AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2001
REGISTRATION NO. 333-54208
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other Jurisdiction 2836 94-3078125
of Incorporation or (Primary Standard Industrial (I.R.S. Employer
Organization) Classification Code Number) Identification No.)
------------------------
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
IRIS BREST, ESQ.
STEMCELLS, INC.
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
GEOFFREY B. DAVIS, ESQ.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
(617) 951-7050 (fax)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
Common Stock, par value $.01 per share....... 65,000 Shares $3.266 $212,264 $53.07
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. The maximum price
per share information is based on the average of the high and low sale
prices on the Nasdaq National Market on January 22, 2001.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
JANUARY 31, 2001
STEMCELLS, INC.
SHARES OF COMMON STOCK
---------------
The selling stockholders listed on page 44 of this prospectus or in an
accompanying supplement to this prospectus are offering to sell 65,000 shares of
our common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
---------------------
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary..................... 2
Risk Factors........................... 4
Forward-Looking Statements............. 11
Industry and Market Data............... 11
Use of Proceeds........................ 11
Dividend Policy........................ 11
Capitalization......................... 12
Dilution............................... 13
Selected Consolidated Financial Data... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 22
Management............................. 40
Executive Compensation................. 42
Selling Stockholders................... 44
Security Ownership of Certain
Beneficial Owners and Management..... 45
PAGE
--------
Relationships and Transactions with
Related Parties...................... 47
Description of Capital Stock........... 50
Plan of Distribution................... 54
Legal Matters.......................... 55
Experts................................ 55
Where You Can Find More Information.... 55
Index to Financial Statements.......... F-1
Condensed Consolidated Balance
Sheets............................... F-25
Condensed Consolidated Statements of
Operations........................... F-26
Condensed Consolidated Statements of
Cash Flows........................... F-27
Notes to Condensed Consolidated
Financial Statements................. F-28
i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
STEMCELLS, INC.
We are engaged in research and development efforts focused on the
identification, isolation and expansion of stem cells as the underlying
technology for developing potential cell transplant therapies. Stem cells are
key cells in the body that produce all of the functional mature cell types found
in normal, healthy individuals. Our goal is to develop therapies that will use
stem cells to repopulate or repair tissues, such as those of the brain, pancreas
or liver, that have been damaged or lost as a result of disease or injury. All
of our programs are currently at the discovery or pre-clinical stage.
Many diseases, such as Alzheimer's, Parkinson's and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
We believe that our stem cell technologies, if successfully developed, may
provide the basis for effective therapies for these and other conditions. Our
aim is to return patients to productive lives and significantly reduce the
substantial health care costs often associated with these diseases and
disorders. We have made significant progress toward developing stem cell
therapies for the nervous system by identifying and characterizing the human
central nervous system stem cell. We have also made significant advances in our
search for the stem cells of the pancreas and the liver by identifying novel
markers on the surface of cells so they can be isolated and tested to determine
whether they are stem cells.
We have established our intellectual property position with respect to stem
cell therapies for each of these three areas--the central nervous system, the
pancreas and the liver--by patenting or seeking patent protection for our
discoveries and by entering into exclusive licensing arrangements. Our portfolio
of issued patents includes a method of culturing normal human neural stem cells
in our proprietary medium, and our published studies show that our cultured and
expanded cells give rise to all three major cell types of the central nervous
system. In addition, the Company recently announced the results of a new study
that showed that human brain stem cells can be successfully isolated with the
use of markers present on the surface of freshly obtained brain cells. We
believe this is the first reproducible process for isolating highly purified
populations of well-characterized normal human neural stem cells, and we have
applied for a composition of matter patent. We also have filed an improved
process patent for the growth and expansion of these purified normal human
neural cells.
Historical Note: We were formerly known as CytoTherapeutics and were
incorporated in Delaware in 1988. We currently have one subsidiary, StemCells
California, Inc., a California corporation we acquired in September 1997. Until
mid-1999, we had programs in a different technology, encapsulated cell therapy,
as well as stem cell programs. In 1999, we embarked on a major restructuring of
our research and development operations and sold the encapsulated cell therapy
technology. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
2
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
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1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 8,432 3,350
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048 4,078 769
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(10,484) $(4,865)
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.56) $ (0.26)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,561 19,683
The following table provides a summary of our consolidated balance sheets.
AS OF
AS OF DECEMBER 31 SEPTEMBER 30
---------------------------------------------------- -------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -------------
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities........... $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 7,247
Restricted investments..................................... 27,204
Total assets............................................... 56,808 58,397 44,301 32,866 15,781 41,632
Long-term debt, including capitalized leases............... 5,441 8,223 4,108 3,762 2,937 2,692
Redeemable common stock.................................... 8,159 5,583 5,249 5,249
Stockholders' equity....................................... 45,391 34,747 28,900 17,897 3,506 37,126
In July 1999 we began restructuring the company to focus solely on our stem
cell technology. As part of this restructuring we terminated all activities
related to our former encapsulated cell technology and we relocated our
headquarters from Lincoln, Rhode Island to Sunnyvale, California. The results
shown for the nine months ended September 30, 2000 includes $768,733 in expenses
related to the restructuring. For more information on this restructuring see
"Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes included elsewhere in this prospectus.
During 2000 we realized a $1,427,686 gain and recognized an increase in
value related to our remaining holdings of $27,204,333 in connection with our
investment in Modex Therapeutics Ltd., a Swiss biotechnology company that
completed an initial public offering on June 23, 2000. For more information on
Modex see "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and notes included elsewhere in this prospectus.
3
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION REGARDING STEMCELLS, INC. WE MAY FACE OTHER RISKS NOT
DESCRIBED BELOW THAT WE DO NOT PRESENTLY KNOW ABOUT OR THAT WE CURRENTLY DEEM
IMMATERIAL.
OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE
MATERIALLY ADVERSELY AFFECTED BY ANY OF THESE RISKS. CONSEQUENTIALLY, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, RESULTING IN THE LOSS OF ALL OR
PART OF YOUR INVESTMENT.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cell technology is at the early pre-clinical stage for the brain
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product using stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly integrate into existing tissue in the desired manner, or
(iv) achieve benefits therapeutically equal to or better than the standard of
treatment at the time of testing. In addition, any such product may cause
undesirable side effects. Results of early pre-clinical research may not be
indicative of the results that will be obtained in later stages of preclinical
or clinical research. If the appropriate regulatory authorities do not approve
our products, or if we fail to maintain regulatory compliance, we would have
limited ability to commercialize our products, and our business and results of
operations would be harmed. Furthermore, since stem cells are a new form of
therapy, the marketplace may not accept any products we may develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses.
We owned 126,193 shares of Modex Therapeutics Ltd., stock with an estimated
fair market value on June 30, 2000 of $19,220,165 based on the per share price
of approximately $152.00, which we converted from a market price of 247.50 Swiss
francs on June 30, 2000, and we had been restricted from selling these shares
until December 23, 2000. On January 2, 2001, the market price of Modex stock was
210.00 Swiss francs, which converts to $130.39 using the exchange rates on that
date, and represents an estimated fair market value of $16,453,825 for our
holdings on that date. The performance of Modex stock since Modex's initial
public offering does not predict its future value and the value of our holdings
is subject to change and could decrease significantly. 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 $2,550,230.27. In
connection with this sale, we agreed not to resell any more of our remaining
103,577 Modex shares until April 12, 2001. If we decide to sell more of our
Modex shares, due to the relatively small trading volume in Modex shares and the
relatively large size of our holding, or other factors, we may not be able to
sell our Modex shares at their market value or at all, and we may have to sell
these shares at a significant discount to the market price. If we
4
sell some but not all of our Modex shares, it is likely that we would have to
agree, in connection with the sale, to refrain from selling additional shares
for several months. In addition, fluctuations in currency exchange rates could
decrease the proceeds we might realize on a potential sale of Modex shares.
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on continued progress in our research
and development efforts. We may fail to obtain the necessary capital resources
from any such sources when needed or on terms acceptable to us. If we do not
obtain the necessary capital resources, we may have to delay, reduce or
eliminate some or all of our research and development programs or license our
technology or any potential products to third parties rather than
commercializing them ourselves.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR STEM CELL
RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where we also had our
administrative offices. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$950,000 per year for our former science and administrative facility, which we
have leased through June 30, 2013, and debt service payments and operating costs
of approximately $1,000,000 per year for our former encapsulated cell therapy
pilot manufacturing facility. We are currently seeking to sublease the science
and administrative facility and to sell the pilot manufacturing facility, but
may not be able to do so. These continuing costs significantly reduce our cash
resources and adversely affect our ability to fund further development of our
stem cell technology. The lease for the science and administrative facility
contains a provision requiring occupancy of the premises and we currently may be
in violation of this provision. If the landlord decides to pursue its rights, we
may be required to pay the landlord the entire amount due for the rest of the
lease period.
WE MAY NEED BUT FAIL TO OBTAIN PARTNERS TO SUPPORT OUR STEM CELL DEVELOPMENT
EFFORTS AND TO COMMERCIALIZE OUR TECHNOLOGY.
Equity and debt financings alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may need to rely on our ability to
reach partnering arrangements to provide financial support for our stem cell
discovery and development efforts. In addition, in order to successfully develop
and commercialize our technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies, universities,
research groups and others. While we have engaged, and expect to continue to
engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all. Even if we enter into these
arrangements, we may not be able to satisfy our obligations under them or renew
or replace them after their original terms. Furthermore, these arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our securities. If any of
our collaborators terminates its relationship with us or fails to perform its
obligations in a timely manner, the development or commercialization of our
technology and potential products may be adversely affected.
We entered into a Sponsored Research Agreement with the Scripps Research
Institute under which we funded certain research in return for licenses or
options to license the inventions resulting from the research. This agreement
expired on November 14, 2000 and we are negotiating with Scripps to extend the
term of this agreement or to enter into a new agreement. As of the date of this
prospectus, we have not yet completed our negotiations with Scripps and we
cannot give any assurance
5
that our negotiations will be successful. If we are unable to extend the term of
this agreement or enter into a new agreement, we will have to find a replacement
to perform this research or we will have to perform this research ourselves. In
either case, we may experience delay and additional expense in connection with
this research effort.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We have incurred $124,237,900 in operating losses through September 30, 2000
and expect to continue to incur substantial operating losses in the future in
order to conduct our research and development activities, and if those
activities are successful, to fund clinical trials and other expenses. These
expenses include the cost of acquiring technology, product testing, acquiring
regulatory approvals, establishing production, marketing, sales and distribution
programs, and administrative expenses. We have not earned any revenues from
sales of any product. All of our past revenues have been derived from, and any
revenues we may obtain for the foreseeable future are expected to be derived
from, cooperative agreements, research grants, investments and interest on
invested capital. We have no cooperative agreements and we have received only
two research grants for our stem cell technology, and we may not obtain any such
agreements or additional grants in the future, or receive any revenues from
them.
WE DO NOT ANTICIPATE RECEIVING FUTURE REVENUES FROM THE SALE OF OUR
ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While under the terms of the sale we may receive royalty and
other payments from Neurotech under certain circumstances, we do not anticipate
receiving any material payments from Neurotech in the near future, if at all.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION WILL BE HARMED.
We own or license a number of patents or pending patent applications
covering human nerve stem cell cultures, central nervous system stem cell
cultures, neuroblast cultures, peripheral nervous system stem cell cultures, and
an animal model for liver failure. Patent protection for products such as those
we propose to develop is highly uncertain and involves complex and continually
evolving factual and legal questions. The governmental authorities that consider
patent applications can deny or significantly reduce the patent coverage
requested in an application before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result in the issuance
of patents, or if any existing or future patents will provide sufficient
protection or significant commercial advantage or if others will circumvent
these patents. Since patent applications are secret until patents are issued in
the United States or until the applications are published in foreign countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we were the
first to make the inventions covered by each of our pending patent applications
or that we were the first to file patent applications for such inventions. Our
patents may not issue from our pending or future patent applications or, if
issued, may not be of commercial benefit to us, or may not afford us adequate
protection from competing products. In addition, third parties may challenge our
patents or governmental authorities may declare them invalid. In the event that
a third party has also filed a patent application relating to inventions claimed
in our patent applications, we may have to participate in proceedings to
determine priority of invention. This could result in substantial uncertainties
and cost for us, even if the eventual outcome is favorable to us, and the
outcome might not be favorable to us. Even if a patent issues, a court could
decide that the patent was issued invalidly.
6
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking. Failure to be the first
could prevent us from commercializing all of our research and development
related to such stem cell and have a material adverse effect on the Company.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have received
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents. We are also aware of a number of
patent applications and patents claiming use of genetically modified cells to
treat disease, disorder or injury. We are aware of three patents issued to two
competitors claiming certain methods for enriching central nervous system stem
cells through gene modification of in vitro cultured cells. These patents were
issued or licensed to NeuralStem and Layton Bioscience. It is possible that
NeuralStem or Layton Bioscience will be able to produce commercially available
stem cell products before we can. These genetically modified cells may be
effective in treating defective, diseased or damaged central nervous system
tissue.
If third party patents or patent applications contain claims infringed by
our technology and these claims are valid, we may be unable to obtain licenses
to these patents at a reasonable cost, if at all, and may also be unable to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, our business could be significantly harmed. We
may have to to defend ourselves in court against allegations of infringement of
third party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. An adverse outcome
in such a suit could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require us to
cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own or gain
access to our trade secrets or disclose such technology, or that we will be able
to meaningfully protect our trade secrets and unpatented know-how and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Licensors may cancel our licenses or convert them
to non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of such licenses could expose us to the risks of
third party patents and/or technology. We can give no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic products that address degenerative diseases is
large and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be
7
fully integrated pharmaceutical companies and more established biotechnology
companies, such as Biogen, Inc. and Genzyme, an Elan Corporation. These
companies already produce or are developing treatments for degenerative diseases
that are not stem-cell based, and they have significantly greater capital
resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing than we do. Many of these potential
competitors have significant products approved or in development that could be
competitive with our potential products, and also operate large, well-funded
research and development programs. In addition, we expect to compete with
smaller companies such as NeuralStem and Layton Bioscience and with universities
and other research institutions who are developing treatments for degenerative
diseases that are stem-cell based.
Our competitors may succeed in developing technologies and products that are
more effective than those being developed by us, or that would render our
technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining U.S. Food and Drug Administration
and other necessary regulatory approvals is lengthy, expensive and uncertain. We
or our collaborators may fail to obtain the necessary approvals to commence or
continue clinical testing or to manufacture or market our potential products in
reasonable time frames, if at all. In addition, the United States Congress and
other legislative bodies may enact regulatory reforms or restrictions on the
development of new therapies that could adversely affect the regulatory
environment in which we operate or the development of any products we may
develop.
We base our research and development on the use of human stem and progenitor
cells obtained from fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue. These restrictions
change from time to time and may become more onerous. Additionally, we may not
be able to identify or develop reliable sources for the cells necessary for our
potential products--that is, sources that follow all state and federal
guidelines for cell procurement. Further, we may not be able to obtain such
cells in the quantity or quality sufficient to satisfy the commercial
requirements of our potential products. As a result we may be unable to develop
or produce our products in a profitable manner.
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. The U.S. Congress in the past considered, and in the future
again may consider, legislation that would restrict the extent and duration of
the market exclusivity of an orphan drug. If enacted, such legislation could
prevent us from obtaining some or all of the benefits of the existing statute
even if we were to apply for and be granted orphan drug status with respect to a
potential product.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants, including the members
of our scientific advisory board, our chief executive officer, each of our vice
presidents and the directors of our neural stem cell and liver stem cell
programs. Although we have entered into employment agreements with some of these
individuals, they may terminate their agreements at any time. We currently have
outside consultants and interim
8
personnel in key management and scientific positions who are not permanent
employees. Loss of services of any of these individuals could have a material
adverse effect on our operations, because these individuals possess management
experience or specialized scientific skills which we do not otherwise have and
which we may not be able to replace. In addition, our operations are dependent
upon our ability to attract and retain additional qualified scientific and
management personnel. More generally, we may not be able to attract and retain
the personnel we need on acceptable terms given the competition for experienced
personnel among pharmaceutical, biotechnology and health care companies,
universities and research institutions. If we lose the services of these key
personnel or are unable to attract and retain additional qualified personnel, we
may have to delay, reduce or eliminate some or all of our research and
development programs.
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the Food and Drug Administration has not
granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. We can give no
assurance that reimbursement will be provided by such payors at all or without
substantial delay, or, if such reimbursement is provided, that the approved
reimbursement amounts will be sufficient to enable us to sell products we
develop on a profitable basis. Changes in reimbursement policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
us on the development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals Federal or state governments will adopt or what actions Federal, state
or private payers for healthcare goods and services may take in response to
healthcare reform proposals or legislation. We cannot predict the effect
government control and other healthcare reforms may have on our business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with the winddown of our encapsulated
cell therapy programs, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and you should not rely
upon them as an indication of future performance.
OUR STOCK PRICE MAY BE VOLATILE AND THIS VOLATILITY COULD RESULT IN LAWSUITS
OR MAKE IT DIFFICULT TO RAISE CAPITAL.
The market price for our common stock has been volatile and could decline
below the offering price for the shares. We believe that the market price for
our common stock could fluctuate substantially due to some or all of the risk
factors enumerated above.
9
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our common stock. In the past, companies that have
experienced volatility in the market price of their stock have been the objects
of securities class action litigation. If we were the object of securities class
action litigation, we could incur material costs and suffer a diversion of our
management's attention and resources. In addition, volatility in our stock price
may make it difficult for us to obtain additional capital resources through
financings on terms acceptable to us.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our common stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. In particular, as of October 31, 2000, we had outstanding stock
options to purchase approximately 2,566,530 shares of common stock, at an
average exercise price of approximately $4.402 per share, subject to adjustment
in certain circumstances. Of this total, options covering approximately 941,309
shares are currently exercisable at an average exercise price of approximately
$4.742 per share.
10
FORWARD-LOOKING STATEMENTS
This prospectus 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
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections and elsewhere in this prospectus
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 throughout this prospectus.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding disease occurrences, costs of treatment, biotechnology, and the market
sectors in which we may compete in the future. We obtained this information and
statistics from various third party sources, discussions with our consultants
and/or our own internal estimates. We believe that these sources and estimates
are reliable, but we have not independently verified them.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not, therefore, anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent on
then existing conditions, including our financial stability, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant.
11
CAPITALIZATION
The following table presents our consolidated capitalization as of
September 30, 2000. This table excludes
- 2,797,518 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of September 30, 2000, 2,501,031 shares of common stock upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.209 per share.
b) 101,587 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P in conjunction with the aforementioned
August 3, 2000 financing at an exercise price of $4.725 per share.
c) 19,900 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P. in conjunction with the aforementioned
August 30, 2000 financing at an exercise price of $6.03 per share.
d) 100,000 shares of common stock upon the exercise of warrants granted to
May Davis Group, Inc. and four of its affiliates in connection with the
aforementioned financing at an exercise price of $5.0375 per share.
e) 75,000 shares of common stock upon the exercise of warrants at $6.58125
per share held by holders of our 6% cumulative convertible preferred
stock purchased on April 13, 2000 for $1,500,000.
- The right under certain circumstances for holders of our 6% cumulative
convertible preferred stock to acquire up to a total of 1,126 additional
shares of our 6% cumulative convertible preferred stock, which is
convertible at the option of the holders into common stock at $6.33 per
share subject to customary antidilution protection.
- Millennium Partners, L.P.'s option to purchase up to an additional
$2,000,000 of common stock through August 3, 2001.
- The right of the holders of our 6% cumulative convertible preferred stock
to convert their preferred shares into 397,878 shares of common stock at
$3.77 per share.
- 65,000 shares issued to NeuroSpheres, Ltd. on October 30, 2000.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
AS OF
SEPTEMBER 30,
2000
--------------
Stockholders' equity:
Convertible Preferred Stock, par value $0.01 per share,
1,000,000 shares authorized, 2,626 designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares
issued.................................................. $ 1,500,000
Common stock, par value $0.01 per share, 45,000,000 shares
authorized, 20,881,812 shares issued.................... 208,818
Additional paid-in-capital................................ 134,698,668
Stock subscription receivable............................. (1,250,004)
Accumulated deficit....................................... (124,237,900)
Accumulated other comprehensive income.................... 27,204,333
Deferred compensation..................................... (997,664)
-------------
Total stockholders' equity.............................. $ 37,126,251
=============
12
DILUTION
This offering is for sales of stock by our existing stockholders on a
continuous or delayed basis in the future. Sales of common stock by stockholders
will not result in any substantial change to the net tangible book value per
share before and after the distribution of shares by the selling stockholders.
There will be no change in net tangible book value per share attributable to
cash payments made by purchasers of the shares being offered. Prospective
investors should be aware, however, that the price of our shares may not bear
any rational relationship to net tangible book value per share.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements and other financial information included elsewhere in this
prospectus.
The consolidated historical financial data presented below as of
December 31, 1995, 1996, 1997, 1998, and 1999 and for the years then ended are
derived from our consolidated financial statements, which have been audited by
Ernst & Young LLP, our independent auditors. The selected consolidated financial
data as of September 30, 1999 and 2000, and for the nine months then ended are
derived from our unaudited financial statement. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected consolidated financial data for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000 or any other future period.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue from collaborative
agreements...................... $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development
expenses........................ 14,730 17,130 18,604 17,659 9,991 8,432 3,350
Acquired research and
development..................... 8,344
ECT wind-down and corporate
relocation expenses............. 6,048 4,078 769
Net loss.......................... $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(10,484) $(4,865)
======= ======== ======== ======== ======== ======== =======
Basic and diluted net loss per
share........................... $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.56) $ (0.26)
Shares used in computing basic and
diluted net loss per share...... 12,799 15,430 16,704 18,291 18,706 18,561 19,683
The following table provides a summary of our consolidated balance sheets.
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -------------
BALANCE SHEET DATA
Cash, cash equivalents and marketable
securities.............................. $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 7,247
Restricted investments.................... 27,204
Total assets.............................. 56,808 58,397 44,301 32,866 15,781 41,632
Long-term debt, including capitalized
leases.................................. 5,441 8,223 4,108 3,762 2,937 2,692
Redeemable common stock................... 8,159 5,583 5,249 5,249 --
Stockholders' equity...................... 45,391 34,747 28,900 17,897 3,506 37,126
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations for the nine months ended September 30, 2000 and 1999 and the years
ended December 31, 1999, 1998, and 1997 should be read in conjunction with our
consolidated financial statements and notes to those statements and other
financial information included elsewhere in this prospectus.
RESULTS OF OPERATIONS
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. At the
beginning of last year, 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 Sunnyvale,
California. Comparisons with last year's results are correspondingly less
meaningful than they may be under other circumstances.
We were known as CytoTherapeutics, Inc., until May 23, 2000, when we changed
our name to StemCells, Inc.
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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended September 30, 2000 and 1999, revenues from
collaborative agreements totaled $0 and $5,021,707, respectively. The decrease
in revenues resulted from the June 1999 termination of a Development, Marketing
and License Agreement related to our former ECT. We have not entered into
revenue-producing collaborations with respect to our platform of stem cell
technologies.
During the second quarter 2000 we realized a $1,427,686 gain in connection
with our investment in Modex Therapeutics Ltd ("Modex"), a Swiss biotechnology
company that completed an initial public offering on June 23, 2000. At
September 30, 2000, we owned 126,193 shares with an estimated fair value of
$27,204,333, based on the per share price of $215.58 which we converted from a
market price of 372.00 Swiss francs on that date. On January 2, 2001 the market
price was 210.00 Swiss Francs, which converts to $130.39 and results in an
estimated fair value of $16,453,825 for the Company's
15
holdings on that date. 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 $2,550,230.27. In connection with this sale, we agreed not to
resell any more of our remaining 103,577 Modex shares until April 12, 2001.
Research and development expenses totaled $3,350,101 for the nine months
ended September 30, 2000, compared with $8,432,262 for the same period in 1999.
The decrease of $5,082,161, or 60% from 1999 to 2000 is primarily attributable
to the wind-down of research activities relating to the ECT.
General and administrative expenses were $2,172,137 for the nine months
ended September 30, 2000, compared with $3,195,672 for the same period in 1999.
The decrease of $1,023,535, or 32%, from 1999 to 2000 was primarily attributable
to lower payroll costs (approximately $882,000) resulting from the restructuring
of administrative operations and to the establishment of a smaller corporate
office in California (approximately $136,000).
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to Sunnyvale, California for the nine
months ended September 30, 2000 and 1999 was $768,733 and $4,078,034
respectively. In 1999 we had created a reserve of $1,634,522 for wind-down
expenses related to the first half of 2000, of which approximately $463,000
related to the carrying costs through an expected June 30, 2000 disposition of
the Rhode Island facilities. During the first six months of 2000 we incurred
$288,646 of costs in excess of the amounts reserved as of December 31, 1999 for
the carrying costs, including lease payments, property taxes and utilities, of
the Rhode Island facilities. During the third quarter we incurred an additional
$480,087 in carrying costs for the Rhode Island facilities, as we were unable to
dispose of them by June 30, 2000, as expected. These amounts were previously
included in general and administrative expense, and have been reclassified to be
separately disclosed as encapsulated cell therapy wind down and corporate
relocation expense because they were directly related to the wind down and
relocation. We anticipate that we will incur a similar amount in the fourth
quarter of 2000 and in every quarter thereafter until we dispose of these
facilities. We do not currently have a projected date for such disposal and
there can be no assurance that we will be able to dispose of these facilities in
a reasonable time, if at all. Some additional items that were more properly
included in research and development were also reclassified out of general and
administrative expense, and facilities costs were more accurately spread between
research and development and general and administrative expense.
Interest income for the nine months ended September 30, 2000 and 1999 was
$218,480 and $504,114 respectively. The decrease in interest income in 2000 was
attributable to the lower average investment balances during such period.
Interest expense was $209,287 for the nine months ended September 30, 2000,
compared with $236,836 for the same period in 1999. The decrease in 2000 was
attributable to lower outstanding debt and capital lease balances in 2000
compared to 1999.
Net loss for the nine months ended September 30, 2000 was $4,865,190 or
($0.25) per share, as compared to net loss of $10,483,760 or ($0.56) per share,
for the comparable period in 1999. The decrease in net loss of $5,618,570 or 54%
from the same period in 1999 was primarily attributable to the wind-down of
research activities relating to the ECT and reflects a gain of $1,427,686 in
connection with our investment in Modex. We (then known as CytoTherapeutics,
Inc.) were one of the founders of Modex, a Swiss biotherapeutics company
established in 1996 to pursue encapsulated cell technologies related to our
former programs. After Modex' Initial Public offering on the Swiss Neue Market
on June 23, 2000 and our sale of 23,807 shares, we owned 126,193 shares of Modex
common stock. The IPO price was 168.00 Swiss Francs, and the share price on
September 30, 2000 was 372.00 Swiss Francs. On January 2, 2001 the market price
was 210.00 Swiss Francs. 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 $2,550,230.27. In connection with this sale, we agreed not
to resell any more of our remaining 103,577 Modex shares until April 12, 2001.
16
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues from collaborative agreements totaled $5,022,000, $8,803,000 and
$10,617,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
We earned revenues primarily from a Development, Marketing and License Agreement
with AstraZeneca Group plc, which we signed in March 1995. The decrease in
revenues from 1998 to 1999 resulted primarily from the June 1999 termination of
the AstraZeneca Agreement. 1997 revenues included a $3,000,000 milestone payment
from AstraZeneca related to the Phase II clinical trials for an ECT product.
Research and development expenses totaled $9,984,000 in 1999, as compared to
$17,659,000 in 1998 and $18,604,000 in 1997. The decrease of $7,668,000, or 43%,
from 1998 to 1999 was primarily attributable to the wind-down of research
activities relating to the ECT, precipitated by termination of the AstraZeneca
Agreement. The decrease of $945,000, or 5%, from 1997 to 1998 was primarily
attributable to a reduction in spending on research agreements and a reduction
in research and development personnel.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells California, Inc., in 1997.
Commercialization of this technology will require significant incremental
research and development expenses over a number of years. With the recent
completion of the restructuring of our research operations, we are now focused
solely on the research and development of our platform of stem cell
technologies, which encompasses the technology acquired upon the acquisition of
StemCells California, Inc. and related technology we have developed or licensed.
General and administrative expenses were $4,927,303 for the year ended
December 31, 1999, compared with $4,603,000 in 1998 and $6,158,000 in 1997. The
1999 general administrative expenses were positively impacted by the reduction
in facility costs that were included in wind-down ($239,000), reduction in
amortization of patents and intangible assets of approximately $338,000, as well
as reduced activities and related personnel costs estimated at approximately
$500,000 that were not incurred. This was due to the wind-down of our ECT
programs and relocation of our headquarters in October 1999. The reduction of
$1,555,000, or 25%, from 1997 to 1998 was primarily attributable to a reduction
in legal fees, recruiting and relocation expenses, as well as a reduction in
employees.
Wind-down and relocation expenses totaled $6,047,806 for the year ended
December 31, 1999; no such expenses were incurred in 1998 and 1997. These
expenses relate to the wind-down of our encapsulated cell technology research
and our other Rhode Island operations the transfer of our corporate headquarters
to Sunnyvale, California.
They include accruals of approximately $1,554,000 for employee severance
costs, $1,858,000 in losses and reserves for the write-down of related patents
and fixed assets, $1,172,000 for our costs of settlement of a 1989 funding
agreement with the Rhode Island Partnership for Science and Technology, $702,000
of estimated additional carrying costs through an expected June 30, 2000
disposition of the Rhode Island facilities, and other related expenses totaling
$762,000.
Interest income for the years ended December 31, 1999, 1998 and 1997 totaled
$564,000, $1,254,000 and $1,931,000, respectively. The average cash and
investment balances were $10,663,000, $21,795,000 and $33,343,000 in 1999, 1998
and 1997, respectively. The decrease in interest income from 1997 to 1998 to
1999 was attributable to lower average balances.
In 1999, interest expense was $335,000, compared with $472,000 in 1998 and
$438,000 in 1997. The decrease from 1998 to 1999 was attributable to lower
outstanding debt and capital lease balances. The increase from 1997 to 1998 was
primarily attributable to capitalization of $210,000 of interest on the new
facility in 1997.
17
In October 1997, we recognized a gain in the amount of $3,387,000 related to
the sale of 50 percent of our interest in Modex Therapeutics Ltd.
The net loss in 1999, 1998 and 1997 was $15,709,000, $12,628,000, and
$18,114,000, respectively. The loss per share was $0.84, $0.69 and $1.08 in
1999, 1998 and 1997, respectively. The increase from 1998 to 1999 is primarily
attributable to the elimination of revenue from the AstraZeneca Agreement, which
was terminated in June 1999, as well as expenses related to the wind-down of our
ECT research and our other Rhode Island operations, the transfer of our
corporate headquarters to Sunnyvale, California and an accrual of approximately
$1,172,000 for our estimate of the costs of settlement of the funding agreement
with RIPSAT. The decrease from 1997 to 1998 was attributable to a one-time
charge of $8,344,000 for acquired research and development related to the
purchase of StemCells California, Inc. offset by the $3,387,000 gain on a
partial sale of our interest in Modex in 1997.
The 1999 decrease in patents of $3,229,932 from 1998 was primarily due to
management's decision to wind down the ECT program and dispose of the related
intellectual property. During the fourth quarter of 1999 we sold the patents
related to our encapsulated cell technology to Neurotech for $3,000,000.
Accrued expenses increased by $1,584,949, primarily due to the accrual of
approximately $1,172,000 for our estimate of the costs of settlement of a 1989
funding agreement with the Rhode Island Partnership for Science and Technology
and $463,000 for the estimated lease payments and operating costs of the Rhode
Island facilities through an expected disposal date of June 30, 2000.
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 unrestricted cash and cash equivalents totaling $5,535,264 at
June 30, 2000. Cash equivalents are invested in money market funds.
We also hold 126,193 shares of Modex stock as of January 2, 2001, which is
publicly traded on the Swiss Neue Market exchange. While our Modex stock had an
estimated fair market value of $27,204,333 on September 30, 2000 (and
$16,453,825 on January 2, 2001), the fair market value of our Modex stock has
varied significantly since the Modex public offering and may continue to vary
significantly 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 public offering from selling any of our Modex shares 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 $2,550,230.27. In connection with this sale, we agreed not to resell any more
of our remaining 103,577 Modex shares until April 12, 2001. There is a limited
trading market for Modex stock, and if we were to attempt to sell any
significant portion of our remaining Modex holdings, we would likely be able to
do so only at a significant discount to the then market price, if at all. If we
sell some but not all of our Modex shares, it is likely that we would have to
agree, in connection with the sale, to refrain from selling additional shares
for several months.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former ECT. These relationships are now terminated, and we have not yet
established corporate partnerships with respect to our stem cell technology.
In March 1995, we signed a collaborative research and development agreement
with AstraZeneca plc for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
18
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, we were obligated to conduct certain research
and development pursuant to a four-year research plan agreed upon by the
parties. Over the term of the research plan, we originally expected to receive
annual payments of $5 million to $7 million from AstraZeneca, which was to
approximate the research and development costs incurred by us under the plan.
Subject to the successful development of such products and obtaining necessary
regulatory approvals, AstraZeneca was obligated to conduct all clinical trials
of products arising from the collaboration and to seek approval for their sale
and use. AstraZeneca had the exclusive worldwide right to market products
covered by the agreement. Until the later of either the expiration of all
patents included in the licensed technology or a specified fixed term, we were
entitled to a royalty on the worldwide net sales of such products in return for
the marketing license granted to AstraZeneca and our obligation to manufacture
and supply products. AstraZeneca had the right to terminate the original
agreement beginning April 1, 1998. On June 24, 1999, AstraZeneca informed us of
the results of AstraZeneca's analysis of the double-blind, placebo-controlled
trial of a potential ECT product, an encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients. AstraZeneca determined
that, based on criteria it established, the results from the 85-patient trial
did not meet the minimum statistical significance for efficacy established as a
basis for continuing worldwide trials for the therapy. AstraZeneca therefore
indicated that it did not intend to further develop the bovine cell-containing
implant therapy and exercised its right to terminate the agreement. See also
Note 17--"Research Agreements" to the Accompanying Consolidated Financial
Statements.
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to our ECT and to focus our resources on the
research and development of our platform of proprietary stem cell technologies.
We terminated approximately 68 full time employees and, in October 1999,
relocated our corporate headquarters to Sunnyvale, California. We recorded
$6,047,806 of wind-down expenses including employee separation and relocation
costs during 1999.
On December 30, 1999 we sold our ECT and assigned our intellectual property
assets in it to Neurotech S.A. for a payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties.
In addition, we retained certain non-exclusive rights to use ECT in combination
with our proprietary stem cell technologies and in the field of vaccines for
prevention and treatment of infectious diseases. We received $2,800,000 of the
initial payment on January 3, 2000 with a remaining balance of $200,000 placed
in escrow, to be released to us upon demonstration satisfactory to Neurotech
that certain intellectual property is not subject to other claims.
As part of our restructuring of operations and relocation of corporate
headquarters to Sunnyvale, California, we identified a significant amount of
excess fixed assets. In December of 1999, we completed the disposition of those
excess fixed assets, from which we received more than $746,000. The proceeds are
being used to fund our continuing operations.
In July 1999, as a result of our decision to close our Rhode Island
facilities, the Rhode Island Partnership for Science and Technology, or RIPSAT,
alleged that we were in default under a June, 1989 Funding Agreement, and
demanded payment of approximately $2.6 million. While we believe we were not in
default under the Funding Agreement, we deemed it best to resolve the dispute
without litigation and, on March 3, 2000, entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority, or
IRBA, and the Rhode Island Industrial Facilities Corporation, or RIIFC. We
agreed to pay RIPSAT $1,172,000 in full satisfaction of all of our obligations
to them under the Funding Agreement. At the same time, IRBA agreed to return to
us the full amount of our debt service reserve, comprising approximately
$610,000 of principal and interest, relating to the bonds we had with IRBA and
RIIFC. The $610,000 debt service reserve was transferred directly to RIPSAT,
leaving the remainder of approximately $562,000 to be paid by us. We made this
payment in March of 2000.
19
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of the their collaborative development and
licensing agreement with us relating to the development of products for the
treatment of Parkinson's disease; however, the claim was resolved with no effect
on our resources. On May 21, 1998, Genentech exercised its right to terminate
the Parkinson's collaboration and demanded that we redeem, for approximately
$3,100,000, certain shares of our redeemable Common Stock held by Genentech.
Genentech's claim was based on provisions in the agreement requiring us to
redeem, at the price of $10.01 per share, the shares representing the difference
between the funds invested by Genentech to acquire such stock and the amount
expended by us on the terminated program less an additional $1,000,000. In
March 2000, we entered into a Settlement Agreement with Genentech under which
Genentech released us from any obligation to redeem any shares of our Common
Stock held by Genentech, without cost to us. Accordingly, the $5.2 million of
redeemable common stock shown as a liability in our December 31, 1999 balance
sheet was transferred to equity in March, 2000 without any impact on our
liquidity and capital resources. We and Genentech also agreed that all
collaborations between us were terminated, and that neither of us had any rights
to the intellectual property of the other.
In May 1996, we secured an equipment loan facility with a bank in the amount
of $2,000,000. On August 5, 1999 we made a payment of approximately $752,000 of
principal and interest to the lender to retire this loan facility rather than
seek a waiver by the lender of our violation of a loan covenant requiring us to
maintain unrestricted liquidity in an amount equal to or in excess of
$10 million.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $950,000 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 are actively seeking to sublease,
assign or sell our 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 April 13, 2000, we sold 1,500 shares of our 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common stock
to two members of our Board of Directors for $1,500,000, on terms more favorable
to us than we were able to obtain from outside investors. The face value of the
shares of preferred stock is convertible at the option of the holders into
common stock at $3.77 per share. The holders of the preferred stock have
liquidation rights equal to their original investments plus accrued but unpaid
dividends. The investors would be entitled to make additional investments in our
securities on the same terms as those on which we complete offerings of our
securities with third parties within 6 months, if any such offerings are
completed. They have waived that right with respect to the common stock
transactions described below. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to a
total of 1,126 additional shares of convertible preferred stock, the face value
of which is convertible at the option of the holders into common stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrants expire on April 13, 2005.
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 may be
entitled, pursuant to an adjustable warrant issued in connection with the sale
of common stock to the Fund, to receive additional shares of common stock 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
20
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. This 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. Substantial additional funds will be required to support
our research and development programs, 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.
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 into the first quarter 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.
21
BUSINESS
OVERVIEW
We are engaged in research aimed at the development of therapies that would
use stem and progenitor cells derived from fetal or adult sources to treat, and
possibly cure, human diseases and injuries such as Parkinson's disease,
hepatitis, diabetes, and spinal cord injuries. The body uses certain key cells
known as stem cells to produce all the functional mature cell types found in
normal organs of healthy individuals. Progenitor cells are cells that have
already developed from the stem cells, but can still produce one or more types
of mature cells within an organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate, based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
Our proposed therapies are based on the transplanting of healthy human stem
and progenitor cells to repair or replace central nervous system, pancreas or
liver tissue that has been damaged or lost as a result of disease or injury,
potentially returning patients to productive lives and significantly reducing
health care costs. We believe that we have achieved significant progress in
research regarding stem cells of the central nervous system through the advances
we have made in the isolation, purification and transplantation of central
nervous system stem and progenitor cells. We have also made advances in our
research programs to discover the stem cells of the pancreas and of the liver.
We have established an intellectual property position in all three areas of our
stem cell research--the central nervous system, the pancreas and the liver--by
patenting our discoveries and entering into exclusive licensing arrangements. We
believe that, if successfully developed, our platform of stem cell technologies
may create the basis for therapies that would address a number of conditions
with significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many degenerative diseases of the nervous system, such as
Parkinson's disease, Alzheimer's disease and amyotrophic lateral sclerosis.
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the identification of some of the specific substances or
proteins that are deficient. While administering these substances or proteins as
medication does overcome some of the limitations of traditional pharmaceuticals
such as lack of specificity, there is no existing technology that can deliver
them to the precise sites of action and in the appropriate physiological
quantities or for the duration required to cure the degenerative condition.
Cells, however, do this naturally. As a result, investigators have
considered replacing failing cells that are no longer producing the needed
substances or proteins by implanting stem or progenitor cells capable of
regenerating the cell that the degenerative condition has damaged or destroyed.
Where
22
there has been irreversible tissue damage or organ failure, transplantation of
stem cells offers the possibility of generating new and healthy tissue, thus
potentially restoring the organ function and the patient's health.
THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
We believe that, if successfully developed, stem cell-based therapy--the use
of stem or progenitor cells to treat diseases--has the potential to provide a
broad therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves or from donors. Cells obtained from the same person who will
receive them may be abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can be
used for transplantation into individuals whose own cells are not
suitable because of disease or other reasons.
We have developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that reproducibly grows normal
human central nervous system, or CNS, stem and progenitor cells. We believe this
is the first reproducible process for growing normal human CNS stem cells. More
recently, we have discovered markers on the cell surface that identify the human
CNS stem cells. This allows us to purify them and eliminate other unwanted cell
types. Together, these discoveries enable us to select normal human CNS stem
cells and to expand them in culture to produce a large number of pure stem
cells.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells.
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. In our research, we have shown that stem cells of
the central nervous system transplanted into hosts are accepted, migrate, and
successfully specialize to produce mature neurons and glial cells.
More generally, because the stem cell is the pivotal cell that produces all
the functional mature cell types in an organ, we believe these cells, if
successfully identified and developed for transplantation, may serve as
platforms for five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- gene discovery and use, and
- diagnostics.
23
We will be pursuing key alliances in these areas.
OUR PLATFORM OF STEM CELL TECHNOLOGIES
Stem cells have two defining characteristics:
- some of the cells developed from stem cells produce all the kinds of
mature cells making up the particular organ; and
- they "self renew"--that is, other cells developed from stem cells are
themselves new stem cells, thus permitting the process to continue again
and again.
Stem cells are known to exist for many systems of the human body, including
the blood and immune system, the central and peripheral nervous systems
(including the brain), and the liver, pancreas endocrine, and the skin systems.
These cells are responsible for organ regeneration during normal cell
replacement and, to a more or less limited extent, after injury. We believe that
further research and development will allow stem cells to be cultivated and
administered in ways that enhance their natural function, so as to form the
basis of therapies that will replace specific subsets of cells that have been
damaged or lost through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture any of the finite number of different
types of human stem cells will be able to obtain patent protection for the
methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human central
nervous system stem and progenitor cells in our proprietary chemically defined
medium, and our published studies show that these cultured and expanded cells
give rise to all three major cell types of the central nervous system. Also, a
separate study sponsored by us using these cultured stem and progenitor cells
showed that the cells are accepted, migrate, and successfully specialize to
produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human central nervous system stem cells can be successfully isolated by markers
present on the surface of freshly obtained brain cells. We believe this is the
first reproducible process for isolating highly purified populations of
well-characterized normal human central nervous system stem cells, and have
applied for a composition of matter patent. Because the cells are highly
purified and have not been genetically modified, they may be especially suitable
for transplantation and may provide a safer and more effective alternative than
therapies that are based on cells derived from cancer cells, or from cells
modified by a cancer gene to make them grow, or from an unpurified mixture of
many different cell types or cells derived from animals. We have also filed an
improved process patent for the growth and expansion of these purified normal
human central nervous system cells.
Neurological disorders such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke, affect a significant portion of the
U.S. population and there currently are no effective long-term therapies for
them. We believe that therapies based on our process for identifying, isolating
and culturing neural stem and progenitor cells may be useful in treating such
diseases. We are continuing our research into, and have initiated the
development of, human central nervous system stem and progenitor cell-based
therapies for these diseases.
We continue to advance our research programs to discover the islet stem cell
in the human pancreas and the liver stem cell. Islet cells are the cells that
produce insulin, so islet stem cells may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin secretion is
24
defective. Liver stem cells may be useful in the treatment of diseases such as
hepatitis, cirrhosis of the liver and liver cancer.
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of our knowledge, no one has developed an FDA-approved method
for replacing lost or damaged tissues from the human nervous system. Replacement
of tissues in other areas of the human body is limited to those few sites, such
as bone marrow or peripheral blood cell transplants, where transplantation of
the patient's own cells is now feasible. In a few additional areas, including
the liver, transplantation of donor organs is now used, but is limited by the
scarcity of organs available through donation. We believe that our stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and specialize
into the multiple kinds of cells that are commonly lost in various diseases,
transplanted stem cells may be able to migrate limited distances to the proper
location within the body, to expand and specialize and to replace damaged or
defective cells, facilitating the return to proper function. We believe that
such replacement of damaged or defective cells by functional cells is unlikely
to be achieved with any other treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for, and
current status of, our primary research and product development programs and
projects. The table is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. Our research and product
development
25
programs are at relatively early stages of development and will require
substantial resources to commercialize.
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
------------------------------------------------------------
PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
- --------------------------------- ------------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central - Demonstrated IN VITRO the ability to initiate and expand
nervous system tissue (including stem cell-containing human neural cultures and
spinal cord, degenerated retinas specialization into three types of central nervous system
and tissue affected by certain cells
genetic disorders) - Demonstrated the ability of neurosphere-initiating stem
cells from human brain
- Demonstrated in rodent studies that transplanted human
brain-derived stem cells are accepted and properly
specialized into the three major cell types of the
central nervous system.
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas - Identified markers on the surface of cells to identify,
islet tissue isolate and culture islet stem cells of the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver - Demonstrated the production of hepatocytes from purified
tissue including tissue resulting mouse hematopoietic stem cells
from certain metabolic genetic - Identified IN VITRO culture assay for growth of human
diseases bipotent liver progenitor cells that can produce both
bile duct and hepatocytes
- Showed that the in vitro culture of human bipotent liver
cells can also grow human hepatitis virus
- ------------------------
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of central nervous system, stem and progenitor cell technology, animal models
for the identification and/or testing of stem and progenitor cells and our own
research and development efforts to date. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We have assembled an experienced team of scientists
and scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
BRAIN STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with central nervous system stem and progenitor cell
cultures in collaboration with NeuroSpheres, Ltd., in 1992. We believe that
NeuroSpheres was the first to invent these cultures. We are the exclusive,
worldwide licensee from NeuroSpheres to such inventions and associated patents
and patent applications for all uses, including transplantation in the human
body, as embodied in these patents. See "License Agreements and Sponsored
Research Agreements--NeuroSpheres, Ltd."
26
In 1997, our scientists invented a reproducible method for growing human
CNS, stem and progenitor cells in cultures. In preclinical IN VITRO and early IN
VIVO studies, we demonstrated that these cells specialize into all three of the
cell types of the central nervous system. Because of these results, we believe
that these cells may form the basis for replacement of cells lost in certain
degenerative diseases. We are continuing research into, and have initiated the
development of, our human CNS stem and progenitor cell cultures. We have
initiated the cultures and demonstrated that these cultures can be expanded for
a number of generations IN VITRO in chemically defined media. In collaboration
with us, Dr. Anders Bjorklund has shown that cells from these cultures can be
successfully transplanted and accepted into the brains of rodents where they
subsequently migrated and specialized into the appropriate cell types for the
site of the brain into which they were placed.
In 1998, we expanded our preclinical efforts in this area by initiating
programs aimed at the discovery and use of specific monoclonal antibodies to
facilitate identification and isolation of CNS and other stem and progenitor
cells or their specialized progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human CNS stem cells that
resulted in a 100-fold increase in CNS stem and progenitor cell production after
6 passages. We are expanding our preclinical efforts toward the goal of
selecting the proper indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering our methods for the human CNS cell
cultures containing central nervous system stem cells, for compositions of human
CNS cells expanded by these methods, and for use of these cultures in human
transplantation. These human CNS stem and progenitor cells expanded in culture
may be useful for repairing or replacing damaged central nervous system tissue,
including the brain and the spinal cord.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS stem cells, and also allowed a separate patent
application for our media for culturing human CNS stem cells.
Also in 1999, we announced the filing of a US patent application covering
our proprietary process for the direct isolation of normal human CNS stem cells
based on the markers found to be present on the surface of freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human CNS stem cells
utilizing this proprietary process. In November 1999, we announced the study's
first results: Our researchers, by using our proprietary markers on the surface
of the cell, had succeeded in identifying, isolating and purifying human CNS
stem cells from brain tissue, and were able to expand the number of these cells
in culture.
We believe that this is the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human CNS
stem cells. Because the cells are normal human CNS stem cells and have not been
genetically modified, they may be especially suitable for transplantation and
may provide a safer and more effective alternative to therapies that are based
on cells derived from cancer cells or from an unpurified mix of many different
cell types, or from animal derived cells.
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were able to take these
purified and expanded stem cells and transplant them into normal mouse brain
hosts, where they take hold and grow into neurons and glial cells.
During the course of the study, the transplanted human CNS stem cells
survived for as long as one year and migrated to specific functional domains of
the host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
when CNS stem cells isolated and cultured with our proprietary processes are
transplanted, they adopt the characteristics of the host brain and act like
normal stem cells. In other words, the study suggests the possibility of a
continual replenishment of normal human brain cells.
27
As noted above, human CNS stem and progenitor cells harvested and purified
and expanded using our proprietary processes may be useful for creating
therapies for the treatment of degenerative brain diseases such as Parkinson's,
Huntington's and Alzheimer's disease. These conditions affect more than
5 million people in the United States and there are no effective long-term
therapies currently available. We believe the ability to purify human brain stem
cells directly from fresh tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types, that can be expanded in culture
without fear of also expanding some unwanted cell types;
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development and function of the
brain is absent. Brain-derived stem cell cultures might be genetically
modified to produce those proteins. The modified brain stem cells could be
transplanted into patients with these genetic diseases;
- the efficient acceptance of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
nerve cells.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreas stem and progenitor cells is currently being conducted
by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in collaboration
with some of our senior researchers.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes, which is often called "juvenile
diabetes" and most commonly diagnosed in childhood; and 30,000 new patients are
diagnosed with the disease every year. It is a costly, serious, lifelong
condition, requiring constant attention and insulin injections every day for
survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreas stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. We
believe that stem cells produce the regeneration, in which case this animal
model may be useful for identifying specific markers on the cell surface unique
to the pancreas stem cells. We believe this may lead to the development of
cell-based treatments for Type 1 diabetes and that portion of Type 2 diabetes
characterized by defective secretion of insulin.
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel markers on the cell surface identified by Dr. Sarvetnick and her research
team as being unique to the pancreas islet stem cell for which we have now filed
a US patent application. In collaboration with Dr. Sarvetnick, we continue to
advance the discovery program directed at the identification, isolation and
culturing of pancreas stem and progenitor cells utilizing this technology.
28
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments.
In 1998, our researchers continued to advance methods for establishing
enriched cell populations suitable for transplantation in preclinical animal
models. We are focused on discovering and utilizing our proprietary methods to
identify, isolate and culture liver stem and progenitor cells and to evaluate
these cells in preclinical animal models.
In 1999, our researchers devised a culture assay that we will use in our
efforts to identify liver stem and progenitor cells. In addition to supporting
the growth of an early human liver bipotent progenitor cell, it is also possible
to infect this culture with human hepatitis virus, providing a valuable system
for study of the virus. This technology could also provide a unique IN VITRO
model for the testing of drugs that act on, or are metabolized by, human liver
cells.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999, AstraZeneca terminated the collaboration.
Consequently, in July 1999, we announced plans for the restructuring of our
research operations to abandon all further ECT research and to concentrate our
resources on the research and development of our proprietary platform of stem
cell technology. We reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
Sunnyvale, California. We are actively seeking to sublease, assign or sell our
interest in our former corporate headquarters building and our pilot
manufacturing and cell processing facility in Rhode Island.
In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. We retained certain
non-exclusive rights to use the ECT in combination with our proprietary stem
cell technology, and in the field of vaccines for prevention and treatment of
infectious diseases.
29
In a related development, by mutual consent we and the Advanced Technology
Program of the National Institute of Standards and Technology terminated two
grants previously awarded to us for our encapsulated cell therapy and stem
cell-related research. The encapsulated cell therapy grant was obviated by the
sale of the technology to Neurotech. The funding agency has invited us to
resubmit a proposal consistent with the new directions we are taking in our
research and development of our platform of stem cell technologies.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation, in exchange for 1,320,691 shares of
our common stock and options and warrants for the purchase of 259,296 common
shares. Simultaneously with the acquisition, its President, Richard M. Rose,
M.D., became our President, Chief Executive Officer and a director, and Irving
L. Weissman, M.D., a founder of the California corporation, became a member of
our board of directors. We, as the sole stockholder of our subsidiary, voted on
February 23, 2000, to amend its Certificate of Incorporation to change its name
to StemCells California, Inc.
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics SA, a Swiss biotherapeutics company, to pursue extensions of
our former technology of ECT for certain applications outside the central
nervous system. Modex, headquartered in Lausanne, Switzerland, was formed to
integrate technologies developed by us and by several other institutions to
develop products to treat diseases such as diabetes, obesity and anemia. After
our disposition of the encapsulated cell technology in December 1999, we no
longer had common research or development interests with Modex, but we held
approximate 17% of its stock. Modex completed an initial public offering on
June 23, 2000, in the course of which we realized a gain of approximately
$1.4 million from the sale of certain shares. After Modex's IPO, we owned
126,193 shares, or approximately 9%, of Modex's equity, subject to a lockup
until December 23, 2000. The closing market price of Modex stock on the Swiss
Neue Market exchange on January 2, 2001 was 210.00 Swiss francs, or
approximately $130.39, per share. 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 $2,550,230.27. In connection with this
sale, we agreed not to resell any more of our remaining 103,577 Modex shares
until April 12, 2001.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
We have entered into a number of license agreements with commercial and
non-profit institutions, as well as a number of research-plus-license agreements
with academic organizations. The research agreements provide that we will fund
certain research costs, and in return, will have a license or an option for a
license to the resulting inventions. Under the license agreements, we will
typically be subject to obligations of due diligence and the requirement to pay
royalties on products that use patented technology licensed under such
agreements.
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in a License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation, subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired. We have developed additional intellectual
property relating to the subject matter of the license. We entered into an
additional license agreement with
30
NeuroSpheres as of October 30, 2000, under which we obtained an exclusive
license in the field of non-transplant uses, such as drug discovery and drug
testing, so that together the licenses are exclusive for all uses of the
technology. We made up-front payments to NeuroSpheres of 65,000 shares of our
common stock and $50,000, and we will make additional cash payments when
milestones are achieved in the non-transplant field, or in any products
employing NeuroSpheres patents for generating cells of the blood and immune
system from neural stem cells. Milestone payments would total $500,000 for each
product that is approved for market. Our agreements with NeuroSpheres will
terminate at the expiration of all patents licensed to us, but can terminate
earlier if we breach without curing our obligations under the agreement or if we
declare bankruptcy. We would have a security interest in the licensed technology
in the event that NeuroSpheres declares bankruptcy.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene. Each agreement with Signal will terminate at
the expiration of all patents licensed under it, but the licensing party can
terminate earlier if the other party breaches its obligations under the
agreement or declares bankruptcy. Also, the party receiving the license can
terminate the agreement at any time upon notice to the other party. Under these
agreements, we must reimburse Signal for payments it must make to the University
of California based on products we develop and for 50% of certain other payments
Signal must make.
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
Our research agreement with Scripps expired on November 14, 2000 and we are
negotiating with Scripps to extend the term of this agreement or to enter into a
new agreement. As of the date of this prospectus, we have not yet completed our
negotiations with Scripps and we cannot give any assurance that our negotiations
will be successful. If we are unable to extend the term of this agreement, we
will have to find a replacement to perform this research or we will have to
perform this research ourselves. In either case, we may experience delay and
additional expense in connection with this research effort. Our license
agreements with Scripps will terminate upon expiration, revocation or
invalidation of the patents licensed to us, unless governmental regulations
require a shorter term. These license agreements also will terminate earlier if
we breach without curing our obligations under the agreement or if we declare
bankruptcy, and we can terminate the license agreements at any time upon notice.
Upon the initiation of the Phase II trial for our first product using Scripps
licensed technology, we must pay Scripps $50,000 and upon completion of that
Phase II trial we must pay Scripps an additional $125,000. Upon approval of the
first product for sale in the market, we must pay Scripps $250,000.
Our license agreements with the California Institute of Technology will
expire upon expiration, revocation, invalidation or abandonment of the patents
licensed to us. We can terminate any of these license agreements by giving 30
days' notice to the California Institute of Technology. Either party can
terminate these license agreements upon a material breach by the other party. We
paid $10,000 to the California Institute of Technology upon execution of the
license agreements, and we must pay an additional $10,000 upon the issuance of
the patent licensed to us under the relevant agreement. We
31
also will pay $5,000 on the anniversary of the issuance of the patent licensed
to us under the relevant agreement. These amounts are creditable against
royalties we must pay under the license agreements. The maximum royalties that
we will have to pay to the California Institute of Technology will be
$2 million per year, with an overall maximum of $15 million. Once we pay the
$15 million maximum royalty, the licenses will become fully paid and
irrevocable.
MANUFACTURING
The keys to successful commercialization of brain stem and progenitor cells
are efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier. The carrier may also be used to
improve the stability and acceptance of the stem cells or their progeny. Because
of the early stage of our stem and progenitor cell programs, all of the issues
that will affect manufacture of stem and progenitor cell products are not yet
clear.
MARKETING
We expect to market and sell our products primarily through co-marketing,
licensing or other arrangements with third parties. There are a number of
substantial companies with existing distribution channels and large marketing
resources who are well equipped to market and sell our products. It is our
intent to have the marketing of our products undertaken by such partners,
although we may seek to retain limited marketing rights in specific narrow
markets where the product may be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be of major
importance to our future business. We have an aggressive program of vigorously
seeking and protecting our intellectual property which we believe might be
useful in connection with our products. We believe that our know-how will also
provide a significant competitive advantage, and we intend to continue to
develop and protect our proprietary know-how. We may also from time to time seek
to acquire licenses to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of patents and
patent applications related to various stem and progenitor cells and methods of
deriving and using them. These patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, our U.S. patent
portfolio in the stem cell therapy area includes nineteen issued U.S. patents,
six of which have issued within the last year. An additional thirteen patent
applications are pending, one of which has been allowed.
We own or have filed patent applications which have been published for the
following U.S. patents: Patent Number 5,968,829 (Human CNS neural stem cells);
Patent Number 6,103,530 (Human CNS neural stem cells--culture media);
Application Number WO 99/11758 (Cultures of human CNS neural stem cells); and
Application Number WO 00/36091 (An animal model for identifying a common
stem/progenitor to liver cells and pancreatic cells). We have licensed the
following patents or pending patent applications from Neurospheres Holdings
Ltd.: Patent Number 5,851,832 (In vitro proliferation); Patent Number 5,750,376
(In vitro genetic modification); Patent Number 5,981,165 (In vitro production of
dopaminergic cells from mammalian central nervous system multipotent stem cell
compositions); Patent Number 6,093,531 (Generation of hematopoietic cells from
multipotent neural stem cells); Application Number WO 93/01275 (Mammalian
central nervous system multipotent stem cell compositions); Application Number
WO 94/09119 (Remyelination using mammalian central nervous
32
system multipotent stem cell compositions); Application Number WO 94/10292
(Biological factors useful in differentiating mammalian central nervous system
multipotent stem cell compositions); Application Number WO 94/16718 (Genetically
engineered mammalian central nervous system multipotent stem cell compositions);
Application Number WO 96/15224 (Differentiation of mammalian central nervous
system multipotent stem cell compositions); and Application Number WO 96/15226
(In vitro production of dopaminergic cells from mammalian central nervous system
multipotent stem cell composition). We have licensed the following patents or
pending patent applications from the University of California, San Diego: Patent
Number 5,776,948 (Method of production of neuroblasts); Patent Number 6,013,521
(Method of production of neuroblasts); Patent Number 6,020,197 (Method of
production of neuroblasts); and Application Number WO 94/16059 (Method of
production of neuroblasts). We have licensed the following patents or pending
patent applications from the California Institute of Technology: Patent
Number 5,629,159 (Immortalization and disimmortalization of cells); Application
Number WO 96/40877 (Immortalization and disimmortalization of cells); Patent
Number 5,935,811 (Neuron restrictive silencer factor proteins); Application
Number WO 96/27665 (Neuron restrictive silencer factor proteins); Patent
Number 5,589,376 (Mammalian neural crest stem cells); Patent Number 5,824,489
(Methods for isolating mammalian multipotent neural crest stem cells);
Application Number WO 94/02593 (Mammalian neural crest stem cells); Patent
Number 5,654,183 (Genetically engineered mammalian neural crest stem cells);
Patent Number 5,928,947 (Mammalian multipotent neural crest stem cells); Patent
Number 5,693,482 (In vitro neural crest stem cell assay); Patent
Number 6,001,654 (Methods for differentiating neural stem cells to neurons or
smooth muscle cells (TGFb)); Application Number WO 98/48001 (Methods for
differentiating neural stem cells to neurons or smooth muscle cells (TGFb));
Patent Number 5,672,499 (Methods for immortalizing multipotent neural crest stem
cells); Patent Number 5,849,553 (Immortalizing and disimmortalizing multipotent
neural crest stem cells); and Patent Number 6,033,906 (Differentiating mammalian
neural stem cells to glial cells using neuregulins).
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University, to certain patents and
know-how regarding present and certain future developments in CNS and pancreas
stem cells.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative and liver diseases, diabetes
and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology
33
companies are investigating new drugs and therapeutic approaches for the same
purposes, which may achieve new efficacy profiles, extend the therapeutic window
for such products, alter the prognosis of these diseases, or prevent their
onset. We believe that our products, when successfully developed, will compete
with these products principally on the basis of improved and extended efficacy
and safety and their overall economic benefit to the health care system.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies. Smaller companies may
also be significant competitors, particularly through collaborative arrangements
with large pharmaceutical or biotechnology companies. Many of these competitors
have significant products approved or in development that could be competitive
with our potential products.
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect that all of these products will compete with our potential stem and
progenitor cell products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed patent
applications relating to the use of genetically modified cells to treat disease,
disorder or injury. We may be required to seek licenses from these competitors
in order to commercialize certain of our proposed products.
Once our products are developed and receive regulatory approval, they must
then compete for market acceptance and market share. For certain of our
potential products, an important success factor will be the timing of market
introduction of competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a
number of years and involves significant uncertainty combined with the
expenditure of substantial resources. In addition, the federal, state, and other
jurisdictions have restrictions on the use of fetal tissue.
34
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
in specific disease models to assess the
potential safety and efficacy of the product
and our formulation as well as the quality
and consistency of the manufacturing process.
2. Submission to the FDA of an application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence its receipt by the FDA, as long as there are
no questions, requests for delay or
objections from the FDA.
3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, or cGMP, determined by the FDA.
Each protocol is submitted to the FDA as part
of the IND. The protocol for each clinical
study must be approved by an independent
Institutional Review Board, or IRB, at the
institution at which the study is conducted
and the informed consent of all participants
must be obtained. The IRB will consider,
among other things, the existing information
on the product, ethical factors, the safety
of human subjects, the potential benefits of
the therapy and the possible liability of the
institution.
Clinical development is traditionally
conducted in three sequential phases, which
may overlap:
- In Phase I, products are typically
introduced into healthy human subjects or
into selected patient populations to test
for adverse reactions, dosage tolerance,
absorption and distribution, metabolism,
excretion and clinical pharmacology.
35
- Phase II involves studies in a limited
patient population to (i) determine the
efficacy of the product for specific
targeted indications and populations, (ii)
determine optimal dosage and dosage
tolerance and (iii) identify possible
adverse effects and safety risks. When a
dose is chosen and a candidate product is
found to be effective and to have an
acceptable safety profile in Phase II
evaluations, Phase III trials begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical efficacy
and to test further for safety within an
expanded patient population, generally at
multiple study sites.
The FDA continually reviews the clinical
trial plans and results and may suggest
changes or may require discontinuance of the
trials at any time if significant safety
issues arise.
4. Submission to the FDA of marketing The results of the preclinical studies and
authorization applications clinical studies are submitted to the FDA in
the form of marketing approval authorization
applications.
5. FDA approval of the application(s) prior The testing and approval process will require
to any commercial sale or shipment of the substantial time, effort and expense. The
drug. Biologic product manufacturing time for approval is affected by a number of
establishments located in certain states also factors, including relative risks and
may be subject to separate regulatory and benefits demonstrated in clinical trials, the
licensing requirement availability of alternative treatments and
the severity of the disease. Additional
animal studies or clinical trials may be
requested during the FDA review period which
might add to that time.
After FDA approval for the initial indications and requisite approval of the
manufacturing facility, further clinical trials may be required to gain approval
for the use of the product for additional indications. The FDA may also require
unusual or restrictive post-marketing testing and surveillance to monitor for
adverse effects, which could involve significant expense, or may elect to grant
only conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirement. Even after product licensure approval, the
manufacturer must comply with cGMP on a continuing basis, and what constitutes
cGMP may change as the state of the art of manufacturing changes. Domestic
manufacturing facilities are subject to regular FDA inspections for cGMP
compliance which are normally held at least every two years. Foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. Domestic manufacturing facilities may also be subject to inspection by
foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that
36
affect more than 200,000 individuals in the United States if the sponsor does
not realistically anticipate its product becoming profitable from sales in the
United States. We may apply for orphan drug status for certain of our therapies.
Under the Orphan Drug Act, a manufacturer of a designated orphan product can
seek tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity in
the United States for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of products from being approved for the same use including,
in some cases, slight variations on the originally designated orphan product.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which contain such research. Certain of our collaborators have stock
options or other equity interests in us that could subject such collaborators
and us to the proposed regulations.
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which relates to the use of human cells. We
cannot now determine the effects of that approach or what regulatory actions
might be taken from it. Restrictions exist on the testing or use of cells,
whether human or non-human.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations which govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
37
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 29, 2000, our investment in 126,193 shares of Modex Therapeutics
Ltd. Stock was valued at $16,356,333 based on the per share price of $129.61,
which we converted from a market price of 210.00 Swiss francs. Our value in this
investment is subject to both equity price risk and foreign currency exchange
risk. Modex shares were offered in an 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 the date of
this prospectus, the Modex closing share price has fluctuated from a low of
150.50 Swiss francs on January 16, 2001 to a high of 390.00 Swiss francs on
October 6, 2000. The market price of the Modex stock on January 2, 2001 was
210.00 Swiss francs, which converts to $130.39 using exchange rates on that
date, which represents an estimated fair market value of $16,453,825 for our
holdings on that date. 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 $2,550,230.27. In connection with this sale, we agreed not to
resell any more of our Modex shares until April 12, 2001. If we were to seek to
liquidate all or part of our remaining 103,577 Modex shares, our proceeds would
depend on the share price and foreign currency exchange rates at the time of
conversion. Additionally, if we sell a sizable portion of our holdings, we may
have to sell these shares at a discount to market price.
The company's sole market risk sensitive instrument is:
MARKET VALUE EXPECTED
ASSOCIATED AT DECEMBER 29, FUTURE
NO. OF SHARES DESCRIPTION RISKS 2000 CASH FLOWS
126,193 Modex Equity/Foreign $16,356,333 (1)
Therapeutics Currency
Translation
- ------------------------
(1) Although we have not formally adopted a liquidation plan for this
investment, liquidation may be necessary to meet operating cash flow
requirements. Under the agreement with Modex, we had been restricted from
selling our holding through December 23, 2000 and, as noted above, we sold
22,616 shares on January 9, 2001 and agreed not to sell any more shares
until April 12, 2001. If we sell some but not all of our remaining 103,577
shares, we likely would have to agree, in connection with the sale, to
refrain from selling additional shares for several months.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
38
EMPLOYEES
As of December 31, 2000, we had twenty-six full-time employees, of whom six
have Ph.D. degrees, as well as two half-time employees. The equivalent of
fifteen full-time employees work in research and development and laboratory
support services. A number of our employees have held positions with other
biotechnology or pharmaceutical companies or have worked in university research
programs. No employees are covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of our Scientific Advisory Board provide us with strategic guidance
in regard to our research and product development programs, as well as
assistance in recruiting employees and collaborators. Each Scientific Advisory
Board member has entered into a consulting agreement with us. These consulting
agreements specify the compensation to be paid to the consultant and require
that all information about our products and technology be kept confidential. All
of the Scientific Advisory Board members are employed by employers other than us
and may have commitments to or consulting or advising agreements with other
entities that limit their availability to us. The Scientific Advisory Board
members have generally agreed, however, for so long as they serve as consultants
to us, not to provide any services to any other entities which would conflict
with the services the member provides to us. Members of the Scientific Advisory
Board offer consultation on specific issues encountered by us as well as general
advice on the directions of appropriate scientific inquiry for us. In addition,
Scientific Advisory Board members assist us in assessing the appropriateness of
moving our projects to more advanced stages. The following persons are members
of our Scientific Advisory Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Dr. Weissman was a cofounder of
SyStemix, Inc., and Chairman of its Scientific Advisory Board. He has
served on the Scientific Advisory Boards of Amgen Inc., DNAX and T-Cell
Sciences, Inc. Dr. Weissman is Chairman of the Scientific Advisory Board
of StemCells, Inc.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
39
MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
NAME AGE POSITION
- ---- -------- --------
John J. Schwartz, Ph.D.................... 66 Director, Chairman of the Board
Martin M. McGlynn......................... 54 President and Chief Executive Officer
Mark J. Levin............................. 50 Director
Roger M. Perlmutter M.D., Ph.D............ 48 Director
Irving L. Weissman, M.D................... 60 Director
- John J. Schwartz, Ph.D., was elected to the board of directors in December
1998 and was elected Chairman of the board at the same time. He was
formerly Senior Vice President and General Counsel of SyStemix, Inc. from
1993 to 1995, and then President and Chief Executive Officer of SyStemix,
Inc. from 1995 to 1997. Dr. Schwartz is currently President of Quantum
Strategies Management Company, a registered investment advisor located in
Atherton, California. Prior to his positions at SyStemix, he served as
Assistant Professor and a Vice President and General Counsel at Stanford
University in California. Dr. Schwartz graduated from Harvard Law School
in 1958 and received his Ph.D. in physics from the University of Rochester
in 1966.
- Martin M. McGlynn joined the company on January 15, 2001 when he was
appointed President and Chief Executive Officer of the company and of its
wholly-owned subsidiary, StemCells California, Inc. From 1994 until he
joined the company, Mr. McGlynn was President and Chief Executive Officer
of Pharmadigm, Inc., a privately held company in Salt Lake City, Utah,
engaged in research and development in the fields of inflammation and
genetic immunization. Mr. McGlynn received a bachelor of commerce degree
from University College, Dublin, Ireland in 1968, a diploma in industrial
engineering from the Irish Institute of Industrial Engineering in 1970,
and a diploma in production planning from the University of Birmingham,
England in 1971.
- Mark J. Levin is a founder of the company and has served as a director
since the company's inception. From inception until January 1990 and from
May 1990 until February 1991, Mr. Levin served as the company's President
and acting Chief Executive Officer. From November 1991 until March 1992,
he served as Chief Executive Officer of Tularik, Inc., a biotechnology
company. From August 1991 until August 1993, Mr. Levin was Chief Executive
Officer and a director of Focal, Inc., a biomedical company. Mr. Levin is
currently the Chairman of the Board and Chief Executive Officer of
Millennium Pharmaceuticals, Inc., a biotechnology company. Mr. Levin is
also currently on the Board of Directors of Tularik, Inc.
- Roger M. Perlmutter, M.D., Ph.D., was elected to the board of directors in
December 2000. Dr. Perlmutter is Executive Vice President, Research and
Development, of Amgen, Inc., a position he has held since January 2001.
Prior to joining Amgen, Dr. Perlmutter was Executive Vice President,
Worldwide Basic Research and Preclinical Development, Merck Research
Laboratories, a division of Merck & Co., Inc., a position he held since
August 1999. He joined Merck in February 1997 as Senior Vice President,
Merck Research Laboratories, from February 1997 to December 1998 and as
Executive Vice President from February 1999 to July 1999. Prior to joining
Merck, Dr. Perlmutter was a professor in the Department of Immunology,
Biochemistry and Medicine at the University of Washington from
January 1991 to
40
January 1997 and served as chairman of the Department of Immunology at the
University of Washington from May 1989 to January 1997. He also was an
Investigator at the Howard Hughes Medical Institute from October 1991 to
January 1997. Dr Perlmutter has been a member of the board of directors of
The Irvington Institute for Immunological Research since 1997 and of the
Institute for Systems Biology since 1999. He also serves as President of
the Merck Genome Research Institute, a position he has held since
March 2000. Dr. Perlmutter is licensed to practice medicine in the State
of California and the State of Washington. He was graduated from Reed
College in 1973 and received his M.D. and Ph.D. from Washington
University, St. Louis, Missouri in 1979.
- Irving L. Weissman, M.D., Director, is the Karel and Avice Beekhuis
Professor of Cancer Biology, Professor of Pathology and Professor of
Developmental Biology at Stanford University. Stanford has employed Dr.
Weissman since July 1967, and he has been a Faculty member since January
1969. He has been a full professor of pathology since September 1987, and
also of developmental biology since July 1989. Since October 1990, Dr.
Weissman has also served as a professor of biology (by courtesy). He has
been Chairman of the Stanford University Immunology Program since 1986.
Dr. Weissman was a cofounder of SyStemix, Inc., and Chairman of its
Scientific Advisory Board. He has served on the Scientific Advisory Boards
of Amgen Inc., DNAX and T-Cell Sciences, Inc. Dr. Weissman is a member of
the National Academy of Sciences and also serves as Chairman of our
Scientific Advisory Board. He also serves as Chief Executive Officer and a
member of the Board of Managers of Celtrans, LLC.
Our Restated Certificate of Incorporation and Amended and Restated By-laws
provide for the classification of the board of directors into three classes, as
nearly equal in number as possible, with the term of office of one class
expiring each year. There are no family relationships between any of our
directors or executive officers. Our executive officers are elected by, and
serve at the discretion of, the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and compensation committee.
The board may also establish other committees to assist in the discharge of its
responsibilities.
The audit committee oversees our financial reporting process on behalf of
the board of directors, makes recommendations to the board regarding the
independent auditors to be nominated for election by the stockholders, reviews
the independence of such auditors, approves the scope of their annual audit
activities, reviews their audit results, assures that our financial reporting is
of high quality, and reviews the interim financial statements with our
management and the independent auditors prior to the filing of our Quarterly
Report on Form 10-Q. Dr. Schwartz and Dr. Perlmutter make up the audit
committee.
The duties of the compensation committee are to make recommendations to the
board and our management concerning salaries in general, determine executive
compensation, and approve incentive compensation. The compensation committee is
currently comprised of Mr. Levin and Dr. Schwartz.
41
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officer during the fiscal years ended December 31, 1999, 1998 and 1997
and the two other most highly compensated executive officers who served in such
capacities during the fiscal year ended December 31, 1999 but who were not
serving in such capacities as of the end of such fiscal year. There were no
other persons serving as executive officers at the end of such fiscal year.
SUMMARY COMPENSATION TABLE
AWARDS
------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) AWARDS($) OPTIONS (#) COMPENSATION
- --------------------------- -------- --------- -------- ---------------- ---------- ----------- ------------
Richard M. Rose M.D...... 1999 279,974 0 0 0 0 4667(2)
Chief Executive 1998 286,553 0 0 0 150,000(3) 11,330(4)
Officer(1) 1997 68,750 0 0 0 300,000(5) 76,268(6)
Phillip K. Yachmetz...... 1999 406,731(8) 0 0 0 12,000 71,355(9)
Senior Vice President 1998 155,780 10,000 0 0 75,000 86,695(10)
And General Counsel
Acting Chief Financial
Officer and Treasurer(7)
Moses Goddard, M.D....... 1999 195,176(12) 0 0 0 18,000 7,921(13)
Vice President, Chief 1998 188,957 0 0 0 67,875(14) 0
Technical Officer Cell
Encapsulation (11)
- ------------------------
(1) Dr. Rose became Chief Executive Officer on September 26, 1997. Dr. Rose
resigned as a director and officer of the company and its wholly owned
subsidiary effective as of January 31, 2000.
(2) Represents the personal portion of the use of a company vehicle, as well as
$5,000 of fair market value of our matching contributions of common stock to
Dr. Rose's account in the company's 401(k) Plan.
(3) Represents the regrant of an option in the original amount of 200,000 shares
which was reduced to 150,000 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on
July 10,1998.
(4) Represents $4,666.56 of fair market value of the company matching
contributions of common stock to Dr. Rose's account in our 401(k)Plan.
(5) One option grant for 200,000 shares was reduced to 150,000 shares upon there
pricing of the grant effective as of July 10, 1998 at a price of $1.28 per
share.
(6) Represents advance for relocation expenses of $75,000 and fair market value
of $1,268 of our matching contributions of common stock to Dr. Rose's
account in our 401(k) plan.
(7) Mr. Yachmetz was appointed Acting Chief Financial Officer and Treasurer
effective as of April 2, 1999. The term of Mr. Yachmetz' Employment
Agreement expired on October 31, 1999.
42
(8) Includes $204,807 of compensation and accrued and unused vacation paid upon
the expiration of Mr. Yachmetz' Employment Agreement in accordance with the
terms of such agreement.
(9) Represents $15,304 as the fair market value of 9,601 shares of our common
stock earned in 1998 and issued in 1999, $3,990 of fair market value of our
matching contributions of common stock to Mr. Yachmetz' account in our
401(k) Plan and $52,061 of temporary living and relocation expenses adjusted
for taxes.
(10) Represents $14,724 of temporary living and relocation expenses adjusted for
taxes paid to Mr. Yachmetz and personal use of a company vehicle. Also
represents $1,827 of fair market value of our matching contributions of
common stock to Mr. Yachmetz' account in our 401(k) Plan.
(11) Dr. Goddard resigned as a director and officer of the company effective as
of August 30, 1999 and served as a consultant to the company through
March 28, 2000.
(12) Includes $70,945 of compensation paid to Dr. Goddard in accordance with the
severance agreement entered into with us.
(13) Represents the fair market value of 4,687 shares of our common stock
granted to Dr. Goddard through our 1992 Equity Incentive Plan.
(14) Represents the regrant of options in the total original amount of 90,500
shares which was reduced to 67,875 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on July 10,
1998.
43
SELLING STOCKHOLDERS
SALES BY NEUROSPHERES, LTD.
NeuroSpheres, Ltd. will be selling shares of common stock in this offering.
We entered into a license agreement with NeuroSpheres on October 30, 2000
expanding our rights to the intellectual property covered by the license
agreement. See "Business--License Agreements and Sponsored Research
Agreements--NeuroSpheres, Ltd." Under that license agreement, on October 30,
2000, we issued 65,000 shares of our common stock to NeuroSpheres and we agreed
to file a registration statement covering the resale of those shares by
NeuroSpheres.
44
SECURITY OWNERSHIP OF THE SELLING STOCKHOLDERS,
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information regarding the beneficial ownership of
our common stock as of December 31, 2000 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
- each selling stockholder;
- each director and named executive officer; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o StemCells, Inc., 525
Del Rey Avenue, Suite C, Sunnyvale, CA 94085.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed to be outstanding shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of December 31, 2000, assuming that this
offering occurs in that 60-day period, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. The
shares listed below for the selling stockholders represent all of the shares
that each selling stockholder currently beneficially owns, the number of shares
each of them may offer and the number of shares each of them will own after the
offering assuming they sell all of the shares. To our knowledge, except as set
forth in the footnotes below, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by that stockholder. Beneficial ownership percentage
is based on 20,953,887 shares of our common stock outstanding on December 31,
2000 and as adjusted for unexercised options and warrants as of that date as
noted below and 180,914 shares and 19,900 warrants issued to one of the Selling
Shareholders on August 30, 2000.
The selling stockholders may offer all or some of their shares. All numbers
in the following table are based on information obtained by questionnaires
received by the company.
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK SHARES OF COMMON BENEFICIALLY OWNED AFTER
BENEFICIALLY OWNED PRIOR STOCK OFFERED THIS OFFERING
TO THIS OFFERING HEREBY -------------------------
------------------------- ---------------- NUMBER
NUMBER OF NUMBER OF OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES SHARES PERCENTAGE
- ------------------------ --------- ---------- ---------------- --------- ----------
Donald Kennedy, Ph.D....................... 10,225(1) * -- 10,225 *
Mark J. Levin.............................. 376,525(2) 1.7 -- 376,525(3) 1.7
John J. Schwartz, Ph.D..................... 95,857(4) 0.4 -- 95,857(5) 0.4
Irving Weissman, M.D....................... 328,184(6) 1.5 -- 328,184 1.5
George W. Dunbar, Jr....................... 43,031(7) 0.2 -- 43,031 0.2
All directors and executive officers as a
group (5 persons)........................ 853,822(8) 3.8 -- 853,822(3)(5) 3.8
Millennium Partners, L.P.**................ 1,927,891(9) 8.7 -- 1,927,891(10) 8.7
NeuroSpheres, Ltd.......................... 65,000 0.3 65,000 -- --
- ------------------------
* Less than 0.1%
** Millennium Partners, L.P., a Cayman Islands limited partnership, is a
private investment partnership whose general partners are Millennium
Management, L.L.C., a Delaware limited
45
liability company whose managing member is Israel A. Englander, and
Englander (Cayman Islands) Limited, a Cayman Islands exempted company. Both
Millennium Management, L.L.C., and Englander (Cayman Islands) Limited are
controlled by Mr. Englander.
(1) Includes 10,225 shares issuable upon exercise of stock options exercisable
within 60 days. Dr. Kennedy subsequently resigned from the board of
directors.
(2) Includes 28,650 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 198,871 shares issuable upon conversion of
cumulative convertible preferred shares at the currently applicable
conversion price, and a warrant to purchase 37,500 shares.
(3) Does not include shares previously registered for resale (Form S-1,
Registration No. 333-45496). Because the number of shares of common stock
issuable to Mr. Levin upon exercise of warrants or conversion of preferred
stock held by Mr. Levin may fluctuate, we previously registered for resale
by Mr. Levin a number of shares of common stock that is greater than the
number of shares of common stock currently beneficially owned by Mr. Levin.
(4) Includes 95,857 shares issuable upon exercise of stock options exercisable
within 60 days.
(5) Does not include shares previously registered for resale (Form S-1,
Registration No. 333-45496). Because the number of shares of common stock
issuable to Dr. Weissman upon exercise of warrants or conversion of
preferred stock held by Dr. Weissman may fluctuate, we previously registered
for resale by Dr. Weissman a number of shares of common stock that is
greater than the number of shares of common stock currently beneficially
owned by Dr. Weissman.
(6) Includes 33,862 shares issuable upon exercise of stock options exercisable
within 60 days and 7,160 shares issuable upon exercise of warrants
exercisable within 60 days. Includes 198,871 shares issuable upon conversion
of 6% cumulative convertible preferred shares at the currently applicable
conversion price. Includes a total of 50,791 shares owned by trusts for the
benefit of Dr. Weissman's children as to which he disclaims beneficial
ownership. Also includes a warrant to purchase 37,500 shares.
(7) Includes 43,031 shares issuable upon exercise of stock options exercisable
within 60 days. Mr. Dunbar was appointed Acting President and Chief
Executive Officer of our wholly owned subsidiary, StemCells
California, Inc., effective as of November 8, 1999, and was appointed Acting
President and Chief Executive Officer of the company effective as of
February 1, 2000. On January 15, 2001, Martin McGlynn became President and
Chief Executive Officer of the Company.
(8) Includes 291,479 shares issuable upon exercise of warrants and stock options
exercisable within 60 days.
(9) Includes 180,914 shares issued as of August 30, 2000 and 19,900 shares
issuable upon exercise of warrants issued together with those shares.
Includes 101,587 shares issuable upon exercise of warrants issued August 3,
2000. Includes 463,369 shares currently issuable upon exercise of the
adjustable warrant but does not include other shares issuable upon exercise
of adjustable warrants because such number of shares cannot be determined
until the dates of determination set forth in the adjustable warrant and
will be based on fluctuations in the market price of our common stock prior
to determination. Does not include shares issuable upon exercise of option
to purchase up to $2 million of additional shares because such number of
shares cannot be determined unless and until the option is exercised and
will be based on the average market price at the time of exercise.
(10) Does not include shares previously registered for resale (Form S-1,
Registration No. 333-45496). Because the number of shares of common stock
issuable to Millennium Partners, L.P. upon exercise of adjustable warrants
may fluctuate, we previously registered for resale by Millennium Partners,
L.P. a number of shares of common stock that is greater than the number of
shares of common stock currently beneficially owned by Millennium Partners,
L.P.
46
RELATIONSHIP AND TRANSACTIONS WITH RELATED PARTIES
Dr. Schwartz, a member and Chairman of the Board of Directors, was retained
in July 1998 to serve as a consultant to us rendering strategic business advice
and consulting services, including assistance in the negotiation and
consummation of strategic collaboration transactions specified by us. Under
terms of an agreement dated December 19, 1998, and amended as of July 1, 1999
(the "Letter Agreement") Dr. Schwartz agreed to serve as a Director and Chairman
of the Board of Directors of the Company for a term expiring at the 2001 Annual
Meeting of Stockholders. The Letter Agreement incorporates certain payments
provided for under a consulting services agreement dated July 27, 1998, and
amended as of December 19, 1998 (the "Consulting Services Agreement"). As a
result, Dr. Schwartz is entitled to a retainer of $192,000 per year plus $1,500
for each Board meeting or Committee meeting (if held at a date and time separate
from the Board meeting) physically attended and $500 for each Board meeting or
Committee meeting (if held at a date and time separate from the Board meeting)
held by conference call, payable quarterly in arrears. Dr. Schwartz is obligated
to spend no less than thirty business days per calendar quarter devoted to the
performance of his duties under the Letter Agreement. In the event Dr. Schwartz
devotes more than thirty business days in any calendar quarter to the
performance of his duties, Dr. Schwartz is entitled to receive additional
compensation at the rate of $1,500 per day. Under the Letter Agreement,
Dr. Schwartz was granted a stock option covering 40,000 shares of Common Stock
that vests in equal portions on the last day of each of the 29 months of the
term of the Letter Agreement. By virtue of provisions incorporated from the
Consulting Services Agreement, Dr. Schwartz also holds an option to purchase
76,000 shares of the Company's Common Stock at $1.281 per share, the fair market
value of the Company's Common Stock at the time the option was granted, vesting
at a rate of 3,167 shares per month for the ensuing 23 months after the date of
the grant, with a final vesting of 3,159 shares in the 24th month, plus another
option to purchase 48,000 shares of Common Stock at the then current fair market
value of the Company's Common Stock on July 27, 1999, vesting at a rate of 2,000
shares per month. In the event Dr. Schwartz ceases to be Chairman of the Board
of Directors, either as a result of an affirmative vote of the Board of
Directors for reasons other than cause or due to his disability or his
resignation from such position, but remains a Director, his cash compensation
and remaining unvested portion of the 40,000-share time-based stock option will
be reduced to the then current rate for a Director of the Company, plus $5,000
per month pursuant to the Consulting Services Agreement. In the event
Dr. Schwartz ceases to be Chairman of the Board of Directors, either as a result
of an affirmative vote of the Board of Directors for reasons other than cause or
due to his disability or his resignation from such position, and then he resigns
as a Director or is removed as a Director pursuant to the Company's By-laws, the
Company shall have no further obligation to pay cash compensation to
Dr. Schwartz under the Letter Agreement but he would receive $5,000 per month
pursuant to the Consulting Services Agreement. Dr. Schwartz shall have one year
from such date to exercise the vested portion of the 40,000-share time-based
option and any unvested portion of that option shall lapse. In the event
Dr. Schwartz is removed from his positions as Director and Chairman of the Board
of Directors for cause, as defined in the Letter Agreement, the Company shall
have no further obligation to pay cash compensation to Dr. Schwartz under the
Letter Agreement, any unvested portion of the 40,000-share time-based option
shall lapse and the exercise of any vested portion shall be governed by the
terms of the Company's 1992 Equity Incentive Plan. The termination of the Letter
Agreement for any reason shall have no effect on the Consulting Services
Agreement, which had an initial term through July 27, 2000 and was renewed on a
month-to-month basis, and Dr. Schwartz shall serve as a consultant to the
Company rendering strategic business advice and counseling services, including
assistance in the negotiation and consummation of strategic collaboration
transactions specified by the Company as provided therein. At a meeting of the
Board on February 23, 2000, in order to conserve cash and demonstrate his
continuing confidence in the Company's future, the Board of Directors, upon the
suggestion of Dr. Schwartz, approved a resolution revising the compensation
arrangement between Dr. Schwartz and the Company, for the period commencing
January 1, 2000. Under this resolution, Dr. Schwartz waives any and all cash
payments which may accrue to him for his retainer, monthly and meeting fees, and
agrees to take, in lieu of such cash payments, compensation in the form of
options to
47
purchase shares of the Company's common stock at below-market prices ($0.25 per
share). To effectuate the intention of Dr. Schwartz and other members of the
Board to change the form but not the amount of compensation, Dr. Schwartz will
be granted options covering a number of shares of the Company's common stock
such that the difference between the aggregate exercise price of such options
and the aggregate market value of the shares underlying such options (using the
closing price of the Company's common stock for the date of the subject Board or
Committee meeting (if such Committee meeting is not held contemporaneously with
a Board meeting) or, with respect to the quarterly or monthly retainer payments
of $33,000 and $5,000 respectively, the closing price for the last business day
of the quarter or month) is equal to the compensation he is entitled to receive.
All options so issued to Dr. Schwartz vest immediately. The Consulting Services
Agreement expired under its terms on July 27, 2000 and the board of directors
renewed it on a month-to-month basis on September 19, 2000.
Dr. Weissman, a member of the Board of Directors, was retained in
September 1997 to serve as a consultant to us. Pursuant to his Consulting
Agreement, Dr. Weissman has agreed to provide consulting services to us and
serve on our Scientific Advisory Board. We agreed to pay Dr. Weissman $50,000
per year for his services and granted him an option to purchase 500,000 shares
of Common Stock for $5.25 per share, of which 31,250 shares vested at the date
of grant. Originally, the remainder of the option would have vested upon the
occurrence of certain milestones related to the Company's stem cell research
program and in the event of certain changes of control. We agreed to amend the
option on October 27, 2000 so that the shares would become exercisable over
eight years from the original grant date (so the option is currently exercisable
for 200,000 shares) or in the event of certain changes of control. We expect to
incur a charge of approximately $800,000 during the fourth quarter of 2000 as a
result of this change in the vested portion of the option. The deferred
compensation expense associated with the unvested portion of the grants was
determined to be approximately $1.4 million. We plan to revalue the options
using the Black-Scholes method on a quarterly basis and recognize additional
compensation expense accordingly. The Company also agreed to nominate
Dr. Weissman for a position on the Board of Directors. The Consulting Agreement
contains confidentiality, noncompetition, and assignment of invention provisions
and is for a term of fifteen years, subject to earlier termination by us for
cause or frustration of purpose and earlier termination by Dr. Weissman for good
reason. Dr. Weissman initially received no compensation as a member of the Board
of Directors or for attending meetings of the Board or its committees or
meetings of our Scientific Advisory Board, but was reimbursed for reasonable
expenses he incurred in attending such meetings. In December 2000, we agreed
with Dr. Weissman that we would pay him the same compensation paid to other
members of the Board.
Martin McGlynn joined the company as President and Chief Executive Officer
on January 15, 2001. Under the terms of an agreement between Mr. McGlynn and us,
Mr. McGlynn is entitled to an annual base salary of $275,000 per year,
reviewable annually by the Board of Directors, and a bonus, in the Board's sole
discretion, of up to 25% of his base salary. Mr. McGlynn was granted an option
to purchase 400,000 shares of Common Stock with an exercise price equal to the
fair market value of the Common Stock on the date of his employment. One-fourth
of these options will vest on the first anniversary of his employment and the
remaining three-fourths will vest in equal monthly installments during his
second through fourth years of employment. The Board may, in its sole
discretion, grant Mr. McGlynn a bonus option to purchase up to an additional
25,000 shares. The vesting under the option is subject to acceleration in the
event of certain changes of control. We also agreed to pay Mr. McGlynn a $50,000
relocation bonus and reimburse him for relocation expenses. Our agreement with
Mr. McGlynn provides that if his employment is terminated by the Company without
cause or by Mr. McGlynn for good reason, he will be entitled to severance
payments equal to one year's base salary and he will receive healthcare benefits
under our plans for one year after termination. If Mr. McGlynn's employment is
terminated as a result of his disability, he will receive up to six months' base
salary. If we terminate Mr. McGlynn's employment for cause or if he resigns, he
will not be entitled to any severance or other benefits.
48
George W. Dunbar, Jr., Acting President and Chief Executive Officer from
February 1, 2000 to January 15, 2001, was a founding member of iCEO, LLC
("iCEO") in September 1999. Mr. Dunbar joined the company as Acting President of
StemCells California, Inc., our wholly owned subsidiary, and he held this
position until January 15, 2001. Under the terms of two agreements dated as of
November 17, 1999 and effective as of November 8, 1999, the first between us and
iCEO and the second between us and Mr. Dunbar, Mr. Dunbar agreed to serve as
Acting President of StemCells California, Inc., our wholly owned subsidiary.
Pursuant to the terms of his agreement with us, Mr. Dunbar was entitled to an
annual salary of $175,000 and was granted a stock option to purchase 48,000
shares of our common stock that vested at the rate of 4,000 shares per month
commencing on December 6, 1999 and continuing until fully vested so long as he
served as Acting President. The vesting under the option was subject to
acceleration in the event of certain changes of control. Additionally, the
agreement provided that the Board would consider once per quarter the grant of
an option for an additional 3,000 shares if it is determined that the services
rendered by Mr. Dunbar during the preceding quarter exceeded expectations. The
agreement with Mr. Dunbar had no provisions for any severance payments or other
benefits upon Mr. Dunbar's resignation or termination. Pursuant to the terms of
the agreement between iCEO and us, iCEO was entitled to receive annual
compensation of $75,000 for so long as Mr. Dunbar continued to serve in his role
as Acting President of StemCells California, Inc. or in any other interim role
with the Company. In addition, iCEO was granted a stock option to purchase
48,000 shares of our common stock that vested at the rate of 4,000 shares per
month commencing on December 6, 1999 and continuing until fully vested so long
as Mr. Dunbar served as Acting President of StemCells California, Inc. or in any
other interim role with the company. Additionally, the iCEO agreement provided
that the Board would consider once per quarter the grant of an option to iCEO
for an additional 3,000 shares if it is determined that the services rendered by
Mr. Dunbar during the preceding quarter exceeded expectations. As a member of
iCEO, Mr. Dunbar was entitled to receive, once annually, a distribution of his
assigned allocable percentage of net taxable income and net long-term gain with
respect to the pooled income and gain from shares of stock or exercised options
received by iCEO from its clients, including that received from us. When
Mr. Dunbar was appointed Acting President and Chief Executive Officer effective
as of February 1, 2000, there was no adjustment to his or iCEO's compensation or
stock options. In the event that during the period of his service as Acting
President and Chief Executive Officer or within 120 days from the termination of
such services, Mr. Dunbar were to become a permanent employee in any capacity,
we would be obligated under the iCEO agreement to pay iCEO a fee equal to
one-third of the then targeted first year's compensation for Mr. Dunbar. Our
agreements with Mr. Dunbar and iCEO expired in November 2000 and at that time we
paid Mr. Dunbar a bonus of $50,000 and granted him an immediately exercisable
option to purchase 12,031 shares of common stock. We continued to employ
Mr. Dunbar in the same capacity until January 15, 2001 at an annual salary of
$250,000, and also granted him an option to purchase 8,000 shares of common
stock for each additional month, or pro rata portion of a month, of his
employment.
In April 2000, we sold 750 shares of our 6% cumulative convertible preferred
stock plus a warrant to purchase 37,500 shares of our common stock to each of
Dr. Weissman and Mr. Levin for $750,000, for a total of $1,500,000, on terms
more favorable to us than we were able to obtain from outside investors. The
face value of the shares is convertible at the option of the holder into common
stock at $3.77 per share. The holders of the preferred stock have liquidation
rights equal to their original investments plus accrued but unpaid dividends.
The investors would be entitled to make additional investments in our securities
on the same terms as those on which we complete offerings of our securities with
third parties within 6 months, if any such offerings are completed. If offerings
totaling at least $6 million are not completed during the 6 months, the
investors have the right to acquire up to a total of 1,126 additional shares of
convertible preferred stock the face value of which is convertible at the option
of the holder into common stock at $6.33 per share. Any unconverted preferred
stock will be converted into common stock on April 13, 2002 in the case of the
original stock issued and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrants expire on April 13,
2005.
49
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 45,000,000 shares of common stock, $.01 par value per
share, and 1,000,000 shares of undesignated preferred stock, $.01 par value per
share, to be issued from time to time in one or more series, with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions as our board of directors may determine. As of December 31, 2000,
we had outstanding 20,953,887 shares of common stock and 1,500 shares of 6%
cumulative convertible preferred stock.
As of December 31, 2000, we had 277 stockholders of record with respect to
our common stock and outstanding options to purchase 2,653,354 shares of our
common stock, of which 656,625 were currently exercisable. The following summary
of provisions of our capital stock describes all material provisions of, but
does not purport to be complete and is subject to, and qualified in its entirety
by, our restated certificate of incorporation and our amended and restated
by-laws, which are included as exhibits to the registration statement of which
this prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our common stock are entitled
to any and all dividends as such dividends are declared by the Board of
Directors. This right is not cumulative, and no right shall accrue to holders of
common stock by reason of the fact that dividends on said shares were not
declared in any prior period. The shares of common stock are not convertible and
the holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to an amount equal to $1.00 per share,
subject to the rights of the holders of the preferred stock. After payment to
the holders of the common stock of the full preferential amounts due to them,
the holders of common stock have the right to share equally in the distribution
of the entire remaining assets of the company legally available for
distribution, subject to the rights of the holders of the preferred stock. Each
outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders, such voting rights to be counted together
with all other shares of capital stock having voting powers and not as a
separate class, except as otherwise required by law.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
PREFERRED STOCK
Our board of directors may from time to time direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Shares of preferred stock of
any one series shall be identical with each other in all respects except as to
the dates from which dividends shall accrue and/or cumulate. In the event of any
liquidation, dissolution or winding up of the company, the holders of
undesignated preferred stock of each series are entitled to receive an amount
fixed by the company's Restated Certificate of Incorporation or by the
resolution(s) of the board of directors providing for the issuance of such
series.
The board of directors designated 2,626 shares, $.01 par value per share, as
6% cumulative convertible preferred stock, 1,500 shares of which are issued and
outstanding. The holders of these preferred shares are entitled to receive
cumulative dividends at a per share rate of 6% of the liquidation preference of
each share, per annum accruing daily and compounding quarterly, with priority
over payment of any dividend on common stock or any other class or series of
equity security
50
of the company. In the event of any liquidation, dissolution or winding up of
the company, the holders of the 6% cumulative convertible preferred stock are
entitled to receive in preference to holders of any other class or series of
equity securities, an amount equal to $1,000 per share plus (i) dividends added
to the liquidation preference, (ii) all accrued but unpaid dividends and
(iii) all "Monthly Delay Payments" under the Registration Rights Agreement. The
6% cumulative convertible preferred stock was issued pursuant to a Securities
Purchase Agreement. Each holder of the 6% cumulative convertible preferred stock
has at any time the right to convert any or all 6% cumulative convertible
preferred stock held by such holder into fully paid, validly issued and
nonassessable shares of common stock, $.01 par value per share, at which point
the rights of the holders of converted 6% cumulative convertible preferred stock
shall be treated as having become the owners of such common stock. The
affirmative vote of a majority in interest of the outstanding 6% cumulative
convertible preferred stock is required for (i) any amendment, modification or
repeal of the Certificate of Designations, Certificate of Incorporation or
by-laws that may amend or change or adversely affect any of the rights or
preference of the 6% cumulative convertible preferred stock; provided, however,
that the holders of 6% cumulative convertible preferred stock who are affiliates
of the company shall not participate in such votes, and such shares shall be
deemed not to be outstanding for purposes of such votes. We have no current
intention to issue any more of our unissued, authorized shares of undesignated
preferred stock. However, the issuance of any shares of undesignated preferred
stock in the future could adversely affect the rights of the holders of common
stock.
WARRANTS
As of September 30, 2000, we had outstanding warrants to purchase 296,487
shares of common stock at an average exercise price of $5.3876 per share,
subject to customary antidilution adjustment. The warrants were issued at
various times during this year to eight different parties as described below.
As of April 13, 2000, we issued to each of Irving Weissman and Mark Levin a
warrant in connection with a Securities Purchase Agreement dated as of
April 13, 2000. Each warrant is to purchase 37,500 shares of our common stock at
an exercise price of $6.58125 per share. Each warrant is exercisable, in whole
or in part, at any time on or after April 13, 2000 and on or prior to April 13,
2005. The exercise price is subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the warrants, during any time that the warrant shares are not
subject to an effective registration statement, each investor may elect to
receive a reduced number of warrant shares in lieu of tendering the exercise
price in cash. Each investor is not entitled to any rights as a shareholder
until he exercises the warrant. In the event of a transaction by us in which
more than 50% of our voting power is disposed of, each investor shall have the
right to purchase, by exercise of the warrant and payment of the exercise price,
the kind and amount of shares and other securities and property which he would
have owned or have been entitled to receive after the occurrence of the
transaction had the warrant been exercised immediately prior thereto, subject to
the adjustment of the exercise price as described in the warrant and above. We
may, at any time during the term of the warrant, reduce the exercise price to
any amount for any period of time deemed appropriate by our Board of Directors.
Under the terms of the warrants, the number of shares of common stock that each
investor may acquire upon exercise cannot exceed a number that, when added to
the total number of shares of common stock the investor is deemed to
beneficially own, together with all shares of common stock deemed beneficially
owned by the investor's affiliates (as defined by Rule 144 of the Securities Act
of 1933), would exceed 9.99% of the total issued and outstanding shares of the
common stock.
We issued a warrant to Millennium Partners L.P. on August 3, 2000, which may
entitle them to receive additional shares of common stock on eight dates
beginning six months from that date and every three months thereafter. On
August 30, 2000 we issued a second warrant to Millennium which may entitle them
to receive additional shares of common stock on eight dates beginning six months
51
from August 30, 2000 and every three months thereafter. On November 1, 2000, we
agreed with Millennium to cancel the adjustable warrant issued on August 30,
2000 and to decrease the number of shares for which the adjustable warrant
issued on August 3, 2000 may be exercisable. The number of additional shares
Millennium will be entitled to receive on each date will be based on the number
of shares of common stock Millennium 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 limit the number of additional shares
by purchasing part of the entitlement from Millennium. The remaining warrant is
exercisable, in whole or in part, at any time on or prior to 30 days after the
last date which may entitle Millennium to receive additional shares. This
warrant is subject to adjustment for subdivisions, combinations, stock
dividends, reorganizations and various other issuances of common stock. During
any period of time that the shares of common stock underlying this warrant are
not subject to an effective registration statement, Millennium may elect to
exercise the warrant by receiving a reduced number of shares in lieu of
tendering the exercise price in cash. In the event of certain mergers, asset
sales and tender or exchange offers, Millennium shall have the right to
purchase, by exercise of this warrant and payment of the exercise price, the
kind and amount of shares and other securities and property it would have owned
or have been entitled to receive after the occurrence of the transaction had the
warrant been exercised immediately before the transaction, subject to the
adjustment of the exercise price as described in the warrant and above, or, if
applicable, the right to receive a substitute warrant after a merger or the
right to tender the warrant for the consideration that would have been received
if the warrant had been exercised and the shares issued upon exercise had been
tendered. Under the terms of this warrant, the number of shares of common stock
that Millennium may acquire upon exercise cannot exceed a number that, when
added to the total number of shares of common stock Millennium is deemed to
beneficially own, together with all shares of common stock deemed beneficially
owned by Millennium's affiliates (as defined by Rule 144 of the Securities Act
of 1933), would exceed 9.99% of the total issued and outstanding shares of the
common stock.
Millennium also received a warrant on August 3, 2000 to purchase up to
101,587 shares of common stock at $4.725 per share, which is callable by us at
$7.875 per underlying share. On August 30, 2000 we issued an additional warrant
to purchase up to 19,900 shares of common stock at $6.03 per share which is
callable by us at $10.05 per underlying share. Each callable warrant is
exercisable, in whole or in part, at any time on or after the issuance date and
on or prior to the fifth year anniversary of the issuance date. The exercise
price and number of shares are subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the callable warrants, during any time that the warrant
shares are not subject to an effective registration statement, Millennium may
elect to receive a reduced number of warrant shares in lieu of tendering the
exercise price in cash. Millennium is not entitled to any rights as a
shareholder until it exercises the warrant. In the event of certain mergers,
asset sales and tender or exchange offers, Millennium shall have the right to
purchase, by exercise of the callable warrant and payment of the exercise price,
the kind and amount of shares and other securities and property it would have
owned or have been entitled to receive after the occurrence of the transaction
had the warrant been exercised immediately prior thereto, subject to the
adjustment of the exercise price as described in the warrant and above, or, if
applicable, the right to receive a substitute warrant after a merger or the
right to tender the warrant for the consideration that would have been received
if the warrant had been exercised and the shares issued upon exercise had been
tendered. Under the terms of the callable warrants, the number of shares of
common stock that Millennium may acquire upon exercise cannot exceed a number
that, when added to the total number of shares of common stock Millennium is
deemed to beneficially own, together with all shares of common stock deemed
beneficially owned by Millennium's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the common stock.
52
On August 3, 2000 we issued a warrant to the May Davis Group and four of its
affiliates to purchase up to 100,000 shares of common stock at $5.0375 per
share. The warrant is exercisable, in whole or in part, at any time on or after
the issuance date and on or prior to the fifth year anniversary of the issuance
date. The exercise price and number of shares are subject to adjustment for
subdivisions, combinations, stock dividends, reorganizations and various other
issuances.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe L.P.
53
PLAN OF DISTRIBUTION
We will not receive any of the proceeds from the sale by the selling
stockholders of the common stock offered hereby.
The shares of the common stock offered hereby may be sold from time to time
by the selling stockholders, or by pledgees, donees, transferees or other
successors in interest (i) to or through underwriters or dealers, (ii) directly
to one or more other purchasers, (iii) through agents on a best-efforts basis,
or (iv) through a combination of any such methods of sale. Such sales may be
made on one or more exchanges or in the over-the-counter market, or otherwise at
prices and at terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. The shares may be sold by
one or more of the following: (a) a block trade in which the broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; and (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (e) privately
negotiated transactions without a broker or dealer. In effecting sales, brokers
or dealers engaged by the selling stockholders may arrange for other brokers or
dealers to participate. Brokers or dealers will receive commissions or discounts
from selling stockholders in amounts to be negotiated prior to the sale. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus.
In addition, the selling stockholders may engage in short sales and other
transactions in the common stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the common stock offered under this prospectus in
connection with such transactions.
If we are notified by a selling stockholder that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution, or a
purchase by a broker-dealer as a principal, a supplemental prospectus will be
filed listing:
- the name of each selling stockholder and of the participating
broker-dealer(s);
- the number of shares involved;
- the price at which such shares were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable; and
- other facts material to the transaction.
We have agreed to pay the cost of registering the shares covered by this
prospectus and the costs of preparing this prospectus and the registration
statement under which it is filed. We will provide the estimated total of these
expenses by amendment.
We and the selling stockholders have agreed to indemnify each other against
certain liabilities, including liabilities arising under the Securities Act.
54
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998, and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
Registration Statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
55
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 (unaudited)......................... F-25
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2000 and September 30, 1999
(unaudited)............................................... F-26
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999 (unaudited)..... F-27
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-28
Pro Forma Financial Information............................. F-33
Additional schedules are not provided either because they are inapplicable
or because the required information is included in the accompanying financial
statements.
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc., (formerly CytoTherapeutics, Inc.)
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
redeemable common stock and stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Providence, Rhode Island
April 14, 2000
F-2
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,760,064 $ 7,864,788
Marketable securities..................................... -- 9,520,939
Accrued interest receivable............................... 42,212 206,609
Technology sale receivable................................ 3,000,000 --
Debt service fund......................................... 609,905 --
Other current assets...................................... 558,674 841,674
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property held for sale...................................... 3,203,491 --
Property, plant and equipment, net.......................... 1,747,885 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 15,780,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,605,068 1,020,119
Deferred revenue.......................................... -- 2,500,000
Current maturities of capitalized lease obligations....... 324,167 317,083
Current maturities of long-term debt...................... -- 1,000,000
------------- -------------
Total current liabilities................................... 3,560,550 5,547,824
Capitalized lease obligations, less current maturities...... 2,937,083 3,261,667
Long-term debt, less current maturities..................... -- 500,000
Deposits.................................................... 26,000 --
Deferred Rent............................................... 502,353 222,673
Commitments and contingencies
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999 and 1998...... 5,248,610 5,248,610
Common stock to be issued................................... -- 187,500
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; 18,635,565 and 17,800,323 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 186,355 178,003
Additional paid-in capital................................ 123,917,758 122,861,606
Accumulated deficit....................................... (119,372,710) (103,664,084)
Unrealized losses on marketable securities................ -- (5,198)
------------- -------------
Accumulated total comprehensive loss...................... (119,372,710) (103,669,282)
------------- -------------
Deferred compensation..................................... (1,225,000) (1,472,919)
------------- -------------
Total stockholders' equity.................................. 3,506,403 17,897,408
------------- -------------
Total liabilities and stockholders' equity.................. $ 15,780,999 $ 32,865,682
============= =============
See accompanying notes to consolidated financial statements.
F-3
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue from collaborative agreements............... $ 5,021,707 $ 8,803,163 $ 10,617,443
Operating expenses:
Research and development.......................... 9,984,027 17,658,530 18,603,523
Acquired research and development................. -- -- 8,343,684
General and administrative........................ 4,927,303 4,602,758 6,158,410
Encapsulated cell therapy wind down and corporate
relocation...................................... 6,047,806 -- --
------------ ------------ ------------
20,959,136 22,261,288 33,105,617
------------ ------------ ------------
Loss from operations................................ (15,937,429) (13,458,125) (22,488,174)
Other income (expense):
Interest income................................... 564,006 1,253,781 1,931,260
Interest expense.................................. (335,203) (472,400) (437,991)
Gain on partial sale of Modex..................... -- -- 3,386,808
Loss on sale/leaseback............................ -- -- (342,014)
Loss on equity investment......................... -- -- (105,931)
Other income (expense)............................ -- 48,914 (57,538)
------------ ------------ ------------
228,803 830,295 4,374,594
------------ ------------ ------------
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
============ ============ ============
Basic and diluted net loss per share................ $ (.84) $ (.69) $ (1.08)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 18,705,838 18,290,548 16,704,144
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- ---------- -------- ------------
Balances, December 31, 1996................................. 815,065 $ 8,158,798 15,614,333 $156,144 $107,649,659
Issuance of common stock.................................... -- -- 307,548 3,074 1,552,432
Issuance of common stock under the stock purchase plan...... -- -- 31,822 319 180,103
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- 1,750,000
Common stock issued pursuant to employee benefit plan....... -- -- 25,588 256 169,196
Issuance of common stock--StemCells......................... -- -- 1,219,381 12,194 7,381,206
Redeemable common stock lapses.............................. (257,311) (2,575,688) 257,311 2,573 2,573,115
Exercise of stock options................................... -- -- 75,237 752 244,427
Deferred compensation--amortization and cancellations -- -- (5,000) (50) (27,294)
Change in unrealized losses on marketable securities........ -- -- -- -- --
Change in cumulative translation adjustment................. -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss
-------- ----------- ---------- -------- ------------
Balances, December 31, 1997................................. 557,754 $ 5,583,110 17,526,220 $175,262 $121,472,844
Issuance of common stock.................................... -- -- -- -- --
Issuance of common stock under the stock purchase plan...... -- -- 43,542 436 83,622
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- 84,812 848 143,025
Issuance of common stock--StemCells......................... -- -- 101,320 1,013 505,587
Redeemable common stock lapses.............................. (33,417) (334,500) 33,417 334 334,166
Exercise of stock options................................... -- -- 11,012 110 1,254
Deferred compensation--amortization and cancellations....... -- -- -- -- 321,108
Change in unrealized losses on marketable securities........ -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss..........................................
-------- ----------- ---------- -------- ------------
Balances, December 31, 1998................................. 524,337 $ 5,248,610 17,800,323 $178,003 $122,861,606
Issuance of common stock.................................... -- -- 196,213 1,962 318,221
Issuance of common stock under the stock purchase plan...... -- -- 57,398 574 41,619
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- 90,798 908 102,502
Issuance of common stock--StemCells......................... -- -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- 490,833 4,908 513,534
Deferred compensation--amortization and cancellations....... -- -- -- -- 80,276
Change in unrealized losses on marketable securities........ -- -- -- -- --
Net loss.................................................... -- -- -- -- --
Comprehensive loss..........................................
-------- ----------- ---------- -------- ------------
Balances, December 31, 1999................................. 524,337 $ 5,248,610 18,635,565 $186,355 $123,917,758
======== =========== ========== ======== ============
OTHER COMPREHENSIVE
INCOME
---------------------------
UNREALIZED
GAINS
(LOSSES) CUMULATIVE
ACCUMULATED ON MARKETABLE TRANSLATION DEFERRED
DEFICIT SECURITIES ADJUSTMENTS COMPENSATION
------------- ------------- ----------- -------------
Balances, December 31, 1996................................. $ (72,922,674) $ 14,760 $(60,416) $ (90,118)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... -- -- -- --
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- (1,750,000)
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations -- -- -- 137,298
Change in unrealized losses on marketable securities........ -- (23,637) -- --
Change in cumulative translation adjustment................. -- -- 60,416 --
Net loss.................................................... (18,113,580) -- -- --
Comprehensive loss
------------- -------- -------- -----------
Balances, December 31, 1997................................. $ (91,036,254) $ (8,877) $ -- $(1,702,820)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... --
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. -- -- -- --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations....... -- -- -- 229,901
Change in unrealized losses on marketable securities........ -- 3,679 -- --
Net loss.................................................... (12,627,830) -- -- --
Comprehensive loss..........................................
------------- -------- -------- -----------
Balances, December 31, 1998................................. $(103,664,084) $ (5,198) $ -- $(1,472,919)
Issuance of common stock.................................... -- -- -- --
Issuance of common stock under the stock purchase plan...... -- 42,193
Deferred compensation recorded in connection with the
granting of stock options................................. -- -- -- --
Common stock issued pursuant to employee benefit plan....... -- -- -- --
Issuance of common stock--StemCells......................... -- -- -- --
Redeemable common stock lapses.............................. --
Exercise of stock options................................... -- -- -- --
Deferred compensation--amortization and cancellations....... -- -- -- 247,919
Change in unrealized losses on marketable securities........ -- 5,198 -- --
Net loss.................................................... (15,708,626) -- -- --
Comprehensive loss.......................................... --
------------- -------- -------- -----------
Balances, December 31, 1999................................. $(119,372,710) $ -- $ -- $(1,225,000)
============= ======== ======== ===========
TOTAL
STOCKHOLDERS'
EQUITY
------------
Balances, December 31, 1996................................. $ 34,747,355
Issuance of common stock.................................... 1,555,506
Issuance of common stock under the stock purchase plan...... 180,422
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 169,452
Issuance of common stock--StemCells......................... 7,393,400
Redeemable common stock lapses.............................. 2,575,688
Exercise of stock options................................... 245,179
Deferred compensation--amortization and cancellations 109,954
Change in unrealized losses on marketable securities........ (23,637)
Change in cumulative translation adjustment................. 60,416
Net loss.................................................... (18,113,580)
------------
Comprehensive loss (18,076,081)
------------
Balances, December 31, 1997................................. $ 28,900,155
Issuance of common stock.................................... --
Issuance of common stock under the stock purchase plan...... 84,058
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 143,873
Issuance of common stock--StemCells......................... 506,600
Redeemable common stock lapses.............................. 334,500
Exercise of stock options................................... 1,364
Deferred compensation--amortization and cancellations....... 551,009
Change in unrealized losses on marketable securities........ 3,679
Net loss.................................................... (12,627,830)
------------
Comprehensive loss.......................................... (12,624,151)
------------
Balances, December 31, 1998................................. $ 17,897,408
Issuance of common stock.................................... 320,183
Issuance of common stock under the stock purchase plan......
Deferred compensation recorded in connection with the
granting of stock options................................. --
Common stock issued pursuant to employee benefit plan....... 103,410
Issuance of common stock--StemCells......................... --
Redeemable common stock lapses..............................
Exercise of stock options................................... 518,442
Deferred compensation--amortization and cancellations....... 328,195
Change in unrealized losses on marketable securities........ 5,198
Net loss.................................................... (15,708,626)
------------
Comprehensive loss.......................................... (15,703,428)
------------
Balances, December 31, 1999................................. $ 3,506,403
============
See accompanying notes to consolidated financial statements.
F-5
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating Activities:
Net loss.................................................... $(15,708,626) $(12,627,830) $(18,113,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,717,975 2,244,146 1,968,234
Acquired research and development......................... -- 551,009 8,343,684
Amortization of deferred compensation..................... 328,195 -- 109,954
Fair market adjustment for property held for sale......... 300,000 -- --
Other non-cash charges.................................... 320,183 410,173 105,931
Gain on investment........................................ -- -- (3,386,808)
Loss on sale of fixed assets.............................. 1,117,286 -- 413,856
Loss on sale of intangibles............................... 440,486
Changes in operating assets and liabilities:
Accrued interest receivable............................. 164,397 346,577 100,004
Other current assets.................................... 283,000 (265,665) (232,604)
Accounts payable and accrued expenses................... 1,344,142 (2,378,613) (1,233,501)
Deferred rent........................................... 279,680 -- --
Deferred revenue........................................ (2,500,000) 2,483,856 (1,842,948)
------------ ------------ ------------
Net cash used in operating activities....................... (11,913,282) (9,236,347) (13,767,778)
Cash flows from investing activities:
Proceeds from sale of Modex, net of cash disposed........... -- -- 2,958,199
Purchases of marketable securities.......................... (4,397,676) (18,982,387) (14,182,521)
Proceeds from sales of marketable securities................ 13,923,813 22,573,625 23,736,242
Purchases of property, plant and equipment.................. (192,747) (2,153,525) (7,710,126)
Proceeds on sale of fixed assets............................ 746,448 -- 8,003,926
Purchase of other investment................................ -- -- (250,000)
Acquisition of other assets................................. (558,311) (400,219) (1,599,418)
Disposal of other assets.................................... 440,486 -- --
Acquisition of StemCells assets............................. -- -- (640,490)
Advance to Cognetix......................................... -- -- (250,000)
Repayment from Cognetix..................................... -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities................... 9,962,013 1,037,494 10,315,812
Cash flows from financing activities:
Proceeds from issuance of redeemable common stock........... -- -- --
Proceeds from issuance of common stock...................... 145,603 227,931 1,905,380
Proceeds from the exercise of stock options and warrants.... 518,442 1,364 245,179
Proceeds from debt financings............................... -- 1,259,300 --
Repayments of debt and lease obligations.................... (1,817,500) (1,366,655) (2,496,849)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... (1,153,455) 121,940 (346,290)
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- (181,627)
------------ ------------ ------------
Decrease in cash and cash equivalents....................... (3,104,724) (8,076,913) (3,979,883)
Cash and cash equivalents, January 1........................ 7,864,788 15,941,701 19,921,584
------------ ------------ ------------
Cash and cash equivalents, December 31...................... $ 4,760,064 $ 7,864,788 $ 15,941,701
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 335,203 $ 444,047 $ 436,461
NON-CASH TRANSACTION:
In December 1999, the Company sold intellectual property related to its
encapsulated cell technology. In association with the transaction, the Company
recorded a receivable of $3,000,000 and reduced intangible assets.
See accompanying notes to consolidated financial statements.
F-6
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
StemCells, Inc. (formerly CytoTherapeutics, Inc.) (the "Company") is a
biopharmaceutical company engaged in the development of novel stem cell
therapies designed to treat human diseases and disorders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
reservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company classifies such holdings
as available-for-sale securities, which are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity.
PROPERTY HELD FOR SALE
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, CA, certain
property considered by management to no longer be necessary has been made
available for sale or lease. The aggregate carrying value of such property has
been reviewed by management, subject to appraisal and adjusted downward to
estimated market value.
F-7
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
Building and improvements................................... 3 -- 15 years
Machinery and equipment..................................... 3 -- 10 years
Furniture and fixtures...................................... 3 -- 10 years
PATENT COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications are written off to
expense at the time such patents are deemed to have no continuing value. At
December 31, 1999 and 1998, total costs capitalized were $718,000 and $4,285,000
and the related accumulated amortization were $9,000 and $347,000, respectively.
Patent expense totaled $539,000, $3,000, and $365,000 in 1999, 1998 and 1997,
respectively.
In December 1999, the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties,
in return for the assignment to Neurotech of intellectual property assets
relating to ECT. In addition, the Company retained certain non-exclusive rights
to use ECT in combination with its proprietary stem cell technology and in the
field of vaccines for prevention and treatment of infectious diseases. The
patent portfolio that was sold had a net book value of $3,180,000. The loss on
this transaction and expenses related to the write-down of ECT are included in
wind-down expenses on the Company's Consolidated Statement of Operations.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted to non-employees, the
Company accounts for these grants in accordance with FAS No. 123--ACCOUNTING FOR
STOCK-BASED COMPENSATION and EITF96-18--ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES, and accordingly, recognizes as consulting expenses
the estimated fair value of such options as calculated using the Black-Scholes
valuation model. Fair value is determined using methodologies allowable by FAS
No. 123. The cost is amortized over the vesting period of each option or the
recipient's contractual arrangement, if shorter.
F-8
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities, as well as net
operating loss carry forwards, and are measured using the enacted tax rates and
rates under laws that are expected to be in effect when the differences reverse.
Deferred tax assets may be reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
REVENUE FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses directly related to the particular
research plan or the achievement of certain development milestones as defined
within the terms of the collaborative agreement. Payments received in advance of
research performed are designated as deferred revenue. Recorded revenues are not
refundable in the event research efforts are considered unsuccessful.
RESEARCH AND DEVELOPMENT COSTS
The company expenses all research and development costs as incurred.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities Exchange Commission's recently issued Staff Accounting
Bulletin No. 101 provides guidance on revenue recognition that may impact the
Company's future reporting relative to recognizing revenues received from
collaborative and similar agreements. The Company does not expect this guidance
to result in significant changes to its existing revenue recognition policy,
subject to the specific terms of each individual collaborative agreement.
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable to the Company than it was then able to
obtain from outside investors. The shares are convertible at the option of the
holders into common stock at $3.77 per share (based on the face value of the
preferred shares). The conversion price may be below the trading market price of
the stock at the time of conversion. The Company has valued the beneficial
conversion feature using the intrinsic value method reflecting the April 13,
2000 commitment date and the most beneficial per share discount available to the
preferred shareholders. Such value was $265,000 and will be treated as a deemed
dividend as of the commitment date. The holders of the preferred stock have
liquidation rights equal to their original investment plus accrued
F-9
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
but unpaid dividends. The investors would be entitled to make additional
investments in the Company on the same terms as those on which the Company
completes offerings of its securities with third parties within 6 months, if any
such offerings are completed. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to
1,126 additional shares of convertible preferred stock at $6.33 per share. Any
unconverted preferred stock is converted (based on the face value of the
shares), at the applicable conversion price, on April 13, 2002 in the case of
the original stock and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrant expires on April 13,
2005.
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999 AstraZeneca terminated the collaboration, as allowed under the
terms of the original collaborative agreement signed in 1995.
As a result of termination, management determined in July 1999 to
restructure its research 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 wound down its research and manufacturing operations in Lincoln,
Rhode Island, and relocated its remaining research and development activities,
and its corporate headquarters, to the facilities of its wholly owned
subsidiary, StemCells California, Inc., in Sunnyvale, California, in
October 1999. The Company terminated legal, professional and consulting
contractual arrangements in support of ECT research. The Company had used these
legal, professional and consulting contractual arrangements to meet regulatory
requirements in support of its research work, to support contractual
arrangements with clinical sites, to provide assistance at clinical sites in
administrating therapy and documenting activities, and to assist in compliance
with FDA and other regulations regarding its clinical trials. ECT related patent
law work was also terminated. The Company also engaged professional consultants
in connection with the determination to exit its ECT activities and restructure
its operations, which concluded with the exit from ECT activities and relocation
of its corporate headquarters to California. The Company reduced its workforce
by approximately 58 employees who had been focused on ECT programs and 10
administrative employees. As a result, the Company sold excess furniture and
equipment in December 1999 and is seeking to sublease the science and
administrative facility and to sell the pilot manufacturing facility.
Wind-down expenses totaled approximately $6,048,000 for the year ended
December 31, 1999; no such expenses were incurred in 1998 and 1997. These
expenses relate to the wind-down of the Company's encapsulated cell technology
research and development program and the Company's other Rhode Island
operations, and the transfer of the Company's corporate headquarters to
Sunnyvale, California.
F-10
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of these expenses, including the amounts and periods of
recognition, are as follows:
TOTAL
THIRD QUARTER FOURTH QUARTER WIND-DOWN
1999 1999 EXPENSE
------------- -------------- ----------
Employee severance costs............................... $1,554,000 $ -- $1,554,000
Impairment losses(1):
Fixed assets......................................... 800,000 -- 800,000
ECT patents.......................................... 260,000 -- 260,000
---------- ---------- ----------
1,060,000 -- 1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters............................... 702,000 -- 702,000
Pilot manufacturing plant............................ 562,000 -- 562,000
---------- ---------- ----------
1,264,000 -- 1,264,000
Employee outplacement.................................. 200,000 -- 200,000
RIPSAT settlement(3)................................... -- 1,172,000 1,172,000
Loss on sale of assets(4):
Fixed assets......................................... -- 318,000 318,000
ECT patents.......................................... -- 180,000 180,000
---------- ---------- ----------
-- 498,000 498,000
Write-down of pilot plant(5)........................... -- 300,000 300,000
---------- ---------- ----------
$4,078,000 $1,970,000 $6,048,000
========== ========== ==========
- ------------------------
(1) Management's estimate of the fixed asset impairment was derived from
communications with an outside auction house. The patent impairment loss was
based on preliminary negotiations with parties interested in acquiring the
patents.
(2) Facilities carrying costs include operating lease payments, utilities,
property taxes, insurance, maintenance, interest and other non-employee
related expenses necessary to maintaining these facilities through the
expected date of disposition (June 30, 2000).
(3) The Company originally received funding from the Rhode Island Partnership
for Science and Technology (RIPSAT) for purposes of conducting ECT
activities conditioned upon maintaining the operation within the state.
RIPSAT claimed that the Company's decision to exit ECT activities and close
the Rhode Island operation was in violation of the funding arrangement and
that the Company was obligated to return a portion of the funding proceeds.
Although the Company disputed these claims, during the fourth quarter of
1999, management determined it was in the best interest of the Company to
settle the issue.
(4) The Company held an auction to sell all ECT fixed assets. Proceeds from that
sale resulted in a loss, which was related to machinery and equipment
($292,000), and furniture and fixtures ($26,000).
F-11
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
(5) The write-down of the pilot plant was based on an independent property
appraisal, which was not available during the third quarter, when the
Company reached a decision to exit ECT activities and relocate the corporate
headquarters.
At December 31, 1999, the Company's $1.6 million wind-down reserve included
approximately $1.2 million for the RIPSAT settlement and approximately
$0.4 million for Rhode Island facility costs.
Property held for sale at December 31, 1999, consisted of $3.2 million
relating to the Company's pilot plant facility located in Lincoln, Rhode Island.
The Company suspended depreciation of these assets totalling approximately
$140,000 for the quarter ended December 31, 1999. The balance reflected the
$300,000 write-down included as part of the additional wind-down expenses
recognized during the fourth quarter, in accordance with Financial Accounting
Standards Board Statement 121, which requires that long-lived assets be reviewed
for impairment whenever events or circumstances indicate that the carrying value
of the asset may not be recoverable. There were no such assets at December 31,
1998.
5. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the company and
StemCells California, Inc. was completed in the form of a purchase. Through the
merger, the Company acquired StemCells California, Inc. for a purchase price
totaling approximately $9,475,000, consisting of 1,320,691 shares of the
Company's common stock, valued at $6,600,000 and options and warrants for the
purchase of 259,296 common shares at nominal consideration, valued at
$1,300,000, the assumption of certain liabilities of $934,000 and transaction
costs of $641,000. Options and warrants were valued utilizing the intrinsic
method; the resultant value approximated the value determined using the Black-
Scholes method. The purchase price was allocated, based upon an asset valuation
study using income approach methods, to license agreements valued at $1,131,000
to be amortized over three years and acquired research and development of
$8,344,000, which was expensed. The acquired research and development had not
reached scientific feasibility and had no alternative future uses. As part of
the acquisition of StemCells, Richard M. Rose, M.D., became President, Chief
Executive Officer and director of the Company and Dr. Irving Weissman became a
director of the Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date. Under the original grants, approximately
100,000 of these options were exercisable immediately on the date of grant,
1,031,000 of these options would vest and become exercisable only upon the
achievement of specified milestones related to the Company's stem cell
development program and the remaining 469,000 options would vest over eight
years. The
F-12
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
expense associated with the grants that vested immediately was considered
non-employee compensation and was based on the fair value of the options
granted. The expense was considered immaterial. In connection with the 469,000
options issued to a non-employee, Dr. Anderson, the Company recorded deferred
compensation of $1,750,000, the fair value of such options at the date of grant,
which will be amortized over an eight-year period. The fair value was determined
using the Black-Scholes method with the following inputs: volatility .594,
expected life 8 years, dividend yield 0.0%, risk free rate 5.98%. If the
milestones specified relating to the 1,031,000 option granted to non-employees
Drs. Weissman and Gage are achieved, at that time the company will record
compensation expense for the fair market value of such options determined using
the Black-Scholes method. The company has also designated a pool of 400,000
options to be granted to persons in a position to make a significant
contribution to the success of the stem cell program.
Stem cell research is conducted pursuant to the provisions of an agreement
between the company and Drs. Weissman and Gage providing for a two-year research
plan. If the goals of the research plan are accomplished, the Company has agreed
to fund continuing stem cell research. Increases in stem cells research funding
of not more than 25% a year will be funded by the Company as long as the goals
of the research plan are being met. However, the Company will retain the option
of (i) ceasing or reducing brain stem cell research even if all research plan
goals are met, but will be required to accelerate the vesting of all
still-achievable performance based stock options, and (ii) ceasing or reducing
non-brain stem cell research even if all plan goals are being met by affording
the scientific research founders the opportunity to continue development of the
non-brain stem cell research by licensing the technology related to such
research to the founders in exchange for a payment to the Company equal to all
prior Company funding for such research, plus royalty payments.
6. MODEX
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutics, Ltd., (Modex) as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounted for this
investment under the cost method at December 31, 1999.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
F-13
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
7. MARKETABLE SECURITIES
During 1999, the Company sold all of its remaining marketable equitable
securities. At December 31, 1999, all of the Company's available funds were held
in cash and cash equivalents. The following is a summary of available-for-sale
securities held at December 31, 1998:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
U.S. government securities..................... $ 1,500,994 $1,720 $ (504) $ 1,502,210
U.S. corporate securities...................... 9,225,095 3,244 (9,658) 9,218,681
----------- ------ -------- -----------
Total debt securities.......................... $10,726,089 $4,964 $(10,162) 10,720,891
=========== ====== ========
Debt securities included in cash and cash
equivalents.................................. (1,199,952)
-----------
Debt securities included in marketable
securities................................... $ 9,520,939
===========
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
------------------------
1999 1998
---------- -----------
Building and improvements........................... $ 665,890 $ 5,665,077
Machinery and equipment............................. 1,691,096 9,887,251
Furniture and fixtures.............................. 219,260 869,831
---------- -----------
2,576,286 16,422,159
Less accumulated depreciation and amortization...... 828,401 8,066,150
---------- -----------
$1,747,885 $ 8,356,009
========== ===========
Depreciation and amortization expense was $1,436,000, $1,720,000, and
$1,778,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
As part of the Company's restructuring of its operations, sale of its
encapsulated cell technology ("ECT"), and relocation of its corporate
headquarters to Sunnyvale, California, the Company identified machinery and
equipment and furniture and fixtures associated with the ECT or otherwise no
longer needed. In December of 1999, the Company disposed of these excess fixed
assets, realizing proceeds of approximately $746,000. At the time of the sale,
these assets had a net book value of approximately $1,063,000 after a third
quarter 1999 write-down of $800,000, which was based on management's estimate of
expected sale proceeds. The third quarter write-down and actual fourth quarter
loss were included in wind-down expenses.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $5,827,000 and $6,587,000, at
December 31, 1999 and 1998, respectively, with related accumulated amortization
of $2,747,000 and $2,860,000 at December 31, 1999 and 1998,
F-14
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
respectively. As a result of the Company's decision to exit ECT and relocate to
Sunnyvale, CA, this property has been classified as held for sale at
December 31, 1999.
9. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Patents, net......................................... $ 708,823 $3,938,755
License agreements, net.............................. 282,750 659,750
Security deposit--building lease..................... 750,000 750,000
Restricted cash...................................... -- 603,467
Deferred financing costs, net........................ 117,195 123,701
---------- ----------
$1,858,768 $6,075,663
========== ==========
The decrease in patents from 1999 to 1998 was primarily due to management's
decision to exit encapsulated cell technology and dispose of the related
intellectual property. Management reached this decision during the third quarter
of 1999, and established a reserve that included $260,000 directly related to
the write-down of encapsulated cell technology patents. During the fourth
quarter, management established an additional reserve that included a $180,000
loss associated with the sale of encapsulated cell technology patents worth
$3,180,000.
At December 31, 1999 and 1998, accumulated amortization was $857,000 and
$818,000, respectively, for patents and license agreements.
10. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Wind-down expenses................................... $1,634,522 $ --
External services.................................... 97,439 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,605,068 $1,020,119
========== ==========
The reserve for wind-down expenses included approximately $1,172,000
relating to the RIPSAT settlement (Notes 4 and 11) and approximately $463,000
for the estimated six months of lease payments and operating costs for the Rhode
Island facilities through an expected disposal date of June 30, 2000.
F-15
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of the related assets. In addition, the Company was required to maintain a
debt service reserve until December 1999. On March 3, 2000 the Company entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). The Company agreed to pay RIPSAT $1,172,000 in
full satisfaction of all obligations of the Company to RIPSAT under the Funding
Agreement dated as of June 22, 1989. On execution and delivery of this
Agreement, IRBA agreed to return to the Company the full amount of the Company's
debt service reserve ("Reserve Funds"), approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. Such amount
has been classified as debt service funds in current assets of the consolidated
balance sheet. In order to avoid the loss of interest on the Reserve Funds due
to early termination of certain investments, the parties agreed that the Company
would render a net payment to RIPSAT in the amount of approximately $562,000.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreements with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000, incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to ten, $1,171,900
for years eleven to fourteen and $1,465,000 in year fifteen, with a $750,000
security deposit held for the term of the lease. The Company is recognizing rent
expense on a straight line basis. At December 31, 1999, the Company had incurred
$426,790 in deferred rent expense.
F-16
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
Future minimum capitalized lease obligations with non-cancelable terms in
excess of one year at December 31, 1999, are as follows:
2000........................................................ $ 606,268
2001........................................................ 589,217
2002........................................................ 519,719
2003........................................................ 436,909
2004........................................................ 425,713
Thereafter.................................................. 2,577,826
----------
Total minimum lease payments................................ 5,302,407
Less amounts representing interest.......................... 2,041,157
----------
Present value of minimum lease payments..................... 3,261,250
Less current maturities..................................... 324,167
----------
Capitalized lease obligations, less current maturities...... $2,937,083
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
12. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Term note payable, interest at the prime rate plus 1/2%
(8.75% at December 31, 1998), principal payments commence
in August 1998, due ratably through May 2000; secured by
certain equipment (prepaid during 1999)................... $ -- $1,500,000
Current maturities of long-term debt........................ -- 1,000,000
---------- ----------
Long-term debt, less current maturities..................... $ -- $ 500,000
========== ==========
13. REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such program by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
F-17
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
13. REDEEMABLE COMMON STOCK (CONTINUED)
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company reclassified the amount recorded at December 31, 1999 as Redeemable
Common Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
14. COMMON STOCK TO BE ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
15. STOCKHOLDERS' EQUITY
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 1999,
the Company had reserved 2,603,736 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
1999 1998 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ---------- -------------- --------- --------------
Outstanding at January 1...... 1,654,126 $3.62 2,446,573 $7.48 2,423,025 $8.34
Granted....................... 536,078 1.08 1,174,118 1.70 679,074 5.33
Exercised..................... (604,362) 1.50 (11,012) .12 (82,737) 2.96
Canceled...................... (646,507) 5.31 (1,955,553) 7.08 (572,789) 9.21
--------- ----- ---------- ----- --------- -----
Outstanding at December 31.... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
========= ===== ========== ===== ========= =====
Options exercisable at
December 31................. 594,216 $3.44 1,108,936 $4.33 1,338,163 $7.79
========= ===== ========== ===== ========= =====
F-18
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
On July 10, 1998, the Company re-priced 751,018 outstanding stock options.
No compensation expense was recorded since the re-priced options carried an
exercise price equal to the market price of the Company's common stock on the
date of the re-pricing.
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 75,384 of these options
are exercisable at December 31, 1997, 96,750 of these options vest and become
exercisable only upon achievement of specified milestones, and the remaining
78,210 options vest over three years from the date of grant. The value of such
options utilizing the intrinsic method, which approximated the value determined
using the Black-Scholes method, was accounted for as part of the StemCells
California acquisition price. Additionally, the Company adopted the 1997
CytoTherapeutics, Inc. StemCells California Research Stock Option Plan (the
StemCells California Research Plan) whereby an additional 2,000,000 shares of
Common Stock have been reserved. During 1997, the Company awarded options under
the StemCells Research Plan to purchase 1.6 million shares of the Company's
common stock to the Chief Executive Officer and scientific founders of StemCells
at an exercise price of $5.25 per share. Under the original grants,
approximately 100,000 of these options were exercisable immediately on the date
of grant, 1,031,000 of these options would vest and become exercisable only upon
achievement of specified milestones and the remaining 469,000 options would vest
over eight years. Options granted to Dr. Rose, in his capacity as Chief
Executive Officer, were valued using the intrinsic value method, in accordance
with the provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Options
granted to non-employees Drs. Weissman, Gage and Anderson were accounted for
using the fair value method in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------- -------- ----------- --------
Less than $5.00........................... 755,398 8.50 $ 1.12 411,945 $ 1.02
$5.01-$10.00.............................. 90,687 4.56 6.55 89,021 6.55
Greater than $10.00....................... 93,250 2.54 11.18 93,250 11.18
------- -------
939,335 594,216
======= =======
F-19
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 1999, 1998, and 1997, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 1999, 1998,
and 1997, consistent with the provisions of FAS 123:
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389) $(18,113,580) $(19,924,437)
Net loss per share... $(.84) $(.84) $(.69) $(.82) $(1.08) $(1.19)
The weighted average fair value per share of options granted during 1999,
1998 and 1997 was $.88, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Expected life (years)................................. 5 5 5 5 .5 .5
Interest rate......................................... 5.5% 5.2% 6.2% 5.0% 4.64% 5.5%
Volatility............................................ 96.7% 63.5% 59.0% 96.7% 63.5% 59.0%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
The effects on 1999, 1998 and 1997 pro forma net loss and net loss per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the stock purchase plan are not necessarily representative of the
effects on reporting the results of operations for future years as the period
presented includes only four, three or two years, respectively, of option grants
under the Company's plans. As required by FAS 123, the Company has used the
Black-Scholes model for option valuation, which method may not accurately value
the options described.
STOCK WARRANTS
In conjunction with the StemCells California merger, the Company exchanged
StemCells California warrants for warrants to purchase 8,952 shares of Company
common stock at $4.71 per share; such warrants were valued using the intrinsic
value method which approximated the value determined using the Black-Scholes
method and were accounted for as part of the purchase price. In conjunction with
various equipment leasing agreements, the Company had outstanding warrants to
purchase 31,545 shares of common stock at prices ranging from $4.00 to $9.00 per
share. The warrants expired in October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expired in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price
F-20
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
of such common stock, sufficient additional shares of common stock to maintain
the warrant holder's percentage ownership of the Company's common stock at 15%.
This right, subject to certain conditions and limitations, expired in
April 2000.
COMMON STOCK RESERVED
The Company has reserved 6,461,846 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
16. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
the Company, signed a Research Funding and Option Agreement with The Scripps
Research Institute ("Scripps") relating to certain stem cell research. Under the
terms of the Agreement, StemCells agreed to fund research in the total amount of
approximately $931,000 at Scripps over a period of three years. StemCells paid
Scripps approximately $77,000 in 1997, $307,000 in 1998, and $309,000 in 1999.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share upon the
achievement of specified milestones. Under the Agreement, StemCells has an
option for an exclusive license to the inventions resulting from the sponsored
research, subject to the payment of royalties and certain other amounts, and is
obligated to make payments totaling $425,000 for achievement of certain
milestones.
In April 1997, the Company entered into an agreement with
Neurospheres, Ltd., which superseded all previous licensing agreements and
settled a dispute with Neurospheres. Under the terms of the settlement, the
Company has an exclusive royalty bearing license for growth-factor responsive
stem cells for transplantation. Neurospheres had an option to acquire
co-exclusive rights but did not exercise by the April 1998 deadline. The Company
retains exclusive rights for transplantation. The parties have no further
research obligations to each other, and the Company is under no obligation to
provide additional funding.
In February 1997, the Company and Cognetix, Inc. entered into a
Collaboration and Development Agreement related to the Company's former
encapsulated cell technology. As part of the agreement with Cognetix, the
Company purchased $250,000 of Cognetix preferred stock and, subject to certain
milestones, was obligated to purchase as much as $1,500,000 of additional
Cognetix stock over the next year. In July 1997, the Company loaned $250,000 to
Cognetix which was repaid with interest in October 1997. In October 1998, the
Company sold the $250,000 of preferred stock back to Cognetix for $298,914. The
Company is under no obligation to provide funding under this agreement.
In 1996, the Company signed certain collaborative development and licensing
agreements with Genentech, Inc. Under the terms of one of those agreements,
Genentech purchased 829,171 shares of redeemable common stock for $8.3 million
to fund development of products to treat Parkinson's disease. Genentech had the
right, at its discretion, to terminate the Parkinson's program at specified
milestones in the program. The Agreement also provided that if the Parkinson's
program were terminated and the funds the Company received from the sale of
stock to Genentech pursuant to the Parkinson's agreement exceeded the expenses
incurred by the Company in connection with such program by more than
$1 million, Genentech had the right to require the Company to repurchase from
F-21
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
Genentech shares of the Company's common stock having a value equal to the over
funding, based upon the share price paid by Genentech. As such, the common stock
purchased by Genentech has been classified as redeemable common stock until the
funds are expended on the program. On May 21, 1998, Genentech exercised its
right to terminate the collaboration and negotiations ensued with respect to the
amount of redeemable common stock to be redeemed in accordance with the
agreement and the method of such redemption. In March 2000 the Company announced
the settlement of this matter with Genentech and at that time the redeemable
common stock was reclassified to common stock. The Company is under no
obligation to provide additional funding to Genentech, Inc.
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
continue the trials of the bovine cell-containing implant therapy and executed
its right to terminate the agreement. The Company has no additional funding
obligations with AstraZeneca.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's encapsulated cell technology
program and its new focus on the stem cell field, its principal academic
collaborations are now with Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $868,000, $1,259,000, and $1,326,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The Company
has no other significant collaborative research funding obligations.
F-22
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 1999, the Company
had tax net operating loss carry forwards of $96,195,000 and research and
development tax credit carry forwards of $4,035,000 which expire at various
times through 2019. Due to the "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss carry
forwards and tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Deferred tax assets:
Capitalized research and development costs................ $ 4,331,000 $ 28,124,000
Net operating losses...................................... 38,478,000 10,786,000
Research and development credits.......................... 4,035,000 3,646,000
Other..................................................... 928,000 235,000
------------ ------------
47,772,000 42,791,000
Deferred tax liabilities:
Patents................................................... (246,000) (1,537,000)
------------ ------------
47,526,000 41,254,000
Valuation allowance....................................... (47,526,000) (41,254,000)
------------ ------------
Net deferred tax assets..................................... $ -- $ --
============ ============
Since there is uncertainty relating to the ultimate use of the loss carry
forwards and tax credits, a valuation allowance has been recognized at
December 31, 1999 and 1998, to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,272,000 in 1999, due primarily to the
increases in net operating loss carry forwards and tax credits offset by
reduction in capitalized research and development costs.
18. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $103,000, $146,000, and $169,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
19. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate
F-23
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
19. CONTINGENCIES (CONTINUED)
disposition of these matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
20. SUBSEQUENT EVENTS
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. (SEE NOTE 3--"SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.")
F-24
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (NOTE 1)
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,247,077 $ 4,760,064
Technology sale receivable................................ 200,000 3,000,000
Other current assets...................................... 768,521 1,210,791
------------- -------------
Total current assets.................................... 8,215,598 8,970,855
Restricted Investments.................................... 27,204,333 --
Property held for sale.................................... 3,203,491 3,203,491
Property, plant and equipment, net........................ 1,517,564 1,747,885
Intangible assets, net.................................... 740,543 1,108,768
Other assets.............................................. 750,000 750,000
------------- -------------
Total assets................................................ $ 41,631,529 $ 15,780,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 234,444 $ 631,315
Accrued expenses.......................................... 574,267 2,605,068
Current maturities of capitalized lease obligations....... 327,083 324,167
------------- -------------
Total current liabilities................................... 1,135,794 3,560,550
Capitalized lease obligations, less current maturities...... 2,692,500 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 650,984 502,353
Redeemable stock............................................ -- 5,248,610
Stockholders' equity
Convertible Preferred Stock............................... 1,500,000 --
Common stock.............................................. 208,818 186,355
Additional paid in capital................................ 134,698,668 123,917,758
Stock Subscription Receivable............................. (1,250,004) --
Accumulated deficit....................................... (124,237,900) (119,372,710)
Accumulated other comprehensive income.................... 27,204,333 --
Deferred compensation..................................... (997,664) (1,225,000)
------------- -------------
Total stockholders' equity.............................. 37,126,251 3,506,403
------------- -------------
Total liabilities and stockholders' equity.............. $ 41,631,529 $ 15,780,999
============= =============
See accompanying notes to condensed consolidated financial statements.
F-25
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
2000 1999
-------------- ---------------
Revenue from collaborative arrangements..................... $ -- $ 5,021,707
Operating expenses:
Research and development.................................. 3,350,101 8,432,262
General and administrative................................ 2,172,137 3,195,672
Encapsulated Cell Therapy wind down and corporate
relocation.............................................. 768,733 4,078,034
------------ -------------
6,290,971 15,705,968
Loss from operations........................................ (6,290,971) (10,684,261)
Other income (expense):
Investment income......................................... 218,480 504,114
Interest expense.......................................... (209,287) (236,836)
Gain on sale of Modex shares.............................. 1,427,686 --
Loss on disposal of fixed assets.......................... (11,098) (66,777)
------------ -------------
1,425,781 200,501
------------ -------------
Net loss.................................................... $ (4,865,190) $ (10,483,760)
Deemed dividend (Note 2).................................. (265,000) --
------------ -------------
Net loss applicable to common shareholders.................. $ (5,130,190) $ (10,483,760)
============ =============
Basic and diluted net loss per common share................. $ (0.26) $ (0.56)
============ =============
Shares used in computing basic and diluted net loss per
common share.............................................. 19,682,590 18,560,675
============ =============
See accompanying notes to condensed consolidated financial statements.
F-26
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- ------------
Cash flows from operating activities:
Net loss.................................................. $(4,865,190) $(10,483,760)
Gain on sale of Modex shares.............................. (1,427,686) --
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 617,447 1,603,691
Write down of fixed assets.............................. -- 800,000
Deferred stock compensation............................. 464,363 244,337
Loss on sale of fixed assets............................ -- 66,777
Net changes in operating assets and liabilities......... (3,086,775) (1,978,807)
----------- ------------
Net cash used in operating activities..................... (8,297,841) (9,747,762)
----------- ------------
Cash flows from investing activities:
Proceeds from marketable securities....................... -- 11,317,482
Purchases of marketable securities........................ -- (4,397,676)
Proceeds from sale of encapsulated cell technology........ 2,800,000 --
Purchase of property, plant and equipment, net............ (18,901) (47,210)
Proceeds from sale of Modex shares........................ 1,427,686 --
Acquisition of other assets............................... -- (138,090)
----------- ------------
Net cash provided by investing activities................. 4,208,785 6,734,505
----------- ------------
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 553,586 548,225
Proceeds from issuance of common stock.................... 4,764,150 --
Proceeds from issuance of preferred stock................. 1,500,000 --
Principal payments under capitalized lease obligations and
mortgage payable........................................ (241,667) (1,710,833)
----------- ------------
Net cash provided by (used by) financing activities....... 6,576,069 (1,162,608)
----------- ------------
Net increase (decrease) in cash and cash equivalents........ 2,487,013 (4,175,865)
Cash and cash equivalents, beginning of period.............. 4,760,064 7,864,788
----------- ------------
Cash and cash equivalents, end of period.................... $ 7,247,077 $ 3,688,923
=========== ============
Non-cash item:
Stock subscription receivable............................. $ 1,250,004 --
See accompanying notes to condensed financial statements.
F-27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
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 nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2000.
The balance sheet at December 31, 1999 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
generally accepted accounting principles in the United States. For the complete
financial statements, refer to the audited financial statements and footnotes
thereto as of December 31, 1999.
NOTE 2. NET LOSS PER SHARE
Net loss-per-share is computed using the weighted-average number of shares
of common stock outstanding. The value associated with the beneficial conversion
feature of certain preferred stock has been treated as a deemed dividend in the
computation of earnings per share (see Note 6 "Beneficial Conversion Value of 6%
Cumulative Convertible Preferred Stock.) Common equivalent shares from stock
options and warrants are excluded, as their effect is antidilutive.
NOTE 3. COMPREHENSIVE INCOME
For the nine months ended September 30, 2000 and 1999, total comprehensive
income/(loss) was $22,339,143 and ($10,483,760) respectively. The reported net
loss for the nine months ended September 30, 2000 and 1999 was $4,865,190 and
$10,483,760.
NOTE 4. INVESTMENTS
At September 30, 2000, the Company owned 126,193 shares of Modex
Therapeutics Ltd. ("Modex"). This Swiss biotechnology company made an initial
public offering of shares on the Swiss Exchange on June 23, 2000. Accordingly,
with an established market value, the investment is recorded as
available-for-sale at an estimated fair market value The market price of Modex
shares was 372 Swiss Francs per share on September 30, 2000, which converts to
$215.58 per share and results in an estimated fair value of $27,204,333 for the
Company's holdings on that date. The unrealized gain was reported in other
comprehensive income. On January 2, 2001 the market price of Modex shares was
210.00 Swiss Francs per share, which converts to $130.39 per share and results
in an estimated fair value of $16,453,825 for the Company's holdings. On
January 19, 2001, the Company sold 22,616
F-28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 4. INVESTMENTS (CONTINUED)
Modex shares for a net price of 182.00 Swiss Francs per share, which converts to
$112.76 per share, for total proceeds of $2,550,230.27.
COST GROSS UNREALIZED GAIN FAIR VALUE SEPTEMBER 30, 2000
- --------------------- --------------------- ------------------------------
$ 0 $27,204,333 $27,204,333
NOTE 5. 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.
During the first six months of 2000 we incurred $288,646 of costs in excess
of the amounts reserved as of December 31, 1999 for the carrying costs of the
Rhode Island facilities. During the third quarter we incurred an additional
$480,087 in carrying costs, including lease payments, property taxes and
utilities, for the Rhode Island facilities, as we were unable to dispose of them
by June 30, 2000, as expected. These amounts were previously included in general
and administrative expense, and have been reclassified to be separately
disclosed as encapsulated cell therapy wind down and corporate relocation
expense because they were directly related to the wind down and relocation. We
anticipate that we will incur a similar amount in the fourth quarter of 2000 and
in every quarter thereafter until we dispose of these facilities. We do not
currently have a projected date for such disposal and there can be no assurance
that we will be able to dispose of these facilities in a reasonable time, if at
all.
Some additional items that were more properly included in research and
development were also reclassified out of general and administrative expense,
and facilities costs were more accurately spread between research and
development and general and administrative expense.
NOTE 6. BENEFICIAL CONVERSION VALUE OF 6% CUMULATIVE CONVERTIBLE PREFERRED
STOCK
As previously reported, the Company sold 1,500 shares of its 6% cumulative
convertible preferred stock plus a warrant for 75,000 shares of the Company's
common stock to two members of its Board of Directors for $1,500,000 on terms
more favorable to the Company than it was then able to obtain from outside
investors. The face value of the shares are convertible at the option of the
holders into common stock at $3.77 per share. The Company has valued the
beneficial conversion feature reflecting the April 13, 2000 commitment date and
the most beneficial per share discount available to the preferred shareholders.
Such value was $265,000 and is treated as a deemed dividend as of the commitment
date.
NOTE 7. SALE OF SECURITIES
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). StemCells received
$3 million of the purchase price at the
F-29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 7. SALE OF SECURITIES (CONTINUED)
closing and received the remaining $1 million upon effectiveness of a
registration statement covering the shares owned by the Fund. The Fund purchased
the Company's common stock and warrants 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. 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 $0.01. Such warrants provide the Fund with the opportunity
to acquire additional common shares at a nominal value if the value of the
common stock that the Fund holds decreases. 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. No portion of the sale proceeds was assigned to
the adjustable warrants, as the ultimate number of shares issuable upon exercise
of the warrants was not determinable and the net impact on the Company's equity
from any such allocation of proceeds would have been zero. 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 was treated as a credit to paid in
capital stockholders' equity. The Company accounts for the sale of the stock and
warrants or the exercise of 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 paid in capital. In addition, any
repurchase of the shares or warrants by the Company would also be accounted for
through 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 paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and the Fund paid the remaining $250,000 upon effectiveness of
a registration statement covering the shares owned by the Fund. 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 accounted for as a credit to
paid in capital.
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
F-30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 7. SALE OF SECURITIES (CONTINUED)
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. SUBSEQUENT EVENTS
As previously reported, in conjunction with the StemCells California merger,
the Company adopted the 1997 CytoTherapeutics, Inc. StemCells California
Research Stock Option Plan whereby an additional 2,000,000 shares of Common
Stock have been reserved. During 1997, the Company awarded options under this
plan to purchase 1.6 million shares of the Company's common stock to the Chief
Executive Officer and scientific founders of StemCells California, Inc. at an
exercise price of $5.25 per share. Under the original grants, approximately
100,000 of these options were exercisable immediately on the date of the grant,
1,031,000 of these options would vest and become exercisable only upon
achievement of specified milestones and the remaining 469,000 options would vest
over eight years. The Company agreed on October 27, 2000 with Irving Weissman,
M.D. and Fred H. Gage, Ph.D., two of the grant recipients, to amend their
options. In exchange for the revision of the options, Dr. Weissman and Dr. Gage
agreed to rescind their Conduct of Research Agreement with the Company, in all
respects, including their right under the Agreement to reacquire certain
technology under certain circumstances. Instead of vesting based on performance
milestones, Dr. Weissman's and Dr. Gage's options will vest over eight years
from the date of the original grant, on the same schedule as the option granted
to the third founder, Dr. David Anderson. 168,750 shares vested upon the
revision and the remaining 300,000 shares will vest at 50,000 shares on each
September 25 until September 25, 2005, when the final 100,000 shares will vest.
The exercise price for the revised options remains $5.25 per share. We expect to
incur a charge of approximately $1,600,000 during the fourth quarter of 2000
relating to the vested portion of the options. The deferred compensation expense
associated with the unvested portion of the grants was determined to be
approximately $2.8 million. The Company plans to revalue the options using the
Black-Scholes method on a quarterly basis and recognize additional compensation
expense, accordingly.
Under a 1997 License Agreement with NeuroSpheres, Ltd., the Company obtained
an exclusive patent license in the field of transplantation. The Company entered
into an additional license agreement with NeuroSpheres as of October 31, 2000,
under which the Company obtained an exclusive license in the field of
non-transplant uses, such as drug discovery and drug testing, so that together
the licenses are exclusive for all uses of the technology. The Company made
up-front payments to NeuroSpheres of 65,000 shares of its common stock and
$50,000, and will make additional cash payments when milestones are achieved in
the non-transplant field, or in any products employing NeuroSpheres patents for
generating cells of the blood and immune system from neural stem cells.
Milestone payments would total $500,000 for each product that is approved for
market.
On December 20, 2000, the Company announced that Donald Kennedy, Ph.D., had
resigned from its board of directors. The Company reported that Dr. Kennedy
resigned in connection with his becoming Editor-in-Chief of Science magazine. On
that date the Company also announced that Roger M. Perlmutter had become a
member of the Board.
F-31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2000 AND 1999
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
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"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on
results of operations or financial condition when adopted as we hold no
derivative financial and instruments and do not currently engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB101"). SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
adoption of SAB 101 had no significant impact on our revenue recognition policy
or results of operations.
In March 2000, the FASB issued interpretation No. 44, ("FIN44"), "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. "This interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying this interpretation are recognized on a prospective basis from July 1,
2000. The adoption of FIN 44 does not have a material impact on our financial
statements.
F-32
PRO FORMA FINANCIAL INFORMATION
During the third quarter of 1999, management reached a decision to exit the
Company's Encapsulated Cell Therapy (ECT) activities, dispose of the related
intellectual property, facilities and equipment and relocate the Lincoln, RI
corporate headquarters to Sunnyvale, CA. The Company terminated legal,
professional and consulting contractual arrangements in support of ECT research.
The Company had used these legal, professional and consulting contractual
arrangements to meet regulatory requirements in support of its research work, to
support contractual arrangements with clinical sites, to provide assistance at
clinical sites in administrating therapy and documenting activities, and to
assist in compliance with FDA and other regulations regarding its clinical
trials. ECT related patent law work was also terminated. The Company also
engaged professional consultants in connection with the determination to exit
its ECT activities and restructure its operations, which concluded with the exit
from ECT activities and relocation of its corporate headquarters to California.
The Company reduced its workforce by approximately 58 employees who had been
focused on ECT programs and 10 administrative employees. At the same time, the
Company accrued various estimated expenses associated with the exit and
wind-down of the ECT activities, disposal of the related property and relocation
of the corporate headquarters. Additional accruals were provided in December
1999 for expenses relating to settlement of a 1989 funding arrangement with the
Rhode Island Partnership for Science and Technology resulting from the Company's
move out of Rhode Island, further adjustment to asset carrying values and
estimated carrying costs associated with the Rhode Island facilities through the
expected disposition date. In addition, during December 1999, the Company
liquidated certain ECT equipment and sold its ECT intellectual property to
Neurotech, S.A. for $3,000,000. The tabular unaudited pro forma consolidated
statement of operations presents the effects of the sale, wind-down and
relocation, as if they had occurred at January 1, 1999. The pro forma effects
and adjustments were determined based on available information and certain
allocations that management believes are reasonable. The pro forma financial
information does not purport to represent what the Company's operating results
would have been had the sale occurred at January 1, 1999 and may not be
indicative of the Company's financial position or operating results for any
future date or period.
F-33
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
HISTORICAL PRO FORMA
CONSOLIDATED CONSOLIDATED
12/31/1999 ADJUSTMENTS(A) 12/31/1999
------------ -------------- ------------
Revenue from collaborative agreements............. $ 5,021,707 $ (5,021,707)(1) $ --
Operating expenses:
Research and development........................ 9,984,027 (5,332,331)(2) 4,571,696
(80,000)(5)
General and administrative...................... 4,927,303 (2,309,315)(3) 2,697,988
80,000 (5)
Encapsulated Cell Therapy wind down and 6,047,806 (6,047,806)(4) --
corporate relocation..........................
------------ ------------ -----------
20,959,136 (13,689,452) 7,269,684
------------ ------------ -----------
Loss from operations.............................. (15,937,429) 8,667,745 (7,269,684)
Other income (expense):
Interest income................................. 564,006 -- 564,006
Interest expense................................ (335,203) -- (335,203)
------------ ------------ -----------
228,803 -- 228,803
============ ============ ===========
Net loss.......................................... $(15,708,626) $ 8,667,745 $(7,040,881)
============ ============ ===========
Basic and diluted net loss per share.............. $ (0.84) $ (0.46) $ (0.38)
============ ============ ===========
Shares used in computing basic and diluted net 18,705,838 18,705,838 18,705,838
loss
per share.......................................
============ ============ ===========
F-34
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NOTE A--PRO FORMA ADJUSTMENTS
(1) To eliminate Encapsulated Cell Therapy collaborative revenue arrangements.
(2) To eliminate research and development expenses, including employee
compensation ($1,566,479), external professional services ($875,818)
facilities and other supplies ($2,890,035) and various other expenses
directly relating to encapsulated cell therapy activities. These expenses
were determined based on an individual account analysis and internal
employee tracking records.
(3) To eliminate general and administrative expenses, including employee
compensation ($761,000), legal, professional and consulting fees ($963,000),
facilities costs ($306,000), amortization ($158,000) and various other
expenses ($121,000), directly relating to encapsulated cell therapy. The
expenses were determined based on an individual account analysis.
(4) To eliminate Encapsulated Cell Therapy wind-down and corporate relocation
expenses, including Rhode Island facility carrying costs, employee severance
arrangements and the related settlement of a 1989 funding arrangement with
the Rhode Island Partnership for Science and Technology. These expenses
related to the Company's decision to eliminate 68 employees, relocate all
remaining research and development and the Company's headquarters to
Sunnyvale, California as a result of a decision to exit Encapsulated Cell
Technology, and were included in wind-down expenses. The wind-down expenses
include employee severance costs of approximately $1,554,000, losses and
reserves for the write-down of related patents and fixed assets of
approximately $1,858,000, an accrual of approximately $1,172,000 of costs
relating to settlement of a 1989 funding agreement with the Rhode Island
Partnership for Science and Technology ("RIPSAT") associated with the
Company's pilot manufacturing facility, approximately $1,264,000 relating to
carrying costs, including lease payments, interest, utilities, taxes and
other related expenses associated with resolving the disposition of the
Rhode Island facilities and $200,000 of employee outplacement fees. The
RIPSAT claim related directly to funding the Company had received from
RIPSAT. When the Company reached the decision to exit its Encapsulated Cell
Technology and relocate all remaining research and the Company's corporate
headquarter's from Rhode Island to Sunnyvale, California. RIPSAT claimed the
Company had violated terms of the funding arrangement. The Company did not
agree with this claim, however, management determined it was in the
Company's best interest to settle the issue. As a result, the costs
associated with the settlement were included in the wind-down amount.
(5) To allocate facilities cost to general and administrative expense from
conversion of the former research and development facility in Sunnyvale, CA
to the Company's Corporate headquarters.
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee and the NASDAQ
listing fee.
SEC registration fee........................................ $ 53
NASDAQ listing fee.......................................... $ 650
Printing and engraving expenses............................. $10,000
Legal fees and expenses..................................... $10,000
Accounting fees and expenses................................ $10,000
Blue sky fees and expenses.................................. $ 250
Transfer agent and registrar fees........................... $ 1,000
Miscellaneous............................................... $ 1,000
-------
Total....................................................... $32,953
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the circumstances indemnification
should apply.
Section Ten of our Restated Certificate of Incorporation provides that we
shall, to the maximum extent legally permitted, indemnify and upon request
advance expenses to each person who is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit proceeding, or
claim (civil, criminal, administrative or investigative) by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Company, or is or was serving, or has agreed to serve, at the request of the
Company, as a director, officer, partner, employee, agent or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprises, provided, however, that the Company is not required to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. The
indemnification provided for in Section Ten is expressly not exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement or vote of directors
II-1
or stockholders or otherwise, and shall inure to the benefit of the heirs and
legal representatives of such persons.
Section 145(g) of the Delaware General Corporation Law provides that the
Company shall have the power to purchase and maintain insurance on behalf of its
officers, directors, employees and agents, against any liability asserted
against and incurred by such persons in any such capacity.
We have obtained insurance covering our directors and officers against
certain liabilities.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Section Nine of the
Company's Restated Certificate of Incorporation eliminates a director's personal
liability for monetary damages for breach of fiduciary duty as a director,
except in circumstances involving a breach of the director's duty of loyalty to
StemCells, Inc. or its shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a) below, Section 4(2) of a
the Securities Act or Regulation D promulgated thereunder relative to sales by
an issuer not involving a public offering; and (ii) in the case of the
transactions (b) below, Section 3(b) of the Securities Act and Rule 701
promulgated thereunder relative to sales pursuant to certain compensatory
benefits plans.
(a) On April 13, 2000, the Registrant sold 1,500 shares of 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of the
Registrant's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. The sale was made in reliance on Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The shares of preferred stock are
convertible at the option of the holders into common stock at $3.77 per share
(based on the face value of the shares). The holders of the preferred stock have
liquidation rights equal to their original investments plus accrued but unpaid
dividends. The investors would be entitled to make additional investments in the
Company on the same terms as those on which the Registrant completes offerings
of its securities with third parties within 6 months, if any such offerings are
completed. They have waived that right with respect to the common stock
transactions described in Note 8, Subsequent Events. If offerings totaling at
least $6 million are not completed during the 6 months, the investors have the
right to acquire up to a total of 1,126 additional shares of convertible
preferred stock, the face value of which is convertible to common stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrants, which are exercisable at $6.58 per share, expire on
April 13, 2005.
II-2
On August 3, 2000, the Registrant completed a $4 million common stock
financing transaction with Millennium Partners, LP, or the Fund. The sale was
made in reliance on Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. The Registrant 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 owned by the Fund. The Fund
purchased the Registrant's common stock at $4.33 per share. The Fund may be
entitled, pursuant to an adjustable warrant issued in connection with the sale
of common stock to the Fund, to receive additional shares of common stock 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 the Registrant's common stock over a
period prior to each date. The Registrant 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
the Registrant at $7.875 per underlying share.
The Fund also 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
that option to purchase Registrant's common stock at $5.53 per share. The
Registrant received $750,000 of the purchase price in connection with the
closing on August 30, 2000 and received the remaining $250,000 upon
effectiveness of a registration statement covering the shares owned by the Fund.
At the closing on August 30, 2000, the Fund also received an adjustable warrant
similar to the one issued on August 3, 2000. This adjustable warrant was
canceled by agreement of the Registrant and the Fund on November 1, 2000. The
Fund also received a five year warrant to purchase up to 19,900 shares of the
Registrant's common stock at $6.03 per share. This warrant is callable by the
Registrant at any time at $10.05 per underlying share.
We entered into a license agreement with NeuroSpheres, Ltd. on October 30,
2000 expanding our rights to the intellectual property covered by the license
agreement. See "Business--License Agreements and Sponsored Research
Agreements--Neurospheres, Ltd." Under that license agreement, on October 30,
2000, we issued 65,000 shares of our common stock to NeuroSpheres and we agreed
to file a registration statement covering the resale of those shares by
NeuroSpheres.
(b) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement [NEED TO UPDATE]:
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
II-3
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
II-4
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
II-5
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000.
II-6
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by section 10(a)(3) of the
Securities Act.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on the 31st day of January, 2001.
STEMCELLS, INC.
BY: /S/ GEORGE KOSHY*
-----------------------------------------
Martin M. McGlynn
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on January 31, 2001.
SIGNATURE TITLE
--------- -----
Martin M. McGlynn,
President, Chief Executive Officer
/s/ GEORGE KOSHY* (Principal Executive Officer)
-------------------------------------------
George Koshy,
Controller and Acting Chief Financial
Officer (Principal Financial Officer and
/s/ GEORGE KOSHY Principal Accounting Officer)
-------------------------------------------
John J. Schwartz, Ph. D.
/s/ GEORGE KOSHY* Director
-------------------------------------------
Roger M. Perlmutter, M.D., Ph.D.
/s/ GEORGE KOSHY* Director
-------------------------------------------
Mark J. Levin
/s/ GEORGE KOSHY* Director
-------------------------------------------
Irving Weissman, M.D.
/s/ GEORGE KOSHY* Director
-------------------------------------------
* Attorney-in-fact
II-8
EXHIBIT INDEX
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21X Subsidiaries of the Registrant.
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 14, 2000 in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-54208) and related Prospectus of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) for the registration of
65,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island
January 30, 2001
