e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 0-19871
STEMCELLS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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94-3078125 |
(State or other jurisdiction
of incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
3155 PORTER DRIVE, PALO ALTO, CA 94304
(Address of principal offices) (zip code)
Registrants telephone number, including area code:
(650) 475 3100
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
COMMON STOCK, $.01 PAR VALUE
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
Title of class
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer as defined in Exchange Act
Rule 126(2). Yes þ No o
Aggregate market value of Common Stock held by non-affiliates at
June 30, 2004: $81,006,548. Inclusion of shares held
beneficially by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common
control with the Registrant.
Common stock outstanding at March 8, 2005:
62,417,451 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement
relating to the registrants 2005 Annual Meeting of
Stockholders to be filed with the Commission pursuant to
Regulation 14A are incorporated by reference in
Part III of this report.
FORWARD LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED UNDER
THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS COULD VARY
MATERIALLY. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY
MATERIALLY ARE DESCRIBED HEREIN AND IN OTHER DOCUMENTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD PAY
PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE
SECTION OF THIS REPORT ENTITLED MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS WELL AS EXHIBIT 99 TO THIS REPORT,
ENTITLED CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING
INFORMATION. READERS SHOULD ALSO CAREFULLY REVIEW ANY RISK
FACTORS DESCRIBED IN OTHER DOCUMENTS WE FILE FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION.
Table of Contents
2
Overview
We are engaged in research aimed at the development of therapies
that would use stem and progenitor cells to treat, and possibly
cure, human diseases and injuries such as neurodegenerative
diseases (for instance, Battens, Parkinsons, and
Alzheimers diseases, and other metabolic genetic
disorders), demyelinating disorders (for instance, Multiple
Sclerosis), spinal cord injuries, stroke, hepatitis, chronic
liver failure, and diabetes. 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. 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. We use cells derived from fetal or adult tissue
sources, and are not developing embryonic stem cells for
therapeutic use. Neither are we involved in any activity
directed toward human cloning; our programs are all directed
toward the use of tissue-derived cells for treating or curing
diseases and injuries.
Many diseases, such as Alzheimers, Parkinsons,
lysosomal storage diseases 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 that these neural,
liver and pancreatic conditions affect more than 50 million
people in the United States and account for more than
$300 billion annually in health care costs.(1)
Our stem cell discovery engine relies upon our state of the art
cell sorting capabilities and our library of proprietary
monoclonal antibodies to human proteins. Using this library of
monoclonal antibodies, we have successfully identified,
purified, and characterized the human central nervous system
stem cell. We have also used our proprietary monoclonal
antibodies to make significant advances in our search for stem
or progenitor cells of the liver and the pancreas. We have
established an intellectual property position in all three areas
of our stem cell research the nervous system, the
liver and the pancreas by patenting our discoveries
and entering into exclusive in-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. We are concentrating our efforts on the preclinical and
clinical development of our neural stem cell program and
research endeavors in characterizing the candidate
stem/progenitor cells for the liver and pancreas programs.
In late December 2004, we submitted our first Investigational
New Drug application (IND), for a clinical trial in Batten
Disease. That IND is currently on clinical hold, and discussions
with the U.S. Food and Drug Administration (FDA) are
continuing as the Company formulates plans to respond to the
FDAs questions and concerns.
Cell Therapy Background
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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
(1) This estimate is based on information from the
Alzheimers Association, the Alzheimers Disease
Education & Referral Center (National Institute on
Aging), the National Institutes of Healths National
Institute on Neurological Disorders and Stroke, the Foundation
for Spinal Cord Injury Prevention, Care & Cure, the
Centers for Disease Control and Prevention, the American
Association of Diabetes Educators, the University of Georgia
College of Pharmacy, the Wisconsin Chapter of the
Huntingtons Disease Society of America, the Cincinnati
Childrens Hospital Medical Center, JAIDs, the American
Liver Foundation, the Northwest Parkinsons Foundation and
the Parkinsons Action Network.
3
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 Parkinsons disease and Alzheimers disease. 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 in some diseases, such as dopamine which is deficient
in the brains of individuals with Parkinsons disease as a
result of the loss of dopamine producing neurons. 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 regulation and quantities or for the
duration required to cure the degenerative condition. Cells,
however, can do this naturally. As a result, investigators have
considered supplementing the failing cells that are no longer
producing the needed substances or proteins by implanting stem
or progenitor cells. Where there has been irreversible tissue
damage or organ failure, transplantation of these stem or
progenitor cells offers the possibility of generating new and
healthy mature cells, thus potentially restoring the organ
function and the patients health.
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The Potential of our Tissue-Derived 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, such cells can often be
obtained only through significant surgical procedures. The
challenge, therefore, has been three-fold:
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1) to identify the stem or progenitor cells of a particular
organ; |
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2) to create techniques and processes that can be used to
expand these rare cells in sufficient quantities to transplant
into multiple patients; and |
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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 techniques for discovering novel monoclonal
antibodies that can be used to label markers on the cell surface
to identify and isolate specific cell types, and particularly
stem and progenitor cells. This methodology allows us to purify
the stem cell population and eliminate other unwanted cell
types. For example, we have discovered and patented the use of
monoclonal antibodies to identify human central nervous system,
or CNS, stem cells, as well as a candidate human liver stem-like
cell and a candidate pancreatic stem/progenitor cell.
We have also developed a process, based on a proprietary
in vitro culture system in chemically defined media,
that reproducibly grows normal human CNS, stem and progenitor
cells. We believe this is the first reproducible process for
growing normal human CNS stem cells. 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.
This process facilitates the banking of large quantities of
individual vials of these cells, which could then be used for
distribution to transplant centers worldwide for administration
to patients.
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 be used to
restore function by replacing specific cells that have been
damaged or destroyed. In our research, we have shown that when
human stem cells of the central nervous system are transplanted
into animals, they are accepted, migrate, and successfully
specialize to produce mature neurons and glial cells.
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More generally, because the tissue-derived stem cell is the
pivotal cell that produces all the functional mature cell types
of the organ from which it originates, we believe these cells,
if successfully identified, expanded and stored as frozen cell
banks, may serve as platforms for five major areas of
regenerative medicine and biotechnology:
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tissue repair and replacement, |
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correction of genetic disorders, |
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drug discovery and screening, |
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gene discovery and use, and |
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diagnostics. |
We intend to research, develop, and commercialize the
therapeutic uses of our stem and progenitor cells alone or in
partnership with third parties. We also intend to monetize
non-core uses of our stem cell technology, such as diagnostics,
gene discovery and use, drug discovery and drug screening, by
engaging in a number of non-exclusive agreements
Stem Cell Technology
Stem cells have two defining characteristics:
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some of the cells developed from stem cells produce all the
kinds of mature cells making up the particular organ; and |
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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 a number of systems of the
human body, including the blood and immune system, the central
and peripheral nervous systems (including the brain), the skin,
bone, and even the hair. They are thought to exist for many
others, including the liver and pancreas endocrine systems, gut,
muscle, and heart. Stem cells are responsible for organ
regeneration during normal cell replacement and, to greater or
lesser 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, derived from
human tissue, with commercial importance. We have also obtained
rights to certain inventions relating to stem cells and
progenitor cells from academic institutions. We expect to
continue to expand our search for, and to seek to acquire rights
from third parties relating to, new stem and progenitor cells,
and to further develop our intellectual property positions with
respect to them in-house and through research at scholarly
institutions. Our portfolio of issued patents includes a method
of culturing normal human central nervous system stem and
progenitor cells in our proprietary chemically defined media,
and our published studies show that these cultured and expanded
cells give rise to all three major cell types of the central
nervous system. In rodents, we have shown that these cells
exhibit the unique properties of stem cells: They migrate and
colonize throughout the organ from which they were derived and
mature into the specialized cells, such as neurons and glial
cells, that are normally found in that region of the organ. We
also have patent applications pending in connection with our
search for liver and pancreas stem and progenitor cells.
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Neurological disorders such as Parkinsons disease,
Alzheimers disease, the side effects of stroke, and the
neural degeneration that accompanies genetic disorders such as
Gauchers Disease, Tay-Sachs Disease, and Batten Disease
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 some
of these diseases.
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Our Neural Stem Cell Program |
We have published the results of a study showing 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. We own or have
exclusive licenses to U.S. patents on this process, as well
as issued patents and pending patent applications for
compositions of matter. 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 are the
exclusive licensee of a U.S. patent issued in December,
2002, covering the transplantation of central nervous system
stem cells (U.S. Patent No. 6,497,872, Neural
transplantation using proliferated multipotent neural stem cells
and their progeny). We have also filed patent applications
covering the growth and expansion of these purified normal human
central nervous system cells.
In 2001, we also announced the results of a new study (published
in 2002) in which we used novel human specific monoclonal
antibodies to demonstrate the extent of engraftment, migration
and site-specific formation of the human neural stem cells into
mature neurons. These neuronal cells integrate in a
3-dimensional array within the normal architecture of the mouse
brain. Astrocytes and oligodendrocytes, the other two principle
types of central nervous system cells, are also generated from
the human neural stem cells.
In 2003, we announced results of three preclinical studies
showing proof of principle of the human CNS-SC for a
neurodegenerative disease using the mouse model for Infantile
Batten Disease (a rare lysosomal storage disease), for spinal
cord injury using a spinal cord crush mouse model and for
myelination in the shiverer mouse model. We also demonstrated in
a mouse model for the Batten disease mouse model that the
Companys human CNS-SC engraft, migrate throughout the
brain and produce the enzyme that is missing in this transgenic
mouse. The transplanted human cells are able to neuroprotect
specific neurons, in the transgenic mouse, from death and
quantitatively reduce the insoluble storage material in the
brain, a characteristic hallmark of this disease. We discussed
these results with the FDA, and began preparations toward the
filing of an Investigational New Drug application (IND).
At the October, 2004 Society for Neuroscience meeting in
San Diego, the Company presented an update to the
preclinical data demonstrating the secretion from the human
neural stem cells of the enzyme that is missing in Batten
disease. The secreted enzyme can be taken up by cells in culture
derived from Battens patients, which provides additional
evidence for the Companys hypothesis that these purified
and expanded human neural stem cells may provide a source of
enzyme to deficient cells. The Company also presented data in
the transgenic mouse model for Batten disease showing the steady
rise in enzyme levels in the brains of these mice over time.
In late December 2004, the Company filed an IND for a
Phase I clinical trial of StemCells proprietary
neural cell therapy product (HuCNS SC)-in Batten disease. The
FDA has informed the Company that it has suggestions and
questions related to the proposed trial that require additional
information from the Company and has placed the proposed trial
on clinical hold. StemCells expects to be in active dialogue
with the FDA to address the outstanding issues. We note that
none of the FDAs suggestions or questions are related to
contaminated embryonic stem cells that have been the matter of
media attention. StemCells, Inc. does not use embryonic stem
cells, and does not use mouse feeder cells in any way in
preparing its stem cells. All cells
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prepared by StemCells, Inc. are grown in serum-free media and do
not come into contact with cells from animals.
The Companys proprietary human neural stem cells have also
shown promising results in preclinical results in spinal cord
injury. Drs. Aileen Anderson and Brian Cummings of the
Reeve-Irvine Center at the University of California presented
the data from their study in mice at theTenth Annual Conference
of the American Society for Neural Transplantation and Repair on
May 2, 2003, showing that the Companys stem
cell technology has the potential to protect and regenerate
damaged nerves and nerve fibers in patients with spinal cord
injuries. In quantitative tests designed to measure functional
recovery from complete hind limb paralysis to normal walking,
the Companys researchers reported that injured mice
transplanted with the Companys human neural stem cells
(hCNS-SC) showed improved motor function compared to control
animals. Inspection of the spinal cords from these mice showed
significant levels of human neural cells derived from the
transplanted stem cells. Previously, injured rats have been
given stem cells from other rats or mice, but not stem cells
from humans. The performance of the human cells in this rodent
injury model suggests the possibility that similar results may
be obtainable in humans. We believe that the significance of
this study is that there is now hope in treating two aspects of
spinal cord injury: nerve damage and loss of motor function.
In November 2003, the Company presented data at the
33rd Annual Society for Neuroscience Meeting showing
production of myelin, the insulator for nerve cells. In the
mutant shiverer mouse, which is deficient in myelin production,
transplantation of hCNS-SC into the brain resulted in widespread
engraftment of human cells that matured into oligodendrocytes,
the myelin producing cells. Analysis of the brain tissue of
these mice shows the human cells juxtaposed to the mouse nerves
where the myelin produced by the human cells now ensheath the
mouse nerve, providing the proper layers of insulation. Further
studies are in progress to demonstrate proper function of the
newly produced myelin. Loss of myelin characterizes conditions
such as spinal cord injury, multiple sclerosis, cerebral palsy
and certain genetic disorders (for example, Krabbes
disease, metachormatic leukodystrophy, Tay Sachs disease).
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Our Other Stem Cell Programs |
We continue to advance our research programs on the candidate
liver and pancreas stem and/or progenitor cells. Liver stem
cells may be useful in the treatment of diseases such as
hepatitis, liver failure, blood-clotting disorder, cirrhosis of
the liver and liver cancer. Islet cells are the pancreas cells
that produce insulin, so pancreatic stem cells may be useful in
the treatment of Type 1 diabetes and those cases of Type 2
diabetes where insulin secretion is defective. These programs
are discussed below.
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Note on State and Federal Grants |
In November 2004, California State Proposition 71 (Prop. 71),
the California Stem Cell Research and Cures Initiative, was
adopted by the electorate. It is intended to encourage stem cell
research in the State of California, and to finance such
research with State funds of approximately $295 million
annually for 10 years beginning with 2005. It is our
understanding that the California Institute for Regenerative
Medicine to be created under the Initiative will provide grants,
primarily but not exclusively to academic institutions, to
advance both embryonic stem cell research and adult stem cell
research; the latter is the current and exclusive focus at
StemCells. StemCells, Inc. is eligible to receive Prop. 71
generated funds and we do intend to apply for such funding. We
also remain eligible for federal government support from the
National Institute of Health (NIH) due to our focus on
adult stem cells. NIH grants to the Company or to its academic
collaborators assist research in the use of our cells for
various diseases and conditions such as Alzheimers disease
and spinal cord injuries. Prop. 71 funds will not go to any
project that receives NIH funding. The Company considers
government grants to be important confirmation of the quality of
its science and intellectual property, but does not rely on them
as a significant source of financial support.
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Expected Advantages of Our Stem Cell Technology
To 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 mainly limited to those few sites, such as bone marrow or
peripheral blood cell transplants, where transplantation of the
patients 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.
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Replaced Cells May Provide Normal Function for the Life of
the Patient |
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.
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Stem Cell Therapy Targets the Root Cause of the
Disease |
Most approved therapies for the diseases being targeted by the
Company are palliative in nature, primarily treating the
symptoms of the disease. Stem cell therapy, by contrast, has the
potential to arrest or slow down the progression of the disease
or even cure the patient.
Research and Development Programs
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.
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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 report. 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 programs are at relatively early stages
of development and will require substantial resources to
commercialize.
Research and Product Development Programs
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Program Description and Objective |
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Human Neural Stem Cell
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Preclinical/IND filing |
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Repair or replace damaged central nervous system tissue
(including spinal cord, stroke-damaged tissue, and tissue
affected by certain genetic disorders)
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Demonstrated the ability to reproducibly
identify and purify human neural stem cells
(hCNS-SC). Demonstrated the ability
to create human neural stem cell banks. |
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Demonstrated in vitro the
ability to initiate and expand stem cell-containing human neural
cultures and specialization into three types of central nervous
system cells. |
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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 with no tumor formation. |
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Commenced preclinical testing of human
neural stem cells in well-characterized small animal models of
human diseases. |
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Batten Disease Indication
(Preclinical): |
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Demonstrated in
vivo proof of principle showing in a mouse model that
hCNS-SC can continuously produce the enzyme that is deficient in
Infantile Batten disease. |
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An Investigational
New Drug (IND) application was filed at the end of 2004; the IND
is currently on holdpending response to FDA questions and
concerns. |
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Spinal Cord Injury: Demonstrated
in vivo proof of principle in a mouse model that
transplanted cells show preferential migration towards injured
sites |
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Stroke Indication: Demonstrated
in vivo proof of principle shows functional integration
of myelin onto the mouse nerve axons. |
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Program Description and Objective |
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Stage/Status(1) |
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Liver Stem Cell
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Research |
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Repair or replace liver tissue damaged or destroyed by cirrhosis
and certain metabolic genetic diseases
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Identified a candidate human liver stem
cell-like population referred to as a human liver engrafting
cell (hLEC). |
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Identified in vitro culture
assay for growth of human liver progenitor cells that express
markers for both bile duct cells and hepatocytes |
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Shown that the in vitro
culture of human liver progenitor cells also can grow human
hepatitis virus; this is a potential assay system to screen for
novel anti-viral compounds. |
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Demonstrated the engraftment and
survival of the candidate hLEC in an in vivo mouse model. |
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Detected human albumin in mouse serum in
animals transplanted with hLECs. |
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Pancreas Islet Stem Cell
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Research |
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Repair or replace damaged pancreas islet tissue
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Identified markers on the surface of a rare human
stem-cell-like pancreatic cell, which is a candidate pancreatic
stem/progenitor cell. |
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Commenced testing of a candidate human pancreatic
stem/progenitor cell in vitro and in vivo in
small animal model. |
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(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. |
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 founding scientists 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,
as well as other occasional consultants including William C.
Mobley, M.D., Ph.D., Maria Millan, M.D., Ben
Barres, Ph.D., and Seung Kim, M.D., Ph.D., all of
Stanford University, and Stephen Back, M.D., of the Oregon
Health Science University.
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
NeuroSpheres Ltd. under License
Agreements below.
In 2000, using our proprietary markers on the surface of the
cell, our researchers succeeded in identifying, isolating and
purifying human CNS stem cells from brain tissue. We believe
that this study, published in Proceedings of the National
Academy of Science in December 2000, was the first to show a
reproducible
10
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. Even more importantly, in
our view, our researchers have been able to take these purified
and expanded stem cells and transplant them into the normal
brains of immunodeficient mouse hosts, where they take hold and
grow into neurons and glial cells.
We have found, during the course of long-term studies using a
number of our cell lines, that 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.
The company has established a number of research collaborations
in the neural field to assess the effects of transplanting the
human CNS stem cells into preclinical animal models, including
the spinal cord injury collaboration with Drs. Aileen
Anderson and Brian Cummings of the Reeve-Irvine Center at the
University of California and a collaboration with the laboratory
of Dr. Gary Steinberg, Chairman of the Department of
Neurosurgery of Stanford University School of Medicine and
Co-director of the Stanford Stroke Center, pertaining to the
evaluation of our human neural stem cells in animal models of
stroke. Pilot studies have been initiated with Stephen A.
Back, M.D., Ph.D., of the Oregon Health Sciences
University and with Jeffery D. Kocsis, Ph.D., of the Yale
University School of Medicine for understanding myelin
production and repair, as well as with Jay Pasricha, M.D.,
of The University of Texas Medical Branch and with Martin
Marsala, M.D., of the University of California,
San Diego, regarding the formation of specific populations
of neurons; (UCSD). In addition, we have an NIH-funded
collaboration with Dr. George A. Carlson of the McLaughlin
Research Institute, to understand the role of Alzheimers
plaques in neuronal cell death in Alzheimers disease.
As noted above, human CNS stem and progenitor cells harvested,
purified and expanded using our proprietary processes may be
useful for creating therapies for the treatment of degenerative
brain diseases like Parkinsons and Alzheimers
diseases and genetic disorders affecting the brain such as
Batten Disease. These conditions affect about 5 million
people in the United States and there are no effective long-term
therapies currently available. We believe our ability to purify
human brain stem cells directly from tissue and to expand them
into cell banks is important because:
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it provides an enriched source of normal stem cells; |
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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 Battens, a key metabolic enzyme required for
normal development and function of the brain is absent.
Brain-derived stem cells might produce enough enzyme after
transplantation to delay disease progression, or, if not enough
enzyme is made naturally, the cells might be genetically
modified to produce those proteins. The native or modified brain
stem cells could be transplanted into patients with these
genetic diseases; |
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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. |
StemCells Inc holds a substantial portfolio of issued and
allowed patents in the neural field. See Patents,
Proprietary Rights and Licenses.
11
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. Grompes 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 rights to a novel mouse model of liver
failure for evaluating cell transplantation developed by
Dr. Grompe: The FAH transgenic mouse. This
mouse lacks a key enzyme (FAH, or fumaryl-acetoacetate
hydrolase), which results in build-up of a toxic substance which
causes liver damage. In addition, we obtained an exclusive
license to U.S. Patent No. 6,132,708, claiming a
method of regenerating a functional liver by transplantation of
pancreas cells in mammals, including humans.
Approximately 1 in 10 Americans suffers from diseases and
disorders of the liver for many of which there are currently no
effective, long-term treatments. Our researchers continue to
advance methods for establishing enriched cell populations
suitable for transplantation in preclinical animal models. We
are focused on discovering and utilizing proprietary methods to
identify and isolate liver stem and progenitor cells and to
evaluate these cells in culture and in preclinical animal models.
The Company focuses on discovering and utilizing proprietary
methods to identify and isolate liver stem and progenitor cells
and to evaluate these cells in culture and in preclinical animal
models. The Company intends to use these advanced methods, as
they become available, to establish enriched cell populations
suitable for transplantation.
StemCells has devised a culture assay that it uses in its
efforts to identify liver stem and progenitor cells. In
addition, the culture assay can support the growth of an early
human liver bipotent progenitor cell a cell that can
develop into two kinds of mature liver cells: bile duct cells
and hepatocytes. Further, since cells in this culture can be
infected with human hepatitis virus, it provides a valuable
system for study of the virus. This technology also could
provide a unique in vitro model for the testing of
drugs that act on, or are metabolized by, human liver cells.
The Companys scientists have identified proprietary
monoclonal antibodies that permit us to purify a population of
human liver-engrafting cells, including a candidate human liver
stem cell (hLEC). When tested in the Companys
in vitro culture assay, these antibody-enriched cells
produce human serum albumin, a measure of hepatocyte generation.
Studies to date show that these hLECs can produce human serum
albumin in mouse serum following transplantation into
immunodeficient mice, suggesting that the human liver-engrafting
cell, once transplanted, becomes a functional cell. The program
will focus on demonstrating the robust engraftment and function
of these hLECs in a preclinical animal model of liver
degeneration for proof of principle of a therapeutic cell for
liver disease. A source of defined human cells capable of
engraftment and substantial liver regeneration could provide a
cell-based therapeutic product available to a wider patient base
than liver transplants. An in vitro culture system that can
reproducibly grow human liver progenitor cells might also
provide cells for genetic modification to correct inborn errors
of metabolism.
The Companys scientists have again used StemCells
monoclonal antibody-based search engine to identify a rare
subset of human pancreatic cells that may be candidate
pancreatic stem/progenitor cells. The Company has filed a patent
application on the monoclonal antibodies used. In 2002, the
Company established a collaboration with Dr. Seung Kim of
Stanford University to pursue other avenues to identify an
insulin-producing cell. Dr. Kims laboratory is
studying the developmental biology and controlling events of
generating insulin-producing cells. We believe that these
approaches 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. The Company has
developed what we believe to be an appropriate animal model to
test the biological activity of the purified candidate
pancreatic stem cells.
12
Subsidiary
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StemCells California, Inc. |
On September 26, 1997, we acquired by merger 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. StemCells
California remains our wholly-owned subsidiary, and the owner or
licensee of most of our intellectual property. The members of
its Board of Directors are Irving L. Weissman, M.D., David
J. Anderson, Ph.D., and Fred H. Gage, Ph.D., who were
the founders of StemCells California, as well as John J.
Schwartz, Ph.D. and Martin McGlynn. Drs. Weissman and
Schwartz and Mr. McGlynn are also members of the Board of
the parent company; Mr. McGlynn is President of StemCells
California as well as President and CEO of StemCells, Inc.
References in this annual report to the Company,
we, us, and similar words include this
subsidiary.
License Agreements
We have entered into a number of research-plus-license
agreements with academic organizations including The Scripps
Research Institute (Scripps), the California Institute of
Technology (Cal Tech), the Oregon Health Sciences University
(OHSU), and the University of Texas Medical Branch (UTMB). The
research components of the UTMB agreement is in progress, but
those with the other institutions mentioned have been concluded
and have resulted in a number of license agreements for
resultant technology. Under the license agreements, we are
typically subject to obligations of due diligence and the
requirement to pay royalties on products that use patented
technology licensed under such agreements. The license
agreements with these institutions 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. Generally speaking, these license agreements
will terminate upon expiration, revocation or invalidation of
the patents licensed to us, unless governmental regulations
require a shorter term. They also will terminate earlier if we
breach our obligations under the agreement and do not cure the
breach, or if we declare bankruptcy, and we can terminate the
license agreements at any time upon notice.
In the case of Scripps, we must pay $50,000 upon the initiation
of the Phase II trial for our first product using Scripps
licensed technology, 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.
Pursuant to the terms of our license agreement with Cal Tech and
our acquisition of our wholly owned subsidiary, StemCells
California, we issued 14,513 shares of our common stock to
Cal Tech. We issued an additional 12,800 shares of common
stock to Cal Tech with a market value of approximately $40,000
in May 2000, upon execution of an amendment adding four families
of patent applications to the license agreement. We must pay an
additional $10,000 upon the issuance of the patent licensed to
us under the relevant agreement and $5,000 on the first
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. In August 2002 we acquired an additional license
from Cal Tech to different technology, pursuant to which we
issued 27,535 shares of our common stock with a market
value of approximately $35,000; we have also issued
9,535 shares of our common stock with a market value of
approximately $15,000 to Cal Tech on the issuance of two patents
covered under this additional license.
Pursuant to the terms of the license agreement with OHSU and our
acquisition of StemCells California, we issued 4,838 shares
of our common stock and an option to purchase up to 62,888
additional shares to OHSU with an exercise price of
$.01 per share. The option has vested as to
9,675 shares for which shares were issued on March 31,
2002; the remaining option was terminated and we issued
4,000 shares of our common stock, with a market value of
approximately $3,900, to OHSU in January 2003, pursuant to an
amendment to the license agreement.
13
In 2002, we issued a license to BioWhittaker, Inc., for the
exclusive right to make, sell and distribute one of our
proprietary cells for the research market only. In 2003 and 2004
respectively, we issued non-exclusive licenses to StemCell
Technologies, Inc. to make, use and sell certain proprietary
mouse and rat neural stem cells and culture media for all
mammalian neural stem cells, and to R&D Systems to make, use
and sell certain stem cell expansion kits, also for the research
market. These licenses are not expected to generate material
revenues.
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Signal Pharmaceuticals, Inc. |
In December 1997, we entered into two sublicense agreements with
Signal Pharmaceuticals (Signal), Inc. under which each party
sublicensed to the other certain patent rights and biological
materials for use in defined fields. Signal has now been
acquired by Celgene, which in 2004 relinquished its license to
the University of California, which then terminated the
sublicense to StemCells for lack of diligence. The remaining
sublicense with Signal will terminate no later than at the
expiration of all patents licensed under it, but StemCells can
terminate it earlier if Celgene breaches its obligations under
the agreement or declares bankruptcy; Celgene can terminate the
agreement at any time upon notice to StemCells.
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 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.
Together, our rights under 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 in
October 2000 and $50,000 in January 2001, 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. In addition, in October 2000 we reimbursed
Neurospheres for patent costs amounting to $341,000. Milestone
payments, payable at various stages in the development of
potential products, would total $500,000 for each product that
is approved for market. The first milestone for a potential
product is $50,000, became due in 2004 when the product
candidate for Batten disease entered pre-clinical development in
a non-rodent model. The next milestone for that product
candidate will be $75,000, due upon acceptance of our
Investigational New Drug (IND) application with the
U.S. Food and Drug Administration (FDA) and the
commencement of clinical trials in human patients. In addition,
we made our first annual payment of $50,000 in 2004; the annual
payments are due by the last day of the year and are fully
creditable against royalties due to NeuroSpheres. Our agreements
with NeuroSpheres will terminate at the expiration of all
patents licensed to us, but can terminate earlier if we breach
our obligations under the agreement and do not cure the breach,
or if we declare bankruptcy. We have a security interest in the
licensed technology.
Manufacturing
We believe that our facility in Palo Alto has the capacity to be
used for cell processing under FDA-determined Good Manufacturing
Practices-like conditions in quantities sufficient for clinical
trials, and we have developed a robust and replicable process
for producing and processing the cells.
Marketing
Because of the early stage of our stem and progenitor cell
programs, we have not yet addressed questions of channels of
distribution and marketing of potential future products.
14
Patents, Proprietary Rights And Licenses
We believe that proprietary protection of our inventions will be
critical to our future business. We vigorously seek out
intellectual property that we believe might be useful in
connection with our products, and have an aggressive program of
protecting our intellectual property. 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 to compositions of
matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently,
our U.S. patent portfolio includes forty-three issued
U.S. patents, three of which issued in 2004. More than
thirty additional patent applications are pending, two of which
have been allowed. In addition, we have foreign counterparts to
many of the U.S. applications and patents; counterparts to
fourteen of our U.S. patents or applications have issued in
various countries, making a total of about 130 individual
non-U.S. patents from those fourteen cases. In 2003, one
party filed an opposition to two of our issued European patent
cases. While we are confident that we will overcome the
opposition, there is no guarantee that we will prevail. If we
are unsuccessful in our defense of the opposed patents, all
claimed rights in the opposed patents will be lost in Europe.
U.S. counterparts to these patents are part of our issued
patent portfolio; they are not subject to opposition, since that
procedure does not exist under U.S. patent law, although
other types of proceedings may be available to third parties to
contest our U.S. patents.
In December 1998, the U.S. Patent and Trademark Office
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.
U.S. Patent No. 5,968,829, entitled Human CNS
Neural Stem Cells, which covers our composition of matter
for human CNS stem cells, was granted in 1999, and
U.S. Patent No. 6,103,530, covering our media for
culturing human CNS stem cells, was granted in 2000.
In 2002, the U.S. Patent Office issued a key strategic
patent to us: U.S. Patent Number 6,468,794, entitled
Enriched central nervous system stem cell and progenitor
cell populations, and methods for identifying, isolating and
enriching for such populations. The patent issued on
October 22, 2002 and covers the identification and
purification of the human CNS stem cell. In 2001, we were
granted U.S. Patent No. 6,238,922 (Use of
collagenase in the preparation of neural stem cell
cultures) which described methods to advance the in
vivo culture and passage of human CNS stem cells that result
in a 100-fold increase in CNS stem and progenitor cell
production after 6 passages. We believe the methodologies of
these two patents together will augment our leadership position
in the stem cell field by providing a reproducible proprietary
method for obtaining and expanding stem cells for therapeutic
uses.
Another significant patent in the neural field, of which we are
the exclusive licensees, was also issued in 2002, and, we
believe, may prove even more important: We believe that
U.S. Patent Number 6,497,872, entitled Neural
transplantation using proliferated multipotent neural stem cells
and their progeny, covers transplanting any neural stem
cells or their differentiated progeny, whether the cells have
been cultured in suspension or as adherent cells, for the
treatment of any disease. The patent gives us the right to
exclude others from practicing the claimed invention.
In 2003, two neurogenin-related patents were issued
(U.S. Patents Numbers 6,555,337 and 6,566,496) as well as
U.S. Patent Number 6,638,501, covering the use of
multipotent neural stem cell progeny to augment non-neural
tissues and U.S. Patent Number 6,541,251, covering a novel
pancreatic progenitor gene and its uses.
In 2004, U.S. Patent Number 6,777,233, covering a cell
culture composition of multipotent human neural stem cells
regardless of the source of tissue from which the cells are
derived, was issued to the Company. In
15
addition, U.S. Patent Number 6,824,774, covering antibodies
that specifically bind to a neuron-restrictive silencer factor
protein, and U.S. Patent Number 6,753,153, covering markers
for identification and isolation of certain pancreatic islet
progenitors, were issued; these patents are exclusively licensed
to the Company.
These new patents, together with U.S. Patent Number
6,294,346 (Use of multipotent neural stem cells and their
progeny for the screening of drugs and other biological
agents), which issued September 25, 2001, have
strengthened our already extensive patent portfolio and, we
believe, give StemCells the dominant intellectual property
position in the field, covering methods for identification,
isolation, expansion, and transplantation of neural stem cells
as well as drug discovery and testing.
The following table lists our issued U.S. patents and
published international patent applications:
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U.S. Patent Number |
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Subject |
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Owned by StemCells
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5,968,829
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Human CNS neural stem cells |
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6,103,530
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Human CNS neural stem cells culture media |
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6,238,922
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Use of collagenase in the preparation of neural stem cell
cultures |
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6,468,794
|
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Enriched neural stem cell populations, and methods for
identifying, isolating and enriching for neural stem cells |
|
6,498,018
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Human CNS neural stem cells |
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6,777,233
|
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Cultures of human CNS neural stem cells. |
Licensed from NeuroSpheres
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5,750,376
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In vitro genetic modification |
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5,851,832
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In vitro proliferation |
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5,980,885
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Methods for inducing in vivo proliferation of precursor cells |
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5,981,165
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In vitro production of dopaminergic cells from mammalian central
nervous system multipotent stem cell compositions |
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6,071,889
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Methods for in vivo transfer of a nucleic acid sequence to
proliferating neural cells |
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6,093,531
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Generation of hematopoietic cells from multipotent neural stem
cells |
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6,165,783
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Methods of inducing differentiation of multipotent neural stem
cells |
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6,294,346
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Methods for screening biological agents |
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6,368,854
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Hypoxia-mediated neurogenesis |
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6,399,369
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cDNA libraries derived from populations of non-primary neural
cells |
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6,497,872
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Neural transplantation using proliferated multipotent neural
stem cells and their progeny |
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6,638,501
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Use of multipotent neural stem cell progeny to augment
non-neural tissues |
Licensed from University of California, San Diego
|
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5,766,948
|
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Method of production of neuroblasts |
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6,013,521
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Method of production of neuroblasts |
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6,020,197
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Method of production of neuroblasts |
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6,045,807
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|
Method of production of neuroblasts |
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6,265,175
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Method of production of neuroblasts |
|
6599695
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Method for assaying for early gene expression in neuroblasts |
16
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|
U.S. Patent Number |
|
|
Subject |
|
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|
|
Licensed from the California Institute of Technology
|
|
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5,589,376
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Mammalian neural crest stem cells |
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5,629,159
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Immortalization and disimmortalization of cells |
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5,654,183
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Genetically engineered mammalian neural crest stem cells |
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5,672,499
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Methods for immortalizing multipotent neural crest stem cells |
|
5,693,482
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In vitro neural crest stem cell assay |
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5,824,489
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Methods for isolating mammalian multipotent neural crest stem
cells |
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5,849,553
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Immortalizing and disimmortalizing multipotent neural crest stem
cells |
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5,928,947
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Mammalian multipotent neural crest stem cells |
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5,935,811
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Neuron restrictive silencer factor proteins |
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6,001,654
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Methods for differentiating neural stem cells to neurons or
smooth muscle cells (TGFb) |
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6,033,906
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Differentiating mammalian neural stem cells to glial cells using
neuregulins |
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6,270,990
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Neuron restrictive silencer factor proteins |
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6,555,337
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Neurogenin |
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6,566,496
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|
Neurogenin |
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6,824,774
|
|
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Antibodies that bind neuron-restrictive silencer factor proteins |
Licensed from the Scripps Research Institute
|
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6,242,666
|
|
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An animal model for identifying a common stem/ progenitor to
liver cells and pancreatic cells |
|
6,541,251
|
|
|
Pancreatic progenitor 1 gene and its uses |
|
6,753,153
|
|
|
Markers for identification and isolation of pancreatic islet
alpha and beta progenitors |
Licensed from Oregon Health Sciences University
|
|
|
|
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6,132,708
|
|
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Liver regeneration using pancreas cells |
17
|
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|
|
Published International Patent Applications |
|
|
Subject |
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|
|
|
Owned by StemCells
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|
WO 99/11758
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Cultures of human CNS neural stem cells |
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WO 00/47762
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|
Enriched neural stem cell populations and methods of
identifying, isolating, and enriching neural stem cells |
|
WO 00/50572
|
|
|
Use of collagenase in the preparation of neural stem cell
cultures |
|
WO 04/020597
|
|
|
Enriched central nervous system stem cell and progenitor cell
populations, and methods for identifying, isolating, and
enriching for such populations |
Licensed from NeuroSpheres
|
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WO 93/01275
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|
|
Mammalian central nervous system multipotent stem cell
compositions |
|
WO 94/09119
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|
|
Remyelination using mammalian central nervous system multipotent
stem cell compositions |
|
WO 94/10292
|
|
|
Biological factors useful in differentiating mammalian central
nervous system multipotent stem cell compositions |
|
WO 94/16718
|
|
|
Genetically engineered mammalian central nervous system
multipotent stem cell compositions |
|
WO 95/13364
|
|
|
In situ modification and manipulation of stem cells of the CNS |
|
WO 96/15224
|
|
|
In vitro production of dopaminergic cells from mammalian central
nervous system multipotent stem cell composition |
|
WO 99/16863
|
|
|
Generation of hematopoietic cells |
|
WO 99/21966
|
|
|
Erythropoietin-mediated neurogenesis |
Licensed from University of California, San Diego
|
|
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WO 94/16059
|
|
|
Method of production of neuroblasts |
Licensed from the California Institute of Technology
|
|
|
|
|
WO 94/02593
|
|
|
Mammalian neural crest stem cells |
|
WO 00/52143
|
|
|
Isolation and enrichment of neural stem cells from uncultured
tissue based on cell-surface marker expression |
|
WO 96/27665
|
|
|
Neuron restrictive silencer factor proteins |
|
WO 96/40877
|
|
|
Immortalization and disimmortalization of cells |
|
WO 98/48001
|
|
|
Methods for differentiating neural stem cells to neurons or
smooth muscle cells using TGF-# super family growth factors |
Licensed from The Scripps Research Institute
|
|
|
|
|
WO 00/36091
|
|
|
An animal model for identifying a common stem/progenitor to
liver cells and pancreatic cells |
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 individuals 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.
18
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, liver and
pancreas stem cells. Our licenses may be canceled or converted
to non-exclusive licenses if we fail to use the relevant
technology or if we breach our agreements. Loss of such licenses
could expose us to the risks of third party patents and/or
technology. There can be no assurance that any of these licenses
will provide effective protection against our competitors.
The patent positions of pharmaceutical and biotechnology
companies, including ours, are uncertain and involve complex and
evolving legal and factual questions The coverage sought in a
patent application can be denied or significantly reduced before
or after the patent is issued. 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 significant protection or commercial advantage or will
be circumvented by others. Since patent applications are secret
until the applications are published (usually eighteen months
after the earliest effective filing date), 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. There can be no assurance that
patents will issue from our pending or future patent
applications or, if issued, that such patents will be of
commercial benefit to us, afford us adequate protection from
competing products, or not be challenged or declared 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 interference
proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in
substantial uncertainties and cost for us, even if the eventual
outcome is favorable to us. There can be no assurance that our
patents, if issued, would be held valid by a court of competent
jurisdiction.
One party has opposed two of our issued European patents. While
we are confident that we will overcome the opposition, there is
no guarantee that we will prevail. If we are unsuccessful in our
defense of the opposed patents, all claimed rights in the
opposed patents will be lost in Europe. U.S. counterparts
to these patents are part of our issued patent portfolio; they
are not subject to opposition, since that procedure does not
exist under U.S. patent law, although other types of
proceedings may be available to third parties to contest our
U.S. patents.
A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent
applications or have been issued patents relating to cell
therapy, stem cells and other technologies potentially relevant
to or required by our expected products. We cannot predict
which, if any, of such applications will issue as patents or the
claims that might be allowed. We are aware that a number of
companies have filed applications relating to stem cells. 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 two patents issued to a
competitor claiming certain methods for treating defective,
diseased or damaged cells in the mammalian CNS by grafting
genetically modified donor cells from the same mammalian species.
If third party patents or patent applications contain claims
infringed by our technology and such claims or claims in issued
patents are ultimately determined to be valid, there can be no
assurance that we would be able to obtain licenses to these
patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology. If we are unable to obtain
such licenses at a reasonable cost, we may not be able to
develop certain products commercially. There can be no assurance
that we will not be obliged 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.
19
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 lysosomal storage disorders,
neurodegenerative and liver diseases, diabetes and other
diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology 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 and if
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 any stem and progenitor cell products that we
may develop 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. In the event our
therapies should require the use of such genetically modified
cells, we may be required to seek licenses from these
competitors in order to commercialize certain of our proposed
products, and such licenses may not be granted.
If we develop products that receive regulatory approval, they
would then have to 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.
20
The steps required before our potential products may be marketed
in the United States include:
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1. Preclinical laboratory and animal tests
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Preclinical tests include laboratory evaluation of the cells and
the formulation intended for use in humans for quality and
consistency. In vivostudies are performed in normal
animals and specific disease models to assess the potential
safety and efficacy of the cell therapy product. |
2. Submission to the FDA of an Investigational New Drug
application (IND), which must become effective before
U.S. human clinical trials may commence
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The IND is submitted to the FDA with the preclinical data, a
proposed development plan and a proposed protocol for a study in
humans. The IND becomes effective 30 days following receipt
by the FDA, provided there are no questions, requests for delay
or objections from the FDA. If the FDA has questions or
concerns, it notifies the sponsor, and the IND will then be on
clinical hold until the sponsor responds satisfactorily. |
3. Adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product
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Clinical trials involve the evaluation of a potential product
under the supervision of a qualified physician, in accordance
with a protocol that details the objectives of the study, the
parameters to be used to monitor safety and the efficacy
criteria to be evaluated. 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 (IRB) of
the institution at which the study is conducted and the informed
consent of all participants must be obtained. The IRB reviews
the existing information on the product, considers ethical
factors, the safety of human subjects, the potential benefits of
the therapy and the possible liability of the institution. The
IRB is responsible for ongoing safety assessment of the subjects
during the Clinical Investigation. |
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Clinical development is traditionally conducted in three
sequential phases, Phase 1, 2 and 3. |
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Phase 1 studies for a cell therapy product are designed to
evaluate safety in a small number subjects in a selected patient
population by assessing adverse effects, and may include
multiple dose levels. This study may also gather preliminary
evidence of a beneficial effect on the disease. |
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Phase 2 may involve studies in a limited patient population
to determine biological and clinical effects of the product and
to identify possible adverse effects and safety risks of the
product in the selected patient population. |
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Phase 3 trials would be undertaken to conclusively
demonstrate clinical benefit or effect and to test further for
safety within a broader patient population, generally at
multiple study sites. |
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Steps |
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Considerations |
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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 authorization
applications
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The results of the preclinical studies and clinical studies are
submitted to the FDA in the form of marketing approval
authorization applications. |
5. FDA approval of the application(s) prior to any
commercial sale or shipment of the drug. Biologic product
manufacturing establishments located in certain states also may
be subject to separate regulatory and licensing requirement
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The testing and approval process will require substantial time,
effort and expense. The time for approval is affected by a
number of factors, including relative risks and benefits
demonstrated in clinical trials, the 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 product, the manufacturing and the
initial indications, 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.
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FDA Manufacturing Requirements |
Among the conditions for product licensure is the requirement
that the prospective manufacturers quality control and
manufacturing procedures conform to the FDAs current good
manufacturing practice (cGMP) requirements. 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.
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 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.
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FDA Human Cell and Tissue Regulations |
Our research and development is based on the use of human stem
and progenitor cells. The FDA has initiated a risk-based
approach to regulating Human Cell, Tissue and Cellular and
Tissue-based products and has published current Good Tissue
Practice (cGTP) regulations. As part of this approach, the FDA
has published final rules for registration of establishments
that engage in the recovery, screening, testing, processing,
storage or distribution of human cells, tissues, and cellular
and tissue-based products, and for the
22
listing of such products. In addition, the FDA has published
rules for making suitability and eligibility determinations for
donors of cells and tissue and for current good tissue practice
for manufacturers using them, which come into effect in May
2005. We cannot now determine the full effects of this
regulatory initiative, including precisely how it may affect the
clarity of regulatory obligations and the extent of regulatory
burdens associated with multipotent stem cell research (for stem
cells that give rise to various tissue types, including blood),
and the manufacture and marketing of stem cell products.
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
that 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.
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.
Employees
As of December 31, 2004, we had thirty-six full-time
employees, of whom nine have Ph.D. degrees. Twenty-eight
full-time employees work in research and development and
laboratory support services. No employees are covered by
collective bargaining agreements.
Risk Factors
We are subject to a number of risks, which you should be aware
of before you decide to buy our common stock. These risks are
discussed more fully in the Cautionary Factors Relevant to
Forward-Looking Information attached to this Annual Report
on Form 10-K as Exhibit 99. Our approach to drug
discovery is unproven and all of our current product candidates
are in preclinical development. While we have submitted an IND
to the U.S. Food and Drug Administration, that IND is
currently on clinical hold. We have not received regulatory
approval for, or generated revenues from, any of our product
candidates. If we do not successfully commercialize any of our
product candidates, we will be unable to generate product
revenue or achieve profitability. As of December 31, 2004,
we had an accumulated deficit of $174,205,214. We expect to
continue to incur significant and increasing losses over the
next several years and we may never be profitable.
23
Scientific Advisory Board
Members of our Scientific Advisory Board (SAB) 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 that would conflict
with the services the member provides to us. We are entitled to
terminate the arrangement if we determine that there is such a
conflict. 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:
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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,
Stanford California, and Director of the Stanford University
Institute for Cancer/ Stem Cell Biology and Medicine.
Dr. Weissmans lab was responsible for the discovery
of the first ever mammalian stem cell, the hematopoietic
(blood-forming) stem cell. Dr. Weissman was responsible for
the formation of three stem cell companies, SyStemix, Inc.,
StemCells, Inc., and Cellerant, Inc. He is a member of the Board
of Directors and Chairman of the Scientific Advisory Boards of
StemCells and Cellerant. Dr. Weissman co-discovered the
mammalian and human hematopoietic stem cells and the human
neural stem cell. Past achievements of Dr. Weissmans
laboratory include identification of the states of development
between stem cells and mature blood cells and identification of
the states of thymic lymphocyte development. More recently, his
laboratory at Stanford has developed accurate mouse models of
human leukemias, and has shown the central role of inhibition of
programmed cell death in that process. Dr. Weissman has
been elected to the National Academy of Science. He has received
the Kaiser Award for Excellence in Preclinical Teaching, the
Pasarow Foundation Award, and the Outstanding Investigator Award
from the National Institutes of Health. |
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David J. Anderson, Ph.D., is Professor of Biology,
California Institute of Technology, Pasadena, California and
Investigator, Howard Hughes Medical Institute. His laboratory
was the first to isolate a multipotent, self-renewing, stem cell
for the peripheral nervous system, the first to identify
instructive signals that promote the differentiation of these
stem cells along various lineages, and the first to accomplish a
direct purification of peripheral neural stem cells from
uncultured tissue. Dr. Andersons laboratory also was
the first to isolate transcription factors that act as master
regulators of neuronal fate. More recently, he has identified
signals that tell a neural stem cell to differentiate to a glial
cell rather than a neuron. Dr. Anderson is a co-founder of
StemCells and a member of its SAB. Dr. Anderson also serves
on the SAB of Allen Institute for Brain Science. He has held a
presidential Young Investigator Award from the National Science
Foundation, a Sloan foundation Fellowship in Neuroscience, and
has been Donald D. Matson lecturer at Harvard Medical School. He
has received the Charles Judson Herrick Award from the American
Association of Anatomy, and the 1999 W. Alden Spencer
Award in Neurobiology from Columbia University. |
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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.
Dr. Gages lab was the first to discover the mammalian
central nervous system stem cell. His research focus is on the
development of strategies to induce recovery of function
following central nervous system (CNS) damage.
Dr. Gage is a co-founder of StemCells and a member of its
SAB. Dr. Gage also serves on the Scientific Advisory Board
of Ceregene, Inc. Dr. Gage has been the recipient of
numerous awards, including the 1993 Charles A. Dana Award for
Pioneering Achievements in Health and Education, the Christopher
Reeves Medal, the Decade of the Brain |
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Medal, the Max-Planck research Prize, and the Pasarow Foundation
Award. In 2003, Professor Gage was elected to the National
Academy of Science. |
Consultants to our SAB include William C.
Mobley, M.D., Ph.D., Maria Millan, M.D., Ben
Barres, Ph.D., and Seung Kim, M.D., Ph.D., all of
Stanford University and Stephen Back, M.D., of the Oregon
Health Science University.
AVAILABLE INFORMATION
Our principal executive offices are located at 3155 Porter
Drive, Palo Alto, CA 94304, and our main telephone number is
(650) 475-3100. Investors can obtain access to this annual
report on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and all
amendments to these reports, free of charge, on our website at
http://www.stemcellsinc.com as soon as reasonably practicable
after such filings are electronically filed with the SEC. The
public may read and copy any material we file with the SEC at
the SECs Public Reference Room at 450 Fifth Street,
N.W., Washington D.C., 20549. The public may obtain information
on the operations of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site,
http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers
that file electronically with the SEC.
We entered into a 5-year lease, as of February 1, 2001, for
a 40,000 square foot facility, located in the Stanford
Research Park in Palo Alto, California. This facility includes
space for animals as well as laboratories, offices, and a suite
designed to be used to manufacture materials for clinical
trials. The facility will better enable us to achieve our goal
of utilizing genetically unmodified human stem cells for the
treatment of disorders of the nervous system, liver, and
pancreas. We have space-sharing agreements for part of the
animal facility not needed for our own use, including one with
Stanford University.
We continue to lease the following facilities in Lincoln, Rhode
Island obtained in connection with our former encapsulated cell
technology: our former research laboratory and corporate
headquarters building which contains 62,500 square feet of
wet labs, specialty research areas and administrative offices
held on a lease agreement that goes through June 2013, as well
as a 21,000 square-foot pilot manufacturing facility and a
3,000 square-foot cell processing facility financed by
bonds issued by the Rhode Island Industrial Facilities
Corporation. We have subleased the 21,000 square-foot and
the 3,000 square foot facility. We have also subleased
approximately one-fourth of the 62,500 square foot
facility. We are actively seeking to sublease, assign or sell
our remaining interests in these properties.
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ITEM 3. |
LEGAL PROCEEDINGS |
Geron Corporation has opposed two of our European patents that
relate to neural stem cells and their uses. The oppositions were
filed with the European Patent Office on December 11, 2003
(Patent No. EP-B-0594669) and February 13, 2004
(Patent No. EP-B-0669973). We filed responses to both
oppositions on September 23, 2004. Geron alleges that each
patent should be revoked on multiple grounds.
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
PART II
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ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
The common stock of StemCells is traded on the SmallCap Market
System of NASDAQ under the Symbol STEM. Prior to
December 23, 2002 our common stock was traded on the NASDAQ
National
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Market. The quarterly ranges of high and low bid prices for the
last two fiscal years as reported by NASDAQ are shown below:
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2004
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First Quarter
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$ |
2.69 |
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$ |
1.56 |
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Second Quarter
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$ |
2.19 |
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$ |
1.30 |
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Third Quarter
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$ |
1.82 |
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$ |
1.25 |
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Fourth Quarter
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$ |
4.85 |
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$ |
1.52 |
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2003
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First Quarter
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$ |
1.45 |
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$ |
0.85 |
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Second Quarter
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$ |
2.82 |
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$ |
0.65 |
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Third Quarter
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$ |
2.59 |
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$ |
1.17 |
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Fourth Quarter
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$ |
3.10 |
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$ |
1.70 |
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No cash dividends have been declared on the Company common stock
since the Companys inception.
As of March 9, 2005, there were approximately 538 holders
of record of the common stock, and as of the same date the
closing price per share of the common stock on the NASDAQ
SmallCap Market was $4.55.
The Company issued the following unregistered securities in 2004:
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In August 2004, StemCells issued 9,535 shares of common
stock to the California Institute of Technology (Cal Tech) as
payment for fees of $10,000 and $5,000 that were due on the
issuance of two patents to which StemCells holds a license from
Cal Tech that were payable in cash or stock at the
Companys option. The shares were issued in a transaction
not involving any public offering pursuant to Section 4(2)
of the Securities Act of 1933, as amended. |
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In December 2004, StemCells issued 1,816 shares of common
stock to inventors of a technology as part payment for
approximately $2,800 of the total option fee of $25,000 to
acquire an exclusive license to the technology from the Board of
Trustees of The Leland Stanford Junior University. The shares
were issued in a transaction not involving any public offering
pursuant to Section 4(2) of the Securities Act of 1933, as
amended. |
Equity Compensation Plan Information
The following table provides certain information with respect to
all of the Companys equity compensation plans in effect as
of the end of December 31, 2004.
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Equity Compensation Plan Information |
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|
Remaining Available |
|
|
|
|
|
Securities to be |
|
|
Average Exercise |
|
for Issuance Under |
|
|
|
|
|
Issued upon |
|
|
Price of |
|
Equity |
|
|
|
|
|
Exercise of |
|
|
Outstanding |
|
Compensation Plans |
|
|
|
|
|
Outstanding |
|
|
Options, |
|
(Excluding |
|
|
|
|
|
Options, Warrants |
|
|
Warrants and |
|
Securities Reflected |
|
|
Plan Category |
|
|
and Rights (a) |
|
|
Rights (b) |
|
in Column (a)) (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
|
6,682,201 |
(1) |
|
|
$ |
2.67 |
|
|
$ |
2,057,440 |
|
|
|
Equity compensation arrangements not approved by security holders
|
|
|
|
346,199 |
(2) |
|
|
$ |
2.14 |
|
|
|
N/a |
|
|
|
Totals
|
|
|
|
7,028,400 |
|
|
|
$ |
2.64 |
|
|
$ |
2,057,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Consists of Incentive Stock Options issued to employees and
options issued as compensation to consultants for consultation
services. These options were issued under the Companys
1992 Equity |
26
|
|
|
Incentive Plan, its Directors Stock Option Plan, its
StemCells, Inc. Stock Option Plan, or its 2001 and 2004 Equity
Incentive Plans. |
|
(2) |
Consists of warrants outstanding that are fully vested to
purchase: |
|
|
|
|
|
146,199 shares of our common stock that was issued in
December 2001 for external services fully vested with an
exercise price of $3.42 per share and exercisable, in whole
or in part, for four years from the date of issuance. |
|
|
|
200,000 shares of our common stock that was issued in
January 2003 for external services fully vested with an exercise
price of $1.20 per share and exercisable, in whole or in
part, for five years from the date of issuance. |
|
|
|
These warrants, which constitute the equity compensation
arrangements not approved by security holders, were all issued
in exchange for advisory services by non-employees. |
|
|
ITEM 6. |
SELECTED FINANCIAL DATA |
The following selected historical information has been derived
from the audited financial statements of the Company. The
financial information as of December 2004 and 2003 and for each
of the three years in the period ended December 31, 2004
are derived from audited financial statements included elsewhere
in this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from collaborative and licensing agreements
|
|
$ |
22 |
|
|
$ |
18 |
|
|
$ |
40 |
|
|
$ |
|
|
|
Revenue from grants
|
|
|
119 |
|
|
|
255 |
|
|
|
375 |
|
|
|
505 |
|
|
Revenue from assignment of rights to technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
141 |
|
|
|
273 |
|
|
|
415 |
|
|
|
805 |
|
Research and development expenses
|
|
|
8,760 |
|
|
|
6,144 |
|
|
|
7,382 |
|
|
|
8,603 |
|
General and administrative expenses
|
|
|
3,954 |
|
|
|
3,391 |
|
|
|
3,359 |
|
|
|
3,788 |
|
Encapsulated Cell Technology (ECT) wind-down and corporate
relocation(1)
|
|
|
2,827 |
|
|
|
2,885 |
|
|
|
1,164 |
|
|
|
575 |
|
Loss before deemed dividends and cumulative effect of change in
accounting principle
|
|
|
(15,330 |
) |
|
|
(12,291 |
) |
|
|
(11,644 |
) |
|
|
(4,021 |
) |
Net loss applicable to common stockholders
|
|
|
(15,330 |
) |
|
|
(14,425 |
) |
|
|
(13,276 |
) |
|
|
(5,567 |
) |
Basic and diluted loss per share applicable to common
stockholders
|
|
$ |
(0.31 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.25 |
) |
Shares used in computing basic and diluted loss per share amounts
|
|
|
49,606 |
|
|
|
32,080 |
|
|
|
25,096 |
|
|
|
22,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
41,060 |
|
|
$ |
13,082 |
|
|
$ |
4,236 |
|
|
$ |
13,697 |
|
|
Restricted investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
47,627 |
|
|
|
19,786 |
|
|
|
11,329 |
|
|
|
20,803 |
|
|
Accrued wind-down expenses and deferred rent(1)
|
|
|
5,528 |
|
|
|
3,823 |
|
|
|
1,931 |
|
|
|
575 |
|
|
Long-term debt, including capital leases
|
|
|
1,646 |
|
|
|
1,850 |
|
|
|
2,087 |
|
|
|
2,316 |
|
|
Redeemable preferred stock(2)
|
|
|
|
|
|
|
|
|
|
|
2,660 |
|
|
|
2,663 |
|
|
Stockholders equity
|
|
|
36,950 |
|
|
|
10,964 |
|
|
|
1,933 |
|
|
|
12,633 |
|
27
|
|
(1) |
Relates to wind-down expenses in respect of the Companys
Rhode Island facility. See footnote 7 in the consolidated
financial statements |
|
(2) |
See footnote 9 in the consolidated financial statements |
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results
of operations should be read in conjunction with the
accompanying financial statements and the related footnotes
thereto.
This report contains forward looking statements within the
meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act that involve
substantial risks and uncertainties. Such statements include,
without limitation, all statements as to expectation or belief
and statements as to our future results of operations, the
progress of our research, product development and clinical
programs, the need for, and timing of, additional capital and
capital expenditures, partnering prospects, costs of manufacture
of products, the protection of and the need for additional
intellectual property rights, effects of regulations, the need
for additional facilities and potential market opportunities.
Our actual results may vary materially from those contained in
such forward-looking statements because of risks to which we are
subject, including uncertainty as to whether the U.S. Food
and Drug Administration will remove the clinical hold on our
proposed initial clinical trial and permit us to proceed to
clinical testing despite the novel and unproven nature of the
Companys technology; the risk that, even if approved, our
initial clinical trial could be substantially delayed beyond its
expected dates or cause us to incur substantial unanticipated
costs; uncertainties regarding the our ability to obtain the
capital resources needed to continue our current research and
development operations and to conduct the research, preclinical
development and clinical trials necessary for regulatory
approvals; failure to obtain a corporate partner or partners to
support the development of our stem cell programs, the
uncertainty regarding the outcome of the Phase I clinical
trial and any other trials the Company may conduct in the
future; the uncertainty regarding the validity and
enforceability of issued patents; the uncertainty whether any
products that may be generated in the Companys stem cell
programs will prove clinically effective and not cause tumors or
other side effects; the uncertainty whether the Company will
achieve revenues from product sales or become profitable;
uncertainties regarding the Companys obligations in regard
to its former encapsulated cell therapy facilities in Rhode
Island; obsolescence of our technology; competition from third
parties; intellectual property rights of third parties;
litigation and other risks to which we are subject. See
Cautionary Factors Relevant to
Forward-Looking-Information filed herewith as
Exhibit 99 and incorporated herein by reference.
Overview
Since our inception in 1988, we have been primarily engaged in
research and development of human therapeutic products. Since
the second half of 1999, our sole focus has been on our stem
cell technology. In the last quarter of 2004 we filed the first
in a planned series of INDs for CNS diseases or conditions with
the FDA. This IND, which is for a Phase I clinical trial of
our human neural stem cells in Batten disease, is currently on
clinical hold until questions and issues raised by the FDA have
been resolved.
We have not derived any revenues from the sale of any products
apart from license revenue for the research use of our human
neural stem cells and other patented cells and media, 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 had expenditures for toxicology and other
studies in preparation for submitting the Batten disease IND to
the FDA, and will incur more such expenditures for any future
INDs. 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
28
time and there can be no assurance that such financing or
partnering revenues will be available when needed or on terms
acceptable to us.
In June 2004, the Company entered into an agreement with
institutional and other accredited investors with respect to the
private placement of approximately 13,160,000 shares of its
common stock at a purchase price of $1.52 per share, for
gross proceeds of approximately $20,000,000. Investors also
received warrants exercisable for five years to purchase
approximately 3.3 million shares of common stock at an
exercise price of $1.90 per share. C.E. Unterberg, Towbin
LLC (Unterberg) served as placement agent for the transaction.
For acting as the Companys placement agent, Unterberg
received fees totaling $1,200,000, expense reimbursement of
approximately $25,000 and a five year warrant to
purchase 526,400 shares of the Companys common
stock at an exercise price of $1.89 per share. (See
Liquidity and Capital Resources below for further
detail on these transactions.)
In October 2004, the Company entered into agreements with
institutional investors with respect to the direct placement of
7,500,000 shares of its registered common stock at a
purchase price of $3.00 per share, for gross proceeds of
$22,500,000. Unterberg and Shoreline Pacific, LLC (Shoreline)
served as placement agents for the transaction. For acting as
the Companys placement agent, Unterberg and Shoreline
received fees totaling $1,350,000 and expense reimbursement of
approximately $40,000. (See Liquidity and Capital
Resources below for further detail on these transactions.)
In September 2004, the National Institutes of Health
(NIH) awarded the Company a Small Business Technology
Transfer grant of $464,000 for studies in Alzheimers
disease, consisting of $308,000 for the first year and $156,000
for the remainder of the grant term, September 30, 2004
through March 31, 2006. The studies will be conducted by
Dr. George A. Carlson of the McLaughlin Research Institute
(MRI) in Great Falls, Montana, which will receive
approximately $222,000 of the total award. A multi-year grant
was awarded by the NIH to the Reeve-Irvine Center at the
University of California-Irvine to fund new studies by
Drs. Aileen J. Anderson and Brian J. Cummings of the human
central nervous system stem cell (hCNS-SC) grafts in the
treatment of spinal cord injuries. The Company will not receive
any funds from this grant, but will collaborate with
Drs. Anderson and Cummings by providing its proprietary
cells for the studies. In October 2004, the Company also entered
a long-term license agreement with R&D Systems, authorizing
it to manufacture, use and sell certain kits for the expansion
of neural stem cells, for educational and research purposes
worldwide.
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 recurring and
nonrecurring events, including without limitation the receipt
and payment of recurring and nonrecurring licensing payments,
the initiation or termination of research collaborations, the
on-going expenses to lease and maintain our facilities in Rhode
Island and the increasing costs associated with our facility in
California. To expand and provide high quality systems and
support to our Research and Development programs, as well as to
enhance our internal controls over financial reporting, we will
need to hire more personnel, which will lead to higher operating
expenses. We hired a Vice President of Development and
contracted with an Acting Chief Medical Officer in 2003, and
have hired a Chief Financial Officer in 2004.
Our program in neural stem and progenitor cells ranges from the
preclinical stage, as we focus increasingly on testing human
neural stem cells in small animal models of human diseases, both
in-house and through external academic collaborators, through
the development phase with respect to the planned clinical trial
in Batten disease mentioned above. In our liver stem cell
program, we are engaged in evaluating our proprietary liver
engrafting cell in various in vivo assays. Our pancreas
program research will focus on the candidate human pancreatic
stem/progenitor cell. Our key focus will be to demonstrate the
in vivo engraftment and biological activity of the cells in an
appropriate animal model after expansion in culture.
29
Critical Accounting Policies
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
Use of Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements. Actual results could differ
from these estimates. The significant estimates are the accrued
wind-down expenses (Note 7) and valuation allowance against
net deferred tax assets (Note 11).
Stock-Based Compensation
As permitted by the provisions of Statement of Financial
Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, and SFAS No. 123,
Accounting for Stock-Based Compensation, the
Companys employee stock option plan is accounted for under
Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees. 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. In these
circumstances and in accordance with APB 25, the Company
recognizes no compensation expense for qualified stock option
grants. The Company also issues non-qualified stock options for
a fixed number of shares to employees with an exercise price
less than the fair market value of the shares at the date of
grant. When such options vest, the Company recognizes the
difference between the exercise price and fair market value at
date of grant as compensation expense in accordance with
APB 25.
The Company accounts for certain stock options granted to
non-employees, in accordance with FAS No. 123 and
Emerging Issues Task Force (EITF) 96-18,
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
expense the estimated fair value of such options as calculated
using the Black-Scholes valuation model. The calculated value is
re-measured during the service period. Fair value is determined
using methodologies allowable by FAS No. 123. The cost
is amortized over the vesting period of each option or the
recipients contractual arrangement, if shorter.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R (revised 2004),
Share-Based Payment. This statement revises
SFAS No. 123, Accounting for Stock-Based Compensation,
and requires companies to expense the value of employee stock
options and similar awards. The effective date of this standard
is interim and annual periods beginning after June 15,
2005. Upon the adoption of SFAS No. 123R the Company
will be required to expense stock options in its Statement of
Operations. Note 9 of the Notes to the Consolidated
Financial Statements describes our equity compensation plans,
and Note 1 of the Notes to the Consolidated Financial
Statements contains a summary of the pro forma effects to
reported net (loss) and (loss) per share for 2004, 2003, and
2002 as if we had elected to recognize compensation cost based
on the fair value of the options granted at grant date, as
prescribed by FAS No. 123R.
Long-Lived Assets
The Company adopted FAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets,
at the beginning of 2002. As permitted by the transition
rules of FAS No. 144, long-lived assets classified as
held for sale as a result of activities that were initiated
prior to this Statements initial application shall
continue to be accounted for in accordance with
FAS No. 121. If however, the criteria for classifying
long-lived assets held for sale under FAS No. 144 are
not met by the end of the fiscal year in which this Statement is
initially applied, the related long-lived assets shall be
reclassified as held and used. At December 31, 2002, the
criteria under FAS No. 144 for classifying the
Companys long-lived assets held for sale were not met and
accordingly, such assets were reclassified as held and used on
the balance sheet.
30
The Company routinely evaluates the carrying value of its
long-lived assets. The Company records impairment losses on
long-lived assets used in operations when events and
circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets
are less than the carrying amount of those assets. If an
impairment exists, the charge to operations is measured as the
excess of the carrying amount over the fair value of the assets.
Research and Development Costs
The Company expenses all research and development costs as
incurred. Research and Development costs include costs of
personnel, external services, supplies, facilities and
miscellaneous other costs.
Wind-down and Exit Costs
In connection with the Companys wind-down of its
Encapsulated Cell Therapy (ECT) operations, its research
and manufacturing operations in Lincoln, Rhode Island, and the
relocation of its remaining research and development activities
and corporate headquarters, to California, in October 1999, the
Company has provided its estimate of the exit cost obligation in
accordance with EITF 94-3, Other Cost to Exit an
Activity. On an ongoing basis the Company will re-evaluate
such estimate.
RESULTS OF OPERATIONS
|
|
|
Years Ended December 31, 2004, 2003 and 2002 |
Revenues totaled $141,000, $273,000, and $415,000 for the years
ending December 31, 2004, 2003 and 2002, respectively.
2004 versus 2003. Revenues for 2004 include $93,000 that
is part of a one-year Small Business Innovation Research grant
of $342,000 from the National Institute of Neurological Disease
and Stroke (NINDS) received at the end of 2003, and $26,000
which is part of a Small Business Technology Transfer
(STTR) grant received in 2004 for approximately $464,000
over one and one half years for studies in Alzheimers
disease. The STTR grant will support joint work with the
McLaughlin Research Institute (MRI) in Great Falls,
Montana. We will retain $243,000 and the remaining $221,000 will
be disbursed to MRI. Revenues for 2004 also include $22,000 in
licensing revenue.
Revenues for 2003 include $143,000, which was part of the
$342,000 NINDS grant and $112,000 from the grant awarded by the
National Institute of Diabetes & Digestive &
Kidney Disorders (NIDDKD) of the National Institutes of
Health. In addition, revenues for 2003 include $18,000 in
licensing revenue. The decrease from 2003 to 2004 was primarily
attributable to the NIDDKD grant, for which, in 2003 the draw
down was $112,000 but we did not, and shall not, draw further
funds from the grant since we are no longer pursuing the
particular research that the grant covered. The decrease was
also attributable to the completed draw down of the $342,000
NINDS grant. The draw down was $143,000 in 2003 and $93,000 in
2004. The remaining $106,000 was paid to a subcontractor.
2003 versus 2002. Revenues for 2002 include $150,000 that
was part of a 2001 SBIR grant from the National Institute of
Allergy and Infectious Diseases (NIAID), $225,000 from the
NIDDKD grant, and $40,000 in licensing revenue. The decrease in
revenue from 2002 to 2003 was primarily due to the completion of
the NIAID grant in 2002, and to a partial draw down in 2003 from
the $225,000 NIDDKD grant.
|
|
|
Research & development expenses |
Research and development expenses totaled $8,760,000 in 2004, as
compared to $6,144,000 in 2003 and $7,382,000 in 2002.
2004 versus 2003. The increase of $2,616,000 or 43% from
2003 to 2004 was primarily due to the expenditures required for
pre-clinical pharmacology and toxicology studies, supplies,
personnel and other external services in preparation for
submitting our first IND to the FDA. The increase was also
attributable to
31
a higher valuation in 2004 of stock options granted as
compensation to non-employees as compared to the valuation in
2003. The valuation computed by the Black Scholes
Method is dependant on variable factors at the time
of such valuation such as stock price, stock price volatility,
interest rate and remaining life of the option. Our stock price
at December 31, 2004 was $4.23 as compared to $1.98 at
December 31, 2003. In addition, the increase reflects
higher patent fees and costs than incurred in the same period in
2003. At December 31, 2004, we had twenty-eight full-time
employees working in research and development and laboratory
support services as compared to twenty-one at December 31,
2003.
2003 versus 2002. The decrease of $1,238,000 or 17% from
2002 to 2003, was primarily attributable to the cost reduction
program initiated in the last quarter of 2002 which resulted in
a reduction in personnel and related expenses, reduction in
expenditure on supplies and outside services, and a reduction in
rent expense as a result of an amendment to the lease on our
current facilities in California. This decrease in expenses in
2003 relative to 2002 was offset by the effect of a lower
valuation in 2002 of stock options granted as compensation to
non-employees as compared to the valuation in 2003. At
December 31, 2003, we had twenty-one full-time employees
working in research and development and laboratory support
services as compared to twenty-eight at December 31, 2002.
|
|
|
General & administrative expenses |
General and administrative expenses were $3,954,000 in 2004,
compared with $3,391,000 in 2003 and $3,359,000 in 2002.
2004 versus 2003. The increase of $563,000 or 17% from
2003 to 2004 was primarily attributable to, the cost of external
services incurred in the evaluation and testing of our internal
financial control systems so as to meet the requirements of and
be in compliance with the new Securities and Exchange Commission
rules issued under section 404 of the Sarbanes-Oxley Act.
The increase in general and administrative expenses was also
attributable to the separate printing of our proxy statement and
our Form 10-K and the effect of a greater number of
shareholders in 2004 when compared to 2003 on these costs. In
addition, we incurred an increase in the external auditor fees
in the first quarter of 2004 as a result of the restatement of
our prior year financials.
2003 versus 2002. The increase of $32,000 or 1%, from
2002 to 2003 was primarily attributable to the depreciation
expense of our Rhode Island facility (Pilot plant building
related to our former ECT research). No depreciation expense was
recorded in 2002, as the assets were classified as held for
sale. At December 31, 2002, the criteria under
FAS No. 144 for classifying the Companys
long-lived assets held for sale were not met and accordingly,
such assets with a fair value of $3,203,491 at December 31,
2002 were reclassified as held and used on the balance sheet for
all periods presented and are included in building and
improvements. We resumed depreciating these assets effective
January 2003. This increase in expense relative to 2002 was
offset by a decrease in other expenses such as external
services, facilities, information technology related expenses,
all of which resulted from a cost reduction program initiated in
the last quarter of 2002.
In 1999 we created a reserve for the estimated lease payments
and operating costs of the Rhode Island facilities through
June 30, 2000, when we expected to full sublease, assign or
sell our remaining interests in the property. We did not fully
sublet the Rhode Island facilities in 2000 and therefore made a
change in estimate to accrue additional expenses of $3,327,000
to cover operating lease payments, utilities, taxes, insurance,
maintenance, interest and other non-employee expenses through
2001. In the year 2001 we paid $1,780,000 of lease payments and
operating expenses net of subtenant income which were recorded
against the reserve. At December 31, 2001 we revised our
estimate and recorded an additional reserve of $575,000 as
operating expenses net of subtenant income for our former
corporate headquarters in Rhode Island. This reserve was based
on information provided by our broker/realtor that estimated,
based on assumptions relevant to the real estate market
conditions as of the end of 2001, the time it would be likely to
take until the facility would be fully sub-leased. In 2002, we
incurred $964,000 in lease payments and operating expenses, net
of subtenant income for this facility, of which $575,000 was
booked against the reserve created at the end of 2001 and the
remainder recorded as wind-down expenses. At the end of December
2002, based on an analysis of the real
32
estate market conditions at that time, we revised the reserve to
$775,000. In 2003 we incurred $984,000 in lease payments and
operating expenses, net of subtenant income for this facility of
which $775,000 was recorded against the reserve and the
remainder recorded as wind-down expenses. At the end of 2003,
after considering various factors such as the Companys
lease payments through to the end of the lease, operating
expenses, the current real estate market in Rhode Island, and
estimated subtenant income based on occupancy both actual and
projected, we revised the reserve at December 31, 2003 to
$2,676,000. In 2004, we recorded $1,152,000 in operating
expenses against this reserve. In 2004, after evaluating the
afore-mention factors, at the end of each quarter
March 31, 2004, June 30, 2004 and September 30,
2004 and December 31, 2004 we re-evaluated our
estimate and adjusted the reserve to $2,510,000, $2,680,000,
$3,743,000 and $4,350,000 respectively, by recording an
additional $130,000 at March 31, 2004, $468,000 at
June 30, 2004, $1,345,000 at September 30, 2004 and
$883,000 at December 31, 2004 as wind-down expenses. Even
though it is the intent of the Company to sublease, assign or
sell our interests in the facility at the earliest possible
time, we cannot determine with certainty a fixed date by which
such events will occur. In light of this uncertainty, based on
estimates, we will periodically re-evaluate and adjust the
reserve, as necessary.
Interest income for the years ended December 31, 2004, 2003
and 2002 totaled $322,000, $39,000 and $109,000, respectively.
The increase in interest income from 2003 to 2004 was primarily
attributable to a higher average bank balance as a result of our
financing transactions in 2004 (See Liquidity and Capital
Resources below for further detail on these
transactions.). Our decrease in interest income from 2002 to
2003 was attributable to the lower interest rate on overnight
and money market funds and a lower average bank balance.
In 2004, interest expense was $191,000, compared to $207,000 in
2003 and $227,000 in 2002. The decrease from 2002 to 2004 was
attributable to lower outstanding debt and capital lease
balances.
Other expenses for 2004 include a loss of $56,000 resulting from
a write-off of obsolete lab equipment and $6,000 in state
franchise taxes. For 2003, other income net of other expenses
was $24,000, consisting of income received from the leasing of
equipment to subtenants and state franchise taxes paid. For 2002
other expenses includes $34,000 paid in state franchise taxes
and a $3,000 loss in disposal of equipment.
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Deemed Dividends Related to Convertible Preferred Stock |
We recorded deemed dividends of $2,066,000 and $1,280,000 for
2003 and 2002 respectively. The dividends are related to the 3%
Cumulative Convertible Preferred Stock (see note 9 to the
consolidated financial statements) which includes the accretion
of common stock warrants, the accretion of the beneficial
conversion feature and the accretion of related issuance costs.
The aggregate accretion value associated with the warrants,
beneficial conversion feature and issuance costs were included
in the calculation of net loss applicable to common stockholders.
There is no longer any preferred stock outstanding, as all of
the Companys previously outstanding 3% and 6% cumulative
convertible preferred stock was converted to the Companys
common stock prior to the end of 2003.
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Liquidity and Capital Resources |
Since our inception, we have financed our operations through the
sale of common and preferred stock, the issuance of long-term
debt and capitalized lease obligations, revenues from
collaborative agreements, research grants and interest income.
We had cash and cash equivalents totaling $41,060,000 at
December 31, 2004. Cash equivalents are invested in
U.S. Treasuries with maturities of less than 90 days.
We used $11,274,000, $8,543,000, and $10,087,000 of cash, in
2004, 2003 and 2002 respectively, in our operating activities.
The increase in cash used in 2004 in comparison to 2003 was
primarily attributable to the expenses incurred in preparing to
submit our first IND to the FDA, for a clinical trial of our
human neural stem cells as a treatment for Batten disease. The
33
decrease in cash used in operating activities from 2002 to 2003
was primarily due to a cost reduction program initiated in the
last quarter of 2002 which included a reduction in head count
and other operating expenses. In addition, we negotiated an
amendment in our rent obligations under the lease on our current
facilities in California which reduced our average annual rent
over the remaining term of the lease from approximately
$3.7 million to $2.0 million.
On June 16, 2004, we entered into an agreement with
institutional and other accredited investors with respect to the
private placement of approximately 13,160,000 shares of our
common stock at a purchase price of $1.52 per share, for
gross proceeds of approximately $20,000,000. Investors also
received warrants exercisable for five years to purchase
approximately 3,290,000 shares of common stock at an
exercise price of $1.90 per share. During the period
October 2004 to December 2004, 306,525 of these warrants were
exercised to purchase an aggregate of 306,525 shares of the
Companys common stock at $1.90 per share. The Company
received proceeds of $582,000 on issuance of the shares. C.E.
Unterberg, Towbin LLC (Unterberg) served as placement agent for
the private placement. For acting as our placement agent,
Unterberg received fees of approximately $1,200,000, expense
reimbursement of approximately $25,000 and a five year warrant
to purchase 526,400 shares of our common stock at an
exercise price of $1.89 per share.
On October 26, 2004, the Company entered into an agreement
with institutional investors with respect to the registered
direct placement of 7,500,000 shares of its common stock at
a purchase price of $3.00 per share, for gross proceeds of
$22,500,000. Unterberg and Shoreline Pacific, LLC (Shoreline)
served as placement agents for the transaction. The Company sold
these shares under a shelf registration statement previously
filed with and declared effective by the U.S. Securities
and Exchange Commission. For acting as our placement agent
Unterberg and Shoreline received fees of approximately
$1,350,000 and expense reimbursement of approximately $40,000.
No warrants were issued as part of this financing transaction.
On December 10, 2003 the Company completed a
$9.5 million financing transaction with Riverview Group
L.L.C. (Riverview), through the sale of 5 million shares of
common stock at a price of $1.90 per share. The closing
price of the Companys common stock on that date was
$2.00 per share.
On May 7, 2003, the Company entered into a stock purchase
agreement with Riverview under which Riverview agreed to
purchase 4 million shares of the Companys common
stock for $6.5 million, or $1.625 per share. On the
date of the agreement, the sale price was above the trading
price of the Companys common stock, which closed at
$1.43 per share on that date. The Company also agreed to
issue a 2-year warrant to Riverview to
purchase 1,898,000 shares of common stock at
$1.50 per share. The exercise price is subject to
adjustment for stock splits, dividends, distributions,
reclassifications and similar events. In the event that certain
conditions are met, including the closing sale price of the
Common Stock remaining at or above $2.50 per share for 10
consecutive trading days, the Company may require Riverview to
exercise the warrant for any remaining shares or to relinquish
any unexercised portion. On November 11, 2003, Riverview
exercised part of the warrant acquiring 1,098,000 shares at
$1.50 per share. The proceeds to the Company from this
warrant exercise totaled $1,647,000. The warrant is exercisable
for the remaining 800,000 shares until April 8, 2005,
subject to our right to require exercise or forfeiture as
described above.
On August 23, 2002, we entered into an agreement with
Triton West Group, Inc. (Triton) pursuant to which we sold
1,028,038 shares of common stock to Triton for aggregate
proceeds of $1,100,000, or approximately $1.07 per share.
On December 4, 2001, we issued 5,000 shares of 3%
cumulative convertible preferred stock to Riverview. We received
total proceeds of $4,728,000 net of the fee to Cantor
Fitzgerald and other associated costs. This preferred stock is
convertible into shares of our common stock at a current
conversion price of $2.00 per share of common stock. There
was a mandatory redemption provision in the preferred stock
under which any preferred stock remaining on December 4,
2003, was to be redeemed on that date. In connection with the
preferred stock agreement, we issued to Riverview Group a
warrant to purchase 350,877 shares of our common stock
at a price of $3.42 per share. We paid Cantor
Fitzgerald & Co., our financial advisor in connection
with the transaction, a fee of $200,000 and issued them a
warrant for 146,199 shares exercisable at $3.42 per
share. Both warrants expire on December 4, 2005. On
December 7, 2001, Riverview converted 1,000 shares of
its 3% cumulative convertible preferred stock for
500,125 shares of the Companys common
34
stock. On April 9, 2003, the Company agreed with Riverview
to reduce the conversion price to $0.80 per share for a
period of 20 trading days. The inducement resulted in a deemed
dividend of approximately $1,000,000. Riverview immediately
agreed to convert 2,000 shares with a face value of
$2 million, at the reduced price. Riverview received
2,521,041 shares of common stock upon conversion, which
includes 21,041 shares valued at $16,833 as accrued
dividends. On November 11, 2003, Riverview converted the
remaining 2,000 shares of its 3% cumulative convertible
preferred stock for 1,010,833 shares of the Companys
common stock, which includes 10,833 shares valued at
$21,666 as accrued dividends. As a result of the above
transactions all of the 3% cumulative convertible preferred
stock were fully converted into our common stock before the
mandatory redemption date of December 4, 2003.
On May 10, 2001, we entered into a common stock purchase
agreement with Sativum Investments Limited for the potential
future issuance and sale of up to $30,000,000 of our common
stock, subject to restrictions and other obligations. The
agreement expired in January 2004. We had the right to draw down
on this facility, sometimes termed an equity line, from time to
time, and Sativum was obligated to purchase shares of our common
stock at a 6% discount to a volume weighted average market price
over the 20 trading days following the draw-down notice. We were
limited with respect to how often we could exercise a draw down
and the amount of each draw down. The Company did draw down
$4,000,000 by issuance of 707,947 shares in July of 2001,
$118,000 by issuance of 107,812 shares in December of 2002,
$66,000 by issuance of 58,516 shares in January of 2003,
and $375,000 by issuance of 245,472 shares in May of 2003,
before applicable fees. In connection with our execution of the
common stock purchase agreement with Sativum, we issued
three-year warrants to purchase an aggregate of
350,000 shares of our common stock at $2.38 per share
to Sativum (250,000 shares) and our placement agents
(Pacific Crest Securities Inc., 75,000 shares and Granite
Financial Group, Inc., 25,000 shares). Our placement agents
exercised their warrants in full in July 2001, and we received
payment of $238,050 for the shares issued to them.
We continue to have outstanding obligations in regard to our
former facilities in Lincoln, Rhode Island. In 1997, we had
entered into a fifteen-year lease for a scientific and
administrative facility (the SAF) in a sale and leaseback
arrangement. The lease includes escalating rent payments. For
the year 2005, we expect to pay $938,000 as an operating lease
payment and in addition, based on our 2004 expenses,
approximately $500,000 as operating expenses. In 1992 and 1994
we had 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 a pilot manufacturing facility and a related
cell processing 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. For these related facilities we expect to pay
approximately $460,000 in principal, interest and related
expenses in 2005. In addition based on 2004 expenses we expect
to incur approximately $40,000 in expenses common to both
facilities such as property management and legal fees. We have
subleased the pilot manufacturing facility and the cell
processing facility, as well as a portion (approximately
one-fourth) of the SAF. We expect to receive, in aggregate,
approximately $708,000 in sub-tenant rent for all of the Rhode
Island facilities. As a result of the above transactions, our
estimated costs net of sub-tenant rent for the Rhode Island
facilities will be approximately $1,230,000 for 2005. We are
actively seeking to sublease, assign or sell our remaining
interests in these facilities. Failure to do so within a
reasonable period of time will have a material adverse effect on
our liquidity and capital resources.
The following table summarizes our future contractual cash
obligations (including both Rhode Island and California leases,
but excluding interest income and sub-lease income with respect
to the Rhode Island properties):
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Total | |
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|
Payable in | |
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|
Obligations at | |
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Payable in | |
|
Payable in | |
|
Payable in | |
|
Payable in | |
|
Payable in | |
|
2010 and | |
|
|
12/31/04 | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
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Beyond | |
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|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Capital lease payments
|
|
$ |
2,839,805 |
|
|
$ |
472,680 |
|
|
$ |
445,486 |
|
|
$ |
332,545 |
|
|
$ |
244,531 |
|
|
$ |
244,572 |
|
|
$ |
1,099,991 |
|
Operating lease payments
|
|
|
11,652,113 |
|
|
|
3,007,630 |
|
|
|
1,115,186 |
|
|
|
937,500 |
|
|
|
1,171,875 |
|
|
|
1,171,875 |
|
|
|
4,248,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total contractual cash obligations
|
|
$ |
14,491,918 |
|
|
$ |
3,480,310 |
|
|
$ |
1,560,672 |
|
|
$ |
1,270,045 |
|
|
$ |
1,416,406 |
|
|
$ |
1,416,447 |
|
|
$ |
5,348,038 |
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|
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35
We have incurred significant operating losses and negative cash
flows since inception. We have not achieved profitability and
may not be able to realize sufficient revenues to achieve or
sustain profitability in the future. We do not expect to be
profitable in the next several years, but rather expect to incur
additional operating losses. We have limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain our product development efforts,
for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, for general and
administrative expenses and other working capital requirements.
We rely on cash balances and proceeds from equity and debt
offerings, proceeds from the transfer or sale of our
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund our
operations. If we exhaust our cash balances and are unable to
realize adequate financing, we may be unable to meet operating
obligations and be required to initiate bankruptcy proceedings.
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. Funding may not be available when
needed at all, or on terms acceptable to us. Lack of
necessary funds may require us to delay, scale back or eliminate
some or all of our research and product development programs,
planned clinical trials, and/or our capital expenditures or to
license our potential products or technologies to third parties.
With the exception of operating leases for facilities, we have
not entered into any off balance sheet financial arrangements
and have not established any special purpose entities. We have
not guaranteed any debts or commitments of other entities or
entered into any options on non-financial assets. During 2001,
we were party to a space-sharing agreement entered into between
us and Celtrans, LLC. (now Cellerant, Inc.). Dr. Irving
Weissman, a member of our Board of Directors and Chairman of our
Scientific Advisory Board, is the founder and Chairman of
Cellerant, a privately-owned biotechnology company that is a
subtenant in the building in which the Company is located. Under
the agreement, which was effective as of September 1, 2001,
Cellerant or, with our approval, a subtenant of Cellerant, may
use certain animal space in our facility, which we do not
currently require for our own use. That agreement was partially
in abeyance until February 2005, since the animal space was used
by a third party by agreement with us and with Cellerant. We
also provide certain services to Cellerant with respect to
animal care for mice housed in Cellerants own space. In
addition, Dr. Weissman remains a consultant to us under an
agreement entered in 1997.
Recent Accounting Pronouncements
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Accounting for Stock-Based Compensation |
In December 2004, FASB issued SFAS No. 123R (revised
2004), Share-Based Payment. This Statement is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation
and amends SFAS No. 95, Statement of Cash Flows This
Statement supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation
guidance. . Upon the adoption of SFAS No. 123R the
Company will be required to expense stock options in its
Statement of Operations. Among other items, the new standard
would require the expensing of stock options issued by the
Company in the financial statements using a fair-value-based
method. The provisions of SFAS 123R are effective for the
first interim or annual reporting period that begins after
June 15, 2005; the Company will therefore adopt the new
requirements no later than the beginning of its third quarter of
fiscal 2005. Adoption of the expensing requirements will reduce
the Companys reported earnings. See Stock-based
Compensation in Note 1 for dis closures regarding the
effect on net earnings and earnings per share if we had applied
the fair value recognition provisions of SFAS No. 123R.
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Accounting for Costs Associated with Exit or Disposal
Activities |
In June 2002, the FASB issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 provides guidance related to accounting
for costs associated with disposal activities
36
covered by SFAS No. 144 and with one-time termination
benefits and other exit or restructuring activities previously
covered by Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
SFAS No. 146 supersedes EITF Issue No. 94-3 in
its entirety. Under SFAS No. 146, the following
conditions must be met for an action to qualify as an exit or
disposal plan: management having the authority to approve the
action commits to a plan of termination; the plan identifies the
number of employees to be terminated, their job classifications
or functions and their locations, and the expected completion
date; the plan establishes the terms of the benefit arrangement
including the benefits that employees will receive upon
termination (including but not limited to cash payments) in
sufficient detail to enable employees to determine the type and
amount of benefits they will receive if they are involuntarily
terminated; and actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be
made or that the plan will be withdrawn. SFAS No. 146
was effective in 2003 and will be applied prospectively to
qualifying exit or disposal activities initiated after
December 31, 2002.
37
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
MAKING AN INVESTMENT DECISION REGARDING STEMCELLS, INC. Any of
the following risks could materially adversely affect our
business, financial conditions or results of operation.
Additional risks and uncertainties not known to us or that we
currently deem immaterial may also impair our business
operations.
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.
Risks Related to our Business
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Our financial situation is precarious and, based on
currently estimated operating expenses, our existing capital
resources may not be sufficient to fund our operations beyond
2006 |
We have incurred significant operating losses and negative cash
flows since inception. We have not achieved profitability and
may not be able to realize sufficient revenues to achieve or
sustain profitability in the future. We do not expect to be
profitable in the next several years, but rather expect to incur
additional operating losses. We have limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain our product development efforts
and for acquisition of technologies and intellectual property
rights, preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, general and
administrative expenses and other working capital requirements.
We 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, and government grants and funding from
collaborative arrangements, if obtainable, to fund our
operations. If we exhaust our cash reserves and are unable to
realize adequate financing, we may be unable to meet operating
obligations and be required to initiate bankruptcy proceedings.
Our existing capital resources may not be sufficient to fund our
operations beyond 2006. These conditions raise doubt about our
ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
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. Funding may not be available when
needed at all or on terms acceptable to us. Lack of
necessary funds may require us to delay, scale back or eliminate
some or all of our research and product development programs
and/or our capital expenditures or to license our potential
products or technologies to third parties.
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|
The FDA may fail to approve our Investigational New Drug
Application for our proposed Phase I clinical trial of our
proprietary neural cell therapy product in Batten disease, and
the Institutional Review Board (IRB) at the clinical site
may fail to approve the clinical protocol for the trial. |
We filed our first Investigational New Drug, or IND, application
to the U.S. Food and Drug Administration (FDA) in late
December, 2004, for our proposed Phase I clinical trial of our
proprietary neural cell therapy product HuCNS
SC in Batten disease. The FDA has informed us that
it has suggestions and questions related to the proposed trial
that require additional information and has placed our proposed
trial on hold. We cannot be certain whether the FDA will remove
the clinical hold on the Companys proposed initial
clinical trial and permit the Company to proceed to clinical
testing despite the novel and unproven nature of our technology.
We may not be able to satisfy the FDAs concerns without
conducting extensive and time consuming additional preclinical
studies, if at all. Even if approved, our clinical trial could
be substantially delayed beyond its expected dates. In addition
to requiring FDA approval, the trial cannot go forward until the
IRB of the trial site has approved the proposed clinical
protocol. The IRB for Stanford
38
University, theproposed site of the trial, has not yet acted on
the protocol. Should it fail to approve the trial, or require
modifications to the protocol that are not acceptable to the
Company, the Company would need to find another trial site.
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Our technology is at an early stage of discovery and
development, and we may fail to develop any commercially
acceptable products. |
We have yet to develop any products. Our stem cell technology is
still at the discovery phase for the liver and pancreas stem
cells and, while we have filed an IND with respect to our human
neural (brain) stem cells, the U.S. Food and Drug
Administration (FDA) has placed a clinical hold on our
proposed clinical trial pending the Companys response to
its concerns. 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:
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survive and persist in the desired location; |
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provide the intended therapeutic benefits; |
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properly integrate into existing tissue in the desired manner; or |
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achieve therapeutic benefits equal to or better than the
standard of treatment at the time of testing. |
In addition, our products 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
pre-clinical or clinical research. If 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, because 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 claims.
Moreover, because our cell therapy treatments will be derived
from tissue of individuals other than the patient (that is, they
will be non-self or allogeneic
transplant products), patients will require the use of
immunosuppressive drugs such as cyclosporine, FK506, or others
to prevent rejection of the cells. While immunosuppression is
now standard in connection with allogeneic transplants of
various kinds, long-term maintenance on immunosuppressive drugs
can produce complications that include infection, cancer,
cardiovascular disease, renal dysfunction and other side effects
depending upon which immunosuppressive regimen is employed.
Immunosuppression has not been tested with our therapies since
we have not yet conducted any clinical trials.
As noted above, we filed an IND with the FDA earlier this year
which is currently on clinical hold. Before we are permitted to
move forward, as part of the IND process, the FDA will need to
be satisfied that the cell bank to be used in these trials
qualifies as a suitable source of the cells for the proposed
clinical trial, and that the pre-clinical safety testing (i.e.,
pharmacology and toxicology studies) we conducted in various
animal models is adequate. We must also obtain the approval of
the internal review board at the medical institution where the
clinical trial would be conducted. We may not be able to satisfy
all of the requirements to move the Batten disease program into
clinical trials, which could have a material adverse effect on
our product development timeline.
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We have payment obligations resulting from real property
owned or leased by us in Rhode Island, which diverts funding
from our stem cell research and development. |
Prior to our reorganization in 1999 and the consolidation of our
business in California, we carried out our former encapsulated
cell therapy programs in Lincoln, Rhode Island, where we also
had our administrative offices. Although we have vacated the
Rhode Island facilities, we remain obligated to make on average,
lease payments and payments for operating costs of approximately
$1,450,000 per year before sub-tenant rent income for our former
science and administrative facility, which we have leased
through June 30, 2013, and
39
debt service payments and payments for operating costs of
approximately $500,000 per year for our former encapsulated cell
therapy pilot manufacturing facility, which we own. We have
currently subleased a portion of the science and administrative
facility, and are seeking to sublease the remaining portion, but
we cannot be sure that we will be able to keep any part of the
facility subleased for the duration of our obligation. We have
currently subleased the entire pilot manufacturing facility to a
privately-held biotechnology company, but may not be able to
sublease or sell the facility in the future once the current
sublease agreements expire. These continuing costs significantly
reduce our cash resources and adversely affect our ability to
fund further development of our stem cell technology. In
addition, changes in real estate market conditions and
assumptions regarding the length of time it may take us to
either fully sublease, assign or sell our remaining interest in
the our former research facility in Rhode Island may have a
significant impact on and cause large variations in our quarter
to quarter results of operations. In 1999, in connection with
exiting our former research facility in Rhode Island, we created
a reserve for the estimated lease payments and operating
expenses related to it. The reserve has been re-evaluated and
adjusted based on assumptions relevant to real estate market
conditions and the estimated time until we could either fully
sublease, assign or sell our remaining interests in the
property. At December 31, 2004, the reserve was $5,528,000.
In 2004, we incurred $1,152,000 in operating expenses net of
sub-tenant income for this facility. In 2004 and 2003
respectively, we incurred $1,152,000 and $984,000 in lease
payments and operating expenses net of subtenant income for this
facility. Expenses for this facility will fluctuate based on
changes in tenant occupancy rates and other operating expenses
related to the lease. Even though it is our intent to sublease,
assign, sell or otherwise divest ourselves of our interests in
the facility at the earliest possible time, we cannot determine
with certainty a fixed date by which such events will occur. In
light of this uncertainty, based on estimates, we will
periodically re-evaluate and adjust the reserve, as necessary.
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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, and we may fail to obtain any such agreement on
terms acceptable to us. 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
expire. Furthermore, these arrangements may require us to grant
certain rights to third parties, including exclusive marketing
rights to one or more products, may require us to issue
securities to our collaborators or may contain other terms that
are burdensome to us. 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.
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We have a history of operating losses, and we may fail to
obtain revenues or become profitable. |
We 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 currently have no cooperative
agreements, we have only one current research grant 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.
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If we are unable to protect our patents and proprietary
rights, our business, financial condition and results of
operations will be harmed. |
We own or license a number of patents and pending patent
applications related to various stem and progenitor cells and
methods of deriving and using them, including human neural stem
cell cultures. 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, if any existing or future patents
will provide sufficient protection or significant commercial
advantage or if others will circumvent these patents. We cannot
be certain that we were the first to discover the inventions
covered by each of our pending patent applications or that we
were the first to file patent applications for such inventions
because patent applications are secret until they are published,
and because publication of discoveries in the scientific or
patent literature often lags behind actual discoveries. Patents
may not issue from our pending or future patent applications or,
if issued, may not be of commercial benefit to us. In addition,
our patents may not afford us adequate protection from competing
products. 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. Further,
patents issue for a limited term, and our patents may expire
before we utilize them profitably. Under the procedures of the
European Patent Office, third parties may oppose our issued
European patents during the relevant opposition period. Such
oppositions 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. One party has opposed two
of our granted European patents. While we are confident in our
position, there is no guarantee that we will prevail. If we are
unsuccessful in our defense of the opposed patents, all claimed
rights in the opposed patents will be lost in Europe.
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.
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 technology.
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If others are first to discover and patent the stem cells
we are seeking to discover, we could be blocked from further
work on those stem cells. |
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 for us or our
collaborators to be the first to discover any stem cell that we
are seeking to discover. Failure to be the first could prevent
us from commercializing all of our research and development
affected by that patent.
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If we are unable to obtain necessary licenses to
third-party patents and other rights, we may not be able to
commercially develop our expected products. |
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. If third party
patents or patent applications contain valid claims that our
technology infringes upon their technology, 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
41
to obtain such licenses at a reasonable cost, our business could
be significantly harmed. 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 licensors, however, 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 these 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.
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We compete with companies that have significant advantages
over us. |
The market for therapeutic products to treat diseases of, or
injuries to, the central nervous system (CNS) is large, and
competition is intense. The majority of the products currently
on the market or in development are small molecule
pharmaceutical compounds. Many of the worlds
pharmaceutical companies, including Merck, Pfizer, Abbott,
Bristol-Myers Squibb, Novartis and GlaxoSmithKline, have made
significant commitments to the CNS field. Any cell-based therapy
to treat diseases of, or injuries to, the CNS is likely to face
intense competition from the small molecule sector. In addition,
a number of biotechnology companies with resources far greater
than ours may also emerge as competitors. These include Genzyme,
Amgen, Cephalon, Transkaryotic Therapies, BioMarin, Celgene,
Biogen, and Titan Pharmaceuticals. Finally, we also expect to
compete with smaller biotechnology companies, some of which are
privately owned, such as Neuralstem, Geron, NeuroNova, ReNeuron,
ES Cell International, and CellFactors/ Diacrin.
We believe that our human neural stem cells may have application
to many or most of the Lysosomal Storage Diseases
(LSDs) with CNS involvement. We have submitted our
first IND for Batten Disease, which is one of the LSDs that
affect the CNS; that IND is currently on clinical hold, and we
have no assurance as to when or whether the FDA will release the
hold and permit the clinical trial to begin. There are, so far
as we know, no approved therapies for Battens or any of
the other CNS-specific LSDs, but other companies, including
Genzyme, BioMarin, and Transkaryotic Therapies, have products
approved to treat peripheral aspects of some of the other LSDs,
and other products are in clinical trials.
In the field of diabetes, a number of major companies currently
market products for the treatment of diabetes and are also
engaged in the research and development of new therapies. Such
companies include Eli Lilly, Novo Nordisk, J&J, Amylin,
Serono. Consequently, should we successfully develop a
cell-based therapy for diabetes, we would expect to face severe
competition from these and similar companies.
In the liver field, there are no broad-based therapies for the
treatment of liver disease at present. The primary therapy is
liver transplantation, which is limited by the availability of
matched donor organs. Liver-assist devices, when and if they
become available, could also be used to help patients while they
await suitably matched organs for transplantation.
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Development of our technology is subject to and restricted
by extensive government regulation, which could impede our
business. |
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 and restricted by
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
U.S. 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
42
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.
Although we do not use embryonic stem cells, government
regulation and threatened regulation of embryonic tissue may
lead top researchers to leave the field of stem cell research,
or the country, in order to assure that their careers will not
be impeded by restrictions on their work. Similarly, these
factors may induce the best graduate students to choose other
fields less vulnerable to changes in regulatory oversight, thus
exacerbating the risk, discussed below, that we may not be able
to attract and retain the scientific personnel we need in face
of the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions
for what may become a shrinking class of qualified individuals.
In addition, we cannot assure you that constraints on the use of
embryonic stem cells will not be extended to use of fetal stem
cells. Moreover, it is possible that concerns regarding research
using embryonic stem cells will impact our ability to attract
collaborators and investors and our stock price.
We may apply for status under the Orphan Drug Act for some of
our therapies to gain a seven-year period of marketing
exclusivity for those therapies. The U.S. Congress in the past
has 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.
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We are dependent on the services of key personnel. |
We are highly dependent on the principal members of our
management and scientific staff and some of our outside
consultants, including the members of our scientific advisory
board, our chief executive officer, 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. In addition, our operations are dependent upon our ability
to attract and retain additional qualified scientific and
management personnel. 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.
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We need to improve our financial control
procedures. |
Managements Annual Report on Internal Controls Over
Financial Reporting found deficiencies in the operating
effectiveness of its internal controls over financial reporting
that collectively constitute significant deficiencies and a
material weakness under standards established by the American
Institute of Certified Public Accountants, resulting in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements of the Company will not
be prevented or detected. In the opinion of Grant Thornton LLP,
the Companys independent auditors, Managements
assessment that that StemCells Inc. did not maintain effective
internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material
respects. It is also the opinion of Grant Thornton that because
of the effect of the material weakness identified by management
(i.e., instances where both the preparation and review of
general journal entries were performed by the same individual)
on the achievement of the objectives of the control criteria,
StemCells Inc. has not maintained effective internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. The Company has already taken remedial
steps, and will continue its on-going evaluation of internal
controls and attempts to improve its internal controls over
financial reporting as necessary to assure their effectiveness,
but there can be no assurance that it will succeed or that other
deficiencies will not be identified.
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Since health care insurers and other organizations may not
pay for our products or may impose limits on reimbursements, our
ability to become profitable could be reduced. |
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 U.S. Food and Drug Administration has not granted marketing
approval. Significant uncertainty exists as to the reimbursement
status of newly approved health care products or novel therapies
such as ours. 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 policies 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 also expect
that there will continue to be a number of federal and state
proposals to implement government control over health care
costs. Efforts at health care 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 health care goods
and services may take in response to health care reform
proposals or legislation. We cannot predict the effect
government control and other health care reforms may have on our
business.
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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. 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 commercialize them
ourselves. We intend to pursue our needed capital resources
through equity and debt financings, corporate alliances, grants
and collaborative research arrangements. We may fail to obtain
the necessary capital resources from any such sources when
needed or on terms acceptable to us. Our ability to complete
successfully any such arrangements will depend upon market
conditions and, more specifically, on continued progress in our
research and development efforts.
Risks Related to the Securities Market
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Our stock price has been, and will likely continue to be,
highly volatile, which may negatively affect our ability to
obtain additional financing in the future. |
The market price of our stock has been and is likely to continue
to be highly volatile due to the risks and uncertainties
described in this section of the prospectus, as well as other
factors, including:
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our ability to develop and test our technology; |
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our ability to patent or obtain licenses to necessary technology; |
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conditions and publicity regarding the industry in which we
operate, as well as the specific areas our product candidates
seek to address; |
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competition in our industry; |
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price and volume fluctuations in the stock market at large that
are unrelated to our operating performance; and |
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comments by securities analysts, or our failure to meet market
expectations. |
Over the two-year period ended December 31, 2004, the
closing price of our common stock as reported on the Nasdaq
SmallCap Market ranged from a high of $4.48 to a low of $.66. As
a result of this volatility, your investment in our stock is
subject to substantial risk. Furthermore, the volatility of our
stock price could negatively impact our ability to raise capital
in the future.
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We are contractually obligated to issue shares in the
future, diluting your interest in us. |
As of December 31, 2004, there were outstanding and
exercisable warrants to purchase 5,490,285 shares of our common
stock, at a weighted average exercise price of $2.08 per share.
As of December 31, 2004, there were also outstanding and
exercisable options to purchase 6,682,201 shares of our common
stock, at a weighted average exercise price of $2.67 per share.
Moreover, we expect to issue additional options to purchase
shares of our common stock to compensate employees, consultants
and directors, and may issue additional shares to raise capital,
to acquire other companies or technologies, to pay for services,
or for other corporate purposes. Any such issuances will have
the effect of further diluting the interest of the purchasers of
the securities being sold in this offering.
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Managements Annual Report on Internal Controls Over
Financial Reporting |
StemCells, Inc., is responsible for establishing and maintaining
adequate internal control over financial reporting.
StemCells internal control system was designed to provide
reasonable assurance to the Companys management and board
of directors regarding the preparation and fair presentation of
published financial statements.
StemCells management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2004. In making its assessment of internal
control over financial reporting, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control
Integrated Framework.
Managements assessment identified the following material
weakness in the Companys internal control over financial
reporting: significant deficiencies were identified in the
Companys general ledger process as a result of the fact
that some journal entries and reports were both prepared and
reviewed by the same individual and not reviewed by another
individual; management has determined that these significant
deficiencies, in the aggregate, constituted a material weakness
in the design and operation of the Companys internal
controls in effect prior to December 31, 2004. Although the
Company hired a separate chief financial officer in November
2004, the new controls this addition allowed had not been in
operation for a sufficient period of time to enable management
to obtain sufficient evidence about their operating
effectiveness.
Because of the material weakness described in the preceding
paragraph, management believes that, as of December 31,
2004, the companys internal control over financial
reporting was not effective based on the COSO criteria.
StemCells independent auditors have issued an audit report
on our assessment of the Companys internal control over
financial reporting. This report appears below.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders
StemCells, Inc.
We have audited managements assessment, included in the
accompanying StemCells Inc. Managements Report on Internal
Control Over Financial Reporting, that StemCells Inc. did not
maintain effective internal control over financial reporting as
of December 31, 2004, because of the effect of the material
weakness identified in managements assessment, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). StemCells Inc.s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in a more than remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
managements assessment. The company identified instances
where both the preparation and review of general journal entries
were performed by the same individual. This material weakness
was considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2004 consolidated
financial statements, and this report does not affect our report
dated March 4, 2005, on those consolidated financial
statements.
In our opinion, managements assessment that StemCells Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the
control criteria, StemCells Inc. has not maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria
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established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of StemCells Inc. as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, changes in redeemable preferred stock
and stockholders equity, and cash flows for each of the
two years in the period ended December 31, 2004 and our
report dated March 4, 2005 expressed an unqualified opinion
on those financial statements.
San Jose, California
March 4, 2005
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ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
The Company has no financial instruments that are sensitive to
market risk.
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ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
STEMCELLS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
StemCells Inc.
We have audited the consolidated balance sheets of StemCells
Inc. and subsidiary as of December 31, 2004 and 2003, and
the related consolidated statements of operations, changes in
redeemable preferred stock and stockholders equity, and
cash flows for each of the two years in the period ended
December 31, 2004. These financial statements are the
responsibility of management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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. as of December 31,
2004 and 2003, and the consolidated results of their operations
and their consolidated cash flows for each of the two years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the
effectiveness of StemCells Inc.s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated March 4,
2005, expressed an unqualified opinion on managements
assessment, and an adverse opinion on the operating
effectiveness, of such internal control over financial reporting.
San Jose, California
March 4, 2005
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
StemCells, Inc.
We have audited the consolidated balance sheet (not presented
herein) of StemCells, Inc. as of December 31, 2002, and the
related consolidated statements of operations, changes in
redeemable preferred stock and stockholders equity, and
cash flows for the year the ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (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 audit 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. at December 31, 2002,
and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with
U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that StemCells, Inc. will continue as a going concern.
As more fully described in Note 1, the Company has incurred
significant operating losses and negative cash flows since
inception and expects to continue to incur significant operating
losses for the foreseeable future. These conditions raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Palo Alto, California
March 4, 2003, except for Note 1, as to which the date
is March 25, 2004.
51
StemCells, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
41,059,532 |
|
|
$ |
13,081,703 |
|
|
Other receivable
|
|
|
180,963 |
|
|
|
145,463 |
|
|
Other current assets
|
|
|
209,074 |
|
|
|
180,048 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
41,449,569 |
|
|
|
13,407,214 |
|
Property, plant and equipment, net
|
|
|
3,424,294 |
|
|
|
3,611,402 |
|
Other assets, net
|
|
|
2,753,419 |
|
|
|
2,767,798 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
47,627,282 |
|
|
$ |
19,786,414 |
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
524,917 |
|
|
$ |
454,434 |
|
|
Accrued expenses and other
|
|
|
1,547,370 |
|
|
|
1,041,150 |
|
|
Accrued wind-down expenses
|
|
|
1,013,460 |
|
|
|
789,000 |
|
|
Capital lease obligations, current portion
|
|
|
52,843 |
|
|
|
|
|
|
Bonds payable, current portion
|
|
|
244,167 |
|
|
|
237,084 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,382,757 |
|
|
|
2,521,668 |
|
Capital lease obligations, less current maturities
|
|
|
41,065 |
|
|
|
|
|
Bonds payable, less current maturities
|
|
|
1,605,417 |
|
|
|
1,849,583 |
|
Deposits and other long-term liabilities
|
|
|
610,126 |
|
|
|
521,420 |
|
Accrued wind-down expenses non current
|
|
|
4,514,569 |
|
|
|
3,033,984 |
|
Deferred rent
|
|
|
523,801 |
|
|
|
896,201 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,677,735 |
|
|
|
8,822,856 |
|
Commitments (Note 5)
|
|
|
|
|
|
|
|
|
Preferred stock $0.01 par value; 1,000,000 shares
authorized issuable, none outstanding (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 125,000,000 and
75,000,000 shares authorized; 62,129,407 and
40,998,858 shares issued and outstanding at
December 31, 2004 and 2003, respectively
|
|
|
621,293 |
|
|
|
409,988 |
|
|
Additional paid-in capital
|
|
|
211,419,300 |
|
|
|
170,406,393 |
|
|
Accumulated deficit
|
|
|
(174,205,214 |
) |
|
|
(158,874,915 |
) |
|
Deferred compensation
|
|
|
(885,832 |
) |
|
|
(977,908 |
) |
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
36,949,547 |
|
|
|
10,963,558 |
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock, and
stockholders equity
|
|
$ |
47,627,282 |
|
|
$ |
19,786,414 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
StemCells, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenue from collaborative and licensing agreements
|
|
$ |
22,206 |
|
|
$ |
18,307 |
|
|
$ |
40,010 |
|
Revenue from grants
|
|
|
118,828 |
|
|
|
255,123 |
|
|
|
375,367 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
141,034 |
|
|
|
273,430 |
|
|
|
415,377 |
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,760,431 |
|
|
|
6,143,676 |
|
|
|
7,382,272 |
|
|
General and administrative
|
|
|
3,953,564 |
|
|
|
3,390,652 |
|
|
|
3,358,581 |
|
|
Encapsulated Cell Therapy wind-down and corporate relocation
|
|
|
2,826,879 |
|
|
|
2,885,329 |
|
|
|
1,163,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,540,874 |
|
|
|
12,419,657 |
|
|
|
11,904,657 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,399,840 |
) |
|
|
(12,146,227 |
) |
|
|
(11,489,280 |
) |
Other Income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
322,227 |
|
|
|
38,826 |
|
|
|
108,702 |
|
|
Interest expense
|
|
|
(191,006 |
) |
|
|
(207,112 |
) |
|
|
(226,723 |
) |
|
Loss on disposal of property, plant and equipment
|
|
|
(55,609 |
) |
|
|
|
|
|
|
(2,736 |
) |
|
Other income (expense)
|
|
|
(6,071 |
) |
|
|
23,761 |
|
|
|
(34,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
69,541 |
|
|
|
(144,525 |
) |
|
|
(154,975 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before deemed dividend
|
|
|
(15,330,299 |
) |
|
|
(12,290,752 |
) |
|
|
(11,644,255 |
) |
Dividends to preferred stockholders
|
|
|
|
|
|
|
(68,497 |
) |
|
|
(351,727 |
) |
Deemed dividend to preferred stockholders
|
|
|
|
|
|
|
(2,065,911 |
) |
|
|
(1,280,004 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
|
(15,330,299 |
) |
|
|
(14,425,160 |
) |
|
|
(13,275,986 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$ |
(0.31 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic and diluted loss per share
calculations
|
|
|
49,606,277 |
|
|
|
32,080,233 |
|
|
|
25,096,252 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
53
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Redeemable Convertible | |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
|
|
Comprehensive |
|
|
|
Total | |
|
|
| |
|
| |
|
Additional | |
|
Accumulated | |
|
Income |
|
Deferred | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Paid-In Capital | |
|
Deficit | |
|
(Loss) |
|
Compensation | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
Balances, December 31, 2001
|
|
|
5,500 |
|
|
$ |
2,662,932 |
|
|
|
24,220,021 |
|
|
$ |
242,200 |
|
|
$ |
149,180,388 |
|
|
$ |
(134,519,684 |
) |
|
$ |
|
|
|
$ |
(2,270,097 |
) |
|
$ |
12,632,807 |
|
Issuance of common stock related to equity financing net of
issuance cost $89,706
|
|
|
|
|
|
|
|
|
|
|
1,135,850 |
|
|
|
11,359 |
|
|
|
1,117,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,128,644 |
|
Dividends paid to 3% convertible preferred holders in stock
|
|
|
|
|
|
|
|
|
|
|
97,969 |
|
|
|
980 |
|
|
|
128,290 |
|
|
|
(129,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of redeemable convertible preferred shares to common
stock
|
|
|
(1,500 |
) |
|
|
(1,283,250 |
) |
|
|
1,252,244 |
|
|
|
12,522 |
|
|
|
1,493,185 |
|
|
|
(222,457 |
) |
|
|
|
|
|
|
|
|
|
|
1,283,250 |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
1,280,004 |
|
|
|
|
|
|
|
|
|
|
|
(1,280,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,280,004 |
) |
Common stock issued for external services
|
|
|
|
|
|
|
|
|
|
|
61,419 |
|
|
|
614 |
|
|
|
90,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,527 |
|
Common stock issued pursuant to employee benefit plan
|
|
|
|
|
|
|
|
|
|
|
44,988 |
|
|
|
450 |
|
|
|
56,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,465 |
|
Exercise of employee and consultant stock options
|
|
|
|
|
|
|
|
|
|
|
47,587 |
|
|
|
476 |
|
|
|
8,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,335 |
|
Compensation expense from grant of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,689 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,681,413 |
) |
|
|
|
|
|
|
|
|
|
|
1,681,413 |
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(469,089 |
) |
|
|
(469,089 |
) |
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,644,255 |
) |
|
|
|
|
|
|
|
|
|
|
(11,644,255 |
) |
Balances, December 31, 2002
|
|
|
4,000 |
|
|
|
2,659,686 |
|
|
|
26,860,078 |
|
|
|
268,601 |
|
|
$ |
149,238,207 |
|
|
$ |
(146,515,666 |
) |
|
$ |
|
|
|
$ |
(1,057,773 |
) |
|
$ |
1,933,369 |
|
54
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS EQUITY (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Redeemable Convertible | |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
|
|
Comprehensive |
|
|
|
Total | |
|
|
| |
|
| |
|
Additional | |
|
Accumulated | |
|
Income |
|
Deferred | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Paid-In Capital | |
|
Deficit | |
|
(Loss) |
|
Compensation | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
Balances, December 31, 2002
|
|
|
4,000 |
|
|
$ |
2,659,686 |
|
|
|
26,860,078 |
|
|
$ |
268,601 |
|
|
$ |
149,238,207 |
|
|
$ |
(146,515,666 |
) |
|
$ |
|
|
|
$ |
(1,057,773 |
) |
|
$ |
1,933,369 |
|
Issuance of common stock related to equity financing net of
issuance cost $310,403
|
|
|
|
|
|
|
|
|
|
|
9,303,988 |
|
|
|
93,040 |
|
|
|
16,037,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,130,347 |
|
Dividends paid to 3% convertible preferred holders in stock
|
|
|
|
|
|
|
|
|
|
|
49,809 |
|
|
|
497 |
|
|
|
68,000 |
|
|
|
(68,497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock and
beneficial conversion feature
|
|
|
|
|
|
|
2,065,911 |
|
|
|
|
|
|
|
|
|
|
|
(2,065,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,065,911 |
) |
Conversion of redeemable convertible preferred shares to common
stock
|
|
|
(4000 |
) |
|
|
(4,725,597 |
) |
|
|
3,500,000 |
|
|
|
35,000 |
|
|
|
4,690,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,725,597 |
|
Common stock issued for external services
|
|
|
|
|
|
|
|
|
|
|
98,180 |
|
|
|
982 |
|
|
|
296,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,803 |
|
Common stock issued pursuant to employee benefit plan
|
|
|
|
|
|
|
|
|
|
|
49,425 |
|
|
|
494 |
|
|
|
61,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,263 |
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
1,098,000 |
|
|
|
10,980 |
|
|
|
1,636,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,647,000 |
|
Exercise of employee and consultant stock options
|
|
|
|
|
|
|
|
|
|
|
39,378 |
|
|
|
394 |
|
|
|
29,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,086 |
|
Compensation expense from grant of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,548 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,343 |
|
|
|
|
|
|
|
|
|
|
|
(171,343 |
) |
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,208 |
|
|
|
251,208 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,290,752 |
) |
|
|
|
|
|
|
|
|
|
|
(12,290,752 |
) |
Balances, December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
40,998,858 |
|
|
$ |
409,988 |
|
|
$ |
170,406,393 |
|
|
$ |
(158,874,915 |
) |
|
$ |
|
|
|
$ |
(977,908 |
) |
|
$ |
10,963,558 |
|
55
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK
AND STOCKHOLDERS EQUITY (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Redeemable Convertible | |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
|
|
|
|
Comprehensive |
|
|
|
Total | |
|
|
| |
|
| |
|
Additional | |
|
Accumulated | |
|
Income |
|
Deferred | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Paid-In Capital | |
|
Deficit | |
|
(Loss) |
|
Compensation | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
Balances, December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
40,998,858 |
|
|
$ |
409,988 |
|
|
$ |
170,406,393 |
|
|
$ |
(158,874,915 |
) |
|
$ |
|
|
|
$ |
(977,908 |
) |
|
$ |
10,963,558 |
|
Issuance of common stock related to equity financing net of
issuance cost $2,863,021
|
|
|
|
|
|
|
|
|
|
|
20,660,000 |
|
|
|
206,600 |
|
|
|
39,433,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,640,178 |
|
Common stock issued for licensing agreements
|
|
|
|
|
|
|
|
|
|
|
11,351 |
|
|
|
114 |
|
|
|
17,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,833 |
|
Common stock issued for external services
|
|
|
|
|
|
|
|
|
|
|
41,050 |
|
|
|
410 |
|
|
|
72,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,050 |
|
Common stock issued pursuant to employee benefit plan
|
|
|
|
|
|
|
|
|
|
|
48,707 |
|
|
|
487 |
|
|
|
93,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,013 |
|
Exercise of employee and consultant stock options
|
|
|
|
|
|
|
|
|
|
|
62,916 |
|
|
|
629 |
|
|
|
44,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,379 |
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
306,525 |
|
|
|
3,065 |
|
|
|
579,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582,398 |
|
Compensation expense from grant of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,868 |
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,493 |
|
|
|
|
|
|
|
|
|
|
|
(737,493 |
) |
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829,569 |
|
|
|
829,569 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,330,299 |
) |
|
|
|
|
|
|
|
|
|
|
(15,330,299 |
) |
Balances, December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
62,129,407 |
|
|
$ |
621,293 |
|
|
$ |
211,419,300 |
|
|
$ |
(174,205,214 |
) |
|
$ |
|
|
|
$ |
(885,832 |
) |
|
$ |
36,949,547 |
|
See accompanying notes to consolidated financial statements.
56
StemCells, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before deemed dividend
|
|
$ |
(15,330,299 |
) |
|
$ |
(12,290,752 |
) |
|
$ |
(11,644,255 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,037,719 |
|
|
|
1,013,133 |
|
|
|
402,190 |
|
|
Amortization of deferred compensation
|
|
|
829,569 |
|
|
|
251,208 |
|
|
|
(469,089 |
) |
|
Issue of shares and options in exchange for services
|
|
|
200,931 |
|
|
|
602,613 |
|
|
|
237,680 |
|
|
Loss on disposal of fixed assets
|
|
|
54,644 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(61,660 |
) |
|
|
(4,831 |
) |
|
|
1,687 |
|
|
|
Other receivable
|
|
|
26,160 |
|
|
|
(75,740 |
) |
|
|
(12,351 |
) |
|
|
Other current assets
|
|
|
(29,026 |
) |
|
|
(77,219 |
) |
|
|
258,807 |
|
|
|
Other assets, net
|
|
|
|
|
|
|
(277,863 |
) |
|
|
(379,572 |
) |
|
|
Accounts payable and accrued expenses
|
|
|
665,409 |
|
|
|
725,673 |
|
|
|
(147,523 |
) |
|
|
Accrued wind-down expenses
|
|
|
1,705,045 |
|
|
|
1,891,620 |
|
|
|
437,833 |
|
|
|
Deferred rent
|
|
|
(372,400 |
) |
|
|
(429,218 |
) |
|
|
1,123,943 |
|
|
|
Deposits
|
|
|
|
|
|
|
128,180 |
|
|
|
103,345 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(11,273,908 |
) |
|
|
(8,543,196 |
) |
|
|
(10,087,305 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(676,138 |
) |
|
|
(189,733 |
) |
|
|
(222,335 |
) |
Acquisition of other assets
|
|
|
(72,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(748,305 |
) |
|
|
(189,733 |
) |
|
|
(222,335 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
39,640,178 |
|
|
|
16,130,347 |
|
|
|
1,128,644 |
|
Proceeds from the exercise of stock options
|
|
|
45,379 |
|
|
|
30,085 |
|
|
|
9,335 |
|
Proceeds from the exercise of warrants
|
|
|
582,398 |
|
|
|
1,647,000 |
|
|
|
|
|
Repayments of capital lease obligations
|
|
|
(30,830 |
) |
|
|
|
|
|
|
|
|
Repayments of debt obligations
|
|
|
(237,083 |
) |
|
|
(229,167 |
) |
|
|
(289,167 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
40,000,042 |
|
|
|
17,578,265 |
|
|
|
848,812 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
27,977,829 |
|
|
|
8,845,336 |
|
|
|
(9,460,828 |
) |
Cash and cash equivalents at beginning of year
|
|
|
13,081,703 |
|
|
|
4,236,367 |
|
|
|
13,697,195 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
41,059,532 |
|
|
$ |
13,081,703 |
|
|
$ |
4,236,367 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
191,006 |
|
|
$ |
207,112 |
|
|
$ |
226,723 |
|
57
StemCells, Inc.
Consolidated Statements of Cash
Flows (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for licensing agreements
|
|
$ |
17,833 |
(1) |
|
$ |
3,920 |
(2) |
|
$ |
35,000 |
(3) |
|
Conversion of 6% cumulative preferred stock
|
|
|
|
|
|
|
|
|
|
$ |
1,505,707 |
(4) |
|
Conversion of 3% cumulative preferred stock
|
|
|
|
|
|
$ |
4,725,597 |
(5) |
|
|
|
|
|
Dividends paid to 3% convertible preferred stock holders in
stock
|
|
|
|
|
|
$ |
68,497 |
(6) |
|
$ |
129,270 |
(6) |
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
$ |
1,067,579 |
(7) |
|
$ |
1,280,004 |
(7) |
|
|
[1] |
Under the terms of a license agreement with the California
Institute of Technology (Cal Tech), fees of $10,000 and $5,000
were due on the issuance of two patents to which StemCells holds
a license from Cal Tech, payable in cash or stock at the
Companys choice. Company elected to pay the fees in stock
and issued 9,535 unregistered shares to Cal Tech. Part payment
in stock (1,816 shares) of $2,833 as part of an option
agreement with the Board of Trustees of the Leland Stanford
Junior University to acquire an exclusive license to an
invention. |
|
[2] |
Under the terms of an amended license agreement with the Oregon
Health Sciences University (OHSU), 4,000 shares of stock
were due to OHSU on execution of the amended agreement. |
|
[3] |
In August 2002 we acquired a license from Cal Tech, pursuant to
which we issued 27,535 shares of our common stock with a
market value of approximately $35,000 |
|
[4] |
1,500 shares of 6% cumulative convertible preferred stock
including accumulated dividends was converted for
1,252,444 shares of common stock with a market value of
$1,505,707. The total of the accumulated dividends was $222,457. |
|
[5] |
4,000 shares of the 3% cumulative convertible preferred
stock was converted for 3,500,000 shares of the
Companys common stock with a market value of $4,725,597. |
|
[6] |
Accumulated dividends to 3% convertible preferred stock
holders was paid in stock with a total market value of $129,270
(97,969 shares) and $68,497(49,809 shares) in 2002 and
2003 respectively. |
|
[7] |
See note 9 under 3% Cumulative Redeemable Convertible
Preferred Stock |
See accompanying notes to consolidated financial
statements.
58
StemCells, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
|
|
1. |
Summary of Significant Accounting Policies |
StemCells, Inc., a Delaware corporation, (the Company) is a
biopharmaceutical company that operates in one segment, engaged
in the development of novel stem cell therapies designed to
treat human diseases and disorders.
The accompanying consolidated financial statements have been
prepared on the basis that the Company will continue as a going
concern. Since inception, the Company has incurred annual losses
and negative cash flows from operations and has an accumulated
deficit of approximately $174.2 million at
December 31, 2004. The Company has not derived revenues
from the sale of products, and does not expect to receive
revenues from product sales for at least several years. It may
not be able to realize sufficient revenues to achieve or sustain
profitability in the future.
StemCells expects to incur additional operating losses over the
next several years. The Company has very limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain its product development efforts,
for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, for general and
administrative expenses and other working capital requirements.
StemCells relies on cash reserves and proceeds from equity and
debt offerings, proceeds from the transfer or sale of
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund its
operations. If the Company exhausts its cash reserves and is
unable to realize adequate financing, it may be unable to meet
operating obligations and be required to initiate bankruptcy
proceedings. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome
of this uncertainty.
In connection with the filing of the Annual Report on
Form 10-K for the year ended December 31, 2003, the
Company restated its financial statements for the year ended
December 31, 2002 related to the accounting for wind-down
expenses for the Companys former corporate headquarters in
Rhode Island and lease incentives related to its current
facilities in California.
|
|
|
Principles of Consolidation |
The consolidated financial statements include accounts of the
Company and StemCells California, Inc., a wholly owned
subsidiary. Significant inter-company balances and transactions
have been eliminated on consolidation.
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements. Actual results could differ
from these estimates. The significant estimates include the
accrued wind-down expenses (Note 7) and valuation allowance
against deferred tax assets (Note 11).
|
|
|
Cash and Cash Equivalents |
The Company considers cash equivalents to be only those
investments that are highly liquid, readily convertible to cash
and which mature within three months from the date of purchase.
59
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
Comprehensive Income (Loss) |
Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). The Company has no items
of other comprehensive income therefore comprehensive income
(loss) equals net income (loss).
|
|
|
Property, Plant and Equipment |
Property, plant and equipment, including that held under capital
lease obligations, is stated at cost and depreciated using the
straight-line method over the estimated life of the respective
asset, or the lease term if shorter, as follows:
|
|
|
|
|
Building and improvements
|
|
|
3 20 years |
|
Machinery and equipment
|
|
|
3 10 years |
|
Furniture and fixtures
|
|
|
3 10 years |
|
Leasehold improvements are amortized on a straight-line basis
over the shorter of their estimated useful lives or lease terms.
The Company adopted FAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets, at the
beginning of 2002. As permitted by the transition rules of
FAS No. 144, long-lived assets classified as held for
sale as a result of activities that were initiated prior to this
Statements initial application shall continue to be
accounted for in accordance with FAS No. 121. If
however, the criteria for classifying long-lived assets held for
sale under FAS No. 144 are not met by the end of the
fiscal year in which this Statement is initially applied, the
related long-lived assets shall be reclassified as held and
used. At December 31, 2002, the criteria under
FAS No. 144 for classifying the Companys
long-lived assets held for sale were not met and accordingly,
such assets with a fair value of $3,203,491 at December 31,
2001 were reclassified as held and used on the balance sheet for
all periods presented and are included in Property, Plant and
Equipment, net. Depreciation of these assets resumed
January 1, 2003.
Prior to fiscal year 2001, the Company capitalized certain
patent costs related to patent applications. Accumulated costs
were 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 charged to expense at the time such
patents are deemed to have no continuing value. Since 2001 the
Company expenses all patent costs as incurred. At
December 31, 2004 and 2003, total costs capitalized
amounted to $980,000 and the related accumulated amortization
was $292,000 and $236,000, respectively. Patent related expenses
totaled $753,000, $665,000, and $650,000 in 2004, 2003 and 2002
respectively. License costs are capitalized and amortized over
the period of the license agreement.
The Companys employee stock option plan is accounted for
under Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees. 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. In these circumstances and in accordance with
APB 25, the Company recognizes no compensation expense for
qualified stock option grants. The Company also issues
non-qualified stock options for a fixed number of shares to
employees with an exercise price less than the fair market value
of the shares at the date of grant. When such options vest, the
Company recognizes the difference between the exercise price and
fair market value at date of grant as compensation expense in
accordance with APB 25.
60
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
For purposes of disclosures pursuant to Statement of Financial
Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (FAS 123) as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, (FAS 148), the estimated
fair value of options is amortized to expense over the
options vesting period. The following table illustrates
the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss applicable to common stockholders as
reported
|
|
$ |
(15,330,299 |
) |
|
$ |
(14,425,160 |
) |
|
$ |
(13,275,986 |
) |
Add: Stock-based employee/director compensation expense included
in reported net loss
|
|
|
33,868 |
|
|
|
242,548 |
|
|
|
143,002 |
|
Deduct: Total stock-based employee/director compensation expense
under the fair value based method for all awards
|
|
|
(819,317 |
) |
|
|
(960,166 |
) |
|
|
(619,631 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders pro forma
|
|
$ |
(16,115,748 |
) |
|
$ |
(15,142,778 |
) |
|
$ |
(13,752,615 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share applicable to common
stockholders as reported
|
|
$ |
(0.31 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.53 |
) |
Basic and diluted net loss per share applicable to common
stockholders pro forma
|
|
$ |
(0.32 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.55 |
) |
Shares used in Basic and Diluted loss per share amounts
|
|
|
49,606,277 |
|
|
|
32,080,233 |
|
|
|
25,096,252 |
|
The effects on pro forma net loss and net loss per share of
expensing the estimated fair value of stock options are not
necessarily representative of the effects on reporting the
results of operations for future years. 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.
The Company accounts for stock options granted to non-employees
in accordance with FAS No. 123 and Emerging Issues
Task Force (EITF) 96-18 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 expense the
estimated fair value of such options as calculated using the
Black-Scholes valuation model. The fair value is re-measured
during the service period and is amortized over the vesting
period of each option or the recipients contractual
arrangement, if shorter. The expense recorded for the issuance
of options to non-employees for the years ended
December 31, 2004, 2003 and 2002 was $829,569, $251,206,
and $(469,088), respectively.
In December 2004, FASB issued SFAS No. 123R (revised
2004), Share-Based Payment. This Statement is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation and amends SFAS No. 95, Statement
of Cash Flows This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. Upon the adoption of
SFAS No. 123R the Company will be required to expense
stock options in its Statement of Operations. Among other items,
the new standard requires the expensing of stock options issued
by the Company in the financial statements using a
fair-value-based method. The provisions of SFAS 123R are
effective for the first interim or annual reporting period that
begins after June 15, 2005; the Company will therefore
adopt the new requirements no later than the beginning of its
third quarter of fiscal 2005. Adoption of the expensing
requirements will reduce the Companys reported earnings.
61
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company routinely evaluates the carrying value of its
long-lived assets. The Company records impairment losses on
long-lived assets used in operations when events and
circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets
are less than the carrying amount of those assets. If an
impairment exists, the charge to operations is measured as the
excess of the carrying amount over the fair value of the assets.
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 tax credits carryforwards and are measured using
the enacted tax rates and 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.
Revenues from collaborative agreements and grants are recognized
as earned upon either the incurring of reimbursable expenses
directly related to the particular research plan or the
completion 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. The Company recognizes non-refundable upfront license
fees and certain other related fees on a straight-line basis
over the development period. Fees associated with substantive at
risk, performance based milestones are recognized as revenue
upon their completion, as defined in the respective agreements.
Incidental assignment of technology rights are recognized as
revenue at time of receipt.
|
|
|
Recent Accounting Pronouncements |
In June 2002, the FASB issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 provides guidance related to accounting
for costs associated with disposal activities covered by
SFAS No. 144 and with one-time termination benefits
and other exit or restructuring activities previously covered by
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 supersedes
EITF Issue No. 94-3 in its entirety. Under
SFAS No. 146, the following conditions must be met for
an action to qualify as an exit or disposal plan: management
having the authority to approve the action commits to a plan of
termination; the plan identifies the number of employees to be
terminated, their job classifications or functions and their
locations, and the expected completion date; the plan
establishes the terms of the benefit arrangement including the
benefits that employees will receive upon termination (including
but not limited to cash payments) in sufficient detail to enable
employees to determine the type and amount of benefits they will
receive if they are involuntarily terminated; and actions
required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan
will be withdrawn. SFAS No. 146 was effective in 2003
and will be applied prospectively to qualifying exit or disposal
activities initiated after December 31, 2002.
In January 2003, the FASB issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51(FIN 46).
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. The Company
does not believe it has
62
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
any investments in variable interest entities and does not
anticipate any impact with the adoption of this interpretation.
In May 2003, the FASB issued SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, (SFAS 150). SFAS 150
establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. SFAS 150 must be applied
immediately to instruments entered into or modified after
May 31, 2003. The adoption of SFAS 150 did not have a
material effect on the Companys results of operations or
financial position.
In December 2004, FASB issued SFAS No. 123R (revised
2004), Share-Based Payment. This Statement is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation and amends SFAS No. 95, Statement
of Cash Flows This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. Upon the adoption of
SFAS No. 123R the Company will be required to expense
stock options in its Statement of Operations. Among other items,
the new standard would require the expensing of stock options
issued by the Company in the financial statements using a
fair-value-based method. The new standard is effective as of the
beginning of the first interim or annual reporting period that
begins after June 15, 2005. FASB is encouraging companies
to begin applying the new expensing requirements as of the
beginning of 2005 The Company is considering expensing stock
options as of the beginning of 2005. See Stock-based
Compensation in this Note 1 for disclosures regarding
the effect on net earnings and earnings per share if the Company
had applied the fair value recognition provisions of
SFAS No. 123R
|
|
|
Research and Development Costs |
The Company expenses all research and development costs as
incurred. Research and Development costs include costs of
personnel, external services, supplies, facilities and
miscellaneous other costs.
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding
during the period. Basic earnings per share excludes any
dilutive effects of options, shares subject to repurchase,
warrants and convertible securities. Diluted earnings per share
includes the impact of potentially dilutive securities if
dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss applicable to common stockholders
|
|
$ |
(15,330,299 |
) |
|
$ |
(14,425,160 |
) |
|
$ |
(13,275,986 |
) |
Weighted average shares used in computing basic and diluted net
loss per share amounts
|
|
|
49,606,277 |
|
|
|
32,080,233 |
|
|
|
25,096,252 |
|
Basic and diluted net loss per share applicable to common
stockholders
|
|
$ |
(0.31 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.53 |
) |
The Company has excluded outstanding stock options and warrants
from the calculation of diluted loss per common share because
all such securities are anti-dilutive for all applicable periods
presented. These outstanding securities consist of the following
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
2,000,000 |
|
Outstanding options
|
|
|
6,682,201 |
|
|
|
5,025,374 |
|
|
|
4,294,050 |
|
Outstanding warrants
|
|
|
5,490,285 |
|
|
|
2,101,074 |
|
|
|
1,074,593 |
|
63
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
2. |
Property, Plant and Equipment |
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Building and improvements
|
|
$ |
3,308,098 |
|
|
$ |
3,918,889 |
|
Machinery and equipment
|
|
|
2,737,971 |
|
|
|
2,231,189 |
|
Furniture and fixtures
|
|
|
339,458 |
|
|
|
339,458 |
|
|
|
|
|
|
|
|
|
|
|
6,385,527 |
|
|
|
6,489,536 |
|
Less accumulated depreciation and amortization
|
|
|
(2,961,233 |
) |
|
|
(2,878,134 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,424,294 |
|
|
$ |
3,611,402 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $933,000, $916,000,
and $307,000 for the years ended December 31, 2004, 2003
and 2002, respectively. In 2004 leasehold improvements related
to a previous facility with a net book value of $0 (carrying
cost of $705,000 and accumulated depreciation of $705,000) were
written off. In addition obsolete or unusable miscellaneous lab
equipment with a net book value of $55,000 was disposed and
written off.
The Company adopted FAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets, at the
beginning of 2002. As permitted by the transition rules of
FAS No. 144, long-lived assets classified as held for
sale as a result of activities that were initiated prior to this
Statements initial application shall continue to be
accounted for in accordance with FAS No. 121. If
however, the criteria for classifying long-lived assets held for
sale under FAS No. 144 are not met by the end of the
fiscal year in which this Statement is initially applied, the
related long-lived assets shall be reclassified as held and
used. At December 31, 2002, the criteria under
FAS No. 144 for classifying the Companys
long-lived assets held for sale were not met and accordingly,
such assets with a fair value of $3,203,491 at December 31,
2001 were reclassified as held and used on the balance sheet for
all periods presented and are included in building and
improvements. Depreciation of these assets resumed in 2003.
Other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Patents, net
|
|
$ |
687,567 |
|
|
$ |
743,370 |
|
License agreements, net
|
|
|
376,274 |
|
|
|
334,850 |
|
Security deposit building lease
|
|
|
752,500 |
|
|
|
752,500 |
|
Restricted Cash-(Letter of Credit)
|
|
|
937,078 |
|
|
|
937,078 |
|
|
|
|
|
|
|
|
|
|
$ |
2,753,419 |
|
|
$ |
2,767,798 |
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003, accumulated amortization was
$1,590,000 and $1,485,000, respectively, for patents and license
agreements.
64
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
External services
|
|
$ |
639,989 |
|
|
$ |
268,545 |
|
Employee compensation
|
|
|
834,039 |
|
|
|
620,340 |
|
Other
|
|
|
73,342 |
|
|
|
152,265 |
|
|
|
|
|
|
|
|
|
|
$ |
1,547,370 |
|
|
$ |
1,041,150 |
|
|
|
|
|
|
|
|
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. Interest rates vary
with the respective bonds maturities, ranging from 8.1% 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. The Company entered into a
fifteen-year lease for a laboratory facility in connection with
a sale and leaseback arrangement in 1997. The lease has
escalating rent payments and accordingly, the Company is
recognizing rent expense on a straight-line basis. At
December 31, 2004, the Company had $1,177,000 in deferred
rent expense for this facility which is presented as part of the
wind-down accrual.
As of February 1, 2001, the Company entered into a 5-year
lease for a 40,000 square foot facility located in the
Stanford Research Park in Palo Alto, California. The facility
includes space for animals, laboratories, offices, and a suite
designed for manufacture of cells for use in clinical trials. On
December 19, 2002 the Company negotiated an amendment to
the lease, which resulted in reducing the average annual rent
over the remaining term of the lease from approximately
$3.7 million to $2.0 million. As part of the amendment
the Company issued a letter of credit on January 2, 2003
for $503,000, which was in addition to the letter of credit
amounting to $275,000 issued at commencement of the lease to
serve as a deposit for the duration of the lease. The lease has
a rent escalation clause and accordingly, the Company is
recognizing rent expense on a straight-line basis. At
December 31, 2004 the Company had $524,000 in deferred rent
expense for this facility included in accrued expenses.
65
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
As of December 31, 2004, future minimum lease payments and
sublease income under operating and capital leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital | |
|
Operating | |
|
Sublease | |
|
|
Leases(1) | |
|
Leases | |
|
Income | |
|
|
| |
|
| |
|
| |
2005
|
|
$ |
472,680 |
|
|
$ |
3,007,630 |
|
|
$ |
1,421,012 |
|
2006
|
|
|
445,486 |
|
|
|
1,115,186 |
|
|
|
791,454 |
|
2007
|
|
|
332,545 |
|
|
|
937,500 |
|
|
|
73,068 |
|
2008
|
|
|
244,531 |
|
|
|
1,171,875 |
|
|
|
|
|
2009
|
|
|
244,572 |
|
|
|
1,171,875 |
|
|
|
|
|
Thereafter
|
|
|
1,099,991 |
|
|
|
4,248,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
2,839,805 |
|
|
$ |
11,652,113 |
|
|
$ |
2,285,534 |
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
896,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
1,943,492 |
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
297,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized lease obligations, less current maturities
|
|
$ |
1,646,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes Bonds payable |
Rent expense for the years ended December 31, 2004, 2003
and 2002, was $1,109,000, $1,040,000 and $2,565,000 respectively.
In February 2001, the Company was awarded a two-year,
$300,000 per year grant from the National Institutes of
Healths Small Business Innovation Research
(SBIR) office. The grant, which will support joint work
with virologist Dr. Jeffrey Glenn at Stanford University,
is aimed at characterizing the human cells that can be infected
by human hepatitis viruses and to develop a small animal model
using the cells that are most infectable by these viruses to
develop screening assays and identify novel drugs for the
disease. For each of 2001 and 2002, the Company received
$300,000, of which $150,367 represents the Companys share
of the joint effort and has been recognized as revenue. The
remainder, $149,633, was paid to Stanford University as its
share of the joint effort each year of the grant.
On September 30, 2001, the Company was awarded a four-year,
$225,000 per year grant from the National Institute of
Diabetes & Digestive & Kidney Disorders of the
National Institutes of Health for the Companys liver stem
cell program which focuses on identifying liver stem and
progenitor cells for the treatment of liver diseases. The grant
is subject to the availability of funds and satisfactory
progress of the project. For this award, the Company has
recognized $56,000, $225,000 and $112,000 as grant revenue for
2001, 2002 and 2003 respectively. The Company did not draw
further funds in 2004 from this grant as it will no longer
pursues the particular research it covered.
In September 2003 the Company was awarded a one year, $342,000
Small Business Innovation Research grant from the National
Institute of Neurological Disease and Stroke (NINDS), to further
its work in the treatment of spinal cord injuries. For this
award, the Company has recognized $143,000 and $93,000 as grant
revenue for 2003 and 2004, respectively. The remaining $106,000
will go towards reimbursing a subcontractor
In September 2004 the Company was awarded a Small Business
Technology Transfer (STTR) grant for approximately $464,000
over one and one half years for studies in Alzheimers
disease. The grant will support joint work with Dr. George
A. Carlson of the McLaughlin Research Institute (MRI) in
Great Falls, Montana.
66
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company will receive $243,000 and the remainder of $221,000
will be reimbursed to MRI. The Company has recognized $26,000 as
grant revenue for 2004.
|
|
7. |
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. 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 California, in October 1999.
In 1999 the Company established a reserve for the estimated
lease payments and operating costs of the Rhode Island
facilities through an expected disposal date of June 30,
2000. The Company did not fully sublet the Rhode Island
facilities in 2000 and therefore made a change in estimate to
accrue additional expenses of $3,327,000 to cover operating
lease payments, utilities, taxes, insurance, maintenance,
interest and other non-employee expenses through 2001. In the
year 2001 the Company paid $1,780,000 of expenses, which were
recorded against the reserve. At December 31, 2001 the
Company revised its estimate and recorded an additional reserve
of $575,000 as operating expenses net of subtenant income for
its former corporate headquarters in Rhode Island. This reserve
was based on information provided by the Companys
broker/realtor that estimated, based on assumptions relevant to
the real estate market conditions as of the end of 2001, the
time it would be likely to take until the facility would be
fully sub-leased. In 2002, the Company incurred $964,000 in
operating expenses for this facility, of which $575,000 was
booked against the reserve created at the end of 2001 and the
remainder recorded as wind-down expenses. At the end of December
2002 based on an analysis of the real estate market conditions
at that time the Company revised the reserve to $775,000. In
2003 the Company incurred $984,000 in operating expenses for
this facility of which $775,000 was recorded against the reserve
and the remainder was recorded as wind-down expenses. At the end
of 2003, after considering various factors such as the
Companys lease payments through to the end of the lease,
operating expenses, the current real estate market in Rhode
Island, and estimated subtenant income based on occupancy both
actual and projected, the Company revised the reserve at
December 31, 2003 to $2,676,000. In 2004, the Company
recorded $1,152,000 in operating expenses against the reserve.
After evaluating the aforementioned factors, at the end of each
quarter March 31, 2004, June 30, 2004 and
September 30, 2004 and December 31, 2004
the Company re-evaluated its estimate and adjusted the reserve
to $2,510,000, $2,680,000, $3,743,000 and $4,350,000
respectively, by recording an additional $130,000 at
March 31, 2004, $468,000 at June 30, 2004, $1,345,000
at September 30, 2004 and $883,000 at December 31,
2004 as wind-down expenses. Even though it is the intent of the
Company to dispose the facility at the earliest possible time,
it cannot determine with certainty a fixed date by which such
disposal will occur. In light of this uncertainty, based on
estimates, the Company will periodically re-evaluate and adjust
the reserve.
67
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Covered | |
|
|
| |
|
|
January to | |
|
April to | |
|
July to | |
|
October to | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Accrued wind-down reserve at beginning of period
|
|
$ |
2,676,000 |
|
|
$ |
2,510,000 |
|
|
$ |
2,680,000 |
|
|
|
3,743,000 |
|
Less actual expenses recorded against estimated reserve during
the period
|
|
|
(296,000 |
) |
|
|
(298,000 |
) |
|
|
(282,000 |
) |
|
|
(276,000 |
) |
Additional expense recorded to revise estimated reserve at
period-end
|
|
|
130,000 |
|
|
|
468,000 |
|
|
|
1,345,000 |
|
|
|
883,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised reserve at period-end
|
|
|
2,510,000 |
|
|
|
2,680,000 |
|
|
|
3,743,000 |
|
|
|
4,350,000 |
|
Add deferred rent at period end
|
|
|
1,155,000 |
|
|
|
1,162,000 |
|
|
|
1,170,000 |
|
|
|
1,178,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end (current and non
current portion)
|
|
$ |
3,665,000 |
|
|
$ |
3,842,000 |
|
|
$ |
4,913,000 |
|
|
$ |
5,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Portion
|
|
$ |
729,000 |
|
|
$ |
993,000 |
|
|
$ |
1,039,000 |
|
|
$ |
1,013,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current portion
|
|
|
2,936,000 |
|
|
|
2,849,000 |
|
|
|
3,874,000 |
|
|
|
4,515,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued wind-down expenses
|
|
$ |
3,665,000 |
|
|
$ |
3,842,000 |
|
|
$ |
4,913,000 |
|
|
$ |
5,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
Consulting Arrangements |
In September 1997, the Company entered into consulting
arrangements with the principal scientific founders of StemCells
California, Dr. Irving Weissman, Dr. Fred H. Gage and
Dr. David Anderson and with Dr. Richard M. Rose, then
President and CEO of the StemCells California. To attract and
retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Companys stem cell program,
the Company awarded these individuals options to acquire a total
of approximately 1.6 million shares of the Companys
common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date. The Company 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. 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 Companys stem cell development program and
the remaining 468,750 options would vest over eight years. In
connection with the 468,750 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. For
Dr. Andersons options the Company recorded an expense
of $62,000, $49,000 and $50,000 for the years 2004, 2003 and
2002 respectively. The deferred compensation expense associated
with the unvested portion of Dr. Andersons grants as
of December 31, 2004 was $807,000. The fair value was
determined using the Black-Scholes method.
Effective October 31, 2000, the Company agreed with
Drs. Weissman and Gage to revise their
468,750 milestone-vesting stock options to time-based
vesting, on the same schedule as Dr. Andersons
option. Under each of the revised options, 168,750 shares
vested immediately, and the remaining 300,000 shares will
vest at 50,000 per year on September 25, until
September 25, 2005, when the final 100,000 shares will
vest. The exercise price remains $5.25 per share. The
Company recorded an expense of $305,000, $164,000 and a recovery
of $419,000 for the years 2004, 2003 and 2002 respectively, as
compensation expense for the fair market value of the vested
portion of such options in an amount determined using the
Black-Scholes method.
68
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The deferred compensation expense associated with the unvested
portion of the grants was determined to be approximately $79,000
at December 31, 2004. As part of the revision of the
options, Drs. Weissman and Gage relinquished all rights
under an agreement by whose terms they had the right to license
the non-brain stem cell technology in exchange for a payment to
the Company equal to all prior funding for such research plus
royalty payments. The Company plans to revalue the options using
the Black-Scholes method on a quarterly basis and recognize
additional or reduced compensation expense accordingly.
On August 23, 2002, the Company entered into an agreement
with Triton West Group, Inc. (Triton) pursuant to which the
Company sold 1,028,038 shares of common stock to Triton for
aggregate proceeds of $1,100,000, or approximately
$1.07 per share.
On May 7, 2003, the Company entered into a stock purchase
agreement with Riverview, under which Riverview agreed to
purchase 4 million shares of the Companys common
stock for $6.5 million, or $1.625 per share. On the
date of the agreement, the sale price was above the trading
price of the Companys common stock, which closed at
$1.43 per share on that date. The Company also agreed to
issue a 2-year warrant to Riverview to
purchase 1,898,000 shares of common stock at
$1.50 per share. The exercise price is subject to
adjustment for stock splits, dividends, distributions,
reclassifications and similar events. On May 15, 2003 the
Company issued the purchased shares and the warrant, and
registered the resale of the purchased shares and the shares
underlying the warrant. The exercise price may be below the
trading market price at the time of the exercise. In the event
that certain conditions are met, including the closing sale
price of the Common Stock remaining at or above $2.50 per
share for 10 consecutive trading days, the Company may require
Riverview to exercise the warrant for any remaining shares or to
relinquish any unexercised portion. On November 11, 2003,
Riverview exercised part of the warrant acquiring
1,098,000 shares at $1.50 per share. The proceeds to
the Company from this warrant exercise totaled $1,647,000. The
warrant is exercisable for the remaining 800,000 shares
until April 8, 2005, subject to the Companys right to
require exercise or forfeiture as described above.
On December 10, 2003 the Company completed a
$9.5 million financing transaction with Riverview through
the sale of 5 million shares of common stock at a price of
$1.90 per share.
In June 2004, the Company entered into an agreement with
institutional and other accredited investors with respect to the
private placement of approximately 13,160,000 shares of its
common stock at a purchase price of $1.52 per share, for
gross proceeds of approximately $20,000,000. Investors also
received warrants exercisable for five years to purchase
approximately 3.3 million shares of common stock at an
exercise price of $1.90 per share. During the period
October 2004 to December 2004, 306,525 of these warrants were
exercised to purchase an aggregate of 306,525 shares of the
Companys common stock at $1.90 per share. The Company
issued 306,525 shares of its common stock and received
proceeds of $582,000. C.E. Unterberg, Towbin LLC (Unterberg)
served as placement agent for the transaction. For acting as the
Companys placement agent, Unterberg received fees totaling
$1,200,000, expense reimbursement of approximately $25,000 and a
five year warrant, with a fair value of $810,656, to
purchase 526,400 shares of the Companys common
stock at an exercise price of $1.89 per share.
In October 2004, the Company entered into agreements with
institutional investors with respect to the registered direct
placement of 7,500,000 shares of its common stock at a
purchase price of $3.00 per share, for gross proceeds of
$22,500,000. Unterberg and Shoreline Pacific, LLC (Shoreline)
served as placement agents for the transaction. For acting as
the Companys placement agent, Unterberg and Shoreline
received fees totaling $1,350,000 and expense reimbursement of
approximately $40,000.
69
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
On May 10, 2001, the Company entered into a common stock
purchase agreement with Sativum Investments Limited for the
potential future issuance and sale of up to $30,000,000 of the
Companys common stock, subject to restrictions and other
obligations. Under the agreement, which expired in January 2004,
the Company had the right to draw down on the facility, from
time to time, and Sativum was obligated to purchase shares of
the Companys common stock at a 6% discount to a volume
weighted average market price over the 20 trading days following
the draw-down notice. There was neither a requirement that the
Company draw on the facility nor a penalty for not doing so. The
Company was limited with respect to how often it could exercise
a draw down and the amount of each draw down.
In connection with the Companys execution of the common
stock purchase agreement with Sativum, the Company issued three
three-year warrants to purchase an aggregate of
350,000 shares of the Companys common stock at
$2.38 per share to Sativum (250,000 shares), and to
the placement agents: Pacific Crest Securities Inc.
(75,000 shares) and Granite Financial Group, Inc.
(25,000 shares). The placement agents have exercised their
warrants in full, and the Company received payment of $238,050
for the shares issued to them in July 2001. The Company has
valued the warrants using the Black-Scholes method and recorded
the fair value in stockholders equity. These amounts are
$522,500, $167,750 and $55,250 respectively. The exercise price
and number of shares are subject to adjustment for subdivisions,
combinations, stock dividends and reorganizations.
The Company did draw down $4,000,000 by issuance of
707,947 shares in July of 2001, $118,000 by issuance of
107,812 shares in December of 2002, $66,000 by issuance of
58,516 shares in January of 2003, and $375,000 by issuance
of 245,472 shares in May of 2003, before applicable fees.
|
|
|
3% Cumulative Redeemable Convertible Preferred
Stock |
On December 4, 2001, the Company issued 5,000 shares
of 3% cumulative convertible preferred stock to Riverview Group,
L.L.C., (Riverview Group), a wholly owned subsidiary of
Millennium Partners, L.P. plus a 5-year warrant to
purchase 350,877 shares of common stock at
$3.42 per share. The Company received net proceeds of
$4,727,515. This preferred stock was convertible into shares of
the Companys common stock at a conversion price of
$2.00 per share at the option of Riverview Group mandatory
redemption feature requiring the Company to redeem unconverted
preferred stock on December 4, 2003. The conversion price
of $2 per share was subject to adjustment for stock splits,
dividends, distributions, reclassifications and similar events.
The final closing price of the Companys common stock on
the NASDAQ National Market on the December 4, 2001
commitment date was $2.90 per share. The Company valued the
warrants and the beneficial conversion feature reflecting the
December 4, 2001 commitment date and the most beneficial
per share discount available to the preferred shareholders. As
the preferred shares contained a stated redemption, such value
of $3,185,000, including issuance costs of $272,485, was
recorded as a discount to the preferred shares. The preferred
shares were accreted to the mandatory redemption amount and the
accretion resulted in a deemed dividend. The deemed dividend has
been reflected as an adjustment to net loss applicable to common
stockholders. The holders of the preferred stock had liquidation
rights equal to their original investment plus accrued but
unpaid dividends. Dividends due on the shares of the preferred
stock outstanding on a Dividend Payment Date (June 30 and
December 31) could be paid in the Companys common
stock if the Company so elected by those dates. The Company did
elect to pay the dividends in stock, and did so by issuing
38,313 shares of stock on July 3, 2002,
59,656 shares on December 23, 2002 and
17,935 shares June 30, 2003, valued at approximately
$60,000, $69,000 and $30,000 respectively.
70
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Riverview Group converted all of its holdings of the
Companys 3% cumulative convertible preferred stock as
follows:
|
|
|
|
|
On December 7, 2001, 1,000 shares of the 3% cumulative
convertible preferred stock were converted into
500,125 shares of the Companys common stock. |
|
|
|
On April 9, 2003, the Company agreed with Riverview to
reduce the conversion price to $0.80 per share for a period
of 20 trading days. Riverview immediately agreed to convert
2,000 shares with a face value of $2 million, at the
reduced price. Riverview received 2,521,041 shares of
common stock upon conversion, which includes 21,041 shares
valued at $16,833 as accrued dividends. As a result of the
change in the conversion price, the Company recorded a deemed
dividend to preferred shareholders related to the beneficial
conversion feature of approximately $1,000,000 in the second
quarter of 2003. |
|
|
|
On November 11, 2003, Riverview converted the remaining
2,000 shares of its 3% cumulative convertible preferred
stock for 1,010,833 shares of the Companys common
stock, which includes 10,833 shares valued at $21,666 as
accrued dividends. |
The Company recorded deemed dividends related to the 3%
cumulative convertible preferred stock of $2,065,911 and
$1,280,004 in 2003 and 2002. As all of the 3% cumulative
convertible preferred stock was converted prior to
December 31, 2003, no deemed dividends were recorded in
2004.
|
|
|
6% Cumulative Convertible Preferred Stock |
On April 13, 2000 the Company issued 1,500 shares of
6% cumulative convertible preferred stock plus a warrant for
75,000 shares of 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 were initially 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 was
subject to adjustment upon certain equity transactions, as
defined by the applicable agreement. The Company 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 $481,000
and was treated as a deemed dividend as of the commitment date.
The holders of the preferred stock had liquidation rights equal
to their original investment plus accrued but unpaid dividends.
During the first and second quarters of 2001, the conversion
price was reduced as a result of the issuance of adjustable
warrants to Millennium LP, as described above. The Company
revalued the beneficial conversion feature reflecting the
reduced conversion prices and the most beneficial per share
discount available to the preferred shareholders and recorded
additional deemed dividends aggregating $802,000 as of the
applicable reset dates.
On June 7, 2002, one of the preferred stockholders
converted 750 shares of 6% cumulative convertible preferred
stock plus accumulated dividends, at an effective conversion
price of $1.94 per share for 439,442 shares of common
stock. On October 4, 2002, the remaining 750 shares,
which were held by the other preferred shareholder, together
with accumulated dividends, converted automatically at the
then-effective conversion price of $1.07 to 812,802 shares
of common stock. The accumulated dividends were paid in common
stock with a value of $222,457. No 6% cumulative convertible
preferred stock outstanding as of December 31, 2004.
|
|
|
Stock Issued For Technology Licenses |
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
71
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
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.
Effective in 2004, the Company began making annual $50,000
payments, creditable against royalties.
Pursuant to the terms of a license agreement with the California
Institute of Technology (Cal Tech) and the Companys
acquisition of its wholly owned subsidiary, StemCells
California, StemCells issued 14,513 shares of common stock
to Cal Tech. The Company issued an additional 12,800 shares
of common stock to Cal Tech with a market value of approximately
$40,000 in May 2000, upon execution of an amendment adding four
families of patent applications to the license agreement. The
Company must pay an additional $10,000 upon the issuance of each
of the four patents licensed under the amended agreement. These
amounts are creditable against royalties the Company must pay
under the license agreements. The maximum royalties that the
Company will have to pay to the California Institute of
Technology will be $2 million per year, with an overall
maximum of $15 million. Once the Company pays the
$15 million maximum royalty, the licenses will become fully
paid and irrevocable. In August 2002 the Company acquired an
additional license from Cal Tech to a different technology,
pursuant to which the Company issued 27,535 shares of its
common stock with a market value of approximately $35,000; the
Company also issued 9,535 shares of its common stock with a
market value of approximately $15,000 to Cal Tech on the
issuance of two patents covered under this additional license.
In December 2004, the Company made part payment of $2,833 in
stock (1,816 shares) as part of an option agreement with
the Board of Trustees of the Leland Stanford Junior University
to acquire an exclusive license to an invention. The remainder
of the option fee ($7,167) was paid in cash.
Upon entering a license agreement with the Oregon Health
Sciences University (OHSU) in March 1997, the Company
issued it 4,838 shares of common stock and an option to
purchase up to 62,888 additional shares to OHSU with an exercise
price of $.01 per share. The option has vested as to
9,675 shares for which shares were issued on March 31,
2002; the remaining option was terminated and the Company issued
4,000 shares of its common stock, with a market value of
approximately $3,900, to OHSU in January 2003, pursuant to an
amendment to the license agreement.
The Company has adopted several stock plans that provide for the
issuance of incentive and nonqualified stock options, various
stock and performance awards and stock appreciation rights, at
prices to be determined by the Board of Directors. In the case
of incentive stock options, such price will not be less than the
fair market value on the date of grant. Options granted to
employees generally vest ratably over four years and are
exercisable for ten years from the date of grant or within three
months of termination. The Company has paid its directors and
some of its consultants in below-market options or in stock
awards from its stock plans.
72
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table presents the combined activity of the
Companys stock option plans for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
|
|
|
Weighted Average | |
|
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at January 1
|
|
|
5,025,374 |
|
|
$ |
2.91 |
|
|
|
4,294,050 |
|
|
$ |
3.14 |
|
|
|
3,652,560 |
|
|
$ |
3.98 |
|
Granted
|
|
|
1,932,772 |
|
|
|
1.92 |
|
|
|
1,125,161 |
|
|
|
1.25 |
|
|
|
1,041,478 |
|
|
|
0.98 |
|
Exercised
|
|
|
(152,673 |
) |
|
|
0.30 |
|
|
|
(97,233 |
) |
|
|
0.31 |
|
|
|
(47,587 |
) |
|
|
0.20 |
|
Canceled
|
|
|
(123,272 |
) |
|
|
3.49 |
|
|
|
(296,604 |
) |
|
|
2.34 |
|
|
|
(352,401 |
) |
|
|
4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
6,682,201 |
|
|
|
2.67 |
|
|
|
5,025,374 |
|
|
|
2.91 |
|
|
|
4,294,050 |
|
|
|
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
3,687,243 |
|
|
$ |
2.98 |
|
|
|
3,048,940 |
|
|
$ |
3.11 |
|
|
|
2,378,778 |
|
|
$ |
3.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents weighted average price and life
information about significant option groups outstanding at
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.00
|
|
|
3,280,665 |
|
|
|
8.26 |
|
|
$ |
1.21 |
|
|
|
1,377,152 |
|
|
$ |
0.88 |
|
$2.00 - $3.99
|
|
|
1,676,597 |
|
|
|
7.55 |
|
|
$ |
2.89 |
|
|
|
964,529 |
|
|
$ |
2.80 |
|
$4.00 - $5.99
|
|
|
1,724,939 |
|
|
|
3.01 |
|
|
$ |
5.22 |
|
|
|
1,345,562 |
|
|
$ |
5.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,682,201 |
|
|
|
|
|
|
|
|
|
|
|
3,687,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted
during 2004, 2003 and 2002 was $1.64, $0.86 and $1.15,
respectively. The fair value of options at the date of grant
were estimated using the Black-Scholes model with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Expected life (years)
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Interest rate
|
|
|
3.60 |
% |
|
|
3.29 |
% |
|
|
3.03 |
% |
Volatility
|
|
|
111.6 |
% |
|
|
121.1 |
% |
|
|
171.8 |
% |
The Company has neither declared nor paid dividends on any share
of its common stock and does not expect to do so in the
foreseeable future.
73
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Company has the following shares of common stock reserved
for the exercise of options, warrants and other contingent
issuances of common stock, as of December 31, 2004:
|
|
|
|
|
Shares reserved for exercise of stock options
|
|
|
8,806,400 |
|
Shares reserved for warrants related to financing transactions
|
|
|
7,713,075 |
|
Shares reserved for compensation related to external services
|
|
|
200,000 |
|
Shares reserved for warrants related to previously converted
6% convertible preferred stock
|
|
|
158,242 |
|
Shares reserved for warrants related to previously converted
3% convertible preferred stock
|
|
|
861,345 |
|
Shelf reserve for possible future issuances of shares
|
|
|
1,471,962 |
|
|
|
|
|
Total
|
|
|
19,211,024 |
|
|
|
|
|
The Company has entered various research agreements and
collaborations with academic institutions. Under such
arrangements, 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. In
addition, StemCells occasionally makes grants to academic
institutions to support research of interest to the Company
without requesting any intellectual property interests in return.
In November 1997, 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 $225,000 in 2000. In
addition, the Company agreed to issue to Scripps
4,837 shares of the Companys common stock and a stock
option to purchase 9,674 shares of the Companys
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. The Company also entered a Sponsored Research
Agreement and a License Agreement with Oregon Health Sciences
University (OHSU) in March 1997, relating to other certain
research concerning liver repopulating cells. Under subsequent
Sponsored Research Agreements with OHSU, StemCells paid OHSU
approximately $80,500 in 2000, $105,000 in 2001 and $110,000 in
2002. In addition, the Company issued 4,838 shares of
common stock and an option to purchase up to 62,888 additional
shares to OHSU with an exercise price of $.01 per share.
The option has vested as to 9,675 shares for which shares
were issued on March 31, 2002; the remaining option was
terminated and the Company issued 4,000 shares of its
common stock, with a market value of approximately $3,900, to
OHSU in January 2003, pursuant to an amendment to the license
agreement.
In 2001, the Company entered into a collaboration with Stanford
University to pursue certain additional research funded by the
National Institutes of Health under an SBIR grant discussed
above. Pursuant to agreement, the Company paid Stanford
approximately $150,000 in each of 2001 and 2002. In 2002, the
Company entered into a research agreement with the University of
California, Irvine (Irvine), under which it paid Irvine
approximately $3,200 in 2002 and $16,000 in 2003. The Company
also entered a sponsored research agreement with the University
of Texas Medical Branch (UTMB) under which it paid UTMB
approximately $21,000 in 2002 and accrued for payment
approximately $56,000 in 2003.
In 2004, the Company made research grants totaling $61,000 to
three academic institutions.
74
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
Deferred income taxes reflect net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Capitalized research and development costs
|
|
$ |
16,046,000 |
|
|
$ |
12,540,000 |
|
Net operating losses
|
|
|
39,287,000 |
|
|
|
42,050,000 |
|
Research and development credits
|
|
|
4,742,000 |
|
|
|
4,399,000 |
|
Accrued wind down cost
|
|
|
1,740,000 |
|
|
|
1,070,000 |
|
Other
|
|
|
544,000 |
|
|
|
326,000 |
|
|
|
|
|
|
|
|
|
|
|
62,359,000 |
|
|
|
60,385,000 |
|
Valuation allowance
|
|
|
(62,359,000 |
) |
|
|
(60,385,000 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased by
$1,974,000, $3,495,000, and $4,880,000 during 2004, 2003, and
2002 respectively.
The effective tax rate as a percentage of income before income
taxes differs from the statutory federal income tax rate (when
applied to income before income taxes) for the years ended
December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Statutory federal income tax (benefit) rate
|
|
|
(34 |
)% |
|
|
(34 |
)% |
|
|
(34 |
)% |
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for taxes
|
|
|
1.9 |
|
|
|
(2.1 |
) |
|
|
(1.2 |
) |
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of State net operating losses
|
|
|
19.2 |
|
|
|
7.7 |
|
|
|
|
|
Increase in valuation allowance
|
|
|
12.9 |
|
|
|
28.4 |
|
|
|
35.2 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax (benefit) rate
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
12. |
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 total annual cash
compensation to the plan (subject to the maximums defined by
law) and the Company matches 50% of employee contributions, up
to a maximum of 6% of the employees compensation, with the
Companys common stock. The related expense was $78,000,
$60,000, and $76,000 for the years ended December 31, 2004,
2003 and 2002, respectively
75
StemCells, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
13. |
Quarterly Financial Information (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
93 |
|
|
$ |
6 |
|
|
$ |
4 |
|
|
$ |
38 |
|
|
Operating expenses
|
|
|
2,862 |
(1) |
|
|
3,284 |
(1) |
|
|
4,325 |
(1) |
|
|
5,070 |
(1) |
|
Other income (expense)
|
|
|
(1 |
) |
|
|
(25 |
) |
|
|
(17 |
) |
|
|
113 |
|
|
Net loss
|
|
|
(2,770 |
) |
|
|
(3,303 |
) |
|
|
(4,338 |
) |
|
|
(4,919 |
) |
|
Net loss applicable to common stockholders
|
|
|
(2,770 |
) |
|
|
(3,303 |
) |
|
|
(4,338 |
) |
|
|
(4,919 |
) |
|
Basic and diluted (loss) per share applicable to common
stockholders
|
|
$ |
(0.07 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
59 |
|
|
$ |
60 |
|
|
$ |
33 |
|
|
$ |
121 |
|
|
Operating expenses
|
|
|
2,409 |
|
|
|
2,743 |
|
|
|
2,451 |
|
|
|
4,817 |
(1) |
|
Other income (expense)
|
|
|
(59 |
) |
|
|
(30 |
) |
|
|
(11 |
) |
|
|
(44 |
) |
|
Net loss (before deemed dividend)
|
|
|
(2,409 |
) |
|
|
(2,713 |
) |
|
|
(2,429 |
) |
|
|
(4,740 |
) |
|
Net loss applicable to common stockholders
|
|
|
(2,729 |
) |
|
|
(3,928 |
) |
|
|
(2,599 |
) |
|
|
(5,169 |
) |
|
Basic and diluted income (loss) per share applicable to common
stockholders
|
|
$ |
(0.10 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.14 |
) |
|
|
(1) |
Includes adjustment of wind-down accrual see
note 7. |
In January 2005, a warrant issued as part of the June 16,
2004 financing arrangement, was exercised to purchase an
aggregate of 50,250 shares of the Companys common
stock at $1.90 per share. The Company issued
50,250 shares of its common stock and received proceeds of
$95,475. Also in January 2005, 79,899 shares of
unregistered stock were issued upon the cashless exercise by the
holder of a warrant acquired as partial compensation for
services to the Company.
76
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
ITEM 9A. |
CONTROLS AND PROCEDURES |
Conclusion Regarding Effectiveness of Disclosure Controls and
Procedures
Our management, with the participation of our chief executive
officer and chief financial officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this annual report. Based
on this evaluation, our principal executive officer and
principal financial officer concluded that these disclosure
controls and procedures are effective to ensure that the
information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time
periods, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Companys management,
including its chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Controls Over Financial Reporting
In connection with its audit of the Companys consolidated
financial statements for the year ended December 31, 2003,
Grant Thornton LLP, the Companys independent auditors,
communicated to the Audit Committee and management regarding
financial reporting matters that they considered to be
significant deficiencies and which they considered, in the
aggregate, to constitute a material weakness under standards
established by the American Institute of Certified Public
Accountants, primarily as a result of a lack of segregation of
duties in the Companys finance and accounting departments.
Grant Thornton was concerned that significant finance and
accounting duties were the responsibility of a limited number of
individuals who were responsible for operational controls, as
well as monitoring their performance.
During fiscal year 2004, the Company continued to evaluate its
internal controls over financial reporting in order to allow
management to report on, and our independent auditors to attest
to, our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act of 2002 and the
rules and regulations of the SEC and the Public Company
Accounting Oversight Board there under. During the course of
assessing the effectiveness of both the design and operation of
our internal controls over financial reporting and in response
to the deficiencies identified by Grant Thornton in connection
with the fiscal 2003 audit, we made a number of significant
changes in our internal control over financial reporting during
fiscal year 2004 and the first quarter of 2005, as summarized
below.
As a result of our efforts, we have concluded that the following
internal control issues over our financial reporting constituted
significant deficiencies during the fiscal year ended
December 31, 2004:
|
|
|
a. Segregation of Duties The lack of
segregation of duties in the Companys accounting and
finance department resulted in significant deficiencies in the
Companys general ledger transactions in that some journal
entries and reports were both prepared and reviewed by the same
individual and not reviewed by another. As discussed above,
management determined that these significant deficiencies, in
the aggregate, constituted a material weakness in the design and
operation of the Companys internal controls in effect
prior to December 31, 2004. |
|
|
b. Human Resources During 2004, procedures
relating to the hiring of new employees were not followed in all
instances. Management determined that this significant
deficiency did not constitute a material weakness in its
internal controls. |
|
|
c. Stock Administration During 2004, procedures
relating to administration of the Companys 2004 Equity
Incentive Plan were not followed in all instances. Management
determined that these deficiencies did not constitute a material
weakness in its internal controls. |
77
The underlying cause of a significant number of deficiencies
noted during the testing of our internal control processes was
the lack of sufficient resources within the Companys
administrative staff, particularly its accounting and finance
department. During fiscal year 2004, however, and particularly
the fourth quarter of 2004, our management, under the
supervision of the Companys Audit Committee, has added
significant resources to remedy the material weakness identified
by Grant Thornton in connection with the fiscal 2003 audit and
the other significant deficiencies identified during our
internal control review in 2004. Specifically, we have taken a
number of steps that we believe will improve the effectiveness
of our internal control over our financial reporting including
the following:
|
|
|
a. Eric Bjerkholt, an individual meeting the SEC definition
of audit committee financial expert, joined the Companys
board of directors and became chairman of its Audit Committee in
2004. |
|
|
b. We retained an independent third party during 2004 to
assist the Company in its efforts to comply with Rule 404
of the Sarbanes-Oxley Act of 2002. |
|
|
c. In November 2004, we appointed Judi Lum as our new Chief
Financial Officer. |
|
|
d. In February 2005 we hired an additional Senior
Accountant. |
|
|
e. In February 2005, we retained a Human Resource
Coordinator. |
|
|
f. In view of its expanded resources, we plan to move stock
administration functions to our finance and accounting
department during the first quarter of 2005. |
We will continue with our on-going evaluation of internal
controls and will improve our internal controls over financial
reporting as necessary to assure their effectiveness.
The statements contained in Exhibit 31.1 and
Exhibit 31.2 should be considered in light of, and read
together with, the information set forth in this Item 9A.
Changes in Internal Controls
During the quarter ended December 31, 2004, there have been
changes in our internal controls over financial reporting that
have materially affected, and are reasonably likely to
materially affect, our internal control over financial
reporting. These changes are discussed in detail above under
Managements Annual Report on Internal Controls Over
Financial Reporting.
PART III
|
|
ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2005 Annual Meeting
of Shareholders.
|
|
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by
reference from Item 5 of this Annual Report on
Form 10-K and our Proxy Statement for the 2005 Annual
Meeting of Shareholders.
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2005 Annual Meeting
of Shareholders.
|
|
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2005 Annual Meeting
of Shareholders.
78
PART IV
|
|
ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2005 Annual Meeting
of Shareholders.
|
|
ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
(1) Financial Statements:
The financial statements filed as part of this Report are listed
and indexed under Item 8 above.
(2) Financial Statement Schedules:
Schedules are not included herein because they are not
applicable or the required information appears in the Financial
Statements or Notes thereto.
(b) Exhibits.
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
3.1*
|
|
Restated Certificate of Incorporation of the Registrant |
|
3.2++
|
|
Amended and Restated By-Laws of the Registrant. |
|
3.3{*** }
|
|
Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant. |
|
3.4^
|
|
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant. |
|
4.1^^
|
|
Specimen Common Stock Certificate. |
|
4.2++++
|
|
Form of Warrant Certificate issued to a certain purchaser of the
Registrants 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 |
|
4.10XXX
|
|
Registration Rights Agreement dated as of May 10, 2001
between the Registrant and Sativum Investments Limited. |
|
4.11XXX
|
|
Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Sativum Investments Limited. |
|
4.12XXX
|
|
Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Pacific Crest Securities, Inc. |
|
4.13XXX
|
|
Warrant dated May 10, 2001 to Purchase Common Stock issued
to Granite Financial Group, Inc. |
|
4.14XXX
|
|
Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P. |
|
4.15XXX
|
|
Common Stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P. |
|
4.16{** }
|
|
Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of 3% Cumulative Convertible Preferred Stock for
StemCells, Inc. |
|
4.17{** }
|
|
Warrant to Purchase Common Stock Riverview Group, LLC |
|
4.18XXXX
|
|
Warrant to Purchase Common Stock Cantor
Fitzgerald & Co. |
|
4.19&&
|
|
Warrant to Purchase Common Stock Riverview Group, LLC |
79
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
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 Registrants
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. |
|
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. |
80
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
10.40$**
|
|
Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz
and the Registrant. |
|
10.41$**
|
|
Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant. |
|
10.42$**
|
|
License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.43$**
|
|
License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.44$**
|
|
License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.45$$**
|
|
Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant. |
|
10.46++++**
|
|
License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant. |
|
10.47++++**
|
|
License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant. |
|
10.48X
|
|
Form of Registration Rights Agreement dated as of July 31,
2000 between the Registrant and investors. |
|
10.49X
|
|
Subscription Agreement dated as of July 31, 2000 between
the Registrant and Millennium Partners, L.P. |
|
10.50XXX
|
|
Common Stock Purchase Agreement, dated as of May 10, 2001,
between the Registrant and Sativum Investments Limited. |
|
10.51XXX
|
|
Escrow Agreement, dated as of May 10, 2001, among the
Registrant, Sativum Investments Limited and Epstein,
Becker & Green, P.C. |
|
10.52XX
|
|
License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd. |
|
10.53XX
|
|
Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn |
|
10.54XX
|
|
Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant. |
|
10.55XXX
|
|
Registration Rights Agreement, dated as of June 21, 2001,
by and between the Registrant and Millennium Partners, L.P. |
|
10.56XXX
|
|
Subscription Agreement, dated as of June 21, 2001, by and
between the Registrant and Millennium Partners, L.P. |
|
10.57$$$
|
|
2001 Equity Incentive Plan |
|
10.58{** }
|
|
Subscription Agreement, dated as of December 4, 2001
between the Registrant and Riverview Group, L.L.C. |
|
10.59{** }
|
|
Registration Rights Agreement, dated as of December 4, 2001
between the Registrant and Riverview Group, L.L.C. |
|
10.60{** }
|
|
Agreement dated as of December 4, 2001 between the
Registrant and Millennium Partners, L.P. |
|
10.61{** }
|
|
Agreement dated as of December 4, 2001 among the
Registrant, Millennium Partners, L.P. and Riverview Group, L.L.C. |
|
10.62$$$$
|
|
Common Stock Purchase Agreement, dated as of August 23,
2002, between the Registrant and Triton West Group, Inc. |
10.63&
|
|
Agreement, dated as of April 9, 2003, between the
Registrant and Riverview Group, L.L.C. |
|
10.64&&
|
|
Form of Registration Rights Agreement between the Registrant and
Riverview Group, L.L.C. |
|
10.65&&&
|
|
Securities Purchase Agreement, dated as of May 7, 2003,
between the Registrant and Riverview Group, L.L.C. |
81
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
10.66%
|
|
Securities Purchase Agreement dated as of December 9, 2003,
between the Registrant and Riverview Group, L.L.C. |
|
10.67^^^
|
|
Form of Securities Purchase Agreement dated as of June 16,
2004 between the Registrant and certain Purchasers parties
thereto. |
|
10.68^^^
|
|
Form of Warrant. |
|
10.69^^^^
|
|
Amended and Restated 2004 Equity Incentive Plan of the
Registrant. |
|
10.70^^^^^
|
|
Letter Agreement dated as of October 7, 2004 between the
Registrant and Judi Lum. |
|
14.1%%
|
|
Code of Ethics |
|
21X
|
|
Subsidiaries of the Registrant. |
|
23.1
|
|
Consent of Grant Thornton, LLP, Independent Registered Public
Accounting Firm. |
|
23.2
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm. |
|
31.1
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Martin McGlynn, Chief
Executive Officer). |
|
31.2
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Judi Lum, Chief Financial
Officer). |
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Martin McGlynn, Chief Executive Officer) |
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Judi Lum, Chief Financial Officer) |
|
99
|
|
Cautionary Factors Relevant to Forward-Looking Information |
99.1XX
|
|
Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement, dated
October 30, 2000. |
|
|
|
|
++ |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants 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 Registrants Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996. |
82
|
|
|
|
!!! |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
current report on Form 8-K filed on August 3, 1998. |
|
|
|
|
{**} |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on December 7, 2001. |
|
|
|
|
$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on Form 10-K for the fiscal year ended
December 31, 1998 and filed on March 31, 1999. |
|
|
|
|
$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on January 14, 2000. |
|
|
|
|
$$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
|
|
|
X |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-1, File No. 333-45496. |
|
|
|
|
XX |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and filed on April 2, 2001. |
|
|
|
|
XXX |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on Form S-1 as amended to
Form S-3, File No. 333-61726. |
|
|
XXXX |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on Form S-3, File
No. 333-75806. |
|
|
|
|
{***} |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Amendment No. 1 to Registration Statement filed on
Form S-3, File No. 333-83992. |
|
|
|
|
$$$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on August 28, 2002. |
|
|
|
|
& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on April 15, 2003. |
|
|
|
|
&& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on May 13, 2003. |
|
|
|
|
&&& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on May 15, 2003. |
|
|
|
|
% |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on December 10, 2003. |
|
|
|
|
%% |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003. |
83
|
|
|
|
^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on October 25, 2004. |
|
|
|
|
^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants
Registration Statement on Form S-3, File
No. 333-117360. |
|
|
|
|
^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on June 17, 2004. |
|
|
|
|
^^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-8, File
No. 333-118263. |
|
|
|
|
^^^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on November 9, 2004. |
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
Martin McGlynn |
|
PRESIDENT AND CHIEF EXECUTIVE OFFICER |
Dated: March 14, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
|
/s/ MARTIN McGLYNN
Martin
McGlynn |
|
President and Chief Executive Officer and Director (principal
executive officer) |
|
March 14, 2005 |
|
/s/ JUDI LUM
Judi
Lum |
|
Chief Financial Officer |
|
March 14, 2005 |
|
/s/ GEORGE KOSHY
George
Koshy |
|
Controller (principal accounting officer) |
|
March 14, 2005 |
|
/s/ ERIC BJERKHOLT
Eric
Bjerkholt |
|
Director |
|
March 14, 2005 |
|
/s/ RICARDO B.
LEVY, PH.D.
Ricardo
B. Levy, Ph.D. |
|
Director |
|
March 14, 2005 |
|
/s/ ROGER
PERLMUTTER, M.D.
Roger
Perlmutter, M.D. |
|
Director |
|
March 14, 2005 |
|
/s/ JOHN J.
SCHWARTZ, PH.D.
John
J. Schwartz, Ph.D. |
|
Director, Chairman of the Board |
|
March 14, 2005 |
|
/s/ IRVING L.
WEISSMAN, M.D.
Irving
L. Weissman, M.D. |
|
Director |
|
March 14, 2005 |
85
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
3.1*
|
|
Restated Certificate of Incorporation of the Registrant |
|
3.2++
|
|
Amended and Restated By-Laws of the Registrant. |
|
3.3{*** }
|
|
Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant. |
|
3.4^
|
|
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant. |
|
4.1^^
|
|
Specimen Common Stock Certificate. |
|
4.2++++
|
|
Form of Warrant Certificate issued to a certain purchaser of the
Registrants 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 |
|
4.10XXX
|
|
Registration Rights Agreement dated as of May 10, 2001
between the Registrant and Sativum Investments Limited. |
|
4.11XXX
|
|
Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Sativum Investments Limited. |
|
4.12XXX
|
|
Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Pacific Crest Securities, Inc. |
|
4.13XXX
|
|
Warrant dated May 10, 2001 to Purchase Common Stock issued
to Granite Financial Group, Inc. |
|
4.14XXX
|
|
Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P. |
|
4.15XXX
|
|
Common Stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P. |
|
4.16{** }
|
|
Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of 3% Cumulative Convertible Preferred Stock for
StemCells, Inc. |
|
4.17{** }
|
|
Warrant to Purchase Common Stock Riverview Group, LLC |
|
4.18XXXX
|
|
Warrant to Purchase Common Stock Cantor
Fitzgerald & Co. |
|
4.19&&
|
|
Warrant to Purchase Common Stock Riverview Group, LLC |
|
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. |
86
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
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 Registrants
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. |
|
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. |
|
10.40$**
|
|
Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz
and the Registrant. |
|
10.41$**
|
|
Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant. |
|
10.42$**
|
|
License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.43$**
|
|
License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.44$**
|
|
License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant. |
|
10.45$$**
|
|
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. |
87
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
10.48X
|
|
Form of Registration Rights Agreement dated as of July 31,
2000 between the Registrant and investors. |
|
10.49X
|
|
Subscription Agreement dated as of July 31, 2000 between
the Registrant and Millennium Partners, L.P. |
|
10.50XXX
|
|
Common Stock Purchase Agreement, dated as of May 10, 2001,
between the Registrant and Sativum Investments Limited. |
|
10.51XXX
|
|
Escrow Agreement, dated as of May 10, 2001, among the
Registrant, Sativum Investments Limited and Epstein,
Becker & Green, P.C. |
|
10.52XX
|
|
License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd. |
|
10.53XX
|
|
Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn |
|
10.54XX
|
|
Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant. |
|
10.55XXX
|
|
Registration Rights Agreement, dated as of June 21, 2001,
by and between the Registrant and Millennium Partners, L.P. |
|
10.56XXX
|
|
Subscription Agreement, dated as of June 21, 2001, by and
between the Registrant and Millennium Partners, L.P. |
|
10.57$$
|
|
2001 Equity Incentive Plan |
|
10.58{**}
|
|
Subscription Agreement, dated as of December 4, 2001
between the Registrant and Riverview Group, L.L.C. |
|
10.59{**}
|
|
Registration Rights Agreement, dated as of December 4, 2001
between the Registrant and Riverview Group, L.L.C. |
|
10.60{**}
|
|
Agreement dated as of December 4, 2001 between the
Registrant and Millennium Partners, L.P. |
|
10.61{**}
|
|
Agreement dated as of December 4, 2001 among the
Registrant, Millennium Partners, L.P. and Riverview Group, L.L.C. |
|
10.62$$$$
|
|
Common Stock Purchase Agreement, dated as of August 23,
2002, between the Registrant and Triton West Group, Inc. |
|
10.63&
|
|
Agreement, dated as of April 9, 2003, between the
Registrant and Riverview Group, L.L.C. |
|
10.64&&
|
|
Form of Registration Rights Agreement between the Registrant and
Riverview Group, L.L.C. |
|
10.65&&&
|
|
Securities Purchase Agreement, dated as of May 7, 2003,
between the Registrant and Riverview Group, L.L.C. |
|
10.66%
|
|
Securities Purchase Agreement dated as of December 9, 2003,
between the Registrant and Riverview Group, L.L.C. |
|
10.67^^^
|
|
Form of Securities Purchase Agreement dated as of June 16,
2004 between the Registrant and certain Purchasers parties
thereto. |
|
10.68^^^
|
|
Form of Warrant. |
|
10.69^^^^
|
|
Amended and Restated 2004 Equity Incentive Plan of the
Registrant. |
|
10.70^^^^^
|
|
Letter Agreement dated as of October 7, 2004 between the
Registrant and Judi Lum. |
|
14.1%%
|
|
Code of Ethics |
|
21X
|
|
Subsidiaries of the Registrant. |
|
23.1
|
|
Consent of Grant Thornton, LLP , Independent Registered Public
Accounting Firm. |
|
23.2
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm. |
|
31.1
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Martin McGlynn, Chief
Executive Officer). |
|
31.2
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Judi Lum, Chief Financial
Officer). |
88
|
|
|
Exhibit No. |
|
Title or Description |
|
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Martin McGlynn, Chief Executive Officer) |
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Judi Lum, Chief Financial Officer) |
99
|
|
Cautionary Factors Relevant to Forward-Looking Information |
99.1XX
|
|
Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement, dated
October 30, 2000. |
|
|
|
|
++ |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants 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 Registrants 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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
current report on Form 8-K filed on August 3, 1998. |
89
|
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|
{**} |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on December 7, 2001. |
|
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|
$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on Form 10-K for the fiscal year ended
December 31, 1998 and filed on March 31, 1999. |
|
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|
|
$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on January 14, 2000. |
|
|
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|
$$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
|
++ |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-1, File No. 33-85494. |
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|
+++ |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-3, File No. 33-97272. |
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|
++++ |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-1, File No. 33-91228. |
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|
* |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1, File No. 33-45739. |
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|
# |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Annual Report on Form 10-K for fiscal year ended
December 31, 1992 and filed March 30, 1993. |
|
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|
** |
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. |
|
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|
## |
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
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 Registrants 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 Registrants 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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
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 Registrants
current report on Form 8-K filed on August 3, 1998. |
90
|
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|
|
{**} |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on December 7, 2001. |
|
|
|
|
$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on Form 10-K for the fiscal year ended
December 31, 1998 and filed on March 31, 1999. |
|
|
|
|
$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on January 14, 2000. |
|
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|
|
$$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
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|
X |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-1, File No. 333-45496. |
|
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|
XX |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and filed on April 2, 2001. |
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XXX |
Previously filed with the Commission as an Exhibit to, and
incorporate herein by reference to, the Registrants
Registration Statement filed on Form S-1 as amended to
Form S-3, File No. 333-61726. |
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XXXX |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on Form S-3, File
No. 333-75806. |
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|
{***} |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Amendment No. 1 to Registration Statement filed on
Form S-3, File No. 333-83992. |
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$$$$ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on August 28, 2002. |
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& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on April 15, 2003. |
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&& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on May 13, 2003. |
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&&& |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on May 15, 2003. |
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% |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K on December 10, 2003. |
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%% |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003. |
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^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on October 25, 2004. |
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^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants Registration
Statement on Form S-3, File No. 333-117360. |
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^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on June 17, 2004. |
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^^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on Form S-8, File
No. 333-118263. |
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^^^^^ |
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on Form 8-K filed on November 9, 2004. |
91
EXHIBIT 23.1
CONSENT OF GRANT THORNTON LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 4, 2005, accompanying the
consolidated financial statements and management's assessment of the
effectiveness of internal control over financial reporting included in the
Annual Report of Stemcells, Inc. on Form 10-K for the year ended December 31,
2004. We hereby consent to the incorporation by reference of said reports in the
Registration Statements of Stemcells, Inc. on Forms S-3 (File No. 333-117360
effective July 14, 2004, File No. 333-105664, effective May 29, 2003, File No.
333-83992, effective March 8, 2002, File No. 333-75806, effective December 21,
2001, File No. 333-66692, effective August 3, 2001, and File No. 333-61726,
effective June 29, 2001) and Forms S-8 (File No. 333-118263 effective August 16,
2004, File No. 333-66700, effective August 3, 2001, File No. 333-37313,
effective October 7, 1997, File No. 333-29335, effective June 16, 1997, File No.
333-10773, effective August 23, 1996, and File No. 33-49524, effective July 10,
1992) and Registration Statements of CytoTherapeutics, Inc. on Forms S-3 (File
No. 33-91228, effective April 14, 1995, and File No. 33-68900, effective
September 15, 1993).
/s/ Grant Thornton LLP
San Jose, California
March 14, 2005
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-66700) pertaining to the 2001 Equity Incentive Plan, in the
Registration Statements (Form S-8 No. 333-49524 and 333-29335) pertaining to the
1998 Incentive Stock Plan, 1992 Equity Incentive Plan, 1992 Employee Stock
Purchase Plan and 1992 Stock Option Plan for Non-Employee Directors, in the
Registration Statement (Form S-8 No. 333-10773) pertaining to the 1992 Equity
Incentive Plan, in the Registration Statement (Form S-8 No. 333-37313)
pertaining to the 1996 StemCells, Inc. Stock Option Plan and the 1997
CytoTherapeutics, Inc. StemCells Research Stock Option Plan, in the Registration
Statements (Form S-3 No. 333-75806, No. 333-66692, No. 333-61726 and No.
333-83992) of StemCells, Inc. and in the Registration Statements (Form S-3 No.
333-68900 and No. 333-91228) of CytoTherapeutics, Inc. and in the related
Prospectuses of our report dated March 4, 2003, except for Note 1, as to which
the date is March 25, 2004, with respect to the consolidated financial
statements of StemCells, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 2004.
/s/ Ernst & Young LLP
Palo Alto, California
March 14, 2005
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Martin McGlynn, certify that:
(1) I have reviewed this annual report on Form 10-K of StemCells, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a. all significant deficiencies and material weaknesses in
the design or operation of internal controls over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize, and report financial information;
and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Date: March 14, 2005
/s/ Martin McGlynn
- ---------------------------------------
Martin McGlynn
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Judi Lum, certify that:
(1) I have reviewed this annual report on Form 10-K of StemCells, Inc.;
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
a. Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
a. all significant deficiencies and material weaknesses in
the design or operation of internal controls over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize, and report financial information;
and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Date: March 14, 2005
/s/ Judi Lum
- ------------------------------------
Judi Lum
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the StemCells, Inc. (the "Company") Annual Report on Form
10-K for the year ended December 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Martin McGlynn,
President and Chief Executive Officer of the Company, certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge:
(1). The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2). The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: March 14, 2005
/s/ Martin McGlynn
- -------------------------------------
Martin McGlynn
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the StemCells, Inc. (the "Company") Annual Report on Form
10-K for the year ended December 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Judi Lum, Chief
Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:
(1). The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2). The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: March 14, 2005
/s/ Judi Lum
- ---------------------------
Judi Lum
Chief Financial Officer
EXHIBIT 99
CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION REGARDING STEMCELLS, INC. Any of the following risks could
materially adversely affect our business, financial conditions or results of
operation. Additional risks and uncertainties not known to us or that we
currently deem immaterial may also impair our business operations.
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.
RISKS RELATED TO OUR BUSINESS
OUR FINANCIAL SITUATION IS PRECARIOUS AND, BASED ON CURRENTLY ESTIMATED
OPERATING EXPENSES, OUR EXISTING CAPITAL RESOURCES MAY NOT BE SUFFICIENT TO FUND
OUR OPERATIONS BEYOND 2006.
We have incurred significant operating losses and negative cash flows since
inception. We have not achieved profitability and may not be able to realize
sufficient revenues to achieve or sustain profitability in the future. We do not
expect to be profitable in the next several years, but rather expect to incur
additional operating losses. We have limited liquidity and capital resources and
must obtain significant additional capital resources in order to sustain our
product development efforts and for acquisition of technologies and intellectual
property rights, preclinical and clinical testing of our anticipated products,
pursuit of regulatory approvals, acquisition of capital equipment, laboratory
and office facilities, establishment of production capabilities, general and
administrative expenses and other working capital requirements. We 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, and government grants and funding from collaborative arrangements,
if obtainable, to fund our operations. If we exhaust our cash reserves and are
unable to realize adequate financing, we may be unable to meet operating
obligations and be required to initiate bankruptcy proceedings. Our existing
capital resources may not be sufficient to fund our operations beyond 2006.
These conditions raise doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
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. Funding may not be available when needed - at all
or on terms acceptable to us. 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.
THE FDA MAY FAIL TO APPROVE OUR INVESTIGATIONAL NEW DRUG APPLICATION FOR OUR
PROPOSED PHASE I CLINICAL TRIAL OF OUR PROPRIETARY NEURAL CELL THERAPY PRODUCT
IN BATTEN DISEASE, AND THE INSTITUTIONAL REVIEW BOARD (IRB) AT THE CLINICAL SITE
MAY FAIL TO APPROVE THE CLINICAL PROTOCOL FOR THE TRIAL.
We filed our first Investigational New Drug, or IND, application to the U.S.
Food and Drug Administration (FDA) in late December, 2004, for our proposed
Phase I clinical trial of our proprietary neural cell therapy product - HuCNS SC
- - in Batten disease. The FDA has informed us that it has suggestions and
questions related to the proposed trial that require additional information and
has placed our proposed trial on hold. We cannot be certain whether the FDA will
remove the clinical hold on the Company's proposed initial clinical trial and
permit the Company to proceed to clinical testing despite the novel and unproven
nature of our technology. We may not be able to satisfy the FDA's concerns
without conducting extensive and time consuming additional preclinical studies,
if at all. Even if approved, our clinical trial could be substantially delayed
beyond its expected dates. In addition to requiring FDA approval, the trial
cannot go forward until the IRB of the trial site has approved the proposed
clinical protocol. The IRB for
Stanford University, the proposed site of the trial, has not yet acted on the
protocol. Should it fail to approve the trial, or require modifications to the
protocol that are not acceptable to the Company, the Company would need to find
another trial site.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT, AND WE MAY
FAIL TO DEVELOP ANY COMMERCIALLY ACCEPTABLE PRODUCTS.
We have yet to develop any products. Our stem cell technology is still at the
discovery phase for the liver and pancreas stem cells and, while we have filed
an IND with respect to our human neural (brain) stem cells, the U.S. Food and
Drug Administration (FDA) has placed a clinical hold on our proposed clinical
trial pending the Company's response to its concerns. 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:
- survive and persist in the desired location;
- provide the intended therapeutic benefits;
- properly integrate into existing tissue in the desired manner; or
- achieve therapeutic benefits equal to or better than the standard of
treatment at the time of testing.
In addition, our products 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 pre-clinical or clinical research. If 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, because 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 claims.
Moreover, because our cell therapy treatments will be derived from tissue of
individuals other than the patient (that is, they will be "non-self" or
"allogeneic" transplant products), patients will require the use of
immunosuppressive drugs such as cyclosporine, FK506, or others to prevent
rejection of the cells. While immunosuppression is now standard in connection
with allogeneic transplants of various kinds, long-term maintenance on
immunosuppressive drugs can produce complications that include infection,
cancer, cardiovascular disease, renal dysfunction and other side effects
depending upon which immunosuppressive regimen is employed. Immunosuppression
has not been tested with our therapies since we have not yet conducted any
clinical trials.
As noted above, we filed an IND with the FDA earlier this year which is
currently on clinical hold. Before we are permitted to move forward, as part of
the IND process, the FDA will need to be satisfied that the cell bank to be used
in these trials qualifies as a suitable source of the cells for the proposed
clinical trial, and that the pre-clinical safety testing (i.e., pharmacology and
toxicology studies) we conducted in various animal models is adequate. We must
also obtain the approval of the internal review board at the medical institution
where the clinical trial would be conducted. We may not be able to satisfy all
of the requirements to move the Batten disease program into clinical trials,
which could have a material adverse effect on our product development timeline.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY US
IN RHODE ISLAND, WHICH DIVERTS FUNDING FROM OUR STEM CELL RESEARCH AND
DEVELOPMENT.
Prior to our reorganization in 1999 and the consolidation of our business in
California, we carried out our former encapsulated cell therapy programs in
Lincoln, Rhode Island, where we also had our administrative offices. Although we
have vacated the Rhode Island facilities, we remain obligated to make on
average, lease payments and payments for operating costs of approximately
$1,450,000 per year before sub-tenant rent income for our former science and
administrative facility, which we have leased through June 30, 2013, and debt
service payments and payments for operating costs of approximately $500,000 per
year for our former encapsulated cell therapy pilot manufacturing facility,
which we own. We have currently subleased a portion of the science and
administrative facility, and are
seeking to sublease the remaining portion, but we cannot be sure that we will be
able to keep any part of the facility subleased for the duration of our
obligation. We have currently subleased the entire pilot manufacturing facility
to a privately-held biotechnology company, but may not be able to sublease or
sell the facility in the future once the current sublease agreements expire.
These continuing costs significantly reduce our cash resources and adversely
affect our ability to fund further development of our stem cell technology. In
addition, changes in real estate market conditions and assumptions regarding the
length of time it may take us to either fully sublease, assign or sell our
remaining interest in the our former research facility in Rhode Island may have
a significant impact on and cause large variations in our quarter to quarter
results of operations. In 1999, in connection with exiting our former research
facility in Rhode Island, we created a reserve for the estimated lease payments
and operating expenses related to it. The reserve has been re-evaluated and
adjusted based on assumptions relevant to real estate market conditions and the
estimated time until we could either fully sublease, assign or sell our
remaining interests in the property. At December 31, 2004, the reserve was
$5,528,000. In 2004, we incurred $1,152,000 in operating expenses net of
sub-tenant income for this facility. In 2004 and 2003 respectively, we incurred
$1,152,000 and $984,000 in lease payments and operating expenses net of
subtenant income for this facility. Expenses for this facility will fluctuate
based on changes in tenant occupancy rates and other operating expenses related
to the lease. Even though it is our intent to sublease, assign, sell or
otherwise divest ourselves of our interests in the facility at the earliest
possible time, we cannot determine with certainty a fixed date by which such
events will occur. In light of this uncertainty, based on estimates, we will
periodically re-evaluate and adjust the reserve, as necessary.
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, and we may fail to obtain any such agreement on terms acceptable to
us. 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
expire. Furthermore, these arrangements may require us to grant certain rights
to third parties, including exclusive marketing rights to one or more products,
may require us to issue securities to our collaborators or may contain other
terms that are burdensome to us. 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 HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We 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 currently have no cooperative agreements, we have only one
current research grant 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.
IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
We own or license a number of patents and pending patent applications related to
various stem and progenitor cells and methods of deriving and using them,
including human neural stem cell cultures. 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, if any existing or future patents will provide
sufficient protection or significant commercial advantage or if others will
circumvent these patents. We cannot be
certain that we were the first to discover the inventions covered by each of our
pending patent applications or that we were the first to file patent
applications for such inventions because patent applications are secret until
they are published, and because publication of discoveries in the scientific or
patent literature often lags behind actual discoveries. Patents may not issue
from our pending or future patent applications or, if issued, may not be of
commercial benefit to us. In addition, our patents may not afford us adequate
protection from competing products. 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. Further, patents issue for a limited term, and our
patents may expire before we utilize them profitably. Under the procedures of
the European Patent Office, third parties may oppose our issued European patents
during the relevant opposition period. Such oppositions 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. One party has
opposed two of our granted European patents. While we are confident in our
position, there is no guarantee that we will prevail. If we are unsuccessful in
our defense of the opposed patents, all claimed rights in the opposed patents
will be lost in Europe.
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. 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 technology.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT THE STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THOSE STEM CELLS.
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 for us or our collaborators to be the first to discover any stem cell
that we are seeking to discover. Failure to be the first could prevent us from
commercializing all of our research and development affected by that patent.
IF WE ARE UNABLE TO OBTAIN NECESSARY LICENSES TO THIRD-PARTY PATENTS AND OTHER
RIGHTS, WE MAY NOT BE ABLE TO COMMERCIALLY DEVELOP OUR EXPECTED PRODUCTS.
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. If third party patents or patent
applications contain valid claims that our technology infringes upon their
technology, 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 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
licensors, however, 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 these 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 to treat diseases of, or injuries to, the
central nervous system (CNS) is large, and competition is intense. The majority
of the products currently on the market or in development are small molecule
pharmaceutical compounds. Many of the world's pharmaceutical companies,
including Merck, Pfizer, Abbott, Bristol-Myers Squibb, Novartis and
GlaxoSmithKline, have made significant commitments to the CNS field. Any
cell-based therapy to treat diseases of, or injuries to, the CNS is likely to
face intense competition from the small molecule sector. In addition, a number
of biotechnology companies with resources far greater than ours may also
emerge as competitors. These include Genzyme, Amgen, Cephalon, Transkaryotic
Therapies, BioMarin, Celgene, Biogen, and Titan Pharmaceuticals. Finally, we
also expect to compete with smaller biotechnology companies, some of which are
privately owned, such as Neuralstem, Geron, NeuroNova, ReNeuron, ES Cell
International, and CellFactors/Diacrin.
We believe that our human neural stem cells may have application to many or most
of the Lysosomal Storage Diseases ("LSDs") with CNS involvement. We have
submitted our first IND for Batten Disease, which is one of the LSDs that affect
the CNS; that IND is currently on clinical hold, and we have no assurance as to
when or whether the FDA will release the hold and permit the clinical trial to
begin. There are, so far as we know, no approved therapies for Batten's or any
of the other CNS-specific LSDs, but other companies, including Genzyme,
BioMarin, and Transkaryotic Therapies, have products approved to treat
peripheral aspects of some of the other LSDs, and other products are in clinical
trials.
In the field of diabetes, a number of major companies currently market products
for the treatment of diabetes and are also engaged in the research and
development of new therapies. Such companies include Eli Lilly, Novo Nordisk,
J&J, Amylin, Serono. Consequently, should we successfully develop a cell-based
therapy for diabetes, we would expect to face severe competition from these and
similar companies.
In the liver field, there are no broad-based therapies for the treatment of
liver disease at present. The primary therapy is liver transplantation, which is
limited by the availability of matched donor organs. Liver-assist devices, when
and if they become available, could also be used to help patients while they
await suitably matched organs for transplantation.
DEVELOPMENT OF OUR TECHNOLOGY IS SUBJECT TO AND RESTRICTED BY EXTENSIVE
GOVERNMENT REGULATION, WHICH COULD IMPEDE OUR BUSINESS.
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 and restricted by 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
U.S. 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.
Although we do not use embryonic stem cells, government regulation and
threatened regulation of embryonic tissue may lead top researchers to leave the
field of stem cell research, or the country, in order to assure that their
careers will not be impeded by restrictions on their work. Similarly, these
factors may induce the best graduate students to choose other fields less
vulnerable to changes in regulatory oversight, thus exacerbating the risk,
discussed below, that we may not be able to attract and retain the scientific
personnel we need in face of the competition among pharmaceutical, biotechnology
and health care companies, universities and research institutions for what may
become a shrinking class of qualified individuals. In addition, we cannot assure
you that constraints on the use of embryonic stem cells will not be extended to
use of fetal stem cells. Moreover, it is possible that concerns regarding
research using embryonic stem cells will impact our ability to attract
collaborators and investors and our stock price.
We may apply for status under the Orphan Drug Act for some of our therapies to
gain a seven-year period of marketing exclusivity for those therapies. The U.S.
Congress in the past has 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 ARE DEPENDENT ON THE SERVICES OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and some of our outside consultants, including the members of
our scientific advisory board, our chief executive officer, 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. In addition, our operations are
dependent upon our ability to attract and retain additional qualified scientific
and management personnel. 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.
WE NEED TO IMPROVE OUR FINANCIAL CONTROL PROCEDURES.
Management's Annual Report on Internal Controls Over Financial Reporting found
deficiencies in the operating effectiveness of its internal controls over
financial reporting that collectively constitute significant deficiencies and a
material weakness under standards established by the American Institute of
Certified Public Accountants, resulting in more than a remote likelihood that a
material misstatement of the annual or interim financial statements of the
Company will not be prevented or detected. In the opinion of Grant Thornton LLP,
the Company's independent auditors, Management's assessment that that StemCells
Inc. did not maintain effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects. It is also the
opinion of Grant Thornton that because of the effect of the material weakness
identified by management (i.e., instances where both the preparation and review
of general journal entries were performed by the same individual) on the
achievement of the objectives of the control criteria, StemCells Inc. has not
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company has already taken remedial steps, and will continue its
on-going evaluation of internal controls and attempts to improve its internal
controls over financial reporting as necessary to assure their effectiveness,
but there can be no assurance that it will succeed or that other deficiencies
will not be identified.
SINCE HEALTH CARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS
OR MAY IMPOSE LIMITS ON REIMBURSEMENTS, OUR ABILITY TO BECOME PROFITABLE COULD
BE REDUCED.
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 U.S. Food and Drug Administration has not
granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products or novel therapies
such as ours. 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
policies 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 also expect that there will
continue to be a number of federal and state proposals to implement government
control over health care costs. Efforts at health care 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 health care goods and services may take in response to
health care reform proposals or legislation. We cannot predict the effect
government control and other health care reforms may have on our business.
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. 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 commercialize
them ourselves. We intend to pursue our needed capital resources through equity
and debt financings, corporate alliances, grants and collaborative research
arrangements. We may fail to obtain the necessary capital resources from any
such sources when needed or on terms acceptable to us. Our ability to complete
successfully any such arrangements will depend upon market conditions and, more
specifically, on continued progress in our research and development efforts.
RISKS RELATED TO THE SECURITIES MARKET
OUR STOCK PRICE HAS BEEN, AND WILL LIKELY CONTINUE TO BE, HIGHLY VOLATILE, WHICH
MAY NEGATIVELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL FINANCING IN THE FUTURE.
The market price of our stock has been and is likely to continue to be highly
volatile due to the risks and uncertainties described in this section of the
prospectus, as well as other factors, including:
- our ability to develop and test our technology;
- our ability to patent or obtain licenses to necessary technology;
- conditions and publicity regarding the industry in which we operate,
as well as the specific areas our product candidates seek to
address;
- competition in our industry;
- price and volume fluctuations in the stock market at large that are
unrelated to our operating performance; and
- comments by securities analysts, or our failure to meet market
expectations.
Over the two-year period ended December 31, 2004, the closing price of our
common stock as reported on the Nasdaq SmallCap Market ranged from a high of
$4.48 to a low of $.66. As a result of this volatility, your investment in our
stock is subject to substantial risk. Furthermore, the volatility of our stock
price could negatively impact our ability to raise capital in the future.
WE ARE CONTRACTUALLY OBLIGATED TO ISSUE SHARES IN THE FUTURE, DILUTING YOUR
INTEREST IN US.
As of December 31, 2004, there were outstanding and exercisable warrants to
purchase 5,490,285 shares of our common stock, at a weighted average exercise
price of $2.08 per share. As of December 31, 2004, there were also outstanding
and exercisable options to purchase 6,682,201 shares of our common stock, at a
weighted average exercise price of $2.67 per share. Moreover, we expect to issue
additional options to purchase shares of our common stock to compensate
employees, consultants and directors, and may issue additional shares to raise
capital, to acquire other companies or technologies, to pay for services, or for
other corporate purposes. Any such issuances will have the effect of further
diluting the interest of the purchasers of the securities being sold in this
offering.