $300,000 for the rights to future payments.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,200,000 per year associated with our former research
laboratory and corporate headquarters building, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to our pilot
manufacturing and cell processing facility. 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.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund with
more than a billion dollars in assets under management. We received $3 million
of the purchase price at the closing and received the remaining $1 million upon
effectiveness of a registration statement covering the shares purchased by the
Fund. The Fund purchased our common stock at $4.33 per share. The Fund became
entitled, pursuant to an adjustable warrant issued in connection with the sale
of common stock to the Fund, to receive 463,369 additional shares of common
stock on January 27, 2001, and it has exercised its warrant as to such shares at
$0.01 per share. The Fund may become entitled to receive additional shares every
three months thereafter until October, 2002. The number of additional shares the
Fund may be entitled to on each date will be based on the number of shares of
common stock the Fund continues to hold on each date and the market price of our
common stock over a period prior to each date. We will have the right, under
certain circumstances, to cap the number of additional shares by purchasing part
of the entitlement from the Fund. The Fund also received a warrant to purchase
up to 101,587 shares of common stock at $4.725 per share. This warrant is
callable by us at $7.875 per underlying share.
In addition, the Fund has the option for twelve months to purchase up to
$3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per share.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and paid the remaining $250,000 upon effectiveness of a
registration statement covering the shares owned by the Fund. At the closing on
August 30, 2000, we issued to the Fund an adjustable warrant similar to the one
issued on August 3, 2000. T his adjustable warrant was canceled by agreement
between us and the Fund on November 1, 2000. The Fund also received a warrant to
purchase up to 19,900 shares of common stock at $6.03 per share. This warrant is
callable by us at $10.05 per underlying share.
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 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, government grants and funding from
collaborative arrangements, if obtainable, to fund our operations.
11
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. Lack of necessary funds may require us to delay,
reduce or eliminate some or all of our research and product development programs
or to license our potential products or technologies to third parties. Funding
may not be available when needed--at all, or on terms acceptable to us. While
our cash requirements may vary, as noted above, we currently expect that our
existing capital resources, including income earned on invested capital, will be
sufficient to fund our operations through December of 2001. Our cash
requirements may vary, however, depending on numerous factors. 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.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On March 31, 2001, we had an investment in common stock of Modex
Therapeutics Ltd. (Modex), a Swiss Biotherapeutics company. Our value in this
investment was subject to both equity price risk and foreign currency exchange
risk. Modex shares were offered in an initial public offering ("IPO") on the
Swiss Neue Market on June 23, 2000 at a price of 168.00 Swiss francs. From the
date of the IPO to March 9, 2001, the Modex closing share price has fluctuated
from a high of 390.00 Swiss francs on October 6, 2000 to a low of 92.00 Swiss
francs on April 27, 2001. On January 9, 2001, we 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. In connection with this sale, we agreed not to
resell any more of our Modex shares until April 12, 2001. On March 31, 2001 the
market price of Modex stock was 141.00 Swiss francs which converts to $81.22
using exchange rates on that date, which represented an estimated fair market
value of $8,412,650.
On April 30, 2001, StemCells sold its remaining 103,577 shares of Modex
Therapeutics at 87.3 Swiss francs per share, which converts to $ 50.51 per
share at the exchange rate for that date, for total proceeds of approximately
$5,232,168 net of commissions and other fees.
- --------------------------------------------------------------------------------------------------------------------
NO. OF SHARES DESCRIPTION ASSOCIATED RISKS MARKET VALUE AT SALES PROCEEDS ON
MARCH 31, 2001 APRIL 30, 2001
- --------------------------------------------------------------------------------------------------------------------
103,577 Modex Therapeutics Equity/Foreign $8,412,650 $5,232,168
Currency Translation
- --------------------------------------------------------------------------------------------------------------------
13
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 2
None
PART II - ITEM 4
None
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(A) REPORTS ON FORM 8-K
None.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEMCELLS, INC.
----------------------------------------
(Name of Registrant)
May 9, 2001 /s/ George Koshy
----------------------------------------
Controller and Acting Chief Financial
Officer (principal financial officer and
principal accounting officer)