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:
September 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
------------------------------- ------------------
(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
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(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 November 05, 2001 there were 23,472,532 shares of Common Stock, $.01 par
value, issued and outstanding.
1
STEMCELLS, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets September 30, 2001 and December 3
31, 2000
Condensed Consolidated Statements of Operations three and nine months 4
ended September 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows nine months ended 5
September 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 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited) (a)
Assets
Current assets:
Cash and cash equivalents $ 11,853,983 $ 6,068,947
Short-term restricted investments - 16,356,334
Accrued interest receivable 14,917 16,725
Prepaid rent 87,605 -
Other current assets 265,372 524,509
------------- -------------
Total current assets 12,221,877 22,966,515
Property held for sale 3,203,491 3,203,491
Property, plant and equipment, net 1,254,201 1,451,061
Other assets, net 2,471,529 2,173,912
------------- -------------
Total assets $ 19,151,098 $29,794,979
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 168,067 $ 526,191
Accrued expenses 1,005,140 837,358
Accrued wind-down costs 557,163 1,780,579
Current maturities of capitalized lease obligations 335,000 332,083
------------- -------------
Total current liabilities 2,065,370 3,476,211
Capitalized lease obligations, less current maturities 2,353,750 2,605,000
Deposits 129,896 26,000
Deferred rent 862,860 705,746
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
September 30, 2001, and December 31, 2000 1,500,000 1,500,000
Common stock, $.01 par value; 45,000,000 shares authorized;
23,455,137 and 20,956,887 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 234,555 209,569
Additional paid in capital 144,270,287 138,150,067
Accumulated deficit (130,422,200) (130,498,187)
Accumulated other comprehensive income - 16,356,334
Deferred compensation (1,843,420) (2,735,761)
------------- -------------
Total stockholders' equity 13,739,222 22,982,022
------------- -------------
Total liabilities and stockholders' equity $ 19,151,098 $ 29,794,979
============= =============
(a) Derived from the Company's audited financial statements as of
December 31, 2000
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Revenue from grants $276,537 $ - $ 376,537 $ -
Revenue - assignment of
technology rights - - 300,000 -
------------ ------------ ------------ ------------
Total revenue 276,537 - 676,537 -
Operating expenses:
Research and development 1,554,558 1,328,263 6,057,957 3,350,101
General and administrative 564,068 744,404 2,661,230 2,172,137
Wind-down expenses - 480,087 - 768,733
------------ ------------ ------------ -----------
2,118,626 2,552,754 8,719,187 6,290,971
------------ ----------- ------------ -----------
Loss from operations (1,842,089) (2,552,754) (8,042,650) (6,290,971)
Other income (expense):
Investment income 55,001 80,248 180,334 218,480
Interest expense - (66,720) - (209,287)
Gain on sale of investments - - 7,782,398 1,427,686
Loss on disposal of fixed assets - - (24,484) (11,098)
Other income - - 180,389 -
------------ ------------ ------------ ------------
Total other income, net 55,001 13,528 8,118,637 1,425,781
------------ ------------ ------------ ------------
Net income (loss) ($ 1,787,088) ($ 2,539,226) $75,987 ($4,865,190)
------------ ------------ ------------ ------------
Income (loss) per share:
Net Income (loss) (1,787,088) (2,539,226) 75,987 (4,865,190)
Deemed dividend - - - (265,000)
------------ ------------ ------------ ------------
Net Income (loss) attributable to common
shareholders (1,787,088) (2,539,226) 75,987 (5,130,190)
Basic earnings per share:
Net income (loss) per share ($0.08) ($ 0.13) $0.00 ($ 0.26)
Weighted average shares - 22,998,028 20,203,573 21,840,134 19,682,590
Diluted earnings per share:
Net income (loss) per share ($0.08) ($ 0.13) $0.00 ($ 0.26)
Weighted average shares 22,998,028 20,203,573 23,464,951 19,682,590
See accompanying notes to condensed consolidated financial statements.
4
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited) Nine Months Ended
September 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 75,987 ($4,865,190)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 475,965 617,447
Gain on sale of investments (7,782,398) (1,427,686)
Loss on disposal of fixed assets 24,484 -
Gain on assignment of technology rights (300,000) -
Compensation expense relating to the grant of stock options 735,921 464,363
Net changes in operating assets and liabilities (1,015,592) (3,086,775)
------------ ------------
Net cash used in operating activities (7,785,633) (8,297,841)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of investments 7,782,398 1,427,686
Purchase of property, plant and equipment (249,189) (18,901)
Acquisition of other assets (50,345) -
Proceeds from assignment of technology rights 300,000 2,800,000
------------ ------------
Net cash provided by investing activities 7,782,864 4,208,785
------------ ------------
Cash flows from financing activities:
Proceeds from the exercise of warrants 2,244,533 -
Proceeds from the exercise of stock options 139,001 553,586
Proceeds from the issuance of stock, net 3,652,604 4,764,150
Proceeds from issuance of preferred stock, net of costs - 1,500,000
Principal payments under capitalized lease obligations and
mortgage payable (248,333) (241,667)
------------ ------------
Net cash provided by financing activities 5,787,805 6,576,069
------------ ------------
Net increase in cash and cash equivalents 5,785,036 2,487,013
Cash and cash equivalents, beginning of period 6,068,947 4,760,064
------------ ------------
Cash and cash equivalents, end of period $11,853,983 $7,247,077
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 189,764 $ 209,287
See accompanying notes to condensed financial statements.
5
PART I - ITEM 1. - FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001 and 2000
NOTE 1. BASIS OF PRESENTATION
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 nine months ended September 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. We excluded all stock options
and warrants from the calculation of diluted loss per common share for the
three-month period ended September 30, 2000 and 2001, and for the nine month
period ended September 30, 2000, as these securities are antidilutive for these
periods.
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 September
30, 2001 and 2000, total comprehensive income (loss) was ($1,787,088) and
$5,444,942 respectively. For the nine months ended September 30, 2001 and 2000,
total comprehensive income was $75,987 and $22,339,142 respectively.
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 September 30, 2001 the reserve was $557,163.
6
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Reserve as at 12/31/2000 Payments Reserve as at 09/30/01
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
$1,780,579 $1,223,416 $557,163
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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
$2,550,230. 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. On July 26, 2001 the Fund became
entitled to purchase 25,804 additional shares and it has exercised its warrant
as to such shares. On October 24, 2001 the Fund became entitled to purchase
26,191 additional 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 was $376,888, which we accounted 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 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
7
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 remaining 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
received the remaining $500,000 on August 29, 2001 after the 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 up to and including October 2001. 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. Effective July 2001 we will receive $ 47,561 per month covering
rent and operating expenses. We entered into an additional space sharing
agreement effective September 2001 covering approximately 1,973 square feet. We
received $ 41,436 upfront and will receive $ 13,812 per month plus operating
expenses as charged.
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 terminated 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. GRANTS
In February 2001, we were awarded a two-year, $300,000 per year grant from
the National Institute of Health'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 therapies for the disease. We received $ 227,556,
of which $77,923 represents our share of the joint effort through June 30, 2001
and has been recognized as revenue. The remainder, $149,633, was paid to
Stanford University as its share of the joint effort. In addition we received
and recognized as revenue $298,614 for research from a prior SBIR grant relating
to the neural program.
8
On September 30 2001, we were awarded a four-year, $225,000 per year grant
from the National Institute of Diabetes & Digestive & Kidney Disorders of the
National Institutes of Health for our liver stem cell program which focuses on
identifying liver stem and progenitor cells for the treatment of liver diseases.
The grant is subject to the availability of funds and satisfactory progress of
the project.
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 the common stock purchase agreement
with Sativum, we issued three three-year warrants to purchase an aggregate of
350,000 shares of our common stock at $2.38 per share to Sativum (250,000
shares), Pacific Crest Securities Inc. (75,000 shares) and Granite Financial
Group, Inc. (25,000 shares). 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.
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 Sativum common stock purchase
agreement and to the warrants issued in connection with it. We cannot sell more
than 3,922,606 shares pursuant to the agreement without stockholder approval. We
delivered a draw down notice to Sativum Investments Limited, dated as of July
11, 2001, exercising our right to draw down up to $5,000,000 at a market-based
share price not less than $5.00 per share beginning July 12, 2001. Sativum
purchased a total of 707,947 shares of our common stock at an average purchase
price of $5.65 per share, net of Sativum's discount of six percent. Because the
market based price of our common stock was less than $ 5.00 for 4 trading days
during the draw down period, our $5,000,000 request was reduced to $4,000,000.
Our placement agents, Pacific Crest Securities, Inc. and Granite Financial
Group, Inc. received $80,000 and $40,000, respectively, as placement fees in
connection with this draw down, resulting in net proceeds to us of $3,652,604,
after paying escrow fees and other associated costs. Our placement agents have
exercised their warrants in full, and we have received payment of $238,000 for
the shares issued to them.
NOTE 11. 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 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 July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The
9
new rules require business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and goodwill acquired
after this date will no longer be amortized, but will be subject to annual
impairment tests. All other intangible assets will continue to be amortized over
their estimated useful lives. As the Company has not completed any business
combinations through September 30, 2001, the Company believes that these
standards will not have a material impact on its financial position or operating
results.
10
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 nine months ended September
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, revenues from
collaborative research arrangements with corporate sponsors to finance our
operations and grants. 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.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
For the three months ended September 30, 2001 revenue from grants totaled
$276,537. There was no such revenue for the three months ended September 30,
2000.
Research and development expenses totaled $1,554,558 for the three months
ended September 30, 2001, compared with $1,328,263 for the same period in 2000.
The increase of $226,295 or 17% 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, and the cost of leasing a larger
facility.
General and administrative expenses were $564,068 for the three months
ended September 30, 2001, compared with $744,404 for the same period in 2000.
The decrease of $180,336 or 24%, from 2000 to 2001 was primarily attributable to
the effect of the lower valuation of non-qualified stock options on compensation
cost, offset by costs related to an increase in personnel, which included the
hiring of senior management personnel as part of the reorganization and
consolidation of our operations in California and the cost of leasing a larger
facility.
Investment income for the three months ended September 30, 2001 and 2000
was $55,001 and $80,248 respectively. Interest expense of $59,461 for the three
months ended September 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 $66,720. The
decrease in 2001 was attributable to lower outstanding debt and capital lease
balances in 2001 compared to 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
For the nine months ended September 30, 2001, revenues from grants totaled
$376,537, and revenues from assignment of rights related to technology totaled
$300,000. There was no such revenue for the nine months ended September30, 2000.
Research and development expenses totaled $6,057,957 for the nine months
ended September 30, 2001, compared with $3,350,101 for the same period in 2000.
The increase of $2,707,856 or 81% from 2000 to 2001 was primarily attributable
to the cost of leasing a larger facility and costs related to an increase in
personnel to facilitate the expansion of our research programs and initiate
development.
General and administrative expenses were $2,661,230 for the nine months
ended September 30, 2001, compared with $2,172,137 for the same period in 2000.
The increase of $489,093 or 23%, 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, and the cost of leasing a larger facility.
In December 2000, we established a reserve of $1,780,578 related to the
carrying costs for the Rhode Island facilities through 2001. At September 30,
2001 our reserve was $557,163. In comparison, for the first nine months ended
September 30, 2000 we incurred costs of $768,733 in excess of a reserve of
$1,634,522 created in December 1999 for the first six months of 2000.
Investment income for the nine months ended September 30, 2001 and 2000 was
$180,334 and $218,480 respectively. Interest expense of $189,764 for the nine
months ended September 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 $209,287. 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 $2,550,230. On April 30, 2001, we sold our
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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 nine months ended September 30, 2001 was $180,389,
which was a refund for an overpayment of property taxes in prior years. At June
30, 2001we recorded a loss of $24,484 relating to the disposal of some our
equipment located in our former headquarters in Sunnyvale, California.
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 $11,853,983 at
September 30, 2001. Cash equivalents are invested in money market funds.
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 purchasing part of the entitlement from
the Fund. 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. On June 8, 2001, the Fund exercised its remaining option to
purchase $2 million of our common stock at $4.3692 per share.
We have sold all of our shares of Modex Therapeutics, Ltd. for total net
proceeds of$7,782,398 net of commissions and other fees. 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 4
trading days during the draw down period, our $5,000,000 request was reduced to
$4,000,000. Our placement agents, Pacific Crest Securities, Inc. and Granite
Financial Group, Inc.
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received $80,000 and $40,000, respectively, as placement fees in connection with
this draw down, resulting in net proceeds to us of $3,652,604, after paying
escrow fees and other associated costs.
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
We have sold all of our shares of Modex Therapeutics, Ltd., refered to in
our Form 10-K for the year ended December 31, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES-HOLDERS
None
ITEM 5. OTHER INFORMATION
On September 26, 2001, the size of the Board of Directors was increased to six
and Dr. Ricardo Levy was elected to the new position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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.
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(Name of Registrant)
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November 7, 2001 /s/ George Koshy
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Controller and Acting Chief Financial
Officer (principal financial officer and
principal accounting officer)
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