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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended:
June 30, 2001 Commission File Number: 0-19871
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STEMCELLS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
3155 PORTER DRIVE
PALO ALTO, CA 94304
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(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
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(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 July 31, 2001 there were 23,112,139 shares of Common Stock, $.01 par value,
issued and outstanding.
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STEMCELLS, INC.
INDEX
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<Caption>
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets June 30, 2001 and December 31, 3
2000
Condensed Consolidated Statements of Operations three and six months 4
ended June 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows six months ended June 5
30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 11
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 15
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</Table>
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PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30, 2001 December 31, 2000
(unaudited)
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Assets
Current assets:
Cash and cash equivalents $ 9,439,252 $ 6,068,947
Short-term restricted investments - 16,356,334
Accrued interest receivable 14,519 16,725
Prepaid rent 376,688 -
Other current assets 561,395 524,509
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Total current assets 10,391,854 22,966,515
Property held for sale 3,203,491 3,203,491
Property, plant and equipment, net 1,375,607 1,451,061
Other assets, net 2,462,992 2,173,912
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Total assets $17,433,944 $29,794,979
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 537,142 $ 526,191
Accrued expenses 1,068,203 837,358
Accrued wind-down costs 886,161 1,780,579
Current maturities of capitalized lease obligations 334,583 332,083
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Total current liabilities 2,826,089 3,476,211
Capitalized lease obligations, less current maturities 2,437,500 2,605,000
Deposits 95,772 26,000
Deferred rent 815,270 705,746
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 June
30, 2001, and December 31, 2000 1,500,000 1,500,000
Common stock, $.01 par value; 45,000,000 shares authorized;
21,935,192 and 20,956,887 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively 219,352 209,569
Additional paid in capital 141,800,045 138,150,067
Stock subscription receivable (518,556) -
Accumulated deficit (128,635,110) (130,498,187)
Accumulated other comprehensive income - 16,356,334
Deferred compensation (3,106,418) (2,735,761)
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Total stockholders' equity 11,259,313 22,982,022
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Total liabilities and stockholders' equity $17,433,944 $29,794,979
============== =============
</Table>
See accompanying notes to condensed consolidated financial statements.
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PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
(unaudited) Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Revenue from grants $ - $ - $ 100,000 $ -
Revenue - assignment of
technology rights 300,000 - 300,000 -
------------ ------------ ------------ ------------
Total revenue 300,000 - 400,000 -
Operating expenses:
Research and development 2,859,141 1,115,207 4,503,398 2,021,839
General and administrative 1,100,300 770,019 2,097,162 1,427,733
Wind-down expenses - 54,260 - 288,646
------------ ------------ ------------ ------------
3,959,441 1,939,486 6,600,560 3,738,218
------------ ----------- ------------ -----------
Loss from operations (3,659,441) (1,939,486) (6,200,560) (3,738,218)
Other income (expense):
Investment income 46,290 64,900 125,333 138,232
Interest expense - (73,708) - (142,566)
Gain on sale of investments 5,232,168 1,427,686 7,782,399 1,427,686
Loss on disposal of fixed assets (24,484) (11,098) (24,484) (11,098)
Other income - - 180,389 -
------------ ------------ ------------ ------------
Total other income, net 5,253,976 1,407,780 8,063,637 1,412,254
------------ ------------ ------------ ------------
Net income (loss) $ 1,594,535 ($ 531,706) $1,863,077 ($ 2,325,964)
------------ ------------ ------------ ------------
Income (loss) per share:
Net Income (loss) 1,594,535 (531,706) 1,863,077 (2,325,964)
Deemed dividend - (265,000) - (265,000)
------------ ------------ ------------ ------------
Net Income (loss) attributable to common
shareholders 1,594,535 (796,706) 1,863,077 (2,590,964)
Basic earnings per share:
Net income (loss) per share $0.07 ($ 0.04) $0.09 ($ 0.13)
Weighted average shares - 21,511,171 19,329,517 21,251,591 19,419,236
Diluted earnings per share:
Net income (loss) per share $0.07 ($ 0.04) $0.08 ($ 0.13)
Weighted average shares 23,264,606 19,329,517 23,005,026 19,419,236
</Table>
See accompanying notes to condensed consolidated financial statements.
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PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
(unaudited) Six Months Ended
June 30,
2001 2000
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Cash flows from operating activities:
Net income (loss) $1,863,077 ($2,325,964)
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Depreciation and amortization 291,453 407,634
Gain on sale of investments (7,782,399) (1,427,686)
Loss on disposal of fixed assets 24,484 -
Gain on sale of rights to technology (300,000) -
Compensation expense relating to the grant of stock options 1,327,236 87,500
Net changes in operating assets and liabilities (1,159,695) (1,890,508)
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Net cash used in operating activities (5,735,844) (5,149,024)
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Cash flows from investing activities:
Proceeds from sale of investments 7,782,398 1,427,686
Purchase of property, plant and equipment (204,217) 8,005
Acquisition of other assets (50,345) (20,380)
Proceeds from assignment of technology 300,000 2,800,000
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Net cash provided by investing activities 7,827,836 4,215,311
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Cash flows from financing activities:
Proceeds from the exercise of stock options 26,613 368,913
Proceeds from the issuance of equity 1,500,000 -
Cost of equity line (83,300) -
Proceeds from issuance of preferred stock - 1,500,000
Principal payments under capitalized lease obligations and
mortgage payable (165,000) (160,000)
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Net cash provided by financing activities 1,278,313 1,708,913
------------ ------------
Net increase in cash and cash equivalents 3,370,305 775,200
Cash and cash equivalents, beginning of period 6,068,947 4,760,064
------------ ------------
Cash and cash equivalents, end of period $9,439,252 $5,535,264
============ ============
Supplemental disclosure of cash flow information:
Interest paid $129,626 $142,566
</Table>
See accompanying notes to condensed financial statements.
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PART I - ITEM 1. - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2001 and 2000
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, we changed our name 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 us in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the periods presented. Results of operations
for the six months ended June 30, 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 (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 for the three and six-months
period ended June 30, 2001. We excluded all stock options and warrants from the
calculation of diluted loss per common share for the three and six-months period
ended June 30, 2000, as these securities are anitidilutive for that period.
NOTE 3. COMPREHENSIVE INCOME
The only component of other comprehensive loss is unrealized gains and
losses on available for sale securities. For the three months ended June 30,
2001 and 2000, total comprehensive income was $1,594,535 and $ 18,688,459
respectively. For the six months ended June 30, 2001 and 2000, total
comprehensive income was $1,338,492 and $16,894,201 respectively.
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NOTE 4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT
PROGRAM
As previously reported, in 1999 we restructured our operations to
abandon all further encapsulated cell technology research and concentrate our
resources on the research and development of our proprietary platform of stem
cell technologies. We relocated our remaining research and development
activities and our corporate headquarters to California, and have been seeking
to dispose of our former science and administrative and pilot manufacturing
facilities in Rhode Island. In December 2000, we had a reserve of $1,780,579
related to the carrying costs for the Rhode Island facilities through 2001. On
February 2001, we 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 we will be able to dispose of these facilities in
a reasonable time, if at all. At June 30, 2001 the reserve was $886,161.
<Table>
<Caption>
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Reserve as at 12/31/2000 Payments Reserve as at 06/30/01
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$1,780,579 $894,418 $886,161
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</Table>
NOTE 5. INVESTMENTS
At December 31,2000, we owned 126,193 shares of Modex Therapeutics Ltd.
("Modex"), a Swiss biotechnology company traded on the Swiss Exchange. 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.On April 30, 2001, we sold our 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. We no longer hold any shares of Modex.
NOTE 6. ASSIGNMENT OF RIGHTS
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 our former encapsulated cell therapy
technology. StemCells, Inc. has no further rights or obligations under the
agreement.
NOTE 7. SALE OF SECURITIES
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). The Fund purchased our
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 purchase 463,369
additional shares, and it has exercised its warrant as to such shares. On April
27, 2001, the Fund became entitled to purchase 622,469 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 our
common stock over a period prior to each date. The exercise price per share
under the adjustable warrant is $.01. We 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 we account
for as stock issuance cost that has no impact on stockholders' equity. We have
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
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warrants, to additional paid in capital. In addition, any repurchase of the
shares by us would also be accounted for through additional paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the
Fund, we granted the Fund an option to purchase up to an additional $3 million
of our common stock and a callable warrant and an adjustable warrant. The Fund
had the right to 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 our 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 between StemCells 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 us 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 we account for as stock issuance
cost that has no impact on stockholders' equity.
On June 8, 2001, the Fund exercised its option to purchase $2,000,000
of our common stock. At the closing on June 21, 2001, the Fund purchased 457,750
shares of our common stock at $4.3692 per share. We received $1,500,000 of the
purchase price at the closing on June 21, 2001, and we will receive the
remaining $500,000 upon effectiveness of a registration statement related to
these shares. The Fund also received a warrant to purchase 50,352 shares of our
common stock at a price per share of $4.7664. This warrant is callable by us at
any time at $7.944 per underlying share. The calculated value of this callable
warrant using the Black-Scholes method is $184,288, which we account for as
stock issuance cost that has no impact on stockholders' equity. In addition, the
Fund received an adjustable warrant similar to the adjustable warrant issued to
the Fund on August 3, 2000. 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 8. LEASES
As of February 1, 2001, we 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. We 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. In May 2001,
we entered into a space-sharing agreement effective February 1, 2001, covering
approximately 11,000 square feet of the 40,000 square foot facility. We received
$314,523 upfront and $307,630 as payment for the months February 2001 to June
2001.
On April 27, 2001,we reached an agreement to terminate as of May 15,
2001, without cost, our lease on part of our former Sunnyvale headquarters. The
lease on the remaining portion of our former Sunnyvale headquarters will
terminate on August 31, 2001.
We continue to lease the facilities in Lincoln, Rhode Island obtained
in connection with our former encapsulated cell technology, but have now
succeeded in subleasing parts of those facilities: the 3,000 square-foot cell
processing facility and approximately one-third of our former scientific and
administrative facility ("SAF"). We continue 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 our 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 9. GRANT
In February 2001, we were awarded a two-year, $300,000 per year grant
from the National Institute of Healths's Small Business Innovation Research
(SBIR) office. The grant, which will support joint work with
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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 for research from a prior SBIR grant
relating to the neural program.
NOTE 10. EQUITY LINE
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited ("Sativum") for the potential future issuance and
sale of up to $30,000,000 of our common stock, subject to restrictions and other
obligations. We, at our sole discretion, may draw down on this facility,
sometimes termed an equity line, 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.
Our volume weighted average market price is calculated by adding the total
dollars traded in every transaction in a given trading day and dividing that
number by the total number of shares traded during that trading day. We are
limited with respect to how often we can exercise a draw down and the amount of
each draw down.
In connection with our execution of a 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). We have valued the warrants using the Black-Scholes
method. The amounts of $522,500, $167,750 and $55,250 respectively, were
accounted for as stock issuance cost in stockholders' equity. The exercise price
and number of shares are subject to adjustment for subdivisions, combinations,
stock dividends and reorganizations.
NOTE 11. SUBSEQUENT EVENTS
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, subject to restrictions and other
obligations. On July 2, 2001, the Securities and Exchange Commission declared
effective a registration statement with respect to up to 10,350,000 shares of
our common stock, which we may issue pursuant to the common stock purchase
agreement (a facility sometimes termed an equity line) and to the warrants
issued in connection with it. Warrants to purchase a total of 350,000 shares
of our common stock were issued: 250,000 shares to Sativum and an aggregate
of 100,000 shares to placement agents, all at at $2.38 per share. We, at our
sole discretion, may draw down on the equity line, 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 drawdown notice. We cannot sell more than 3,922,606 shares pursuant to
the agreement without stockholder approval. Our placement agents have
exercised their warrants in full, and we have received payment of $238,000
for the shares issued to them. 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 four trading days, the total investment
amount 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 total net proceeds to us of $3,878,000 after paying escrow fees.
On April 27, 2001, the adjustable warrant that Millennium Partners, LP,
had received as part of its August 2000 purchase of StemCells shares became
exercisable for an additional 622,469 shares of our common stock. On July 19,
2001, Millennium purchased all of those shares for $6,225.
NOTE 12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board (FASB)
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
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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.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (Statement). This Statement addresses
financial accounting and reporting for business combinations. This Statement
supersedes APB Opinion No. 16, BUSINESS COMBINATIONS, and amends or supersedes a
number of interpretations of that Opinion. This Statement requires that (1) all
business combinations be accounted for by a single method--the purchase method,
(2) all intangible assets recognized as assets apart from goodwill if they meet
one of two criteria--the contractual-legal criterion or the separability
criterion and (3) In addition to the disclosure requirements in Opinion 16, this
Statement requires disclosure of the primary reasons for a business combination
and the allocation of the purchase price paid to the assets acquired and
liabilities assumed by major balance sheet caption. When the amounts of goodwill
and intangible assets acquired are significant in relation to the purchase price
paid, disclosure of other information about those assets is required, such as
the amount of goodwill by reportable segment and the amount of the purchase
price assigned to each major intangible asset class. The provisions of this
Statement apply to all business combination initiated after June 30, 2001. This
statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later. The
Company will adopt the provisions of the Statement for any business combinations
initiated after June 30, 2001.
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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 and six months ended June 30,
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. In
1999, 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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
For the three months ended June 30, 2001 revenue from the assignment of
rights related to technology totaled $300,000. There was no such revenue for the
three months ended June 30, 2000.
Research and development expenses totaled $2,859,141 for the three months
ended June 30, 2001, compared with $1,115,207 for the same period in 2000. The
increase of $1,743,934 or 156% from 2000 to 2001 was primarily attributable to
compensation costs recognized in the valuation of non-qualified stock options
granted to external consultants, the related costs of an increase in personnel
to facilitate the expansion of our research programs and initiate development,
and the cost of leasing a larger facility.
General and administrative expenses were $1,100,300 for the three months
ended June 30, 2001, compared with $770,019 for the same period in 2000. The
increase of $330,281 or 43%, from 2000 to 2001 was primarily attributable to the
related costs of an increase in personnel, which included the hiring of senior
management personnel as part of the reorganization and consolidation of our
operations in California, the cost of leasing a larger facility, and the
compensation cost recognized in the valuation of non-qualified stock options.
Investment income for the three months ended June 30, 2001 and 2000 was
$46,290 and $64,900 respectively. Interest expense of $65,166 for the three
months ended June 30, 2001 was charged against the wind-down reserve, as the
expense was part of the bond payments related to the Rhode Island facilities.
Interest expense for the same period in 2000 was $73,708. The decrease in 2001
was attributable to lower outstanding debt and capital lease balances in 2001
compared to 2000.
On April 30, 2001, we sold our remaining shares in Modex Therapeutics,
Ltd., a Swiss biotherapeutics company, traded on the Swiss Exchange, for a net
price of 87.30 Swiss Francs per share, which converts to approximately $50.51
for total proceeds and a realized gain of 5,232,168, net of commissions and
fees. We no longer hold any shares of Modex.
Net income for the three months ended June 30, 2001 was $1,594,535 or $0.07
per share, as compared to net loss of ($796,706) or ($0.04) per share, for the
comparable period in 2000. The net positive change of $2,391,241 or 300% from
the same period in 2000 was primarily attributable to a realized gain of
$5,232,168 from the sale of the remaining portion of our Modex investment,
offset by an increase in expenses attributable to an increase in personnel, the
costs associated with our move to a larger facility, and the effect of
compensation cost recognized in the valuation of non-qualified stock options.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the six months ended June 30, 2001, revenues from grants totaled
$100,000, and revenues from assignment of rights related to technology totaled
$300,000. There was no such revenue for the six months ended June30, 2000.
Research and development expenses totaled $4,503,398 for the six months
ended June 30, 2001, compared with $2,021,839 for the same period in 2000. The
increase of $2,481,559 or 123% from 2000 to 2001 was primarily attributable to
the related costs of an increase in personnel to facilitate the expansion of our
research programs and initiate development, the cost of leasing a larger
facility, and the compensation costs recognized in the valuation of
non-qualified stock options.
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General and administrative expenses were $2,097,162 for the six months
ended June 30, 2001, compared with $1,427,733 for the same period in 2000. The
increase of $669,429 or 47%, from 2000 to 2001 was primarily attributable to the
related costs of an increase in personnel, which included the hiring of senior
management personnel as part of the reorganization and consolidation of our
operations in California, the cost of leasing a larger facility, and the
compensation cost recognized in the valuation of non-qualified stock options
under the fair value based method.
In December 2000, we established a reserve of $1,780,578 related to the
carrying costs for the Rhode Island facilities through 2001. At June 30, 2001
our reserve was $886,161. In comparison, for the first six months ended June 30,
2000 we incurred costs of $288,646 in excess of a reserve of $1,634,522 created
in December 1999 for the first six months of 2000.
Investment income for the six months ended June 30, 2001 and 2000 was
$125,333 and $138,232 respectively. Interest expense of $129,626 for the six
months ended June 30, 2001 was charged against the wind-down reserve, as the
expense was part of the bond payments related to the Rhode Island facilities.
Interest expense for the same period in 2000 was $142,566. The decrease in 2001
was attributable to lower outstanding debt and capital lease balances in 2001
compared to 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
and a realized gain of $2,550,231. On April 30, 2001, we sold our remaining
shares in Modex for a net price of 87.30 Swiss Francs per share, which converts
to approximately $50.51 for total proceeds and a realized gain of $5,232,168,
net of commissions and fees. We no longer hold any shares of Modex.
Other income for the six months ended June 30, 2001 was $180,389, which
was a refund for an overpayment of property taxes in prior years. At June 30,
2001 we recorded a loss of $24,484 relating to the disposal of some our
equipment located in our former headquarters in Sunnyvale, California.
Net income for the six months ended June 30, 2001 was $1,863,077 or $0.09
per share, as compared to net loss of ($2,590,964) or ($0.13) per share, for the
comparable period in 2000. The net positive change of $4,454,041 or 172% from
the same period in 2000 was primarily attributable to a realized gain of
$7,782,399 from the sale of the remaining portion of our Modex investment,
offset by an increase in expenses attributable to an increase in personnel, the
costs associated with our move to a larger facility, and the effect of
compensation cost recognized in the valuation of non-qualified stock options.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale
of our common and preferred stock, the issuance of long-term debt and
capitalized lease obligations, revenues from collaborative agreements, research
grants, sales of marketable securities and interest income.
We had unrestricted cash and cash equivalents totaling $9,439,252 at
June 30, 2001. Cash equivalents are invested in money market funds.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former encapsulated cell technology, or ECT. These relationships are now
terminated, and we have not yet established corporate partnerships with respect
to our stem cell technology.
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. The
Fund purchased our common stock at $4.33 per share. The Fund is entitled,
pursuant to an adjustable warrant issued on August 3, 2000 in connection with
the sale of common stock to the Fund, to purchase additional shares of common
stock for $0.01 per share. The adjustments to the adjustable warrant are
calculated on eight dates beginning six months from the closing and every three
months thereafter. 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 have the right, under certain circumstances, to
cap the number of additional shares by
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purchasing part of the entitlement from the Fund. On January 27, 2001, the
Fund's adjustable warrant became exercisable for 463,369 shares of our common
stock, and the Fund purchased all of those shares on March 30, 2001, for $4,634.
On April 27, 2001, the Fund's adjustable warrant became exercisable for an
additional 622,469 shares of our common stock and the Fund purchased all of
those shares on July 19, 2001, for $6,225. The Fund also received on August 3,
2000 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 was granted an 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. This adjustable warrant was canceled by agreement
between us and the Fund on November 1, 2000. The Fund also received on August
23, 2000 a warrant to purchase up to 19,900 shares of common stock at $6.03 per
share. This warrant is callable by us at any time at $10.05 per underlying
share. On June 8, 2001, the Fund exercised its remaining option to purchase $2
million of our common stock. At the closing on June 21, 2001, the Fund purchased
457,750 shares of our common stock at $4.3692 per share. The Fund paid
$1,500,000 of the purchase price at the closing and will pay the remainder upon
effectiveness of the registration statement. In connection with the closing, the
Fund received an adjustable warrant similar to the adjustable warrant issued on
August 3, 2000. The Fund also received a warrant to purchase 50,352 shares of
our common stock at a price per share of $4.7664. This warrant is callable by us
at any time at $7.944 per underlying share.
We have sold all of our shares of Modex Therapeutics, Ltd. Our final
sale of Modex shares occurred on April 30, 2001, when we realized a gain of
$5,232,168 net of commissions and other fees. All other sales occurred prior to
June 30, 2001. In addition, on April 30, 2001, we sold Modex our rights to
future payments under the agreement between us and Neurotech S.A. for $300,000.
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, subject to restrictions and other
obligations. We, at our sole discretion, may draw down on this facility,
sometimes termed an equity line, 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 drawdown notice.
We are limited with respect to how often we can exercise a drawdown and the
amount of each drawdown.. We may, but are not required to, draw down on the
equity line from time to time as necessary and possible under the terms of
the facility. As of July 11, 2001, we notified Sativum of our intention 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 four trading days, the total
investment amount 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 total net proceeds to us of $3,878,000 after paying escrow fees.
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 for the next twelve months.
Our cash requirements may vary, however, depending on numerous factors. If for
some reason we are not able to drawdown on the equity line, 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
On May 31, 2001, we held our Annual Meeting of Shareholders. Mark J.
Levin and John J. Schwartz, Ph.D. were re-elected to the Board as class I
directors, with terms expiring in 2004. The remaining members of the Board,
whose terms continued after the Annual Meeting, are Roger Perlmutter, M.D.,
Irving Weissman, M.D., and Martin McGlynn, President and CEO of StemCells.
The shareholders also approved the 2001 Equity Incentive Plan (the
"Plan"), under which the Board may grant stock options, stock appreciation
rights, restricted stock, unrestricted stock, deferred stock, and performance
awards to employees including executive officers, directors and others providing
services to StemCells or its subsidiary who are in a position to make a
significant contribution to our success. A total of 3,000,000 shares of our
common stock may be issued under the Plan.
Finally, the shareholders ratified the selection of Ernst & Young LLP
as StemCells' independent public accountants for the fiscal year ending December
31, 2001.
The votes on these matters were as follows:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
For Authority Against Abstain Broker
Withheld Non-Votes
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Election of Mark. J. Levin as director 18,763,552 430,870
- ------------------------------------------------------------------------------------------------------------------
Election of John. J. Schwartz, Ph.D., as 18,762,302 432,420
director
- ------------------------------------------------------------------------------------------------------------------
Approval of the 2001 Equity Incentive Plan 6,162,082 811,295 90,362 12,130,683
- ------------------------------------------------------------------------------------------------------------------
Ratification of Ernst & Young LLP as 19,047,479 114,355 32,588
independent accountants for 2001
- ------------------------------------------------------------------------------------------------------------------
</Table>
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PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
On April 30, 2001, StemCells, Inc. sold all of its remaining founder's
shares in Swiss Modex Therapeutics, Ltd. (SWX New Market: MDXN) in a private
placement. StemCells, Inc. sold 103,577 shares at a net price of 87.30 CHF
(Swiss francs) per share, or a total sum of approximately US $5,200,000. Report
dated May 8, 2001.
On May 10, 2001, StemCells, Inc. entered into a definitive agreement
with an institutional investor to provide the company with up to $30,000,000 in
equity financing from time to time. Report dated May 14, 2001.
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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 10, 2001 /s/ George Koshy
----------------------------------------
Controller and Acting Chief Financial
Officer (principal financial officer and
principal accounting officer)