e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 2006
Commission File Number: 0-19871
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
DELAWARE
|
|
94-3078125 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
identification No) |
3155 PORTER DRIVE
PALO ALTO, CA
94304
(Address of principal executive offices including zip code)
(650) 475-3100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter periods that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At July 26, 2006, there were 77,777,174 shares of Common Stock, $.01 par value, issued and
outstanding.
PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
(unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
59,907,206 |
|
|
$ |
34,540,908 |
|
Receivables |
|
|
563,854 |
|
|
|
201,919 |
|
Other current assets |
|
|
1,190,050 |
|
|
|
386,966 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
61,661,110 |
|
|
|
35,129,793 |
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
2,100,887 |
|
|
|
3,720,794 |
|
Property, plant and equipment, net |
|
|
3,927,279 |
|
|
|
3,282,588 |
|
Other assets, net |
|
|
2,604,332 |
|
|
|
2,705,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
70,293,608 |
|
|
$ |
44,838,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,246,970 |
|
|
$ |
637,122 |
|
Accrued expenses |
|
|
814,787 |
|
|
|
1,483.300 |
|
Accrued wind-down expenses, current portion |
|
|
1,255,124 |
|
|
|
1,118,796 |
|
Capital lease obligations, current portion |
|
|
54,676 |
|
|
|
54,676 |
|
Bonds payable, current portion |
|
|
259,167 |
|
|
|
254,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,630,724 |
|
|
|
3,548,061 |
|
|
|
|
|
|
|
|
|
|
Bonds payable, less current maturities |
|
|
1,221,250 |
|
|
|
1,351,250 |
|
Deposits and other long-term liabilities |
|
|
522,866 |
|
|
|
522,866 |
|
Accrued wind-down expenses, non-current portion |
|
|
5,814,115 |
|
|
|
6,186,930 |
|
Deferred rent |
|
|
1,054,939 |
|
|
|
853,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,243,894 |
|
|
|
12,463,104 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 125,000,000
shares authorized; 77,777,174 and 65,396,022
shares issued and outstanding at June 30,
2006 and December 31, 2005, respectively |
|
|
777,771 |
|
|
|
653,960 |
|
|
|
|
|
|
|
|
|
|
Additional paid in capital |
|
|
253,375,404 |
|
|
|
217,919,336 |
|
Accumulated deficit |
|
|
(194,126,048) |
) |
|
|
(185,943,565 |
) |
Accumulated other comprehensive loss |
|
|
(1,977,413 |
) |
|
|
(254,147 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
58,049,714 |
|
|
|
32,375,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
70,293,608 |
|
|
$ |
44,838,688 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from grants |
|
$ |
|
|
|
$ |
26,092 |
|
|
$ |
37,550 |
|
|
$ |
52,184 |
|
Revenue from licensing agreements |
|
|
20,535 |
|
|
|
10,677 |
|
|
|
24,535 |
|
|
|
19,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
20,535 |
|
|
|
36,769 |
|
|
|
62,085 |
|
|
|
72,090 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
3,187,513 |
|
|
|
1,969,096 |
|
|
|
5,879,394 |
|
|
|
3,588,029 |
|
General and administrative |
|
|
1,412,513 |
|
|
|
954,542 |
|
|
|
3,089,837 |
|
|
|
2,459,744 |
|
Wind-down expenses |
|
|
174,901 |
|
|
|
1,197,226 |
|
|
|
331,018 |
|
|
|
1,718,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
4,774,927 |
|
|
|
4,120,864 |
|
|
|
9,300,249 |
|
|
|
7,765,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,754,392 |
) |
|
|
(4,084,095 |
) |
|
|
(9,238,164 |
) |
|
|
(7,693,883 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
|
103,359 |
|
|
|
|
|
|
|
103,359 |
|
|
|
|
|
Interest income |
|
|
703,551 |
|
|
|
261,389 |
|
|
|
1,043,365 |
|
|
|
489,152 |
|
Interest expense |
|
|
(38,505 |
) |
|
|
(45,345 |
) |
|
|
(77,098 |
) |
|
|
(91,756 |
) |
Other income (expense) |
|
|
(3,372 |
) |
|
|
(235 |
) |
|
|
(13,947 |
) |
|
|
(20,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
765,033 |
|
|
|
215,809 |
|
|
|
1,055,679 |
|
|
|
376,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
($ |
3,989,359 |
) |
|
($ |
3,868,286 |
) |
|
($ |
8,182,485 |
) |
|
($ |
7,317,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share applicable to common
stockholders; basic and diluted |
|
($ |
0.05 |
) |
|
($ |
0.06 |
) |
|
($ |
0.11 |
) |
|
($ |
0.12 |
) |
Weighted average shares used to compute
net loss per share applicable to common
stockholders; basic and diluted |
|
|
77,105,128 |
|
|
|
63,072,873 |
|
|
|
71,306,311 |
|
|
|
62,741,639 |
|
See accompanying notes to condensed consolidated financial statements.
4
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
($8,182,485 |
) |
|
|
($7,317,119 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
528,755 |
|
|
|
552,237 |
|
Amortization of deferred compensation |
|
|
|
|
|
|
69,501 |
|
Stock-based compensation expense |
|
|
1,040,263 |
|
|
|
65,280 |
|
Loss on disposal of fixed assets |
|
|
1,197 |
|
|
|
|
|
Income from license and settlement agreement |
|
|
(103,359 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(120,284 |
) |
|
|
(4,481 |
) |
Receivables |
|
|
(241,651 |
) |
|
|
39,289 |
|
Other current assets |
|
|
(803,084 |
) |
|
|
(337,584 |
) |
Other assets |
|
|
106,271 |
|
|
|
52,947 |
|
Accounts payable and accrued expenses |
|
|
(58,665 |
) |
|
|
(712,355 |
) |
Accrued wind-down expenses |
|
|
(236,486 |
) |
|
|
1,146,341 |
|
Deposits received (refunded) |
|
|
|
|
|
|
(76,941 |
) |
Deferred rent |
|
|
200,942 |
|
|
|
42,839 |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(7,868,586 |
) |
|
|
(6,480,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(1,111,357 |
) |
|
|
(235,280 |
) |
Acquisition of other assets |
|
|
(68,375 |
) |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,179,732 |
) |
|
|
(285,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
123,186 |
|
|
|
309,026 |
|
Proceeds from the exercise of warrants |
|
|
994,896 |
|
|
|
1,937,952 |
|
Proceeds from issuance of common stock |
|
|
33,421,534 |
|
|
|
|
|
Repayments of capital lease obligations |
|
|
|
|
|
|
(25,890 |
) |
Repayment of debt obligations |
|
|
(125,000 |
) |
|
|
(119,749 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
34,414,616 |
|
|
|
2,101,339 |
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
25,366,298 |
|
|
|
(4,663,987 |
) |
Cash and cash equivalents, beginning of period |
|
|
34,540,908 |
|
|
|
41,059,532 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
59,907,206 |
|
|
$ |
36,395,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
77,098 |
|
|
$ |
91,756 |
|
See accompanying notes to condensed consolidated financial statements
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006 and 2005
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The terms StemCells, the Company, our, we and us as used in this report refer to
StemCells Inc. The accompanying unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
the accompanying financial statements include all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented. Results of operations for the six months
ended June 30, 2006, are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2006.
The balance sheet at December 31, 2005 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required for complete
financial statements in accordance with accounting principles generally accepted in the United
States of America. For the complete financial statements, refer to the audited financial
statements and footnotes thereto as of December 31, 2005, included on Form 10-K.
The Company has incurred significant operating losses and negative cash flows since inception.
It has not achieved profitability and may not be able to realize sufficient revenues to achieve or
sustain profitability in the future. The Company has limited capital resources and it will need to
raise additional capital from time to time to sustain its product development efforts, acquisition
of technologies and intellectual property rights, preclinical and clinical testing of 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. To fund its operations, the Company relies on cash balances,
proceeds from equity and debt offerings, proceeds from the transfer or sale of intellectual
property rights, equipment, facilities or investments, and on government grants and collaborative
arrangements. The Company cannot be certain that such funding will be available when needed. 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.
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. Significant estimates include the accrued wind-down
expenses and the grant date fair value of share based awards recognized as compensation expense in
accordance with the provisions of Statement of Financial Accounting Standards No. 123 (Revised
2004) Share-Based Payment (SFAS 123R). See Stock-Based Compensation below.
Marketable securities
In accordance with Statement of Financial Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity Securities, the Company has classified the Companys
short-term investments as available-for-sale marketable securities in the accompanying consolidated
financial statements. The marketable securities are stated at fair market value, with unrealized
gains and losses reported in other comprehensive income. Management reviews securities with
unrealized losses for other than temporary impairment. A decline in the fair value of securities
that is deemed other than temporary is charged to earnings when so deemed.
6
Reclassification
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. Patent related expenses of $133,266 and $339,264 for the three and six-month period
ended June 30, 2005 have been reclassified from research and development expense to general and
administrative expense on the consolidated statements of operations for that period to conform with
current year presentation.
Net Loss Per Share
The Company has computed net loss per common share according to the Statement of Financial
Accounting Standards (SFAS) No. 128 Earnings Per Share, which requires disclosure of basic and
diluted earnings per share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities, and is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the impact of
potentially dilutive securities and is computed using the weighted average of common and diluted
equivalent stock options, warrants and convertible securities outstanding during the period. Stock
options, warrants and convertible securities that are anti-dilutive are excluded from the
calculation of diluted loss per common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net loss applicable
to common
stockholders |
|
|
($3,989,359 |
) |
|
|
($3,868,286 |
) |
|
|
($8,182,485 |
) |
|
|
($7,317,119 |
) |
Weighted average
shares used in
computing net loss
per share
applicable to
common
stockholders, basic
and diluted. |
|
|
77,105,128 |
|
|
|
63,072,873 |
|
|
|
71,306,311 |
|
|
|
62,741,639 |
|
Net loss per share
applicable to
common
stockholders, basic
and diluted. |
|
|
($0.05 |
) |
|
|
($0.06 |
) |
|
|
($0.11 |
) |
|
|
($0.12 |
) |
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:
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, |
|
|
2006 |
|
2005 |
Outstanding options |
|
|
7,048,220 |
|
|
|
6,741,787 |
|
Outstanding warrants |
|
|
1,930,658 |
|
|
|
4,187,439 |
|
Total |
|
|
8,978,878 |
|
|
|
10,929,226 |
|
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R. SFAS 123R
requires all share-based payments to employees, or to non-employee directors as compensation for
service on the Board of Directors, to be recognized as compensation expense in the consolidated
financial statements based on the fair values of such payments. The Company maintains shareholder
approved stock-based compensation plans, pursuant to which it grants stock-based compensation to
its employees, and to non-employee directors for Board service. These grants are primarily in the
form of options that allow a grantee to purchase a fixed number of shares of the Companys common
stock at a fixed exercise price equal to the market price of the shares at the date of the grant
(qualified stock option grants). The options may vest on a single date or in tranches over a
period of time, but normally they do not vest unless the grantee is still employed by or a director
of the Company on the vesting date. The compensation expense for these grants will be recognized
over the requisite service period which is
7
typically the period over which the stock-based compensation awards vest. The Company made no
modifications to outstanding options with respect to vesting periods or exercise prices prior to
adopting SFAS 123R. In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107), which provides guidance on the implementation of SFAS 123R.
The Company applied the principles of SAB 107 in conjunction with its adoption of SFAS 123R.
The Company adopted SFAS 123R effective January 1, 2006, using the modified-prospective
transition method. Under this transition method, compensation expense will be recognized based on
the grant date fair value estimated in accordance with the provisions of SFAS 123R for all new
grants effective January 1, 2006, and for options granted prior to but not vested as of December
31, 2005. Prior periods were not restated to reflect the impact of adopting the new standard and
therefore do not include compensation expense related to qualified stock option grants for those
periods. In accordance with SFAS 123R, the Company recognized stock option related compensation
expense of approximately $519,000 and $908,000 for the three and six month periods ended June 30,
2006. All options granted in the three and six month period ended June 30, 2006 were qualified
stock options and the related compensation expense was recognized on a straight line basis over the
vesting period of each grant net of estimated forfeitures. The Companys estimated forfeiture
rates are based on its historical experience within separate groups of employees. The estimated
fair value of the options granted during 2006 and prior years was calculated using a Black Scholes
Merton option pricing model (Black Scholes model). The following summarizes the assumptions used
in the Black Scholes model as applied in the first and second quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
Second Quarter |
|
|
2006 |
|
2006 |
Risk free interest rate(1) |
|
|
4.72 |
% |
|
|
5.08 |
% |
Volatility(2) |
|
|
119.5 |
% |
|
|
110.76 |
% |
Dividend yield(3) |
|
|
0 |
% |
|
|
0 |
% |
Expected term (years until exercise)(4) |
|
|
6.25 |
|
|
|
6.25 |
|
|
|
|
(1) |
|
The risk-free interest rate is based on US Treasury debt securities with
maturities close to the expected term of the option. |
|
(2) |
|
Expected volatility is based on historical volatility of the Companys stock
factoring in daily share price observations. In computing expected volatility, the
length of the historical period used is equal to the length of the expected term of the
option. |
|
(3) |
|
No cash dividends have been declared on the Companys common stock since the
Companys inception, and the Company currently does not anticipate paying cash
dividends over the expected term of the option. |
|
(4) |
|
The expected term is equal to the average of the contractual life of the stock
option and its vesting period. |
At June 30, 2006, approximately $4,873,000 of unrecognized compensation expense related to
stock options is expected to be recognized over a weighted average period of approximately 1.51
years. The resulting effect on net loss and net loss per share attributable to common stockholders
is not likely to be representative of the effects in future periods, due to changes in forfeiture
rates, additional grants and subsequent periods of vesting.
Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
In accordance with APB 25, the Company recognized no compensation expense for qualified stock
option grants, as the options were granted
8
at fair market price of the underlying shares on the
date of the grant. For options issued with an exercise price less
than the fair market value of the shares at the date of grant, the Company recognized the
difference between the exercise price and fair market value as compensation expense in accordance
with APB 25. Prior to January 1, 2006, the Company provided pro forma disclosure amounts in
accordance with Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation, (SFAS 123) as amended by Statement of Financial Accounting Standards No. 148
Accounting for Stock-Based Compensation Transition and Disclosure, (SFAS 148). As compensation
expense was disclosed but not recognized in periods prior to January 1, 2006, no cumulative
adjustment for forfeitures was recorded in 2006. 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
SFAS 123 to stock-based employee compensation in the prior three and six-month periods ended June
30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
Net loss
applicable to common stockholders as reported |
|
$ |
(3,868,286 |
) |
|
$ |
(7,317,119 |
) |
Add: Stock-based employee/director compensation expense
included in reported net loss |
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee/director
compensation expense under the fair value based method
for all awards |
|
|
(101,231 |
) |
|
|
(238,693 |
) |
Net loss
applicable to common stockholders pro forma |
|
$ |
(3,969,517 |
) |
|
$ |
(7,555,812 |
) |
Basic and diluted net loss per share applicable to
common stockholders as reported |
|
$ |
(0.06 |
) |
|
$ |
(0.12 |
) |
Basic and diluted net loss per share applicable to
common stockholders pro forma |
|
$ |
(0.06 |
) |
|
$ |
(0.12 |
) |
Shares used in basic and diluted loss per share
applicable to common stockholder amounts |
|
|
63,072,873 |
|
|
|
62,741,639 |
|
The Company accounts for stock options granted to non-employees in accordance with SFAS 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 model. The fair value is remeasured during the service period and is amortized over
the vesting period of each option or the recipients contractual arrangement, if shorter. No stock
options were issued to non-employees other than options granted to non-employee members of the
Board of Directors for service as Board members.
Revenue Recognition
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.
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 is recognized as revenue at the time of receipt.
Recent Accounting Pronouncements
Accounting for Changes and Error Corrections
In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154 Accounting
Changes and Error Corrections SFAS 154). SFAS 154 replaces APB Opinion No. 20 Accounting
Changes and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS 154
requires that a voluntary
9
change in accounting principle be applied retrospectively with all prior
period financial statements presented on the new accounting principle. SFAS 154 also requires that
a change in method of depreciating or amortizing a long-
lived non-financial asset be accounted for prospectively as a change in estimate, and
correction of errors in previously issued financial statements should be termed a restatement. SFAS
154 is effective for accounting changes and correction of errors made in fiscal years beginning
after December 15, 2005. The implementation of SFAS 154 is not expected to have a material impact
on the Companys consolidated financial statements.
NOTE 2. RENEURON LICENSE AND SETTLEMENT AGREEMENT
In July 2005, the Company entered into a license and settlement agreement with ReNeuron
Limited, a wholly owned subsidiary of ReNeuron Group plc, a publicly listed UK corporation
(collectively referred to as ReNeuron). As part of the agreement, the Company granted ReNeuron a
license that allows ReNeuron to exploit their c-mycER conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. In return for the license, StemCells
received a 7.5% fully-diluted equity interest in ReNeuron, subject to certain anti-dilution
provisions, and a cross-license to the exclusive use of ReNeurons technology for certain diseases
and conditions, including lysosomal storage diseases, spinal cord injury, cerebral palsy and
multiple sclerosis. The agreement also provides for full settlement of any potential claims that
either StemCells or ReNeuron might have had against the other in connection with any putative
infringement of certain of each partys patent rights prior to the effective date of the agreement.
The agreement is Exhibit 10.71 to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2005. An amendment to the agreement was entered on April 3, 2006, a copy of which
was attached as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006. On June 29, 2006, ReNeuron issued additional shares of common stock, of which
StemCells was entitled to 439,071 shares because of the anti-dilution provisions within the
agreement and net of shares due to Neurospheres Ltd., an Alberta corporation from which StemCells
has licensed some of the patent rights that are the subject of the agreement with ReNeuron. The
Company recorded approximately $103,000 as other income for the additional shares. The fair market
value of the Companys holdings in ReNeuron common stock as of December 31, 2005 (8,835,766 shares)
and June 30, 2006 (9,274,837 shares) was approximately $3,721,000 and $2,101,000 respectively.
Changes in market value as a result of changes in market price per share or the exchange rate
between the US dollar and the British pound are accounted for under other comprehensive loss if
deemed temporary, as in this case, and are not recorded as other income or loss until the shares
are disposed of and a gain or loss realized. The unrealized loss as of June 30, 2006, is
approximately $1,977,000. A decline in the fair value of securities that is deemed other than
temporary would be charged to earnings.
NOTE 3. LEASES
The Company 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 related to its former encapsulated cell
technology. 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 currently from 8.1% to 9.5%.
The outstanding principal at June 30, 2006 was approximately $1,480,000. 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, 2005 and June
30, 2006, the Company had deferred rent liability for this facility of approximately $1,208,000 and
$1,223,000 respectively; the deferred rent liability is presented as part of the wind-down accrual.
Although the Company previously discontinued activities relating to encapsulated cell
technology, the Company remains obligated under the leases for the pilot manufacturing facility and
the laboratory facility. The Company has succeeded in subleasing the pilot manufacturing facility
and part of the laboratory facility. The aggregate income received by the Company is significantly
less than the Companys aggregate obligations under the leases, and the Companys continued receipt
of rental income is dependent on the financial ability of the occupants to comply with their
obligations under the subleases. The Company continues to seek to sublet the vacant portions of
the Rhode Island facilities, to assign or sell its interests in all of these properties, or to
otherwise arrange for the termination of its obligations under the lease obligations on these
facilities. There can be no assurance, however,
10
that the Company will be able to dispose of these
properties in a reasonable time, if at all, or to terminate its lease obligations without the
payment of substantial consideration
As of February 1, 2001, the Company entered into a 5-year lease for 40,000 square feet of an
approximately 68,000 square foot facility located in the Stanford Research Park in Palo Alto, CA.
The facility includes space for animals, laboratories, offices, and a GMP (Good Manufacturing
Practices) suite. GMP facilities can be used to manufacture materials for 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
$503,079, which was an addition to the letter of credit in the amount of $275,000 issued at
commencement of the lease, to serve as a deposit for the duration of the lease. The Company
negotiated an amendment to the lease effective April 1, 2005, which extends the term of the lease
through March 31, 2010, includes an immediate reduction in the rent per square foot, and provides
for an expansion of the leased premises by approximately 28,000 additional square feet effective
July 1, 2006. In addition, the Company sublet some of the additional space for the period from
April 1, 2005 through June 30, 2006. The average annual rent due from the Company under its lease
for the period commencing April 1, 2005 to March 31, 2010 is approximately $2 million before
subtenant income. The lease has escalating rent payments, which the Company is recognizing on a
straight-line basis. At June 30, 2006, the Company had deferred rent liability for this facility
of approximately $1,055,000. At June 30, 2006 the Company has a space-sharing agreement covering
in total approximately 11,000 square feet of this facility. The Company receives the amount of
base rent plus the proportionate share of the operating expenses that it pays for such space over
the term of these agreements.
NOTE 4. RELOCATION TO CALIFORNIA FROM RHODE ISLAND
In October 1999, the Company relocated to California from Rhode Island and established a wind
down 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. Even though the Company intends to dispose of the facility at the
earliest possible time, the Companys management cannot determine with certainty a fixed date by
which such disposal will occur. In light of this uncertainty, the Company periodically
re-evaluates and adjusts the reserve. The Company considers 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 actual and projected occupancy. At
December 31, 2005 the reserve was approximately $6,098,000. For the three and six-month period
ended June 30, 2006, the Company incurred approximately $298,000 and $582,000 in operating
expenses, which was recorded against the reserve. After evaluating the afore-mentioned factors the
Company re-valued the reserve to $5,847,000 at June 30, 2006 by booking an additional $156,000 and
$175,100 at March 31, 2006 and June 30, 2006, respectively, as wind-down expenses.
Wind-down reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January to |
|
|
January to March |
|
April to June |
|
January to June |
|
December 31, |
|
|
31, 2006 |
|
30, 2006 |
|
30, 2006 |
|
2005 |
|
|
|
Accrued wind-down reserve at
beginning of period |
|
$ |
6,098,000 |
|
|
|
5,970,000 |
|
|
$ |
6,098,000 |
|
|
$ |
4,350,000 |
|
Less actual expenses
recorded against estimated
reserve during the period |
|
|
(284,000 |
) |
|
|
(298,000 |
) |
|
|
(582,000 |
) |
|
|
(1,079,000 |
) |
Additional expense recorded
to revise estimated reserve
at period-end |
|
|
156,000 |
|
|
|
175,000 |
|
|
|
331,000 |
|
|
|
2,827,000 |
|
|
|
|
Revised reserve at period-end |
|
|
5,970,000 |
|
|
|
5,847,000 |
|
|
|
5,847,000 |
|
|
|
6,098,000 |
|
Add deferred rent at period
end (See Note 3) |
|
|
1,215,000 |
|
|
|
1,223,000 |
|
|
|
1,223,000 |
|
|
|
1,208,000 |
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January to |
|
|
January to March |
|
April to June |
|
January to June |
|
December 31, |
|
|
31, 2006 |
|
30, 2006 |
|
30, 2006 |
|
2005 |
|
|
|
Total accrued wind-down
expenses at period-end
(current and non current
portion) |
|
$ |
7,185,000 |
|
|
$ |
7,070,000 |
|
|
$ |
7,070,000 |
|
|
$ |
7,306,000 |
|
|
|
|
Accrued wind-down expenses
Current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion |
|
$ |
1,182,000 |
|
|
$ |
1,255,000 |
|
|
$ |
1,255,000 |
|
|
$ |
1,119,000 |
|
|
|
|
Non current portion |
|
|
6,003,000 |
|
|
|
5,815,000 |
|
|
|
5,815,000 |
|
|
|
6,187,000 |
|
|
|
|
Total Accrued wind-down
expenses |
|
$ |
7,185,000 |
|
|
$ |
7,070,000 |
|
|
$ |
7,070,000 |
|
|
$ |
7,306,000 |
|
|
|
|
NOTE 5. GRANTS
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
approximately $308,000 for the first year and approximately $156,000 for the remainder of the grant
term, September 30, 2005 through March 31, 2006. The studies have been 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. The remaining $242,000 has been recognized by the
Company as grant revenue as and when resources were expended for this study. For the six month
period ended June 30, 2006, the Company recognized approximately $38,000; the Company has now drawn
down in full its share of the grant.
NOTE 6. STOCKHOLDERS EQUITY
In March 2006, a warrant issued as part of the June 16, 2004 financing arrangement was
exercised to purchase an aggregate of 526,400 shares of the Companys common stock at $1.89 per
share. The Company issued 526,400 shares of its common stock and received proceeds of
approximately $995,000. On April 6, 2006, the Company sold 11,750,820 shares of its common stock
to a limited number of institutional investors at a price of $3.05 per share, for gross proceeds of
approximately $35,840,000. The shares were offered as a registered direct placement under the
Companys effective shelf registration statement previously filed with the Securities and Exchange
Commission. For the three and six month period ended June 30, 2006, the Company issued 43,308 and
103,932 shares from activity related to its stock option plans. The following table presents the
activity of the Companys stock option plans for the six month periods ended June 30, 2006 and
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Exercise |
|
|
|
|
|
|
Average Exercise |
|
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
Outstanding at January 1 |
|
|
6,608,109 |
|
|
$ |
3.02 |
|
|
|
6,682,201 |
|
|
$ |
2.67 |
|
Granted |
|
|
746,887 |
|
|
$ |
3.33 |
|
|
|
384,895 |
|
|
$ |
4.08 |
|
Exercised |
|
|
(103,932 |
) |
|
$ |
1.91 |
|
|
|
(194,475 |
) |
|
$ |
1.62 |
|
Canceled |
|
|
(202,844 |
) |
|
$ |
2.18 |
|
|
|
(130,834 |
) |
|
$ |
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30 |
|
|
7,048,220 |
|
|
$ |
3.10 |
|
|
|
6,741,787 |
|
|
$ |
2.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30 |
|
|
4,583,297 |
|
|
$ |
2.98 |
|
|
|
3,687,643 |
|
|
$ |
2.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and the results of our operations for
the three and six month periods ended June 30, 2006 and 2005 should be read in conjunction with the
accompanying unaudited condensed consolidated 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 (FDA) will permit us to proceed to
clinical testing of proposed products despite the novel and unproven nature of our 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 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 if needed to support the
development and commercialization of our stem cell programs; the uncertainty regarding the outcome
of the Phase I clinical trial and any other trials we 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 our stem cell programs will prove clinically effective and not cause
tumors or other side effects; the uncertainty whether we will achieve revenues from product sales
or become profitable; uncertainties regarding our obligations in regard to our 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. All forward-looking statements attributable to us or to persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements and risk factors set forth in
Item 1A (Risk Factors) and elsewhere in our Form 10-K for the year ended December 31, 2005 and the
risk factors set forth in Part II, Item 1A (Risk Factors) and elsewhere in this Form 10-Q.
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 March 2006, we initiated a Phase I clinical trial of our human neural stem
cells as a treatment for the infantile and late infantile forms of neuronal ceroid lipofuscinosis
(NCL) at Doernbecher Childrens Hospital at Oregon Health & Science University (OHSU) in Portland,
Oregon. NCL, which is often referred to as Batten disease, is a rare, fatal neurodegenerative
disease afflicting infants and young children. We are currently enrolling patients in the trial
and expect to dose the first patient later this year.
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 getting it cleared by 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 time and there can be no assurance that such
financing or partnering revenues will be available when needed or on terms acceptable to us.
Our results of operations have varied significantly from year to year and quarter to quarter
and may vary significantly in the future due to the occurrence of material recurring and
nonrecurring events, including without
13
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 support to our Research and Development programs, we will need to hire more
personnel, which will lead to higher operating expenses.
Our program in neural stem and progenitor cells ranges from the preclinical stage, in which we
test human neural stem cells in small animal models of human diseases both in-house and through
external academic collaborators, through the development phase, in which we evaluate improvements
to expansion methods and the toxicology of the cells, through the clinical development phase, with
respect to the Phase I clinical trial in Batten disease mentioned above. In our liver cell
program, we are engaged in evaluating our proprietary human liver engrafting cell in various in
vivo assays. We plan to advance our liver cell program into product development as rapidly as we
can. Our pancreas program is still in the discovery stage and further evaluation of the
therapeutic potential of the candidate human pancreatic stem/progenitor cell will be required.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our 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 include the accrued wind-down
expenses related to our Rhode Island facilities and the grant date fair value of share based awards
recognized as compensation expense in accordance with the provisions of SFAS 123R.
Stock-Based Compensation
In December 2004, FASB issued SFAS 123R Share-Based Payment. This Statement is a revision
of SFAS 123 Accounting for Stock-Based Compensation and amends SFAS No. 95 Statement of Cash
Flows. SFAS 123R supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees and its
related implementation guidance. SFAS 123R covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The new standard is effective as of the
beginning of the first interim or annual reporting period that begins after December 15, 2005. We
adopted SFAS 123R effective January 1, 2006. Adoption of the expensing requirements will reduce
our reported earnings. See Stock Based Compensation under Note 1 for the current and potential
impact on net loss and net loss per share attributable to common shareholders.
Research and Development Costs
We expense 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 wind-down of our former encapsulated cell technology operations, our
research and manufacturing operations in Lincoln, Rhode Island, and the relocation of our remaining
research and development activities and corporate headquarters to California in October 1999, we
provided a reserve for our estimate of the exit cost obligation in accordance with EITF 94-3 Other
Cost to Exit an Activity. The reserve reflects estimates of the ongoing costs of our former
research and administrative facility in Lincoln, which we hold on a lease that terminates on June
30, 2013. We are seeking to sublease, assign, sell or otherwise divest ourselves of our interest
in the facility at the earliest possible time, but we cannot determine with certainty a fixed date
by which such events will occur, if at all.
14
In determining the facility exit cost reserve amount, we are required to consider the
Companys lease payments through to the end of the lease term and estimate other relevant factors
such as facility operating expenses, real estate market conditions in Rhode Island for similar
facilities, occupancy rates and sublease rental rates projected over the course of the leasehold.
We re-evaluate the estimate each quarter, taking account of changes, if any, in each underlying
factor. The process is inherently subjective because it involves projections over time from the
date of the estimate through the end of the lease and it is not possible to determine any of the
factors except the lease payments with certainty over that period.
Management forms its best estimate on a quarterly basis, after considering actual sublease
activity, reports from our broker/realtor about current and predicted real estate market conditions
in Rhode Island, the likelihood of new subleases in the foreseeable future for the specific
facility and significant changes in the actual or projected operating expenses of the property. We
discount the projected net outflow over the term of the leasehold to arrive at the present value,
and adjust the reserve to that figure. The estimated vacancy rate for the facility is an important
assumption in determining the reserve because changes in this assumption have the greatest effect
on estimated sublease income. In addition, the vacancy rate estimate is the variable most subject
to change, while at the same time it involves the greatest judgment and uncertainty due to the
absence of highly predictive information concerning the future of the local economy and future
demand for specialized laboratory and office space in that area. The average vacancy rate of the
facility for years 2001 through 2005 was approximately 64%, varying from 49% to 80%. As of June
30, 2006, based on current information available to management, the vacancy rate is projected to be
91% for the remainder of 2006, 84% for 2007, and approximately 70% from 2008 through the end of the
lease. These estimates are based on actual occupancy in 2006, expiration of subleases in 2006 and
2008, predicted lead time for acquiring new subtenants, historical vacancy rates for the area and
assessments by our broker/realtor of future real estate market conditions. If the assumed vacancy
rate for 2008 to the end of the Lease had been five percentage points higher or lower at June 30,
2006, then the reserve would have increased or decreased by approximately $230,000. Similarly, a
5% increase or decrease in the operating expenses for the facility from 2006 would have increased
or decreased the reserve by approximately $124,000, and a 5% increase or decrease in the assumed
average rental charge per square foot would have increased or decreased the reserve by
approximately $66,000. Management does not wait for specific events to change its estimate, but
instead uses its best efforts to anticipate them on a quarterly basis.
The wind-down reserve at the end of December 31, 2005 was $6,098,000. For the three and
six-month period ended June 30, 2006, we recorded actual expenses against this reserve of
approximately $298,000 and $582,000 respectively. Based on managements evaluation of the factors
mentioned, and particularly the projected vacancy rates described above, we adjusted the reserve to
$5,847,,000 by recording an additional $331,000 for the six month period ended June 30, 2006. See
Note 4 for a breakdown of these figures by quarter.
RESULTS OF OPERATIONS
Three months ended June 30, 2006 and 2005
Revenue
Revenue in the second quarter of 2006, as compared with the same quarter in 2005, is
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from grants |
|
$ |
|
|
|
$ |
26,092 |
|
|
|
($26,092 |
) |
|
|
|
|
Revenue from licensing agreements |
|
|
20,535 |
|
|
|
10,677 |
|
|
|
9,858 |
|
|
|
92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
20,535 |
|
|
$ |
36,769 |
|
|
|
($16,234 |
) |
|
|
(44 |
)% |
For the three months ended June 30, 2005, revenue from grants totaled approximately $26,000.
The revenue from grants was part of a $464,000 Small Business Technology Transfer grant for studies
in Alzheimers disease. By March 31, 2006, the Company had drawn down in full its share of the
grant. Total revenue includes
15
licensing revenue of approximately $20,000, and $11,000 for the three-month periods ended June
30, 2006 and 2005, respectively.
Operating Expenses
Operating expenses in the second quarter of 2006, as compared with the same quarter in 2005,
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
3,187,513 |
|
|
$ |
1,969,096 |
|
|
$ |
1,218,417 |
|
|
|
62 |
% |
General and administrative |
|
|
1,412,513 |
|
|
|
954,542 |
|
|
|
457,971 |
|
|
|
48 |
% |
Wind-down expenses |
|
|
174,901 |
|
|
|
1,197,226 |
|
|
|
(1,022,325 |
) |
|
|
(85 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
4,774,927 |
|
|
$ |
4,120,864 |
|
|
$ |
654,063 |
|
|
|
16 |
% |
Research and development expenses totaled approximately $3,188,000 for the three months ended
June 30, 2006, compared with approximately $1,969,000 for the same period in 2005. The increase of
$1,218,000, or approximately 62%, from 2005 to 2006 was primarily attributable to expansion of our
operations in cell processing and clinical development, which consisted of an increase in personnel
costs of approximately $585,000 and an increase in external services of approximately $399,000,
with the remainder due to increases in supplies, rent and other operating expenses. Of the
approximately $585,000 increase in personnel costs, approximately $311,000 was attributable to the
expensing of stock option compensation as required by the new accounting pronouncement SFAS 123R
(see Stock Based Compensation under Note 1 above), with the balance attributable to an increase
in head count. At June 30, 2006, we had 36 full-time employees working in research and development
and laboratory support services as compared to 30 at June 30, 2005.
General and administrative expenses were approximately $1,413,000 for the three months ended
June 30, 2006, compared with approximately $955,000 for the same period in 2005. The increase of
$458,000, or approximately 48%, from 2005 to 2006 was primarily attributable to an increase in
personnel costs of approximately $332,000, of which approximately $235,000 was attributable to the
expensing of stock option compensation as required by the new accounting pronouncement SFAS 123R
(see Stock Based Compensation under Note 1 above) with the balance attributable to an increase in
head count. The remaining increase in costs was attributable to an increase in costs related to
auditors fees, investor relations, listing fees, facilities and other expenses.
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 March 31, 2006, the reserve was approximately $5,970,000. For the three months
ended June 30, 2006, expenses of $298,000 net of subtenant income were recorded against this
reserve (see Note 4 for a breakdown of these figures by quarter). At June 30, 2006, we
re-evaluated the estimate and adjusted the reserve to approximately $5,847,000 by recording an
additional $175,000 as wind-down expenses. Wind-down expenses recorded for the same period in 2005
were $1,197,000. 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.
Other Income
Other income in the second quarter of 2006, as compared with the same quarter in 2005, is
summarized in the table below:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
$ |
103,359 |
|
|
$ |
|
|
|
$ |
103,359 |
|
|
|
|
|
Interest income |
|
|
703,551 |
|
|
|
261,389 |
|
|
|
442,162 |
|
|
|
169 |
% |
Interest expense |
|
|
(38,505 |
) |
|
|
(45,345 |
) |
|
|
6,840 |
|
|
|
(15 |
)% |
Other income (expense) |
|
|
(3,372 |
) |
|
|
(235 |
) |
|
|
(3,137 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
$ |
765,033 |
|
|
$ |
215,809 |
|
|
$ |
549,224 |
|
|
|
254 |
% |
For the three months ended June 30, 2006, under the terms of a license and settlement
agreement with ReNeuron (see Note 2 for details), we recorded approximately $103,000 as other
income upon receipt of additional shares of ReNeuron common stock due to us because of an
anti-dilution provision within the agreement.
Interest income for the three months ended June 30, 2006 and 2005 was approximately $704,000
and $261,000, respectively. The increase in interest income in 2006 was primarily attributable to
higher yield on investments.
Interest expense for the three months ended June 30, 2006 and 2005 was approximately $39,000
and $45,000 respectively. The decrease in interest expense in 2006 was attributable to lower
outstanding debt and capital lease balances in 2006 compared to 2005.
Increase in other expense in 2006 was primarily attributable to an approximate $1,000 loss on
write-off of equipment and an increase of $2,000 in franchise tax paid.
Six months ended June 30, 2006 and 2005
Revenue
Revenue for the six months ended June 30, 2006, as compared with the same period in 2005, is
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from grants |
|
$ |
37,550 |
|
|
$ |
52,184 |
|
|
|
($14,634 |
) |
|
|
(28 |
)% |
Revenue from licensing agreements |
|
|
24,535 |
|
|
|
19,906 |
|
|
|
4,629 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
62,085 |
|
|
$ |
72,090 |
|
|
|
($10,005 |
) |
|
|
(14 |
)% |
For the six months ended June 30, 2006 and June30, 2005, revenue from grants totaled
approximately $38,000 and $52,000 respectively. The revenue from grants was part of a $464,000
Small Business Technology Transfer grant for studies in Alzheimers disease. By March 31, 2006, we
had drawn down in full our share of the grant. Total revenue includes licensing revenue of $25,000
and $20,000 for the six-month periods ended June 30, 2006 and 2005, respectively.
Operating Expenses
Operating expenses for the six months ended June 30, 2006, as compared with the same period in
2005, is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
5,879,394 |
|
|
$ |
3,588,029 |
|
|
$ |
2,291,365 |
|
|
|
64 |
% |
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
General and administrative |
|
|
3,089,837 |
|
|
|
2,459,744 |
|
|
|
630,093 |
|
|
|
26 |
% |
Wind-down expenses |
|
|
331,018 |
|
|
|
1,718,200 |
|
|
|
(1,387,182 |
) |
|
|
(81 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
9,300,249 |
|
|
$ |
7,765,973 |
|
|
$ |
1,534,276 |
|
|
|
20 |
% |
Research and development expenses totaled approximately $5,879,000 for the six months ended
June 30, 2006, compared with approximately $3,588,000 for the same period in 2005. The increase of
$2,291,000, or approximately 64%, from 2005 to 2006 was primarily attributable to expansion of our
operations in cell processing and clinical development, which consisted of an increase in personnel
costs of approximately $1,127,000 and an increase in external services of approximately $596,000,
with the remainder attributable to increases in supplies, rent and other operating expenses. Of
the approximately $1,127,000 increase in personnel costs, approximately $528,000 was attributable
to the expensing of stock option compensation as required by the new accounting pronouncement SFAS
123R (see Stock Based Compensation under Note 1 above), with the balance attributable to an
increase in head count. At June 30, 2006, we had 36 full-time employees working in research and
development and laboratory support services as compared to 30 at June 30, 2005.
General and administrative expenses were approximately $3,090,000 for the six months ended
June 30, 2006, compared with approximately $2,460,000 for the same period in 2005. The increase of
$630,000, or approximately 26%, from 2005 to 2006 was primarily attributable to an increase in
personnel costs of approximately $713,000, of which approximately $434,000 was attributable to the
expensing of stock option compensation as required by the new accounting pronouncement SFAS 123R
(see Stock Based Compensation under Note 1 above) with the balance attributable to an increase in
head count. The increase in personnel costs was partially offset by a decrease of approximately
$83,000 in other operating expenses mainly attributable to a decrease in recruiting fees.
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, 2005 the reserve was approximately $6,098,000. For the six months
ended June 30, 2006, expenses of $582,000 net of subtenant income were recorded against this
reserve. At June 30, 2006 we re-evaluated the estimate and adjusted the reserve to approximately
$5,847,000 by recording an additional $331,000 (including the March 31, 2006 adjustment of
$156,000) as wind-down expenses (see Note 4 for a breakdown of these figures by quarter).
Wind-down expenses recorded for the same period in 2005 were $1,197,000. 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.
Other Income
Other income for the six months ended June 30, 2006, as compared with the same period in 2005,
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
$ |
103,359 |
|
|
$ |
|
|
|
$ |
103,359 |
|
|
|
|
|
Interest income |
|
|
1,043,365 |
|
|
|
489,152 |
|
|
|
554,213 |
|
|
|
113 |
% |
Interest expense |
|
|
(77,098 |
) |
|
|
(91,756 |
) |
|
|
14,658 |
|
|
|
(16 |
)% |
Other income (expense) |
|
|
(13,947 |
) |
|
|
(20,632 |
) |
|
|
6,685 |
|
|
|
(32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
$ |
1,055,679 |
|
|
$ |
376,764 |
|
|
$ |
678,915 |
|
|
|
180 |
% |
18
For the six months ended June 30, 2006, as part of a license and settlement agreement with
ReNeuron (see Note 2 for details), we recorded approximately $103,000 as other income for
additional shares of ReNeuron common stock due to us because of an anti-dilution provision within
the agreement.
Interest income for the six months ended June 30, 2006 and 2005 was approximately $1,043,000
and $489,000 respectively. The increase in interest income in 2006 was primarily attributable to
higher yield on investments.
Interest expense for the six months ended June 30, 2006 and 2005 was approximately $77,000 and
$92,000 respectively. The decrease in interest expense in 2006 was attributable to lower
outstanding debt and capital lease balances in 2006 compared to 2005. Decrease in other expense
from approximately $21,000 to $14,000 was primarily attributable to a decrease in estimated
franchise tax payable in 2006.
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 $59,907,207 at June 30, 2006. Cash equivalents are
invested in US Treasury debt securities with maturities of less than 90 days. The table below
summarizes our cash flows for the respective six month periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change from previous year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Net cash used in operating activities |
|
|
($7,868,586 |
) |
|
|
($6,480,046 |
) |
|
|
($1,388,540 |
) |
|
|
21 |
% |
Net cash used in investing activities |
|
|
(1,179,732 |
) |
|
|
(285,280 |
) |
|
|
(894,452 |
) |
|
|
314 |
% |
Net cash provided (used) by financing activities |
|
|
34,414,616 |
|
|
|
2,101,339 |
|
|
|
32,313,277 |
|
|
|
1,538 |
% |
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
25,366,298 |
|
|
|
($4,663,987 |
) |
|
$ |
30,030,285 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase from 2005 to 2006 of approximately $1,389,000, or 21%, in cash used in operating
activities was primarily attributable to an increase in personnel costs and external services, and
the increase of $894,000, or 314%, in cash used in investing activities was primarily attributable
to an increase in equipment costs, all resulting from the expansion of our operations in cell
processing and clinical development.
On April 6, 2006, we sold 11,750,820 shares of our common stock to a limited number of
institutional investors at a price of $3.05 per share, for gross proceeds of approximately
$35,840,000. The shares were offered as a registered direct placement under the Companys effective
shelf registration statement previously filed with the U.S. Securities and Exchange Commission
(SEC). We received total proceeds, net of offering expenses and placement agency fees, of
approximately $33,200,000. UBS Investment Bank (UBS) acted as placement agent in this offering. For
acting as our placement agent, UBS received fees of approximately $2,150,000 and expense
reimbursement of approximately $50,000. No warrants were issued as part of this financing
transaction.
Key financing arrangements in the previous three years include the following:
|
|
|
On October 26, 2004, we entered into an agreement with institutional investors
with respect to the registered direct placement of 7,500,000 shares of our common
stock at a purchase price of $3.00 per share, for gross proceeds of $22,500,000.
C.E. Unterberg, Towbin LLC (Unterberg) and Shoreline Pacific, LLC (Shoreline)
served as placement agents for the transaction. We sold these shares under a shelf
registration statement previously filed with and declared effective by the SEC.
For acting as our placement agent Unterberg and Shoreline received fees of
approximately |
19
$1,350,000 and expense reimbursement of approximately $40,000. No warrants were
issued as part of this financing transaction.
|
|
|
On June 16, 2004, we entered into a definitive 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. Unterberg served as placement
agent for the transaction. For acting as our placement agent, Unterberg received
fees totaling $1,200,192, 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 December 10, 2003 we completed a $9.5 million financing transaction with
Riverview Group L.L.C. (Riverview), through the sale of 5,000,000 shares of common
stock at a price of $1.90 per share. The closing price of our common stock on that
date was $2.00 per share. |
|
|
|
|
Pursuant to a Stock Purchase Agreement dated May 7, 2003, we issued
4,000,000 shares of our common stock to Riverview for $6.5 million, or $1.625 per
share. On the date of the agreement, the price was above the trading price of our
common stock, which closed at $1.43 per share on that date. We also agreed to
issue a 2-year warrant to Riverview to purchase 1,898,000 shares of common stock at
$1.50 per share. In November 2003 and May 2005, Riverview exercised this warrant,
resulting in gross proceeds to us of $2,847,000. |
|
|
|
|
As disclosed above, on April 6, 2006, we sold 11,750,820 shares of our
common stock to a limited number of institutional investors at a price of $3.05 per
share, for net proceeds to us of approximately $33,200,000. |
Future Contractual Cash Obligations
We continue to have outstanding obligations in regard to our former facilities in Lincoln,
Rhode Island, and expect to pay in 2006, based on past experience and current assumptions,
approximately $1,000,000 in lease payments and other operating expenses net of sub-tenant income.
We have subleased a portion of these facilities and are actively seeking to sublease, assign or
sell our remaining interests in these facilities. Failure to do so within a reasonable period of
time will have a material adverse effect on our liquidity and capital resources.
The following table summarizes our future contractual cash obligations (including both Rhode
Island and California leases, but excluding interest income and sub-lease income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in |
|
|
|
|
|
|
|
December |
|
|
Payable in |
|
|
Payable in |
|
|
Payable in |
|
|
Payable in |
|
|
2011 and |
|
|
|
Total |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
beyond |
|
|
|
|
Capital lease
payments |
|
$ |
2,177,727 |
|
|
$ |
256,088 |
|
|
$ |
332,545 |
|
|
$ |
244,531 |
|
|
$ |
244,572 |
|
|
$ |
242,560 |
|
|
$ |
857,431 |
|
Operating lease
payments |
|
|
16,571,954 |
|
|
|
1,557,456 |
|
|
|
3,165,162 |
|
|
|
3,469,017 |
|
|
|
3,536,843 |
|
|
|
1,767,304 |
|
|
|
3,076,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
cash obligations |
|
$ |
18,749,681 |
|
|
$ |
1,813,544 |
|
|
$ |
3,497,707 |
|
|
$ |
3,713,548 |
|
|
$ |
3,781,415 |
|
|
$ |
2,009,864 |
|
|
$ |
3,933,603 |
|
|
|
|
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
20
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.
We intend to pursue opportunities to obtain additional financing in the future through equity
and debt financings, grants and collaborative research arrangements. We have a shelf registration
covering shares of our common stock up to a value of approximately $64 million that could be
available for financings. 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 neededat 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.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In July 2005, the Company entered into a license and settlement agreement with ReNeuron.
As part of the agreement, the Company granted ReNeuron a license that allows ReNeuron to exploit
their c-mycER conditionally immortalized adult human neural stem cell technology for therapy and
other purposes. In return for the license, StemCells received a 7.5% fully-diluted equity interest
in ReNeuron, subject to certain anti-dilution provisions, and a cross-license to the exclusive use
of ReNeurons technology for certain diseases and conditions, including lysosomal storage diseases,
spinal cord injury, cerebral palsy and multiple sclerosis. The agreement also provides for full
settlement of any potential claims that either StemCells or ReNeuron might have had against the
other in connection with any putative infringement of certain of each partys patent rights prior
to the effective date of the agreement. The agreement is Exhibit 10.71 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2005. An amendment to the agreement was entered
on April 3, 2006, a copy of which is attached as an exhibit to this Report on Form 10-Q. On June
29, 2006, ReNeuron issued additional shares of common stock, of which StemCells was entitled to
439,071 shares because of the anti-dilution provisions within the agreement and net of shares due
to Neurospheres Ltd., an Alberta corporation from which StemCells has licensed some of the patent
rights that are the subject of the agreement with ReNeuron. The Company recorded approximately
$103,000 as other income for the additional shares. The fair market value of the StemCells holdings
in ReNeurons common stock as of December 31, 2005 (8,835,766 shares) and June 30, 2006 (9,274,837
shares) was approximately $3,721,000 and $2,101,000 respectively. Changes in market value as a
result of changes in market price per share or the exchange rate between the US dollar and the
British pound are accounted for under other comprehensive loss if deemed temporary, and are not
recorded as other income or loss until the shares are disposed of and a gain or loss realized.
The unrealized loss as of June 30, 2006, is approximately $1,977,000. A decline in the fair value
of securities that is deemed other than temporary would be charged to earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
|
|
|
|
|
|
|
|
|
Share price at |
|
Exchange Rate at |
|
Market Value in |
|
Future |
Company/Stock |
|
|
|
|
|
No. of Shares at |
|
June 30,2006 in |
|
June 30, 2006 |
|
USD at June 30, |
|
Cash |
Symbol |
|
Exchange |
|
Associated Risks |
|
June 30, 2006 |
|
GBP (£) |
|
1 GBP = USD |
|
2006 |
|
Flows |
ReNeuron Group
plc/RENE
|
|
AIM (AIM is the
London Stock
Exchanges
Alternative
Investment Market)
|
|
- Lower share price
- - Foreign currency
translation
- - Liquidity
- - Bankruptcy
|
|
|
9,274,837 |
|
|
|
0.1225 |
|
|
|
1.8491 |
|
|
$ |
2,100,887 |
|
|
|
(1 |
) |
(1) |
|
We have not formally adopted a liquidation plan for this investment. Liquidation may be
necessary in the future to meet operating cash flow requirements. Although we are not legally
restricted from selling the stock, the share price is subject to change and the volume traded
has been very small since the stock was listed on the AIM on August 12, 2005. The performance
of ReNeuron Group plc stock since its listing does not predict its future value. |
Other than the above, no significant changes have occurred in our quantitative and qualitative
information about market risks disclosed in our Annual Report on Form 10-K for the fiscal year
ending December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
In response to the requirement of the Sarbanes-Oxley Act of 2002, as of the end of the
period covered by this report, our chief executive officer and chief financial officer, along with
other members of management, reviewed the effectiveness of the design and operation of our
disclosure controls and procedures. Such controls and procedures are designed to ensure that
information required to be disclosed in the Companys Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to management, including the chief executive
officer and the chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on this evaluation, the chief executive officer and chief financial
officer have concluded that the Companys disclosure controls and procedures are effective.
22
During the most recent quarter, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, these controls of the Company.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Geron Corporation has opposed two of our European patents that relate to neural stem
cells and their uses, alleging that each patent should be revoked on multiple grounds. 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. Both oppositions were heard in 2005, and the patents were
maintained in somewhat altered form by the Opposition Division of the European Patent Office. The
written opinion was issued on May 24, 2006 in the case concerning Patent No. EP-B-0669973, but the
time for appeal has not yet expired. The written opinion has not yet been issued in the case
concerning Patent No. EP-B-0594669; the time for appeal will begin to run in that case when the
Opposition Division opinion issues. There can be no assurance that Geron will not appeal in either
or both cases. While we are confident that, should either decision be appealed by Geron, the
decision will be upheld, there can be no guarantee of this. If we were ultimately unsuccessful in
our defense of the opposed patents, all claimed rights in the opposed patents would 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, but other types
of proceedings may be available to third parties to contest our U.S. patents.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A,
of our Annual Report on Form 10-K for the fiscal year ending December 31, 2005.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 21, 2006, we held our Annual Meeting of Shareholders. Martin McGlynn, President
and CEO of StemCells, and Roger Perlmutter, M.D., Ph.D., were re-elected to the Board as Class III
directors, with terms expiring in 2009. The remaining members of the Board, whose terms continued
after the Annual Meeting, are Eric Bjerkholt, Ricardo Levy, Ph.D., John Schwartz, Ph.D., and Irving
Weissman, M.D. The shareholders also ratified the selection of Grant Thornton LLP as StemCells
independent public accountants for the fiscal year ending December 31, 2006 and adopted the
Companys 2006 Equity Incentive Plan.
The number of proxies finally tabulated represented 71,617,330 of the 77,733,866 eligible shares,
or 92.131 percent of eligible shares. The votes on each of the proposals were as
follows:
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority |
|
|
|
|
|
|
|
|
|
For |
|
|
Withheld |
|
|
Against |
|
|
Abstain |
|
Election of Martin
McGlynn as director |
|
|
69,057,032 |
|
|
|
2,560,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Election of Roger
Perlmutter, M.D.,
Ph.D., as director |
|
|
69,078,635 |
|
|
|
2,538,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of
Grant Thornton LLP
as independent
accountants for 2006 |
|
|
69,871,355 |
|
|
|
|
|
|
|
1,446,519 |
|
|
|
299,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of 2006
Equity Incentive
Plan |
|
|
10,905,995 |
|
|
|
|
|
|
|
2,741,322 |
|
|
|
330,391 |
|
PART II
ITEM 5. OTHER INFORMATION
There were no matters required to be disclosed in a current report on Form 8-K during the
fiscal quarter covered by this report that were not so disclosed.
PART II
ITEM 6. EXHIBITS
Exhibit 31.1 Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
|
|
|
|
|
STEMCELLS, INC. |
|
|
|
|
|
|
|
(name of Registrant) |
|
|
|
|
|
|
|
July 31, 2006
|
|
/s/ Rodney K. B. Young |
|
|
|
|
|
|
|
|
|
Rodney K. B. Young |
|
|
|
|
Chief Financial Officer |
|
|
25
Exhibit Index
PART II ITEM 6. EXHIBITS
Exhibit 31.1 Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
exv31w1
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 quarterly report on Form 10-Q of StemCells, Inc.; |
|
|
(2) |
|
Based on my knowledge, this 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 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 quarterly report; |
|
|
(4) |
|
The registrants other certifying officer(s) 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)) 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 registrants 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 registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
|
(5) |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants 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 registrants internal control over financial
reporting.
Date:
July 31, 2006
|
|
|
|
|
|
/s/ Martin McGlynn |
|
|
|
|
|
Martin McGlynn |
|
|
President and Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Rodney K. B. Young, certify that:
|
(1) |
|
I have reviewed this quarterly report on Form 10-Q of StemCells, Inc.; |
|
|
(2) |
|
Based on my knowledge, this 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 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 quarterly report; |
|
|
(4) |
|
The registrants other certifying officer(s) 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)) 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 registrants 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 registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
|
(5) |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
(a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants 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 registrants internal control over financial
reporting.
Date:
July 31, 2006
|
|
|
|
|
|
/s/ Rodney K. B. Young |
|
|
|
|
|
Rodney K. B. Young |
|
|
Chief Financial Officer |
|
|
exv32w1
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) Quarterly on Form 10-Q for the period
ending June 30, 2006 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. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date:
July 31, 2006
|
|
|
|
|
|
/s/ Martin McGlynn |
|
|
|
|
|
Martin McGlynn |
|
|
President and Chief Executive Officer |
|
|
exv32w2
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) Quarterly on Form 10-Q for the period
ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Rodney K. B. Young, 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. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date:
July 31, 2006
|
|
|
|
|
|
/s/ Rodney K.B. Young |
|
|
|
|
|
Rodney K. B. Young |
|
|
Chief Financial Officer |
|
|