e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION
FILE NUMBER 0-19871
STEMCELLS, INC.
(Exact name of Registrant as
specified in its charter)
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DELAWARE
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94-3078125
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3155
PORTER DRIVE, PALO ALTO, CA 94304
(Address of principal offices)
(zip code)
Registrants telephone number, including area code:
(650) 475-3100
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
COMMON
STOCK, $.01 PAR VALUE
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
Title
of class
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is 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):
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Large
accelerated filer o
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Accelerated
Filer þ
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Non-accelerated
filer o
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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
Aggregate market value of Common Stock held by non-affiliates at
June 30, 2006: $157,013,768. Inclusion of shares held
beneficially by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common
control with the Registrant.
Common stock outstanding at February 23,
2007: 78,625,667 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement
relating to the registrants 2007 Annual Meeting of
Stockholders to be filed with the Commission pursuant to
Regulation 14A are incorporated by reference in
Part III of this report.
FORWARD
LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED UNDER
THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS COULD VARY
MATERIALLY. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY
MATERIALLY ARE DESCRIBED HEREIN AND IN OTHER DOCUMENTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD PAY
PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE
SECTION OF THIS REPORT ENTITLED MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS WELL AS ITEM 1A UNDER THE HEADING
RISK FACTORS.
PART I
Overview
StemCells, Inc. is focused on the discovery and development of
cell-based therapeutics to treat damage to or degeneration of
major organ systems such as the Central Nervous System, Liver
and Pancreas. Many degenerative diseases are caused by the loss
of normal cellular function in the particular organ. Our aim is
to restore organ function, improve patients lives, and
reduce the substantial health care costs associated with these
diseases and disorders. We seek to identify and purify rare stem
and progenitor cells, develop methods and processes to expand
and bank them as transplantable cells, and then demonstrate
their safety and efficacy as therapeutic agents. We are
currently conducting a Phase I clinical trial to evaluate
the safety and preliminary efficacy of our lead product, the
human neural stem cell
(HuCNS-SCtm),
as a treatment for infantile and late infantile neuronal ceroid
lipofuscinosis (NCL), two forms of a group of disorders often
referred to as Batten disease. As of February 2007, two patients
out of a total of six planned in this trial have been enrolled
and transplanted with HuCNS-SC.
Stem cells are cells that can produce all the functional mature
cell types found in normal organs of healthy individuals.
Progenitor cells are cells that have already developed from the
stem cells, but can still produce one or more types of mature
cells within an organ. We use cells derived from donated fetal
or adult tissue sources, which are supplied to us in compliance
with all applicable state and federal regulations. At this time,
we are not developing embryonic stem cells for therapeutic use
nor are we involved in any activity directed toward human
cloning. Our programs are all directed toward the use of
tissue-derived cells for treating or curing diseases and
injuries.
We have successfully identified, purified, and characterized the
human neural stem cell. Our neural stem cell product, HuCNS-SC,
is in a Phase I clinical trial for its first indication and
we are conducting additional preclinical and IND-enabling work
for additional indications. We have also identified a population
of cells derived from liver tissue, the human liver engrafting
cells (hLEC), which when transplanted into a mouse model of
liver degeneration, show long-term engraftment, differentiate
into human hepatocytes, secrete human hepatic proteins and form
structural elements of the liver. Based on this data, we are
developing the hLEC for potential therapeutic applications to
liver diseases. Our goal is to initiate a clinical test of these
cells in patients within the next twelve months. We have also
identified a candidate stem cell of the pancreas and this
program is at the research stage.
We believe that, if successfully developed, our cell
technologies will create the basis for therapies that would
address a number of conditions with significant unmet medical
needs. Many neurodegenerative diseases involve the failure of an
organ that cannot be transplanted, i.e., the brain or central
nervous system. Other diseases, such as hepatitis and diabetes,
involve organs, such as the liver or pancreas, that can be
transplanted, but of which there is a very limited supply
available for transplant. We estimate that these neural, liver
and pancreatic conditions affect more than 57 million
people in the United States and account for more than
$325 billion annually in health care costs.(1)
StemCells California, Inc., a California corporation, is our
wholly-owned subsidiary, and the owner or licensee of most of
our intellectual property. References in this annual report to
the Company, we, us, and
similar words include this subsidiary.
Stem Cell
Therapy Background
Cells maintain normal physiological function in healthy
individuals by secreting or metabolizing substances, such as
sugars, amino acids, neurotransmitters and hormones, which are
essential to life. When cells are damaged or
(1) This estimate is based on information from the
Alzheimers Association, the Alzheimers Disease
Education & Referral Center (National Institute on
Aging), the National Parkinson Foundation, the National
Institutes of Healths National Institute on Neurological
Disorders and Stroke, the Foundation for Spinal Cord Injury
Prevention, Care & Cure, the Travis Roy Foundation, the
Centers for Disease Control and Prevention, the Wisconsin
Chapter of the Huntingtons Disease Society of America, the
American Liver Foundation, the Cincinnati Childrens
Hospital Medical Center, and JAIDs.
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destroyed, they no longer produce, metabolize or accurately
regulate those substances. Cell loss and impaired cellular
function are leading causes of degenerative diseases, and some
of the specific substances or proteins that are deficient in
some of these diseases have been identified. Although
administering these substances or proteins has some advantages
over traditional pharmaceuticals, such as specificity, there is
no existing technology that can deliver them precisely to the
sites of action, under the appropriate physiological regulation,
in the appropriate quantity, nor for the duration required to
cure the degenerative condition. Cells, however, can do all this
naturally. Thus, where failing cells are no longer producing
needed substances or proteins or where there has been
irreversible tissue damage or organ failure, transplantation of
stem or progenitor cells may slow or prevent the loss of
functional cells or enable the generation of new functional
cells, thus potentially maintaining or restoring organ function
and the patients health.
Stem cells have two defining characteristics: (i) they
produce all the kinds of mature cells making up the particular
organ; and (ii) they self renew that is, some
of the cells developed from stem cells are themselves new stem
cells, thus permitting the process to occur again and again.
Stem cells are known to exist for a number of systems of the
human body, including the blood and immune system, the central
and peripheral nervous systems (including the brain), the skin,
bone, and even hair. They are thought to exist for many others,
including the liver and pancreas endocrine systems, gut, muscle,
and heart. Stem cells are responsible for organ regeneration
during normal cell replacement and, to a greater or lesser
extent, after injury.
Stem cells are rare and only available in limited supply,
whether from the patients themselves or from donors. Cells
obtained from the same person who will receive them may be
abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, such cells can often be
obtained only through significant surgical procedures.
Therefore, in order to develop cell-based therapeutics, three
key challenges must be overcome: (i) identifying the stem
or progenitor cells of a particular organ and testing them for
therapeutic potential; (ii) creating processes to enable
use of these rare cells in clinical applications, such as
expanding and banking them in sufficient quantities to
transplant into multiple patients, or purifying them for use in
direct transplantation; and (iii) demonstrating the safety
and efficacy of these potential therapeutics in human clinical
trials.
The
Potential of Our Tissue-Derived Cell-Based
Therapeutics
We believe that, if successfully developed, stem and progenitor
cell-based therapeutics have the potential to provide a broad
therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics. Stem cells
can self-renew and specialize into the different kinds of cells
that are commonly lost in various diseases, and our preclinical
research suggests that transplanted stem cells may also be able
to migrate some distance to the proper location within the body,
expand, specialize and protect or replace damaged or defective
cells. Because of this, we believe that cell-based therapeutics
may facilitate the return to proper function, potentially for
the life of the patient.
To our knowledge, no one has developed an FDA-approved method
for replacing lost or damaged tissues from the human nervous
system. Replacement of tissues in other areas of the human body
is mainly limited to those few cases, such as bone marrow or
peripheral blood cell transplants, where transplantation of the
patients own cells is now feasible. In a few additional
areas, including the liver, transplantation of donor organs is
now used, but is limited by the scarcity of organs available
through donation. More recently, investigators have isolated
subpopulations of cells from a specific organ, such as
hepatocytes from the liver or islet cells from the pancreas,
which have been transplanted into patients with a measure of
success. However, these types of cell transplants are also
limited by the availability of suitable organs.
StemCells has focused on identifying and purifying
tissue-derived stem and progenitor cells for use in homologous
therapy, that is, use of brain derived neural stem cells for
treatment of brain disorders; pancreas derived cells for
treatment of pancreas disorders; or liver derived cells for
treatment of liver disorders. Tissue-derived stem cells are
developmentally pre-programmed to become the specialized cells
of the organ from which they are derived by responding directly
to cues of the host environment. We believe the homologous use
of purified, unmodified tissue-derived cells is the most direct
way to provide for engraftment of the cells and differentiation
into the mature specialized cells of the organ, and should
minimize the risk of transplantation of unwanted cell types.
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We have developed techniques for discovering novel monoclonal
antibodies that can be used to label markers on cell surfaces to
identify and isolate specific cell types, and particularly stem
and progenitor cells. This methodology allows us to purify the
stem cell population and eliminate other unwanted cell types.
For example, we have discovered and patented the use of
monoclonal antibodies to identify the human neural stem cell, as
well as human liver engrafting cells and a candidate pancreatic
stem/progenitor cell.
With respect to the human neural stem cell, our lead product
candidate, we believe we have overcome the first two key
challenges to developing a cell-based therapeutic. We have
developed proprietary and reproducible processes to identify,
purify, expand and bank human neural stem cells from brain
tissue. Because the product is a purified composition of normal
human neural stem cells, it should be better suited for
transplantation and should provide a safer and more effective
alternative to therapies that are based on cells derived from
cancer cells, animal-derived cells or are an unpurified mix of
many different cell types. Furthermore, we have shown that these
purified and expanded stem cells, when transplanted into
immunodeficient mice, engraft, migrate, differentiate into
neurons and glial cells and survive for as long as one year with
no sign of tumor formation or adverse effects on the
animals; moreover, the cells were still dividing at the end of
the test period. These findings show that our neural stem cells,
when transplanted, adopt the characteristics of the host brain
and act like normal stem cells, suggesting the possibility of a
continual replenishment of normal human brain cells.
Business
Strategy
We are seeking to develop and commercialize cell-based
therapeutics to treat, and possibly cure, a range of human
diseases. Our strategy is to be the first to identify, isolate
and patent multiple types of human stem and progenitor cells
with therapeutic and commercial importance; to develop
techniques and processes either to reproducibly purify the cells
for direct transplant or to enable the expansion and banking of
those cells; and then to take them into clinical development as
transplantable therapeutics. To date, we have identified three
rare cell types: the human neural stem cell, human liver
engrafting cells, and a candidate pancreas stem cell. We have
developed the methods and processes to expand and bank the
neural stem cell and are now engaged in the first clinical trial
of our neural stem cell product, HuCNS-SC.
We believe that patent protection will be available to the first
to identify and isolate any of the finite number of different
types of human stem cells, and the first to define methods to
culture such cells, making the commercial development of
cell-based treatments for currently intractable diseases
financially feasible. Thus, a central element of our business
strategy is to obtain patent protection for the compositions,
processes and uses of these multiple types of cells. We have
obtained rights to certain inventions relating to stem cells and
progenitor cells from academic institutions. We expect to
continue to expand our search for, and to seek to acquire rights
from third parties relating to, new stem and progenitor cells,
and to further develop our intellectual property positions with
respect to these cells in-house and through research at
scholarly institutions. Our portfolio of issued patents includes
a method of culturing normal human central nervous system stem
and progenitor cells in our proprietary chemically-defined
media, and our published studies show that these cultured and
expanded cells give rise to all three major cell types of the
central nervous system. We also have patent applications pending
in connection with our work on liver and pancreas stem and
progenitor cells.
Research
and Development Programs
Overview
We have devoted substantial resources to our research programs
to isolate and develop stem and progenitor cells that we believe
can serve as a basis for protecting or replacing diseased or
injured cells. Our efforts to date have been directed at methods
to identify, isolate and culture large quantities of stem and
progenitor cells of the human nervous system, liver and pancreas
and to develop therapeutics utilizing these cells.
The following table shows the current status of, and the
potential initial indications for, our primary research and
product development programs and projects. The table is
qualified in its entirety by reference to the more detailed
descriptions of such programs and projects appearing elsewhere
in this report. We continually evaluate our research and product
development efforts and reallocate resources among existing
programs or to new programs in light of experimental results,
commercial potential, availability of third party funding,
likelihood of near-term
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efficacy, collaboration success or significant technology
enhancement, as well as other factors. Our research and product
development programs are at relatively early stages of
development and will require substantial resources to
commercialize.
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Program Description and Objective
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Stage/Status(1)
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Neural
Program
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Clinical
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Cellular therapy to restore or preserve function to central nervous system tissue by protecting, repairing or replacing dysfunctional or damaged cells. Initial indications are lysosomal storage diseases that affect the CNS, e.g., NCL, and disorders in which demyelination plays a central role, e.g. certain spinal cord injuries, cerebral palsy
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Neuronal Ceroid
Lipofuscinosis (also known as Batten disease)
Demonstrated in vivo proof of principle
showing in a mouse model for Infantile NCL that HuCNS-SC can
continuously produce
the enzyme that is deficient in Infantile NCL
protect host neurons
from death
extend the lifespan
of the HuCNS-SC transplanted mice
Phase 1 clinical trial ongoing at Oregon
Health & Science University. As of February 2007, two
patients out of a total of six planned have been enrolled and
transplanted with HuCNS-SC
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Preclinical
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Spinal Cord Indications:
Demonstrated in vivo proof of principle
in a mouse model for spinal cord injury that transplanted HuCNS-
SC
restores motor
function in injured animals
directly contributes
to the functional recovery; when human cells are ablated
restored function is lost
become specialized
oligodendrocytes and neurons
demonstrated in preclinical studies that
transplanted HuCNS-SC
does not contribute
to scar formation
does not induce
abnormal pain
Myelin Disorders:
Demonstrated in vivo proof of principle in
the myelin deficient shiverer mouse and spinal cord injured
mouse that transplanted HuCNS-SC
shows integration of
myelin producing oligodendrocytes into the mouse brain and
spinal cord
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Program Description and Objective
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Stage/Status(1)
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tight wrapping
of the mouse nerve axons to form myelin sheath
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Research
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Demonstrated the
ability to reproducibly purify human neural stem cells and
expand these cells to create cell banks
Expanded and banked human neural stem cells
engraft in the brain and spinal cords of rodents to give rise to
the 3 specialized cell types of the CNS with no evidence of
tumor formation
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Liver
Program
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Preclinical
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Cellular therapy to restore function to liver tissue by replacing dysfunctional or damaged cells. Initial indications may include liver-based metabolic disorders
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Demonstrated the
engraftment and survival of the hLECs in an in vivo mouse liver
degeneration model.
Detected human serum
albumin and alpha-1-antitrypsin in serum of transplanted
animals.
Detected bile
canaliculi for liver protein export
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Research
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Identified cell
surface markers and methods for purification of human liver
engrafting cells (hLECs) from livers, of a broad age range,
deemed not suitable for liver transplantation.
Identified in vitro culture assay for growth
of human liver engrafting cells, containing cells that
co-express markers for both bile duct cells and hepatocytes
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Pancreas
Program
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Research
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Cellular therapy to restore function to pancreas tissue by replacing dysfunctional or damaged cells
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Identified cell
surface markers and methods for purification of candidate human
pancreatic stem/progenitor cells (hPSCs)
Developed in vitro screening assay for
testing biological activity of hPSCs
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Research refers to early stage research and product
development activities in vitro, including the
selection and characterization of product candidates for
preclinical testing. Preclinical refers to further
testing of a defined product candidate in vitro and
in animals prior to clinical studies. Clinical
refers to the testing of a defined product candidate in humans. |
Neural
Program
Many neurodegenerative diseases involve the failure of brain or
other central nervous system tissue due to the loss of
functional cells. We believe the transplantation of neural stem
or progenitor cells may slow or prevent the
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loss of functional cells or enable the generation of new
functional cells, thus potentially maintaining or restoring
organ function. Our Neural Program is initially focusing on
developing clinical applications to prevent the loss of, or
restore function to, neural cells affected by genetic disorders
such as neuronal ceroid lipofuscinosis, Type III
Gauchers Disease, and certain other lysosomal storage
diseases; diseases in which deficient myelination plays a
central role, such as certain spinal cord injuries or brain
disorders such as cerebral palsy; and traumatic or ischemic
insults to the brain or spinal cord, such as stroke or traumatic
brain injuries. These disorders affect a significant number of
people in the United States and there currently are no effective
long-term therapies for them. We believe that therapeutics based
on our process for identifying, purifying and culturing neural
stem and progenitor cells may be useful in treating such
diseases.
StemCells Inc holds a substantial portfolio of issued and
allowed patents in the neural field. See Patents,
Proprietary Rights and Licenses.
Neuronal
Ceroid Lipofuscinosis (NCL; also known as Batten
disease).
Neuronal ceroid lipofuscinosis (NCL), which is often referred to
as Batten disease, is a neurodegenerative disease that affects
infants and young children. All three forms of NCL
infantile, late infantile and juvenile are caused by
the lack of a lysosomal enzyme, but all are genetically
different. Infantile and late infantile NCL are brought on by
inherited genetic mutations in the CLN1 gene, which codes
for palmitoyl-protein thioesterase 1 (PPT1) and in the CLN2
gene, which codes for tripeptidyl peptidase I (TPP-I),
respectively. As a result of these mutations, the relevant
enzyme is either defective or missing, leading to the
accumulation of non-degraded lysosomal substrates in various
cell types. This accumulation eventually interferes with normal
cellular and tissue function, and leads to seizures and
progressive loss of motor skills, sight and mental capacity.
Today, NCL is always fatal. To correct the major defect in NCL
patients, the missing enzyme has to be provided to the brain
where it can be taken up by the enzyme-deficient cells.
We are currently conducting a Phase I clinical trial at
Oregon Health & Science University Doernbecher
Childrens Hospital to evaluate the safety and preliminary
efficacy of HuCNS-SC as a treatment for infantile and late
infantile NCL. This trial is an open label study with two dose
levels and is planned to enroll six patients. HuCNS-SC will be
transplanted into these patients, who will then receive
immunosuppression for one year following transplantation. In
addition to measuring the safety of HuCNS-SC, the trial will
also evaluate the ability of HuCNS-SC to affect the progression
of the disease. We believe this clinical trial is the first
FDA-approved trial to use purified human neural stem cells as a
potential therapeutic agent. As of February 2007, two patients
have been enrolled and transplanted with HuCNS-SC.
Our preclinical data demonstrate that HuCNS-SC, when
transplanted in a mouse model of infantile NCL, engraft, migrate
throughout the brain, produce the missing PPT1 enzyme,
measurably reduce the toxic storage material in the brain, and
protect host neurons so that more of them survive; in addition,
we have shown that the lifetime of the HuCNS-SC transplanted
mice is extended compared to the control group. We have also
demonstrated in vitro that HuCNS-SC produce TPP-I,
the enzyme that is deficient in late infantile NCL.
Other
Lysosomal Storage Diseases.
NCL, or Batten disease, is one of a group of approximately 46
lysosomal storage diseases (LSDs). Some of these
LSDs, which are all caused by defective or missing enzymes, can
be treated by enzyme replacement therapies. Examples of enzyme
replacement products used in these therapies are
Cerezymetm
for Gaucher disease,
Fabryzymetm
for Fabry disease, Myozyme for Pompe disease,
Aldurazymetm
for MPS I and
Naglazymetm
for MPS VI. About half of the lysosomal storage diseases,
however, affect the central nervous system; consequently, enzyme
replacement therapy is not currently a practical treatment
option for this subset of LSDs because enzymes are typically too
large to cross the blood-brain barrier. We believe that HuCNS-SC
may have the potential to treat some LSDs that affect the CNS by
acting as cellular mini-pumps for the secretion and supply of
missing enzymes to the brain. To date, we have found that
HuCNS-SC can produce the relevant enzyme in several LSDs that
affect the CNS, including infantile and late infantile NCL.
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Spinal
Cord Indications.
Stem cells may have the potential to treat various spinal cord
indications. Using a mouse model of spinal cord injury, our
collaborators, Drs. Aileen Anderson and Brian Cummings of
the Reeve-Irvine Center at the University of California, have
shown that HuCNS-SC have the potential to protect and regenerate
damaged nerves and nerve fibers, and that injured mice
transplanted with our human neural stem cells showed improved
motor function compared to control animals. Inspection of the
spinal cords from these mice showed significant levels of human
neural cells derived from the transplanted stem cells. Moreover,
the human cells that are found in the spinal cord of the
transplanted mice matured into oligodendrocytes, the specialized
neural cell that forms the myelin sheath around axons,
insulating them and enabling them to conduct signals to other
axons. Drs. Anderson and Cummings then selectively ablated
the human cells, and found that the functional improvement was
lost, thus demonstrating that the human cells had played a
direct role in the functional recovery of the transplanted mice.
We are currently conducting preclinical development on HuCNS-SC
as a potential therapeutic for various spinal cord indications.
Other
Remyelination Indications.
In addition to certain spinal cord indications, loss of myelin
characterizes conditions such as multiple sclerosis, cerebral
palsy and certain genetic disorders (for example, Krabbes
disease and metachormatic leukodystrophy). We have shown that
HuCNS-SC differentiate into oligodendrocytes, the myelin
producing cells, and produce myelin. We have transplanted
HuCNS-SC into the brain of the mutant shiverer mouse, which is
deficient in myelin, and shown widespread engraftment of human
cells that matured into oligodendrocytes. Furthermore, analysis
of the brain tissue of these mice shows the myelin produced by
the human cells ensheathes the mouse nerve, providing the proper
layers of insulation. Further studies are in progress to
demonstrate proper function of the newly produced myelin. Pilot
studies for understanding myelin production and repair were
conducted in collaboration with researchers at the Oregon
Health & Science University and the Yale University
School of Medicine. We are currently conducting preclinical
development on HuCNS-SC as a potential therapeutic for a brain
indication characterized by myelin deficiency.
Other
Neural Collaborations.
We have established a number of research collaborations in the
neural field to assess both the in vitro potential of the
HuCNS-SC and the effects of transplanting HuCNS-SC into
preclinical animal models, including a collaboration with
researchers at the Stanford University School of Medicine to
evaluate our human neural stem cells in animal models of stroke.
Collaborative studies regarding the formation of specific
populations of neurons have also been done with researchers at
The University of Texas Medical Branch and the University of
California, San Diego. In addition, we concluded an
NIH-funded collaboration with Dr. George A. Carlson of the
McLaughlin Research Institute to understand the role of
Alzheimers plaques in neuronal cell death in
Alzheimers disease. Under the collaboration,
Dr. Carson transplanted HuCNS-SC into mouse models of
Alzheimers disease and the cells showed robust engraftment
in an environment riddled with Alzheimers plaques. We plan
to analyze the engrafted human cells in the brains of the
transplanted mice.
Liver
Program
Approximately 1 in 10 Americans suffers from diseases and
disorders of the liver for many of which there currently are no
effective, long-term treatments. Liver stem cells may be useful
in the treatment of some of these diseases, such as hepatitis,
liver failure, blood-clotting disorder, cirrhosis of the liver
and liver cancer. A source of defined human cells capable of
engraftment and substantial liver regeneration could provide a
cell-based therapeutic product available to a wider patient base
than whole liver (or organ) transplants.
We have identified and isolated a cell population that we call
human Liver Engrafting Cells (hLEC) which shows promise as a
potential therapeutic. The hLEC can be derived from all types of
human livers, including those that would not otherwise be used
for orthotopic liver transplantation. When tested in our
in vitro culture assay, these antibody-enriched
cells produce enzymes needed for normal liver function, such as
human serum albumin. When transplanted into immunodeficient
mice, the hLEC demonstrate robust engraftment and produce human
proteins including albumin and alpha-1-antitrypsin and form
structural elements of the liver, suggesting that once
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transplanted, hLEC become functional cells. Based on these data,
our Liver Program has a goal of initiating a clinical trial to
test the hLEC in patients within the next twelve months, with
the initial indication likely to be a liver-based metabolic
disorder characterized by an enzyme deficiency.
Pancreas
Program
We have used our monoclonal antibody-based search methodology to
identify a rare subset of human pancreatic cells that may be
candidate pancreatic stem/progenitor cells. If those cells can
be differentiated into islet cells, the pancreas cells that
produce insulin, they may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin
secretion is defective. We have filed a patent application on
the monoclonal antibodies used and have developed what we
believe to be an appropriate animal model to test the biological
activity of the purified candidate pancreatic stem cells.
Note on
State and Federal Grants
In November 2004, California State Proposition 71 (Prop. 71),
the California Stem Cell Research and Cures Initiative, was
adopted by the electorate. It is intended to encourage stem cell
research in the State of California, and to finance such
research with State funds of approximately $295 million
annually for 10 years beginning with 2005. It is our
understanding that the California Institute for Regenerative
Medicine to be created under the Initiative will provide grants,
primarily but not exclusively to academic institutions, to
advance both embryonic stem cell research and adult stem cell
research; the latter is the current and exclusive focus at
StemCells. StemCells, Inc. is eligible to receive Prop. 71
generated funds and we do intend to apply for such funding. We
also remain eligible for federal government support from the
National Institute of Health (NIH) due to our focus on adult
stem cells, although Prop. 71 funds will not go to any project
that receives NIH funding.
Manufacturing
We have made considerable investments in our manufacturing
operations. We believe we have the ability to process cells
suitable for use in our ongoing and planned research and
development activities and clinical trials.
Marketing
Because of the early stage of our stem and progenitor cell
programs, we have not yet addressed questions of channels of
distribution and marketing of potential future products.
Patents,
Proprietary Rights and Licenses
We believe that proprietary protection of our inventions will be
critical to our future business. We vigorously seek out
intellectual property that we believe might be useful in
connection with our products, and have an aggressive program of
protecting our intellectual property. We believe that our
know-how will also provide a significant competitive advantage,
and we intend to continue to develop and protect our proprietary
know-how. We may also from time to time seek to acquire licenses
to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of
patents and patent applications related to various stem and
progenitor cells and methods of deriving and using them. These
patents and patent applications relate to compositions of
matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. As of
December 31, 2006, our U.S. patent portfolio included
forty-eight issued U.S. patents, seven of which issued in
2006. Approximately 20 additional patent applications were
pending, four of which had been allowed. In addition, we have
foreign counterparts to many of the U.S. applications and
patents; counterparts to thirteen of our U.S. patents or
applications have issued in various countries, making a total of
over 130 individual
non-U.S. patents
from those thirteen cases. In 2003, one party filed an
opposition to two of our issued European patent cases. 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 time for appeal has run in each
case. U.S. counterparts to these patents are part of our
issued patent portfolio; they are not subject to opposition,
since that procedure does not exist under U.S. patent law,
although other types of proceedings may be available to third
parties to contest our U.S. patents.
10
Among our significant patents are:
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U.S. Patent No. 5,851,832, covering our methods for
the human CNS cell cultures containing central nervous system
stem cells, for compositions of human CNS cells expanded by
these methods, and for use of these cultures in human
transplantation. These human CNS stem and progenitor cells
expanded in culture may be useful for repairing or replacing
damaged central nervous system tissue, including the brain and
the spinal cord;
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U.S. Patent No. 5,968,829, entitled Human CNS
Neural Stem Cells, which covers our composition of matter
for human CNS stem cells;
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U.S. Patent No. 6,103,530, covering our media for
culturing human CNS stem cells;
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U.S. Patent Number 6,468,794, entitled Enriched
central nervous system stem cell and progenitor cell
populations, and methods for identifying, isolating and
enriching for such populations, which covers the
identification and purification of the human CNS stem cell;
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U.S. Patent Nos. 6,238,922 and 7,049,141 (Use of
collagenase in the preparation of neural stem cell
cultures), which describe methods to advance the in vivo
culture and passage of human CNS stem cells that result in a
100-fold increase in CNS stem and progenitor cell production
after 6 passages. We believe the methodologies of these patents
and the one mentioned immediately above together augment our
leadership position in the stem cell field by providing a
reproducible proprietary method for obtaining and expanding stem
cells for therapeutic uses;
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U.S. Patent Number 6,294,346 (Use of multipotent
neural stem cells and their progeny for the screening of drugs
and other biological agents); and
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U.S. Patent Number 6,497,872, entitled Neural
transplantation using proliferated multipotent neural stem cells
and their progeny, covers transplanting any neural stem
cells or their differentiated progeny, whether the cells have
been cultured in suspension or as adherent cells, for the
treatment of any disease. We are the exclusive licensees of the
patent, which gives us the right to exclude others from
practicing the claimed invention.
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Among the recent patents issued or exclusively licensed to us
are patents covering a method of drug screening using enriched
populations of neural stem cells (U.S. Patent
No. 7,105,150); methods for producing enriched populations
of neural stem cells (U.S. Patent No. 7,037,719);
in vitro cell culture compositions of enriched populations
of neural stem cells (U.S. Patent No. 7,153,686);
methods for the in vitro proliferation of neural stem cells
(U.S. Patent No. 7,115,418); cDNA libraries obtained
from neurospheres (U.S. Patent No. 7,105,342); and
methods of screening for biological agents that affect
proliferation, differentiation, survival, phenotype, or function
of neural stem cells (U.S. Patent No. 7,101,709). In
addition, we expect several other neural stem cell cases to
issue shortly; we have also received indications that another
application, covering methods of selecting for human liver
engrafting cells, should be allowed soon.
These new patents have further strengthened our already
extensive patent portfolio and, we believe, give StemCells the
dominant intellectual property position in the field, covering
methods for identification, isolation, expansion, and
transplantation of neural stem cells as well as drug discovery
and testing.
The following table lists our issued U.S. patents:
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U.S. Patent Number
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Owned by StemCells
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Subject
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Date of Expiration
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5,968,829
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Human CNS neural stem cells
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9/05/17
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6,103,530
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Human CNS neural stem
cells culture media
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9/05/17
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6,238,922
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Use of collagenase in the
preparation of neural stem cell cultures
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2/26/19
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6,468,794
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Enriched neural stem cell
populations, and methods for identifying, isolating and
enriching for neural stem cells
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10/21/19
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6,498,018
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Human CNS neural stem cells
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9/05/17
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6,777,233
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Cultures of human CNS neural stem
cells
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9/05/17
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7,037,719
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Enriched neural stem cell
populations, and methods for identifying, isolating and
enriching for neural stem cells
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10/21/19
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11
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U.S. Patent Number
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Owned by StemCells
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Subject
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Date of Expiration
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7,049,141
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Use of collagenase in the
preparation of neural stem cell cultures
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2/26/19
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7,105,150
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Drug screening &
discovery using enriched neural stem cell populations
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10/21/19
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7,153,686
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Enriched neural stem cell
populations, and methods for identifying, isolating and
enriching for neural stem cells
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10/21/19
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Licensed from
NeuroSpheres
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5,750,376
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In vitro genetic modification
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5/12/15
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5,851,832
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In vitro proliferation
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12/22/15
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5,980,885
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Methods for inducing in vivo
proliferation of precursor cells
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11/09/16
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5,981,165
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In vitro induction of dopaminergic
cells from mammalian central nervous system multipotent stem
cell compositions
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11/09/16
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6,071,889
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Methods for in vivo transfer of a
nucleic acid sequence to proliferating neural cells
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6/06/17
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6,093,531
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Generation of hematopoietic cells
from multipotent neural stem cells
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6/19/18
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6,165,783
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Methods of inducing
differentiation of multipotent neural stem cells
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10/20/18
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6,294,346
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Methods for screening biological
agents
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9/25/18
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6,368,854
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Hypoxia-mediated neurogenesis
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10/20/18
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6,399,369
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cDNA libraries derived from
populations of non-primary neural cells
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6/04/19
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6,497,872
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Neural transplantation using
proliferated multipotent neural stem cells and their progeny
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12/24/19
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6,638,501
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Use of multipotent neural stem
cell progeny to augment non-neural tissues
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6/19/18
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6,897,060 B1
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Generation of hematopoietic cells
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6/19/18
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6,924,142 B2
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Hypoxia-mediated neurogenesis assay
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10/20/18
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7,101,709
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Methods of making cDNA libraries,
cell screening with cultures of neural stem cells
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9/22/12
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7,105,342
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cDNA libraries derived from
populations of non-primary neural cells
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12/5/12
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7,115,418
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Methods of Proliferating
Undifferentiated Neural Cells
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11/30/12
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U.S. Licensed from
NeuroSpheres
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7,166,277
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Remyelination
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1/23/24
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Licensed from the
California Institute
of Technology
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5,589,376
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Mammalian neural crest stem cells
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12/31/13
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5,629,159
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Immortalization and
disimmortalization of cells
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5/13/14
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5,654,183
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Genetically engineered mammalian
neural crest stem cells
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8/05/14
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5,672,499
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Methods for immortalizing
multipotent neural crest stem cells
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9/30/14
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5,693,482
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In vitro neural crest stem cell
assay
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12/02/14
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5,824,489
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Methods for isolating mammalian
multipotent neural crest stem cells
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10/20/15
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12
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Licensed from the
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California Institute
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of Technology
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Subject
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5,849,553
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Immortalizing and disimmortalizing
multipotent neural crest stem cells
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12/15/15
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5,928,947
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Mammalian multipotent neural crest
stem cells
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7/27/16
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5,935,811
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Neuron restrictive silencer factor
proteins
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8/10/16
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6,001,654
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Methods for differentiating neural
stem cells to neurons or smooth muscle cells (TGFb)
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7/27/12
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6,033,906
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Differentiating mammalian neural
stem cells to glial cells using neuregulins
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3/07/17
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6,270,990
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Neuron restrictive silencer factor
proteins
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3/03/15
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6,555,337
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Neurogenin
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9/27/16
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6,566,496
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Neurogenin
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9/27/16
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6,824,774
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Antibodies that bind
neuron-restrictive silencer factor proteins
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10/25/16
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6,890,724 B2
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Methods and Compositions for
Neural Progenitor Cells (cRET)
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9/06/16
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Licensed from the
Scripps Research
Institute
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6,242,666
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An animal model for identifying a
common stem/ progenitor to liver cells and pancreatic cells
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12/16/18
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6,541,251
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Pancreatic progenitor 1 gene and
its uses
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4/26/21
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6,753,153
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Markers for identification and
isolation of pancreatic islet alpha and beta progenitors
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12/13/20
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6,911,533
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Pancreatic progenitor I gene and
its uses
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4/26/21
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Licensed from
Oregon Health &
Science University
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6,132,708
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Liver regeneration using pancreas
cells
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10/10/17
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We also rely upon trade-secret protection for our confidential
and proprietary information and take active measures to control
access to that information.
Our policy is to require our employees, consultants and
significant scientific collaborators and sponsored researchers
to execute confidentiality agreements upon the commencement of
an employment or consulting relationship with us. These
agreements generally provide that all confidential information
developed or made known to the individual by us during the
course of the individuals relationship with us is to be
kept confidential and not disclosed to third parties except in
specific circumstances. In the case of employees and
consultants, the agreements generally provide that all
inventions conceived by the individual in the course of
rendering services to us shall be our exclusive property.
We have obtained rights from universities and research
institutions to technologies, processes and compounds that we
believe may be important to the development of our products.
These agreements typically require us to pay license fees, meet
certain diligence obligations and, upon commercial introduction
of certain products, pay royalties. These include exclusive
license agreements with The Scripps Institute, the California
Institute of Technology and the Oregon Health & Science
University, to certain patents and know-how regarding present
and certain future developments in CNS, liver and pancreas stem
cells. Our licenses may be canceled or converted to
non-exclusive licenses if we fail to use the relevant technology
or if we breach our agreements. Loss of such licenses could
expose us to the risks of third party patents
and/or
technology. There can be no assurance that any of these licenses
will provide effective protection against our competitors. We
have also obtained patent rights from cross-licensing certain of
our patents to NeuroSpheres and to StemCell Therapeutics. See
Patents, Proprietary Rights and Licenses
13
The patent positions of pharmaceutical and biotechnology
companies, including ours, are uncertain and involve complex and
evolving legal and factual questions. The coverage sought in a
patent application can be denied or significantly reduced before
or after the patent is issued. Consequently, we do not know
whether any of our pending applications will result in the
issuance of patents, or if any existing or future patents will
provide significant protection or commercial advantage or will
be circumvented by others. Because patent applications are
secret until the applications are published (usually eighteen
months after the earliest effective filing date), and since
publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that we were the first to make the inventions covered by
each of our pending patent applications or that we were the
first to file patent applications for such inventions. There can
be no assurance that patents will issue from our pending or
future patent applications or, if issued, that such patents will
be of commercial benefit to us, afford us adequate protection
from competing products, or not be challenged or declared
invalid.
In the event that a third party has also filed a patent
application relating to inventions claimed in our patent
applications, we may have to participate in interference
proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in
substantial uncertainties and cost for us, even if the eventual
outcome is favorable to us. There can be no assurance that our
patents, if issued, would be held valid by a court of competent
jurisdiction.
A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent
applications or have been issued patents relating to cell
therapy, stem cells and other technologies potentially relevant
to or required by our expected products. We cannot predict
which, if any, of such applications will issue as patents or the
claims that might be allowed.
If third party patents or patent applications contain claims
infringed by our technology and such claims or claims in issued
patents are ultimately determined to be valid, there can be no
assurance that we would be able to obtain licenses to these
patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology. If we are unable to obtain
such licenses at a reasonable cost, we may not be able to
develop certain products commercially. There can be no assurance
that we will not be obliged to defend ourselves in court against
allegations of infringement of third party patents. Patent
litigation is very expensive and could consume substantial
resources and create significant uncertainties. An adverse
outcome in such a suit could subject us to significant
liabilities to third parties, require disputed rights to be
licensed from third parties, or require us to cease using such
technology.
License
Agreements
We have entered into a number of research-plus-license
agreements with academic organizations including The Scripps
Research Institute (Scripps), the California Institute of
Technology (Cal Tech), the Oregon Health & Science
University (OHSU), and the University of Texas Medical Branch.
The research components of these agreements have been concluded
and have resulted in a number of licenses for resultant
technology. Under the license agreements, we are typically
subject to obligations of due diligence and the requirement to
pay royalties on products that use patented technology licensed
under such agreements. The license agreements with these
institutions relate largely to stem or progenitor cells and or
to processes and methods for the isolation, identification,
expansion or culturing of stem or progenitor cells. Generally
speaking, these license agreements will terminate upon
expiration, revocation or invalidation of the patents licensed
to us, unless governmental regulations require a shorter term.
They also will terminate earlier if we breach our obligations
under the agreement and do not cure the breach, or if we declare
bankruptcy, and we can terminate the license agreements at any
time upon notice.
In the case of Scripps, we must pay $50,000 upon the initiation
of the Phase II trial for our first product using Scripps
licensed technology, and upon completion of that Phase II
trial we must pay Scripps an additional $125,000. Upon approval
of the first product for sale in the market, we must pay Scripps
$250,000.
Pursuant to the terms of our license agreement with Cal Tech, we
must pay $10,000 upon the issuance of the first patent in each
family licensed to us under the relevant agreement and $5,000 on
the first anniversary of the issuance of each such patent,
payable in cash or stock at our option. We have paid $40,000 on
account of these patents through December 31, 2006; the
$10,000 due in 2006 was paid in stock (3,848 shares). These
amounts are creditable against royalties we must pay under the
license agreements. The maximum royalties that we will have to
pay to the California Institute of Technology will be
$2 million per year, with an overall maximum of
$15 million.
14
Once we pay the $15 million maximum royalty, the licenses
will become fully paid and irrevocable. In August 2002 we
acquired an additional license from Cal Tech to different
technology, pursuant to which we issued 27,535 shares of
our common stock with a market value of approximately $35,000;
we have also issued 9,535 shares of our common stock with a
market value of approximately $15,000 to Cal Tech on the
issuance of two patents covered under this additional license.
In 2002, we issued a license to BioWhittaker, Inc., for the
exclusive right to make, sell and distribute one of our
proprietary cells for the research market only. BioWhittaker was
acquired by Cambrex, and the cognizant Cambrex division has now
been acquired by Lonza. In 2003 and 2004 respectively, we issued
non-exclusive licenses to StemCell Technologies, Inc. to make,
use and sell certain proprietary mouse and rat neural stem cells
and culture media for all mammalian neural stem cells, and to
R&D Systems to make, use and sell certain stem cell
expansion kits, also for the research market. These licenses are
not expected to generate material revenues.
In July 2005, we entered into an agreement with ReNeuron
Limited, a wholly owned subsidiary of ReNeuron Group plc, a
listed UK corporation (collectively referred to as
ReNeuron). As part of the agreement, we 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. We
received a 7.5% fully-diluted equity interest in ReNeuron,
subject to certain anti-dilution provisions, as well as 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 we 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 our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005. See Note 2 and
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk for more details on this transaction. In
August 2006, we entered an agreement with Stem Cell Therapeutics
(SCT), a Canadian corporation listed on the Toronto Stock
Exchange, granting it a non-exclusive, royalty-bearing license
to use several of our patents for treating specified diseases of
the central nervous system; the grant does not include any
rights to cell transplantation. SCT granted StemCells a
royalty-free non-exclusive license to certain of its patents for
research and development and a royalty-bearing non-exclusive for
certain commercial purposes. SCT paid an up-front license fee;
the license also provides for other payments including annual
maintenance, milestones, and royalties.
NeuroSpheres,
Ltd.
In March 1994, we entered into a Contract Research and License
Agreement with NeuroSpheres, Ltd., which was clarified in a
License Agreement dated as of April 1, 1997. Under the
agreement as clarified, we obtained an exclusive patent license
from NeuroSpheres in the field of transplantation, subject to a
limited right of NeuroSpheres to purchase a nonexclusive license
from us, which right was not exercised and has expired. We have
developed additional intellectual property relating to the
subject matter of the license. We entered into an additional
license agreement with NeuroSpheres as of October 30, 2000,
under which we obtained an exclusive license in the field of
non-transplant uses, such as drug discovery and drug testing and
clarified our rights under NeuroSpheres patents for generating
cells of the blood and immune system from neural stem cells.
Together, our rights under the licenses are exclusive for all
uses of the technology. We made up-front payments to
NeuroSpheres of 65,000 shares of our common stock in
October 2000 and $50,000 in January 2001, and we will make
additional cash payments when milestones are achieved under the
terms of the October 2000 agreement. In addition, in October
2000 we reimbursed Neurospheres for patent costs amounting to
$341,000. Milestone payments, payable at various stages in the
development of potential products, would total $500,000 for each
product that is approved for market. In addition, beginning in
2004, annual payments of $50,000 became due, payable by the last
day of the year and fully creditable against royalties due to
NeuroSpheres under the October 2000 Agreement. Our agreements
with NeuroSpheres will terminate at the expiration of all
patents licensed to us, but can terminate earlier if we breach
our obligations under the agreement and do not cure the breach,
or if we declare bankruptcy. We have a security interest in the
licensed technology.
15
Signal
Pharmaceuticals, Inc.
In December 1997, we entered into two sublicense agreements with
Signal Pharmaceuticals (Signal), Inc. under which each party
sublicensed to the other certain patent rights and biological
materials for use in defined fields. Signal has now been
acquired by Celgene, which in 2004 relinquished its license to
the University of California, which then terminated the
sublicense to StemCells for lack of diligence. Effective
September 11, 2005, StemCells terminated the remaining
sublicense.
Competition
The targeted disease states for our initial products in some
instances currently have no effective long-term therapies.
However, we do expect that our initial products will have to
compete with a variety of therapeutic products and procedures.
Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat lysosomal storage disorders,
neurodegenerative and liver diseases, diabetes and other
diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new
drugs and therapeutic approaches for the same purposes, which
may achieve new efficacy profiles, extend the therapeutic window
for such products, alter the prognosis of these diseases, or
prevent their onset. We believe that our products, when and if
successfully developed, will compete with these products
principally on the basis of improved and extended efficacy and
safety and their overall economic benefit to the health care
system. The market for therapeutic products that address
degenerative diseases is large, and competition is intense. We
expect competition to increase. We believe that our most
significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies. Smaller
companies may also be significant competitors, particularly
through collaborative arrangements with large pharmaceutical or
biotechnology companies. Many of these competitors have
significant products approved or in development that could be
competitive with our potential products.
Competition for any stem and progenitor cell products that we
may develop may be in the form of existing and new drugs, other
forms of cell transplantation, ablative and simulative
procedures, and gene therapy. We believe that some of our
competitors are also trying to develop stem and progenitor
cell-based technologies. We expect that all of these products
will compete with our potential stem and progenitor cell
products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed
patent applications relating to the use of genetically modified
cells to treat disease, disorder or injury. In the event our
therapies should require the use of such genetically modified
cells, we may be required to seek licenses from these
competitors in order to commercialize certain of our proposed
products, and such licenses may not be granted.
If we develop products that receive regulatory approval, they
would then have to compete for market acceptance and market
share. For certain of our potential products, an important
success factor will be the timing of market introduction of
competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete
the clinical testing and approval processes, and supply
commercial quantities of a product to market. These competitive
products may also impact the timing of clinical testing and
approval processes by limiting the number of clinical
investigators and patients available to test our potential
products.
While we believe that the primary competitive factors will be
product efficacy, safety, and the timing and scope of regulatory
approvals, other factors include, in certain instances,
obtaining marketing exclusivity under the Orphan Drug Act,
availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology
position.
Government
Regulation
Our research and development activities and the future
manufacturing and marketing of our potential products are, and
will continue to be, subject to regulation for safety and
efficacy by numerous governmental authorities in the United
States and other countries.
16
In the United States, pharmaceuticals, biologicals and medical
devices are subject to rigorous Food and Drug Administration, or
FDA, regulation. The Federal Food, Drug and Cosmetic Act, as
amended, and the Public Health Service Act, as amended, the
regulations promulgated thereunder, and other Federal and state
statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage,
export, record keeping, approval, marketing, advertising and
promotion of our potential products. Product development and
approval within this regulatory framework takes a number of
years and involves significant uncertainty combined with the
expenditure of substantial resources. In addition, the federal,
state, and other jurisdictions have restrictions on the use of
fetal tissue.
FDA
Approval
The steps required before our potential products may be marketed
in the United States include:
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Steps
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Considerations
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1. Preclinical laboratory
and animal tests
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Preclinical tests include
laboratory evaluation of the cells and the formulation intended
for use in humans for quality and consistency. In vivo
studies are performed in normal animals and specific disease
models to assess the potential safety and efficacy of the cell
therapy product.
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2. Submission to the FDA of
an Investigational New Drug application (IND), which must become
effective before U.S. human clinical trials may commence
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The IND is submitted to the FDA
with the preclinical and manufacturing data, a proposed
development plan and a proposed protocol for a study in humans.
The IND becomes effective 30 days following receipt by the
FDA, provided there are no questions, requests for delay or
objections from the FDA. If the FDA has questions or concerns,
it notifies the sponsor, and the IND will then be on clinical
hold until the sponsor responds satisfactorily.
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3. Adequate and
well-controlled human clinical trials to establish the safety
and efficacy of the product
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Clinical trials involve the
evaluation of a potential product under the supervision of a
qualified physician, in accordance with a protocol that details
the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each
protocol is submitted to the FDA as part of the IND. The
protocol for each clinical study must be approved by an
independent Institutional Review Board (IRB) of the institution
at which the study is conducted and the informed consent of all
participants must be obtained. The IRB reviews the existing
information on the product, considers ethical factors, the
safety of human subjects, the potential benefits of the therapy
and the possible liability of the institution. The IRB is
responsible for ongoing safety assessment of the subjects during
the Clinical Investigation.
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Clinical development is
traditionally conducted in three sequential phases,
Phase 1, 2 and 3.
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Phase 1 studies for a cell
therapy product are designed to evaluate safety in a small
number subjects in a selected patient population by assessing
adverse effects, and may
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Steps
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Considerations
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include multiple dose levels.
This study may also gather preliminary evidence of a beneficial
effect on the disease.
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Phase 2 may involve studies
in a limited patient population to determine biological and
clinical effects of the product and to identify possible adverse
effects and safety risks of the product in the selected patient
population.
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Phase 3 trials would be
undertaken to conclusively demonstrate clinical benefit or
effect and to test further for safety within a broader patient
population, generally at multiple study sites.
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The FDA continually reviews the
clinical trial plans and results and may suggest changes or may
require discontinuance of the trials at any time if significant
safety issues arise.
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4. Submission to the FDA of
marketing authorization applications
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The results of the preclinical
studies and clinical studies are submitted to the FDA in the
form of marketing approval authorization applications.
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5. FDA approval of the
application(s) prior to any commercial sale or shipment of the
drug. Biologic product manufacturing establishments located in
certain states also may be subject to separate regulatory and
licensing requirement
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The testing and approval process
will require substantial time, effort and expense. The time for
approval is affected by a number of factors, including relative
risks and benefits demonstrated in clinical trials, the
availability of alternative treatments and the severity of the
disease. Additional animal studies or clinical trials may be
requested during the FDA review period, which might add to that
time.
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After FDA approval for the product, the manufacturing and the
initial indications, further clinical trials may be required to
gain approval for the use of the product for additional
indications. The FDA may also require unusual or restrictive
post-marketing testing and surveillance to monitor for adverse
effects, which could involve significant expense, or may elect
to grant only conditional approvals.
FDA
Manufacturing Requirements
Among the conditions for product licensure is the requirement
that the prospective manufacturers quality control and
manufacturing procedures conform to the FDAs current good
manufacturing practice (cGMP) requirements. Even after product
licensure approval, the manufacturer must comply with cGMP on a
continuing basis, and what constitutes cGMP may change as the
state of the art of manufacturing changes. Domestic
manufacturing facilities are subject to regular FDA inspections
for cGMP compliance, which are normally held at least every two
years. Foreign manufacturing facilities are subject to periodic
FDA inspections or inspections by the foreign regulatory
authorities. Domestic manufacturing facilities may also be
subject to inspection by foreign authorities.
Orphan
Drug Act
The Orphan Drug Act provides incentives to drug manufacturers to
develop and manufacture drugs for the treatment of diseases or
conditions that affect fewer than 200,000 individuals in the
United States. Orphan drug status can also be sought for
treatments for diseases or conditions that affect more than
200,000 individuals in the United States if the sponsor does not
realistically anticipate its product becoming profitable from
sales in the United
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States. We may apply for orphan drug status for certain of our
therapies. Under the Orphan Drug Act, a manufacturer of a
designated orphan product can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity in the
United States for that product for the orphan indication. While
the marketing exclusivity of an orphan drug would prevent other
sponsors from obtaining approval of the same compound for the
same indication, it would not prevent other compounds or
products from being approved for the same use including, in some
cases, slight variations on the originally designated orphan
product.
FDA Human
Cell and Tissue Regulations
Our research and development is based on the use of human stem
and progenitor cells. The FDA has initiated a risk-based
approach to regulating Human Cell, Tissue and Cellular and
Tissue-based (HCT/P) products and has published current
Good Tissue Practice (cGTP) regulations. As part of this
approach, the FDA has published final rules for registration of
establishments that recover, process, store, label, package or
distribute HCT/P products or that screen or test the donor of
HCT/P products, and for the listing of such products. In
addition, the FDA has published rules for determining the
suitability of donors of cells and tissue, the eligibility of
the cells and tissues for clinical use and for current good
tissue practice for manufacturers using them, which came into
effect in May 2005. We cannot yet determine the full effects of
this regulatory initiative, including precisely how it may
affect the extent of regulatory obligations associated with
multipotent stem cell research, and the manufacture and
marketing of stem cell products.
Other
Regulations
In addition to safety regulations enforced by the FDA, we are
also subject to regulations under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic
Substances Control Act and other present and potential future
foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations
that govern the import of drug products from the United States
or other manufacturing sites and foreign regulatory requirements
governing human clinical trials and marketing approval for our
products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursements vary
widely from country to country. In particular, the European
Union, or EU, is revising its regulatory approach to
biotechnology products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and
making more uniform the regulations for the registration of
pharmaceutical products in these three markets. Furthermore,
human stem and progenitor cells may be regulated in the EU and
other countries as transplant material or as a somatic cell
therapy medicinal product, depending on the processing,
indication and country.
Reimbursement
and Health Care Cost Control
Reimbursement for the costs of treatments and products such as
ours from government health administration authorities, private
health insurers and others both in the United States and abroad
is a key element in the success of new health care products.
Significant uncertainty often exists as to the reimbursement
status of newly approved health care products.
The revenues and profitability of some health care-related
companies have been affected by the continuing efforts of
governmental and third party payers to contain or reduce the
cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the levels of
reimbursement for new therapeutic products approved for
marketing by the FDA, and are refusing, in some cases, to
provide any coverage for uses of approved products for disease
indications for which the FDA has not granted marketing
approval. In certain foreign markets, pricing or profitability
of prescription pharmaceuticals is subject to government
control. In the United States, there have been a number of
Federal and state proposals to implement government control over
health care costs.
19
Employees
As of December 31, 2006, we had forty-six full-time
employees, of whom thirteen have Ph.D. or M.D. degrees.
Thirty-five full-time employees work in research and development
and laboratory support services. No employees are covered by
collective bargaining agreements.
Scientific
Advisory Board
Members of our Scientific Advisory Board (SAB) provide us with
strategic guidance in regard to our research and product
development programs, as well as assistance in recruiting
employees and collaborators. Each SAB member has entered into a
consulting agreement with us. These consulting agreements
specify the compensation to be paid to the consultant and
require that all information about our products and technology
be kept confidential. All of the SAB members are employed by
employers other than us and may have commitments to or
consulting or advising agreements with other entities that limit
their availability to us. The SAB members have generally agreed,
however, for so long as they serve as consultants to us, not to
provide any services to any other entities that would conflict
with the services the member provides to us. We are entitled to
terminate the arrangements if we determine that there is such a
conflict. Members of the SAB offer consultation on specific
issues encountered by us as well as general advice on the
directions of appropriate scientific inquiry for us. In
addition, SAB members assist us in assessing the appropriateness
of moving our projects to more advanced stages. The following
persons are members of our SAB:
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Irving L. Weissman, M.D., is the Virginia and Daniel K.
Ludwig Professor of Cancer Research, Professor of Pathology and
Professor of Developmental Biology at Stanford University,
Stanford California, and Director of the Stanford University
Institute for Stem Cell Biology and Regenerative Medicine, as
well as Director of the Stanford Comprehensive Cancer Center.
Dr. Weissmans lab was responsible for the discovery
and isolation of the first ever mammalian tissue stem cell, the
hematopoietic (blood-forming) stem cell. Dr. Weissman was
responsible for the formation of three stem cell companies,
SyStemix, Inc., StemCells, Inc., and Cellerant, Inc. He is a
member of the Board of Directors and Chairman of the Scientific
Advisory Boards of StemCells and Cellerant. Dr. Weissman
co-discovered the mammalian and human hematopoietic stem cells
and the human neural stem cell. He has extended these stem cell
discoveries to cancer and leukemia, discovering the leukemic
stem cells in human and mouse acute or blast crisis myeloid
leukemias, and has enriched the cancer stem cells in several
human brain cancers as well as human head and neck squamous cell
carcinoma. Past achievements of Dr. Weissmans
laboratory include identification of the states of development
between stem cells and mature blood cells, the discovery and
molecular isolation and characterization of lymphocyte and stem
cell homing receptors, and identification of the states of
thymic lymphocyte development. His laboratory at Stanford has
developed accurate mouse models of human leukemias, and has
shown the central role of inhibition of programmed cell death in
that process. He has also established the evolutionary origins
of pre-vertebrate stem cells, and identified and cloned the
transplantation genes that prevent their passage from one
organism to another. Dr. Weissman has been elected to the
National Academy of Science, the Institute of Medicine of the
National Academies, the American Association of the Arts and
Sciences, the American Society of Microbiology, and several
other societies.. He has received the Kaiser Award for
Excellence in Preclinical Teaching, the Pasarow Foundation Award
for Cancer Research, the California Scientist of the Year
(2002), the Kovalenko Medal of the National Academy of Sciences,
the Elliott Joslin Medal for Diabetes Research, the de Villiers
Award for Leukemia Research, the Irvington Award for
Immunologist of the Year, the Bass Award of the Society of
Neurosurgeons, the New York Academy of Medicine Award for
Medical Research, the Alan Cranston Award for Aging Research,
the Linus Pauling Award for Biomedical Research, the E. Donnall
Thomas Award for Hematology Research, the van Bekkum Award for
Stem Cell Research, the Outstanding Investigator Award from the
National Institutes of Health, and many other awards.
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David J. Anderson, Ph.D., is Roger W. Sperry Professor of
Biology, California Institute of Technology, Pasadena,
California and Investigator, Howard Hughes Medical Institute.
His laboratory was the first to isolate a multipotent,
self-renewing, stem cell for the peripheral nervous system, the
first to identify instructive signals that promote the
differentiation of these stem cells along various lineages, and
the first to accomplish a direct purification of peripheral
neural stem cells from uncultured tissue.
Dr. Andersons
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laboratory also was the first to isolate transcription factors
that act as master regulators of neuronal fate. More recently,
he has identified signals that tell a neural stem cell to
differentiate to oligodendrocytes, the myelinating glia of the
central nervous system, as well as factors for astrocyte
differentiation. Dr. Anderson is a co-founder of StemCells
and a member of its SAB, and was a founding SAB member of the
International Society for Stem Cell Research. Dr. Anderson
also serves on the SAB of Allen Institute for Brain Science. He
has held a presidential Young Investigator Award from the
National Science Foundation, a Sloan foundation Fellowship in
Neuroscience, and has been Donald D. Matson lecturer at Harvard
Medical School. He has received the Charles Judson Herrick Award
from the American Association of Anatomy, the
1999 W. Alden Spencer Award in Neurobiology from
Columbia University, and the Alexander von Humboldt Foundation
Award. Dr. Anderson is a member of the American Academy of
Arts and Sciences.
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Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics,
The Salk Institute for Biological Studies, La Jolla,
California and Adjunct Professor, Department of Neurosciences,
University of California, San Diego, California.
Dr. Gages lab was the first to discover Neurogenesis
in the adult human brain. His research focus is on the
development of strategies to induce recovery of function
following central nervous system (CNS) damage. Dr. Gage is
a co-founder of StemCells and of BrainCells, Inc., and a member
of the SAB of each. Dr. Gage also serves on the Scientific
Advisory Board of Ceregene, Inc. Dr. Gage has been the
recipient of numerous awards, including the 1993 Charles A. Dana
Award for Pioneering Achievements in Health and Education, the
Christopher Reeves Medal, the Decade of the Brain Medal, the
Max-Planck research Prize, and the Pasarow Foundation Award.
Professor Gage is a member of the Institute of Medicine, a
member of the National Academy of Science, and a Fellow of the
American Academy of Arts and Science.
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21
AVAILABLE
INFORMATION
Our principal executive offices are located at 3155 Porter
Drive, Palo Alto, CA 94304, and our main telephone number is
(650) 475-3100.
Investors can obtain access to this annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and all amendments to these reports, free of charge, on our
website at http://www.stemcellsinc.com as soon as reasonably
practicable after such filings are electronically filed with the
SEC. The public may read and copy any material we file with the
SEC at the SECs Public Reference Room at 450 Fifth
Street, N.W., Washington D.C., 20549. The public may obtain
information on the operations of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site, http://www.sec.gov, which
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC.
Risks
Related to our Business
Any
adverse development in the initial clinical trial for our stem
cell technology could substantially depress our stock price and
prevent us from raising the capital we will need to further
develop our stem cell technology.
To an unusual extent, our ability to progress as a company is
significantly dependent on a single early stage clinical trial.
Any clinical, regulatory or other development that prevents or
delays us from conducting our initial clinical trial for NCL
(Batten disease), or any safety issue or adverse side effect to
any patient that occurs during the trial, or the failure of this
initial trial to enroll patients and proceed to completion as
anticipated or to show the results expected by investors, would
likely significantly depress our stock price and could prevent
us from raising the substantial additional capital we will
require to further develop our stem cell technologies.
Our
financial situation is precarious and, based on currently
estimated operating expenses, our existing capital resources may
not be sufficient to fund our operations beyond the next
eighteen months.
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 and increasing operating losses. We have limited
liquidity and capital resources and must obtain significant
additional capital resources in order to sustain our product
development efforts and for acquisition of technologies and
intellectual property rights, preclinical and clinical testing
of our anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office
facilities, establishment of production capabilities,
maintaining and enforcing our intellectual property portfolio,
general and administrative expenses and other working capital
requirements. We rely on cash reserves and proceeds from equity
and debt offerings, proceeds from the transfer or sale of our
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund our
operations. If we exhaust our cash reserves and are unable to
realize adequate financing, we may be unable to meet operating
obligations and be required to initiate bankruptcy proceedings.
Our existing capital resources may not be sufficient to fund our
operations beyond the next eighteen months. We intend to pursue
opportunities to obtain additional financing in the future
through equity and debt financings, corporate alliances, grants
and collaborative research arrangements. The source, timing and
availability of any future financing will depend principally
upon market conditions, interest rates and, more specifically,
on our progress in our exploratory, preclinical and future
clinical development programs. Funding may not be available when
needed at all or on terms acceptable to us.
Lack of necessary funds may require us to delay, scale back or
eliminate some or all of our research and product development
programs
and/or our
capital expenditures or to license our potential products or
technologies to third parties.
Our
product development programs are based on novel technologies and
are inherently risky.
We are subject to the risks of failure inherent in the
development of products based on new technologies. The novel
nature of the therapies creates significant challenges in
regards to product development and optimization, manufacturing,
government regulation, third party reimbursement and market
acceptance. For example, the FDA
22
has relatively little experience with stem cell-based
therapeutics, and the pathway to regulatory approval for our
product candidates may accordingly be more complex and lengthy
than the pathway for new conventional drugs. These challenges
may prevent us from developing and commercializing products on a
timely or profitable basis or at all.
Our
technology is at an early stage of discovery and development,
and we may fail to develop any commercially acceptable or
profitable products.
We have yet to develop any products that have been approved for
marketing. Before we may market any product, we must obtain
regulatory approval from the FDA and equivalent foreign agencies
after conducting extensive preclinical studies and clinical
trials that demonstrate that our product candidates are safe and
effective for each disease for which we seek approval. We have
no experience in conducting clinical trials prior to the current
NCL trial being conducted at the Oregon Health &
Science University (OHSU). We expect that none of our cell-based
therapeutic product candidates will be commercially available
for several years, if at all.
Our programs are still at the preclinical phase for our human
liver engrafting cell, and at the discovery phase for our
candidate human pancreas stem cell. While the U.S. Food and
Drug Administration (FDA) has permitted us to go forward with
our Phase I clinical trial of our proprietary neural stem
cell therapy product HuCNS SC in NCL,
and the Institutional Review Board of OHSU has approved the
protocol, there can be no assurance that the clinical
investigators will be able to identify suitable candidates for
completion of the trial (which is intended to enroll six
subject, only of whom two have received transplants so far), or
of a successful outcome of the trial if candidates are enrolled.
We may fail to discover the stem cells we are seeking, to
develop any products, to obtain regulatory approvals, to enter
clinical trials, or to commercialize any products. We may elect
to delay or discontinue preclinical studies or clinical trials
based on unfavorable results. Any product using stem cell
technology may fail to:
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survive and persist in the desired location;
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provide the intended therapeutic benefits;
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properly integrate into existing tissue in the desired manner; or
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achieve therapeutic benefits equal to or better than the
standard of treatment at the time of testing.
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In addition, our products may cause undesirable side effects.
Results of preclinical research may not be indicative of the
results that will be obtained in later stages of preclinical or
clinical research. If regulatory authorities do not approve our
products or if we fail to maintain regulatory compliance, we
would be unable to commercialize our products, and our business
and results of operations would be harmed. Furthermore, because
transplantation of stem cells is a new form of therapy, the
marketplace may not accept any products we may develop. If we do
succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals and to
develop or obtain manufacturing, marketing and distribution
capabilities. In addition, we will face substantial additional
risks such as product liability claims.
Moreover, because our cell-based therapeutic products will be
derived from tissue of individuals other than the patient (that
is, they will be non-self or allogeneic
transplant products), patients will require the use of
immunosuppressive drugs such as cyclosporine, FK506, or others
to prevent rejection of the cells. While immunosuppression is
now standard in connection with allogeneic transplants of
various kinds, long-term maintenance on immunosuppressive drugs
can produce complications that include infection, cancer,
cardiovascular disease, renal dysfunction and other side effects
depending upon which immunosuppressive regimen is employed.
Immunosuppression is currently being tested with our therapeutic
product candidate in our Phase I clinical trial for NCL
(Batten disease).
Our
success will depend in large part on our ability to develop and
commercialize products that treat diseases other than Batten
disease.
Although we have initially focused on evaluating our neural stem
cell product for the treatment of infantile and late infantile
NCL (Batten disease), this disease is rare, and the market for
treating this disease is small.
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Accordingly, even if we obtain marketing approval for HuCNS-SC
for infantile and late infantile NCL, in order to achieve
profitability, if at all, we will need to obtain approval for
HuCNS-SC and other potential products to treat additional
diseases that present more significant market opportunities.
We
have payment obligations resulting from real property owned or
leased by us in Rhode Island, which diverts funding from our
stem cell research and development.
Prior to our reorganization in 1999 and the consolidation of our
business in California, we carried out our former encapsulated
cell therapy programs in Lincoln, Rhode Island, where we also
had our administrative offices. Although we have vacated the
Rhode Island facilities, we remain obligated to make lease
payments and payments for operating costs for our former science
and administrative facility, which we have leased through
June 30, 2013. These costs, before
sub-tenant
rental income, amounted to approximately $1,550,000 in 2006; our
rent payments will increase over the term of the lease, and our
operating costs may increase as well. In addition to these costs
of our former science and administrative facility, we are
obligated to make debt service payments and payments for
operating costs of approximately $450,000 per year for our
former encapsulated cell therapy pilot manufacturing facility,
which we own. We have currently subleased a portion of the
science and administrative facility, and are seeking to sublease
the remaining portion, but we cannot be sure that we will be
able to keep any part of the facility subleased for the duration
of our obligation. We have currently subleased the entire pilot
manufacturing facility to a privately-held biotechnology
company, but may not be able to sublease or sell the facility in
the future once the current sublease agreements expire. These
continuing costs significantly reduce our cash resources and
adversely affect our ability to fund further development of our
stem cell technology. In addition, changes in real estate market
conditions and assumptions regarding the length of time it may
take us to either fully sublease, assign or sell our remaining
interest in the our former research facility in Rhode Island may
have a significant impact on and cause large variations in our
quarter to quarter results of operations. In 1999, in connection
with exiting our former research facility in Rhode Island, we
created a reserve for the estimated lease payments and operating
expenses related to it. The reserve is periodically re-evaluated
and adjusted based on assumptions relevant to real estate market
conditions and the estimated time until we can either fully
sublease, assign or sell our remaining interests in the
property. At December 31, 2006, the reserve was $6,750,000.
In 2006 and 2005, we incurred $1,295,000 and $1,079,000 in
operating expenses net of
sub-tenant
income for this facility. Expenses for this facility will
fluctuate based on changes in tenant occupancy rates and other
operating expenses related to the lease. Even though it is our
intent to sublease, assign, sell or otherwise divest ourselves
of our interests in the facility at the earliest possible time,
we cannot determine with certainty a fixed date by which such
events will occur. In light of this uncertainty, based on
estimates, we will periodically re-evaluate and adjust the
reserve, as necessary, and we may make significant adverse
adjustments to the reserve in the future.
We may
need but fail to obtain partners to support our stem cell
development efforts and to commercialize our
technology.
Equity and debt financings alone may not be sufficient to fund
the cost of developing our stem cell technologies, and we may
need to rely on partnering arrangements to provide financial
support for our stem cell discovery and development efforts. In
addition, in order to successfully develop and commercialize our
technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies,
universities, research groups and others. While we have engaged,
and expect to continue to engage, in discussions regarding such
arrangements, we have not reached any agreement, and we may fail
to obtain any such agreement on terms acceptable to us. Even if
we enter into such arrangements, we may not be able to satisfy
our obligations under them or renew or replace them after their
original terms expire. Furthermore, these arrangements may
require us to grant rights to third parties, such as exclusive
marketing rights to one or more products, may require us to
issue securities to our collaborators and may contain other
terms that are burdensome to us. If we enter collaboration
agreements and any of our collaborators terminates its
relationship with us or fails to perform its obligations in a
timely manner, the development or commercialization of our
technology and potential products may be adversely affected.
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Because
the patient population for NCL, or Batten disease, is very
small, we may encounter difficulties in enrolling subjects in
our first clinical trial.
The first clinical application we are pursuing NCL
(also known as Batten disease) has a very small
patient population. From this small population, we must locate
and enroll patients that satisfy the specific enrollment
criteria for our Phase I clinical trial for this
indication. This clinical trial may be delayed significantly or
terminated if we are unable to enroll a sufficient number of
qualified patients.
We
have a history of operating losses, and we may fail to obtain
revenues or become profitable.
We expect to continue to incur substantial operating losses in
the future in order to conduct our research and development
activities, and, if those activities are successful, to fund
clinical trials and other expenses. These expenses include the
cost of acquiring technology, product testing, acquiring
regulatory approvals, establishing production, marketing, sales
and distribution programs and administrative expenses. We have
not earned any revenues from sales of any product. All of our
past revenues have been derived from, and any revenues we may
obtain for the foreseeable future are expected to be derived
from, license agreements, cooperative agreements, research
grants, investments and interest on invested capital. We
currently have no cooperative agreements or research grants and
we may not obtain any such agreements or additional grants in
the future or receive any revenues from them.
If we
are unable to protect our patents and proprietary rights, our
business, financial condition and results of operations will be
harmed.
We own or license a number of patents and pending patent
applications related to various stem and progenitor cells and
methods of deriving and using them, including human neural stem
cell cultures. Patent protection for products such as those we
propose to develop is highly uncertain and involves complex and
continually evolving factual and legal questions. The
governmental authorities that consider patent applications can
deny or significantly reduce the patent coverage requested in an
application before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result
in the issuance of patents, if any existing or future patents
will provide sufficient protection or significant commercial
advantage or if others will circumvent these patents. We cannot
be certain that we were the first to discover the inventions
covered by each of our pending patent applications or that we
were the first to file patent applications for such inventions
because patent applications are secret until they are published,
and because publication of discoveries in the scientific or
patent literature often lags behind actual discoveries. Patents
may not issue from our pending or future patent applications or,
if issued, may not be of commercial benefit to us. In addition,
our patents may not afford us adequate protection from competing
products. Third parties may challenge our patents or
governmental authorities may declare them invalid or reduce
their scope. In the event that a third party has also filed a
patent application relating to inventions claimed in our patent
applications, we may have to participate in proceedings to
determine priority of invention. Even if a patent issues, a
court could decide that the patent was issued invalidly. Because
patents issue for a limited term, our patents may expire before
we utilize them profitably. Our most important patents begin to
expire in 2015. Under the procedures of the European Patent
Office, third parties may oppose our issued European patents
during the relevant opposition period. These proceedings and
oppositions could result in substantial uncertainties and cost
for us, even if the eventual outcome is favorable to us, and the
outcome might not be favorable to us. One party has opposed two
of our granted European patents. Both oppositions were heard in
2005, and the patents were maintained in somewhat altered form.
Although the time for appeal has now run, and the
.U.S. counterparts to these patents are not subject to
opposition, since that procedure does not exist under
U.S. patent law, other types of proceedings may be
available to third parties to contest our U.S. patents. See
Item 1. Business Patents, Proprietary
Rights and Licenses and Item 3. Legal
proceedings.
If we learn of third parties who infringe our patent rights, we
may need to initiate legal proceedings to enforce our patent
rights. These proceedings may entail significant costs, and
these third parties may have significantly greater financial
resources than us. We may not prevail in these proceedings. See
Item 1. Business Patents, Proprietary
Rights and Licenses and Item 3. Legal
proceedings.
25
Proprietary trade secrets and unpatented know-how are also
important to our research and development activities. We cannot
be certain that others will not independently develop the same
or similar technologies on their own or gain access to our trade
secrets or disclose such technology or that we will be able to
meaningfully protect our trade secrets and unpatented know-how.
We require our employees, consultants, and significant
scientific collaborators and sponsored researchers to execute
confidentiality agreements upon the commencement of an
employment or consulting relationship with us. These agreements
may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or
disclosure of such information or technology.
If
others are first to discover and patent the stem cells we are
seeking to discover, we could be blocked from further work on
those stem cells.
Because the first person or entity to discover and obtain a
valid patent to a particular stem or progenitor cell may
effectively block all others, it will be important for us or our
collaborators to be the first to discover any stem cell that we
are seeking to discover. Failure to be the first could prevent
us from commercializing all of our research and development
affected by that patent.
If we
are unable to obtain necessary licenses to third-party patents
and other rights, we may not be able to commercially develop our
expected products.
A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent
applications or have received patents relating to cell therapy,
stem cells and other technologies potentially relevant to or
necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents, and there may be
existing patents of which we are currently unaware which the
commercialization of our product candidates would infringe. If
third party patents or patent applications contain valid claims
that our technology infringes upon their technology, we may be
prevented from commercializing that technology unless the third
party is willing to grant a license to us. We may be unable to
obtain licenses to the relevant patents at a reasonable cost, if
at all, and may also be unable to develop or obtain alternative
non-infringing technology. If we are unable to obtain such
licenses or develop non-infringing technology at a reasonable
cost, our business could be significantly harmed. Also, any
infringement lawsuits commenced against us may result in
significant costs, divert our managements attention and
result in an award against us for substantial damages.
We are aware of intellectual property rights held by third
parties that relate to products or technologies we are
developing. For example, some aspects of our stem cell product
candidates involve the use of growth factors, antibodies and
other reagents that may, in certain cases, be the subject of
third party rights. Before we commercialize any product using
these growth factors, antibodies or reagents, we may need to
obtain license rights from third parties or use alternative
growth factors, antibodies and reagents that are not then the
subject of third party patent rights. We currently believe that
the commercialization of our products as currently planned will
not infringe these third party rights, or, alternatively, that
we will be able to obtain necessary licenses or otherwise use
alternate non-infringing technology. However, third parties may
nonetheless bring suit against us claiming infringement. If we
are unable to prove that our technology does not infringe their
patents, or if we are unable to obtain necessary licenses or
otherwise use alternative non-infringing technology, we may not
be able to commercialize any products. Also, if we use
alternative non-infringing technology, we may need to
demonstrate comparability in subsequent clinical trials.
We have obtained rights from universities and research
institutions to technologies, processes and compounds that we
believe may be important to the development of our products.
These licensors, however, may cancel our licenses or convert
them to non-exclusive licenses if we fail to use the relevant
technology or otherwise breach these agreements. Loss of these
licenses could expose us to the risk that our technology
infringes the rights of third parties. We can give no assurance
that any of these licenses will provide effective protection
against our competitors.
26
We
compete with companies that have significant advantages over
us.
The market for therapeutic products to treat diseases of, or
injuries to, the central nervous system (CNS) is large, and
competition is intense. The majority of the products currently
on the market or in development are small molecule
pharmaceutical compounds. Many of the worlds large
pharmaceutical companies, including Merck, Pfizer, Abbott,
Bristol-Myers Squibb, Novartis and GlaxoSmithKline, have made
significant commitments to the CNS field. Any cell-based therapy
to treat diseases of, or injuries to, the CNS is likely to face
intense competition from the small molecule sector. In addition,
a number of biotechnology companies with resources far greater
than ours may also emerge as competitors. These include Genzyme,
Amgen, Cephalon, Shire Pharmaceuticals, BioMarin, Celgene,
Biogen Idec, and Titan Pharmaceuticals/Schering AG. Finally, we
also expect to compete with smaller biotechnology companies,
such as NeuralStem, Geron, NeuroNova, ReNeuron, and ES Cell
International, some of which are privately owned.
We believe that our human neural stem cells may have application
to many or most of the Lysosomal Storage Diseases
(LSDs) with CNS involvement. We are currently
conducting a Phase I clinical trial at Doernbecher
Childrens Hospital at Oregon Health & Safety
University to treat infantile and late infantile NCL (also known
as Batten disease), which are among the LSDs that affect the
CNS. There can be no assurance that the trial will demonstrate
either safety or efficacy of our HuCNS-SC. There are, so far as
we know, no approved therapies for NCL or any of the other
CNS-specific LSDs, but other companies, including Genzyme,
BioMarin, and Shire, have products approved to treat peripheral
aspects of some of the other LSDs, and other products are in
clinical trials.
In the liver field, there are no broad-based therapies for the
treatment of liver disease at present. The primary therapy is
liver transplantation, which is limited by the availability of
matched donor organs. Liver-assist devices, when and if they
become available, could also be used to help patients while they
await suitably matched organs for transplantation. In addition,
new therapies may become available before we successfully
develop a cell-based therapy for liver disease.
In the field of diabetes, a number of major companies currently
market products for the treatment of diabetes and are also
engaged in the research and development of new therapies. Such
companies include Eli Lilly, Novo Nordisk, J&J, Amylin,
ViaCell, and Serono. Consequently, should we successfully
develop a cell-based therapy for diabetes, we would expect to
face severe competition from these and similar companies.
Development
of our technology is subject to and restricted by extensive
government regulation, which could impede our
business.
Our research and development efforts, as well as any future
clinical trials, and the manufacturing and marketing of any
products we may develop, will be subject to and restricted by
extensive regulation by governmental authorities in the United
States and other countries. The process of obtaining
U.S. Food and Drug Administration and other necessary
regulatory approvals is lengthy, expensive and uncertain. We or
our collaborators may fail to obtain the necessary approvals to
commence or continue clinical testing or to manufacture or
market our potential products in reasonable time frames, if at
all. In addition, the U.S. Congress and other legislative
bodies may enact regulatory reforms or restrictions on the
development of new therapies that could adversely affect the
regulatory environment in which we operate or the development of
any products we may develop.
We base our research and development on the use of human stem
and progenitor cells obtained from fetal tissue. The federal and
state governments and other jurisdictions impose restrictions on
the use of fetal tissue, including those incorporated in the
recent federal current Good Tissue Practice, or cGTP,
regulations. These regulatory and other constraints could
prevent us from obtaining cells and other components of our
products in the quantity or quality needed for their development
or commercialization. These restrictions change from time to
time and may become more onerous. Additionally, we may not be
able to identify or develop reliable sources for the cells
necessary for our potential products that is,
sources that follow all state and federal guidelines for cell
procurement. Certain components used to manufacture our stem
cell product candidates will need to be manufactured in
compliance with the FDAs Good Manufacturing Practices, or
cGMP. Accordingly, we will need to enter into supply agreements
with companies that manufacture these components to cGMP
standards.
27
Although we do not use embryonic stem cells, government
regulation and threatened regulation of embryonic tissue may
lead top researchers to leave the field of stem cell research,
or the country, in order to assure that their careers will not
be impeded by restrictions on their work. Similarly, these
factors may induce the best graduate students to choose other
fields less vulnerable to changes in regulatory oversight, thus
exacerbating the risk, discussed below, that we may not be able
to attract and retain the scientific personnel we need in face
of the competition among pharmaceutical, biotechnology and
health care companies, universities and research institutions
for what may become a shrinking class of qualified individuals.
In addition, we cannot be certain that constraints on the use of
embryonic stem cells will not be extended to use of fetal stem
cells. Moreover, it is possible that concerns regarding research
using embryonic stem cells will negatively impact our stock
price and our ability to attract collaborators and investors.
We may apply for status under the Orphan Drug Act for some of
our therapies to gain a seven-year period of marketing
exclusivity for those therapies. The U.S. Congress in the
past has considered, and in the future again may consider,
legislation that would restrict the extent and duration of the
market exclusivity of an orphan drug. If enacted, such
legislation could prevent us from obtaining some or all of the
benefits of the existing statute even if we were to apply for
and obtain orphan drug status with respect to a potential
product.
We are
dependent on the services of key personnel.
We are highly dependent on the principal members of our
management and scientific staff and some of our outside
consultants, including the members of our scientific advisory
board, our chief executive officer, our chief operating officer,
our vice presidents and the heads of key departments or
functions within the company. Although we have entered into
employment agreements with some of these individuals, they may
terminate their agreements at any time. In addition, our
operations are dependent upon our ability to attract and retain
additional qualified scientific and management personnel. We may
not be able to attract and retain the personnel we need on
acceptable terms given the competition for experienced personnel
among pharmaceutical, biotechnology and health care companies,
universities and research institutions.
Our
activities involve hazardous materials and experimental animal
testing; improper handling of these animals and materials by our
employees or agents could expose us to significant legal and
financial penalties.
Our research and development activities involve the controlled
use of hazardous chemicals and potentially hazardous biological
materials such as human tissue and animals. Their use subjects
us to environmental and safety laws and regulations such as
those governing laboratory procedures, exposure to blood-borne
pathogens, use of animals and the handling of biohazardous
materials. Compliance with current or future laws and
regulations may be expensive and the cost of compliance could
adversely affect us.
Although we believe that our safety procedures for using,
handling, storing and disposing of hazardous and potentially
hazardous materials comply with the standards prescribed by
California and federal regulations, the risk of accidental
contamination or injury from these materials cannot be
eliminated. In the event of such an accident or of any violation
of these or future laws and regulations, state or federal
authorities could curtail our use of these materials; we could
be liable for any civil damages that result, the cost of which
could be substantial; and we could be subjected to substantial
fines or penalties. In addition, any failure by us to control
the use, disposal, removal or storage, or to adequately restrict
the discharge, or to assist in the cleanup, of hazardous
chemicals or hazardous, infectious or toxic substances could
subject us to significant liability. Any such liability could
exceed our resources and could have a material adverse effect on
our business, financial condition and results of operations.
Moreover, an accident could damage our research and
manufacturing facilities and operations and result in serious
adverse effects on our business.
The
manufacture, development and commercialization of stem cell
products expose us to product liability claims, which could lead
to substantial liability.
By developing and, ultimately, commercializing medical products,
we are exposed to the risk of product liability claims. Product
liability claims against us could entail substantial litigation
costs and damage awards
28
against us. We have obtained liability insurance that covers our
clinical trials, and we will need to increase our insurance
coverage if and when we begin commercializing products. We may
not be able to obtain insurance on acceptable terms, if at all,
and the policy limits on our insurance policies may be
insufficient to cover our liability.
Since
health care insurers and other organizations may not pay for our
products or may impose limits on reimbursements, our ability to
become profitable could be reduced.
In both domestic and foreign markets, sales of potential
products are likely to depend in part upon the availability and
amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health
care insurers and other health care payors, such as health
maintenance organizations and self-insured employee plans. There
is considerable pressure to reduce the cost of therapeutic
products, and government and other third party payors are
increasingly attempting to contain health care costs by limiting
both coverage and the level of reimbursement for new therapeutic
products and by refusing, in some cases, to provide any coverage
for uses of approved products for disease indications for which
the U.S. Food and Drug Administration has not granted
marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products or
novel therapies such as ours. Even if we obtain regulatory
approval to market our products, we can give no assurance that
reimbursement will be provided by such payors at all or without
substantial delay or, if such reimbursement is provided, that
the approved reimbursement amounts will be sufficient to enable
us to sell products we develop on a profitable basis. Changes in
reimbursement policies could also adversely affect the
willingness of pharmaceutical companies to collaborate with us
on the development of our stem cell technology. In certain
foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We also expect
that there will continue to be a number of federal and state
proposals to implement government control over health care
costs. Efforts at health care reform are likely to continue in
future legislative sessions. We do not know what legislative
proposals federal or state governments will adopt or what
actions federal, state or private payers for health care goods
and services may take in response to health care reform
proposals or legislation. We cannot predict the effect
government control and other health care reforms may have on our
business.
We
have limited liquidity and capital resources and may not obtain
the significant capital resources we will need to sustain our
research and development efforts.
We have limited liquidity and capital resources and must obtain
substantial additional capital to support our research and
development programs, for acquisition of technology and
intellectual property rights and, to the extent we decide to
undertake these activities ourselves, for preclinical and
clinical testing of our anticipated products, pursuit of
regulatory approvals, establishment of production capabilities,
maintaining and enforcing our intellectually property portfolio,
establishment of marketing and sales capabilities and
distribution channels, and general administrative expenses. If
we do not obtain the necessary capital resources, we may have to
delay, reduce or eliminate some or all of our research and
development programs or license our technology or any potential
products to third parties rather than commercialize them
ourselves. We intend to pursue our needed capital resources
through equity and debt financings, corporate alliances, grants
and collaborative research arrangements. We may fail to obtain
the necessary capital resources from any such sources when
needed or on terms acceptable to us. Our ability to complete
successfully any such arrangements will depend upon market
conditions and, more specifically, on continued progress in our
research and development efforts.
Ethical
and other concerns surrounding the use of stem cell therapy may
negatively affect regulatory approval or public perception of
our product candidates, which could reduce demand for our
products.
The use of stem cells for research and therapy has been the
subject of debate regarding related ethical, legal and social
issues. Although these concerns have mainly been directed to the
use of embryonic stem cells, which we do not use, the
distinction between embryonic and non-embryonic stem cells is
frequently overlooked; moreover, our use of human stem cells
from fetal sources might raise these or similar concerns.
Negative public attitudes toward stem cell therapy could result
in greater governmental regulation of stem cell therapies, which
could harm our business. For example, concerns regarding such
possible regulation could impact our ability to attract
collaborators and investors. Also, existing regulatory
constraints on the use of embryonic stem cells may in the future
be extended to use of fetal stem cells, and these constraints
might prohibit or restrict us from conducting research or
29
commercializing products. Government regulation and threatened
regulation of embryonic tissue could also harm our ability to
attract and retain qualified scientific personnel by causing top
researchers to leave the country or the field of stem cell
research altogether; and by encouraging the best graduate
students to choose other fields that are less vulnerable to
changes in regulatory oversight.
Our
corporate documents and Delaware law contain provisions that may
make it difficult for us to be acquired in a transaction that
would be beneficial to our shareholders.
Our board of directors has the authority to issue shares of
preferred stock and to fix the rights, preferences, privileges
and restrictions of these shares without shareholder approval.
In addition, we have adopted a rights plan that generally
permits our existing shareholders to acquire additional shares
at a substantial discount to the market price in the event of
certain attempts by third parties to acquire us. These rights,
along with certain provisions in our corporate documents and
Delaware law, may make it more difficult for a third party to
acquire us or discourage a third party from attempting to
acquire us, even if the acquisition might be beneficial to our
shareholders.
Risks
Related to the Securities Market
Our
stock price has been, and will likely continue to be, highly
volatile, which may negatively affect our ability to obtain
additional financing in the future.
The market price of our stock has been and is likely to continue
to be highly volatile due to the risks and uncertainties
described in this section of the
Form 10-K,
as well as other factors, including:
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our ability to develop and test our technology;
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our ability to patent or obtain licenses to necessary technology;
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conditions and publicity regarding the industry in which we
operate, as well as the specific areas our product candidates
seek to address;
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competition in our industry;
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price and volume fluctuations in the stock market at large that
are unrelated to our operating performance; and
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comments by securities analysts, or our failure to meet market
expectations.
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Over the two-year period ended December 31, 2006, the
trading price of our common stock as reported on the Nasdaq
Markets ranged from a high of $6.77 to a low of $1.77. As a
result of this volatility, your investment in our stock is
subject to substantial risk. Furthermore, the volatility of our
stock price could negatively impact our ability to raise capital
in the future.
We are
contractually obligated to issue shares in the future, diluting
the interest of current shareholders.
As of December 31, 2006, there were outstanding warrants to
purchase 1,930,658 shares of our common stock, at a
weighted average exercise price of $1.86 per share. As of
December 31, 2006, there were also outstanding options to
purchase 8,501,503 shares of our common stock, at a
weighted average exercise price of $2.88 per share.
Moreover, we expect to issue additional options to purchase
shares of our common stock to compensate employees, consultants
and directors, and may issue additional shares to raise capital,
to acquire other companies or technologies, to pay for services,
or for other corporate purposes. Any such issuances will have
the effect of diluting the interest of current shareholders.
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Item 1B.
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Unresolved
Staff Comments
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None.
30
We entered into a
5-year
lease, as of February 1, 2001, for a 40,000 square
foot facility, located in the Stanford Research Park in Palo
Alto, California. This facility includes space for animals as
well as laboratories, offices, and a suite designed to be used
to manufacture materials for clinical trials. Effective
July 1, 2006, under an agreement that extends the lease
through March 31, 2010, we leased the remainder of the
building, adding approximately 27,500 square feet to our
leased premises. The facility will better enable us to achieve
our goal of utilizing human stem and progenitor cells for the
treatment of disorders of the nervous system, liver, and
pancreas. We have a space-sharing agreement with Stanford
University for part of the animal facility not needed for our
own use.
We continue to lease the following facilities in Lincoln, Rhode
Island obtained in connection with our former encapsulated cell
technology: our former research laboratory and corporate
headquarters building which contains 62,500 square feet of
wet labs, specialty research areas and administrative offices
held on a lease agreement that goes through June 2013, as well
as a 21,000 square-foot pilot manufacturing facility and a
3,000 square-foot cell processing facility financed by
bonds issued by the Rhode Island Industrial Facilities
Corporation. We have subleased the 21,000 square-foot and
the 3,000 square foot facilities. We have also subleased
small portions of the 62,500 square foot facility,
amounting to approximately ten percent for most of 2006. We are
actively seeking to sublease, assign or sell our remaining
interests in these properties.
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Item 3.
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Legal
Proceedings
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In December 2003, Geron Corporation filed oppositions to two of
our European patents that relate to neural stem cells and their
uses, alleging that each patent should be revoked on multiple
grounds. Both oppositions were heard in 2005, and the patents
were maintained in somewhat altered form by the Opposition
Division of the European Patent Office, and the time for appeal
has run. U.S. counterparts to both of 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.
In July, 2006, we filed suit against Neuralstem, Inc., in the
Federal District Court for the District of Maryland, alleging
that its activities violate claims in four of our patents.
Neuralstem has filed a motion for dismissal or summary judgment,
citing Title 35, Section 271(e)(1) of the United
States Code, which says that it is not an act of patent
infringement to make, use or sell a patented invention
solely for uses reasonably related to the development and
submission of information to the FDA. Neuralstem argues
that since it does not have any therapeutic products on the
market yet, the activities complained of fall within the
protection of Section 271(e)(1) that is,
basically, that the suit is premature. This issue will be
decided after discovery is complete.
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Item 4.
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Submission
Of Matters To A Vote Of Security Holders
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None.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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(a) Market Price and dividend information
In September 2005 the Nasdaq Stock Market approved our
application to move the listing of our common stock from the
Nasdaq Capital Market (previously known as the Nasdaq SmallCap
Market) to the Nasdaq National Market (now known as the Nasdaq
Global Market). The stock began trading on the Nasdaq National
Market on
31
September 30, 2005 under the same symbol, STEM. The
quarterly ranges of high and low bid prices for the last two
fiscal years as reported by NASDAQ are shown below:
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2006
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High
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Low
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First Quarter
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$
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4.06
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$
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3.45
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Second Quarter
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$
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3.58
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$
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1.77
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Third Quarter
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$
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2.55
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$
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1.90
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Fourth Quarter
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$
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3.49
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$
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2.05
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2005
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First Quarter
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$
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6.76
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$
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3.00
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Second Quarter
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$
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4.60
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$
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2.58
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Third Quarter
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$
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6.57
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$
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4.19
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Fourth Quarter
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$
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5.53
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$
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3.40
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No cash dividends have been declared on the Companys
common stock since the Companys inception.
32
PERFORMANCE
GRAPH
The following graph compares the cumulative
5-year total
return to shareholders of StemCells, Inc.s common stock
relative to the cumulative total returns of the S & P
500 Index and the Amex Biotechnology Stock Index. The graph
assumes that the value of the investment in the companys
common stock and in each of the indexes (including reinvestment
of dividends) was $100 on December 31, 2001 and tracks it
through December 31, 2006.
The stock price performance shown on the graph below is not
necessarily indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Among
StemCells, Inc., S & P 500 Index and the Amex
Biotechnology Stock Index
for the period from December 31, 2001 until
December 31,
2006(1)
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December 31,
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December 31,
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December 31,
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December 31,
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December 31,
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December 31,
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2001
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2002
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2003
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2004
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2005
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2006
|
StemCells, Inc.
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$
|
100.00
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$
|
31.23
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$
|
56.73
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$
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121.20
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$
|
98.85
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$
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75.93
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S&P 500 Index
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$
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100.00
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$
|
76.63
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$
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96.85
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$
|
105.56
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|
|
$
|
108.73
|
|
|
|
$
|
123.54
|
|
AMEX BIOTECH STOCK INDEX
|
|
|
$
|
100.00
|
|
|
|
$
|
58.26
|
|
|
|
$
|
84.42
|
|
|
|
$
|
93.74
|
|
|
|
$
|
117.28
|
|
|
|
$
|
129.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the closing price of the companys common stock on
the first day of trading on the NASDAQ Global Market. Cumulative
total returns assume reinvestment of all dividends and a
hypothetical investment of $100 on December 31, 2001. |
(b) Approximate Number of Holders of Common Stock
As of February 28, 2007, there were approximately 592
holders of record of the common stock, and as of the same date
the closing price per share of the common stock on the NASDAQ
Global Market was $2.83.
(c) Recent Sale of Unregistered Securities (last three
years ending December 31, 2006)
The Company issued the following unregistered securities in 2004:
|
|
|
|
|
In August 2004, StemCells issued 9,535 shares of common
stock to the California Institute of Technology (Cal Tech) as
payment for fees of $10,000 and $5,000 that were due on the
issuance of two patents to which StemCells holds a license from
Cal Tech that were payable in cash or stock at the
Companys option. The shares were issued in a transaction
not involving any public offering pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
|
33
|
|
|
|
|
In December 2004, StemCells issued 1,816 shares of common
stock to inventors of a technology as part payment for
approximately $2,800 of the total option fee of $25,000 to
acquire an exclusive license to the technology from the Board of
Trustees of The Leland Stanford Junior University. The shares
were issued in a transaction not involving any public offering
pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
|
No unregistered securities were issued in 2005.
The Company issued the following unregistered securities in 2006:
|
|
|
|
|
In August 2006, StemCells issued 3,848 shares of common
stock to the California Institute of Technology (Cal Tech) as
payment of annual fees of $5,000 on each for two patents to
which StemCells holds a license from Cal Tech, payable in cash
or stock at the Companys choice. The Company elected to
pay the fees in stock. The shares were issued in a transaction
not involving any public offering pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
|
Equity
Compensation Plan Information
The following table provides certain information with respect to
all of the Companys equity compensation plans in effect as
of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities to
|
|
|
|
|
|
Remaining Available for
|
|
|
|
be Issued Upon
|
|
|
Weighted-average
|
|
|
Future Issuance Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and rights
|
|
|
Reflected in Column(a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
8,501,503
|
(1)
|
|
$
|
2.88
|
|
|
|
5,320,935
|
|
Equity compensation arrangements
not approved by security holders
|
|
|
100,000
|
(2)
|
|
$
|
1.20
|
|
|
|
N/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
8,601,503
|
|
|
$
|
2.86
|
|
|
|
5,320,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of options issued to employees and options issued as
compensation to consultants for consultation services. These
options were issued under the Companys 1992 Equity
Incentive Plan, its Directors Stock Option Plan, its
StemCells, Inc. Stock Option Plan, or its 2001, 2004 and 2006
Equity Incentive Plans. |
|
(2) |
|
Represents the portion outstanding of a fully vested warrant
issued in January 2003, to purchase 200,000 shares with an
exercise price of $1.20 per share and exercisable, in whole
or in part, for five years from the date of issuance. The
warrant which constitutes an equity compensation arrangement not
approved by security holders was issued in exchange for advisory
services by non-employees. |
34
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial and operating data are derived
from our audited consolidated financial statements. The selected
financial and operating data should be read in conjunction with
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation and the
consolidated financial statements and notes thereto contained
elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from collaborative and
licensing agreements
|
|
$
|
55
|
|
|
$
|
20
|
|
|
$
|
22
|
|
|
$
|
18
|
|
|
$
|
40
|
|
Revenue from grants
|
|
|
38
|
|
|
|
186
|
|
|
|
119
|
|
|
|
255
|
|
|
|
375
|
|
Total revenue
|
|
|
93
|
|
|
|
206
|
|
|
|
141
|
|
|
|
273
|
|
|
|
415
|
|
Research and development expenses
|
|
|
13,600
|
|
|
|
8,226
|
|
|
|
7,844
|
|
|
|
5,479
|
|
|
|
6,732
|
|
General and administrative expenses
|
|
|
7,154
|
|
|
|
5,540
|
|
|
|
4,870
|
|
|
|
4,056
|
|
|
|
4,009
|
|
Wind-down expense(1)
|
|
|
709
|
|
|
|
2,827
|
|
|
|
2,827
|
|
|
|
2,885
|
|
|
|
1,164
|
|
License & settlement
agreement income, net(2)
|
|
|
103
|
|
|
|
3,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before deemed dividends and
cumulative effect of change in accounting principle
|
|
|
(18,948
|
)
|
|
|
(11,738
|
)
|
|
|
(15,330
|
)
|
|
|
(12,291
|
)
|
|
|
(11,644
|
)
|
Net loss
|
|
|
(18,948
|
)
|
|
|
(11,738
|
)
|
|
|
(15,330
|
)
|
|
|
(14,425
|
)
|
|
|
(13,276
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.53
|
)
|
Shares used in computing basic and
Diluted loss per share amounts
|
|
|
74,611
|
|
|
|
63,643
|
|
|
|
49,606
|
|
|
|
32,080
|
|
|
|
25,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,795
|
|
|
$
|
34,541
|
|
|
$
|
41,060
|
|
|
$
|
13,082
|
|
|
$
|
4,236
|
|
Marketable securities
|
|
|
7,266
|
|
|
|
3,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
66,857
|
|
|
|
44,839
|
|
|
|
47,627
|
|
|
|
19,786
|
|
|
|
11,329
|
|
Accrued wind-down expenses and
deferred rent(1)
|
|
|
6,750
|
|
|
|
7,306
|
|
|
|
5,528
|
|
|
|
3,823
|
|
|
|
1,931
|
|
Long-term debt, including capital
leases
|
|
|
1,145
|
|
|
|
1,351
|
|
|
|
1,646
|
|
|
|
1,850
|
|
|
|
2,087
|
|
Redeemable preferred stock(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,660
|
|
Stockholders equity
|
|
|
54,376
|
|
|
|
32,376
|
|
|
|
36,950
|
|
|
|
10,964
|
|
|
|
1,933
|
|
|
|
|
(1) |
|
Relates to wind-down expenses in respect of the Companys
Rhode Island facility. See Note 8 in the consolidated
financial statements. |
|
(2) |
|
Relates to an agreement with ReNeuron Limited. See Note 2
in the consolidated financial statements. |
|
(3) |
|
See Note 10 in the consolidated financial statements. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our financial condition and results
of operations should be read in conjunction with the
accompanying financial statements and the related footnotes
thereto.
This report contains forward looking statements within the
meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act that involve
substantial risks and uncertainties. Such statements include,
without limitation, all statements as to expectation or belief
and statements as to our future results of
35
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) or other applicable
regulators or review boards will permit clinical testing of
proposed products despite the novel and unproven nature of our
technology; the risk that, although it has been allowed to go
forward by the FDA and is now in progress, 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 to
support the development 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;
including uncertainty as to whether results obtained in the
animal models of infantile neuronal ceroid lipofuscinosis (NCL),
spinal cord injury, or other diseases and conditions will be
able to be translated into treatment for humans; the uncertainty
regarding the validity and enforceability of issued patents; the
uncertainty whether HuCNS-SC and any other 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; our likely increase in the use of cash as
compared to our historical use of cash; 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. See Risk Factors under
Item 1A above.
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. We are currently conducting a Phase I
clinical trial of our human neural stem cells as a treatment for
infantile and late infantile neuronal ceroid lipofuscinosis
(NCL), a fatal neurodegenerative disease often referred to as
Batten disease. The trial is being conducted at Oregon
Health & Science Universitys Doernbecher
Childrens Hospital in Portland, Oregon.
We have not derived any revenues from the sale of any products
apart from license revenue for the research use of certain of
our 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 screening and enrolling patients and for
preparing HuCNS-SC doses for our Phase I clinical trial and
will incur more such expenditures for any future clinical
trials. We previously had expenditures for toxicology and other
studies in preparation for submitting the Investigational New
Drug application (IND) for our Phase I trial for NCL 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.
Significant events of the past year include these:
In November, 2006, the first patient in our Phase I
clinical trial was transplanted with our proprietary human
neural stem cell product
HuCNS-SCtm
at Oregon Health & Science Universitys (OHSU)
Doernbecher Childrens Hospital. Since then, a second
patient has also been transplanted with HuCNS-SC at OHSU. This
study is designed to evaluate the safety and preliminary
efficacy of HuCNS-SC as a treatment for infantile and late
infantile NCL (also known as Batten Disease), and a total of six
patients are planned to be enrolled.
36
In April, 2006, we sold 11,750,820 shares of common stock
to a limited number of institutional investors at a price of
$3.05 per share, for gross proceeds of $35.8 million.
We received total proceeds, net of offering expenses and
placement agency fees, of approximately $33.4 million.
In June 2006 and February 2007, we received a combined total of
approximately 1.3 million additional shares of ReNeuron
Group plc, pursuant to the anti-dilution provisions of the
license agreement entered into with ReNeuron in July 2005 as
they applied to two ReNeuron financings. In February 2007, we
sold approximately 5,275,000 shares of ReNeuron for net
proceeds of approximately $3.1 million. As of
February 26, 2007, we owned approximately 4.8 million
shares of ReNeuron. See Note 2 and Item 7a.
Quantitative and Qualitative Disclosures about Market Risk.
In 2006, the U.S. Patent and Trademark Office issued seven
new patents that are owned by or exclusively licensed to
StemCells, Inc., further strengthening what the Company believes
is the dominant intellectual property position in the neural
stem cell field, with claims covering methods for
identification, isolation, expansion, and transplantation of
neural stem cells as well as methods for drug discovery and
testing. See Patents, Proprietary Rights and
Licenses.
In August, 2006, we licensed certain rights to our intellectual
property to Stem Cell Therapeutics Corp., a Canadian
biotechnology company engaged in treating certain central
nervous system disorders by stimulating endogenous neural stem
cells. Under the agreement, we received an up-front fee and will
receive license maintenance fees, as well as milestone and
royalty payments. See License Agreements under
Patents, Proprietary Rights and Licenses.
Our results of operations have varied significantly from year to
year and quarter to quarter and may vary significantly in the
future due to the occurrence of material recurring and
nonrecurring events, including without limitation the receipt
and payment of recurring and nonrecurring licensing payments,
the initiation or termination of research collaborations, the
on-going expenses to lease and maintain our facilities in Rhode
Island and the increasing costs associated with our facility in
California. To expand and provide high quality systems and
support to our Research and Development programs, as well as to
enhance our internal controls over financial reporting, we will
need to hire more personnel, which will lead to higher operating
expenses. Throughout 2006 and early 2007, we made a number of
additions to our management team: In January, Maria
Millan, M.D., FACS, joined us as Director, Liver Cell
Transplant Program; in December, she was promoted to Vice
President and Head of the Liver Program. In April, Elizabeth
Leininger, Ph.D. was appointed Vice President, Regulatory
Affairs and Quality Assurance. In December, Ann
Tsukamoto, Ph.D., formerly Vice President, Research and
Development, was promoted to the newly created position of Chief
Operating Officer, and Rodney Young was promoted to Chief
Financial Officer and Vice President, Finance and
Administration. In January, 2007, Stephen Huhn, M.D.,
F.A.C.S., F.A.A.P., joined us as Vice President and Head of the
Neural Program.
Our Neural Program 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 NCL mentioned above. In
our Liver Program, we are engaged in evaluating our proprietary
liver engrafting cell in various in vivo assays, and are
planning to advance our liver stem 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
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 our management to make
estimates and assumptions that affect
37
the amounts reported in the consolidated financial statements.
Actual results could differ from these estimates. Significant
estimates include the following:
|
|
|
|
|
Accrued wind-down expenses (See Note 8).
|
|
|
|
The grant date fair value of share-based awards recognized as
compensation expense in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004) Share Based Payment
(SFAS 123R). See Stock-based Compensation below.
|
|
|
|
Valuation allowance against net deferred tax assets (See
Note 12).
|
Marketable
securities
In accordance with SFAS 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. See Note 2.
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. We
maintain shareholder approved stock-based compensation plans,
pursuant to which we granted stock-based compensation to our
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 our 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 typically the period over which the stock-based
compensation awards vest. We 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. We applied the
principles of SAB 107 in conjunction with its adoption of
SFAS 123R.
We 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 fair value compensation expense related
to stock option grants for those periods. In accordance with
SFAS 123R, we recognized stock option related compensation
expense of approximately $2,285,000 for the year ended
December 31, 2006. Stock option related compensation
expense was recognized on a straight line basis over the vesting
period of each grant net of estimated forfeitures. We estimated
forfeiture rates based on our 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
38
(Black Scholes model). The following summarizes the assumptions
used in the Black Scholes model as applied by quarter for the
year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2006
|
|
|
Second Quarter 2006
|
|
|
Third Quarter 2006
|
|
|
Fourth Quarter 2006
|
|
|
Risk free interest
rate (1)
|
|
|
4.72
|
%
|
|
|
5.08
|
%
|
|
|
4.68
|
%
|
|
|
4.54
|
%
|
Volatility (2)
|
|
|
119.5
|
%
|
|
|
110.8
|
%
|
|
|
106.6
|
%
|
|
|
103.3
|
%
|
Dividend yield (3)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years until
exercise) (4)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
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 December 31, 2006, approximately $5,775,000 of
unrecognized compensation expense related to stock options is
expected to be recognized over a weighted average period of
approximately 1.6 years. The resulting effect on net loss
and net loss per share attributable to common stockholders may
not 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, we accounted for our stock-based
compensation plans under Accounting Principles Board Opinion
No. 25 (APB 25), Accounting for Stock Issued
to Employees. In accordance with APB 25, we
generally recognized no compensation expense for qualified stock
option grants, as the options were usually granted 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, we recognized
the difference between the exercise price and fair market value
as compensation expense in accordance with APB 25. Prior to
January 1, 2006, we 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 fair
value compensation expense was disclosed but not recognized in
periods prior to January 1, 2006, no cumulative adjustment
for forfeitures was recorded in 2006. See table in
Stock-Based Compensation under Note 1 below for
an illustration of the effect on net loss and net loss per share
if we had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation in the prior
years ended December 31, 2005 and 2004.
We account 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, recognize
as expense the estimated fair value of such options as
calculated using the Black Scholes model. The fair value is
re-measured at each reporting date 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 during the year ended
December 31, 2006, other than options granted to
non-employee members of the Board of Directors for service as
Board members.
In July 2006, pursuant to the 2006 Equity Incentive Plan, we
granted cash-settled Stock Appreciation Rights (SARs) to certain
employees. The SARs give the holder the right, upon exercise, to
the difference between the price per share of our common stock
at the time of exercise and the exercise price of the SAR. The
exercise price of the SARs is equal to the market price of our
common shares at the date of grant. The SARs will vest on the
same schedule as our qualified options issued to employees,
i.e., 25% on the first anniversary of the grant date and then
1/48th every month thereafter. We will recognize
compensation expense for the SARs over the requisite service
period which is typically the period over which the awards vest.
Since the vesting schedule of the SARs is identical
39
to the vesting schedule of options granted this period, our fair
value calculation of the SARs issued using the Black Scholes
model were based on the same assumptions used in calculating
compensation expense for stock options granted this period. The
fair value of the share-based compensation liability for the
cost of the requisite service that has been rendered at the
reporting date is re-measured at each reporting date through the
date of settlement. The following table presents the activity of
the Companys SARs awards for the year ended
December 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
SARs
|
|
|
Exercise Price
|
|
|
SARs
|
|
|
Exercise Price
|
|
|
Outstanding at January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable at
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, we recorded
approximately $293,000 as compensation expense related to SARs
granted. At December 31, 2006, approximately $2,336,000 of
unrecognized compensation expense related to SARs is expected to
be recognized over a weighted average period of approximately
1.9 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 the fair value calculation which is dependent on the
stock price, volatility, interest and forfeiture rates,
additional grants and subsequent periods of vesting.
Long-Lived
Assets
We routinely evaluate the carrying value of our long-lived
assets. We record impairment losses on long-lived assets used in
operations when events and circumstances indicate that assets
may be impaired and the undiscounted cash flows estimated to be
generated by the assets are less than the carrying amount of
those assets. If an impairment exists, the charge to operations
is measured as the excess of the carrying amount over the fair
value of the assets.
Wind-down
and Exit Costs
In connection with our wind-down of 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
have provided our estimate of the exit cost obligation in
accordance with
EITF 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). On an ongoing basis we
re-evaluate such estimate. For further discussion, see
Wind-down expenses under Results of
Operations and Note 8 to the consolidated financial
statements.
40
RESULTS
OF OPERATIONS
Years
Ended December 31, 2006, 2005 and 2004
Revenues
Revenues totaled approximately $93,000, $206,000, and $141,000
for the years ended December 31, 2006, 2005 and 2004,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from previous year: 2006
|
|
|
previous year: 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
versus 2005
|
|
|
versus 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from licensing revenue
|
|
$
|
55,299
|
|
|
$
|
19,526
|
|
|
$
|
22,206
|
|
|
$
|
35,773
|
|
|
|
183
|
%
|
|
$
|
(2,680
|
)
|
|
|
(12
|
)%
|
Revenue from grants
|
|
|
37,551
|
|
|
|
186,388
|
|
|
|
118,828
|
|
|
|
(148,837
|
)
|
|
|
(80
|
)%
|
|
|
67,560
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
92,850
|
|
|
$
|
205,914
|
|
|
$
|
141,034
|
|
|
$
|
113,064
|
|
|
|
(55
|
)%
|
|
$
|
64,880
|
|
|
|
46
|
%
|
Revenues for 2006 include $38,000 that is part of a Small
Business Technology Transfer (STTR) grant received in 2004 for
approximately $464,000 over one and one half years for studies
in Alzheimers disease. The STTR grant will support joint
work with the McLaughlin Research Institute (MRI) in Great
Falls, Montana. We retained $243,000 and the remaining $221,000
was disbursed to MRI. Revenues for 2006 also include licensing
revenue of approximately $55,000 received from various
licensees. Revenues for 2005 include $186,000 that was part of
the STTR grant and approximately $20,000 in licensing revenue.
Revenues for 2004 include $93,000 that completes the draw down
of a one-year Small Business Innovation Research grant of
$342,000 from the National Institute of Neurological Disease and
Stroke (NINDS) received at the end of 2003, and $26,000 which is
part of the STTR grant received in 2004. Total revenue for 2004
includes licensing revenue of $22,000.
Operating
Expenses
Operating expenses totaled approximately $21,464,000,
$16,594,000, and $15,541,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
|
|
|
previous year: 2006
|
|
|
previous year: 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
versus 2005
|
|
|
versus 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development
|
|
$
|
13,600,433
|
|
|
$
|
8,226,734
|
|
|
$
|
7,843,981
|
|
|
$
|
5,373,699
|
|
|
|
65
|
%
|
|
$
|
382,753
|
|
|
|
5
|
%
|
General & administrative
|
|
|
7,154,042
|
|
|
|
5,539,845
|
|
|
|
4,870,014
|
|
|
|
1,614,197
|
|
|
|
29
|
%
|
|
|
669,831
|
|
|
|
14
|
%
|
Wind-down expenses
|
|
|
709,209
|
|
|
|
2,827,403
|
|
|
|
2,826,879
|
|
|
|
(2,118,194
|
)
|
|
|
(75
|
)%
|
|
|
524
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
21,463,684
|
|
|
$
|
16,593,982
|
|
|
$
|
15,540,874
|
|
|
$
|
4,869,702
|
|
|
|
29
|
%
|
|
$
|
1,053,108
|
|
|
|
7
|
%
|
Research &
development expenses
Research and development expenses totaled approximately
$13,600,000 in 2006, as compared to $8,227,000 in 2005 and
$7,844,000 in 2004.
2006 versus 2005. The increase of
approximately $5,374,000 or 65% 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 $2,669,000, an increase in
external services of approximately $1,464,000, an increase in
supplies and other expenses of $771,000 and the cost of
additional space leased in 2006 allocated to research and
development. Of the approximately $2,669,000 increase in
personnel costs, approximately $1,344,000 was attributable to
the expensing of stock-based compensation (which includes the
grant of stock options, stock appreciation rights and share
awards) as required by the new accounting
41
pronouncement SFAS 123R (see Stock-Based
Compensation under Note 1), with the balance
attributable to an increased head count which includes the
hiring of key personnel necessary to facilitate the expansion of
our cell processing and clinical operations. At
December 31, 2006, we had thirty-five full-time employees
working in research and development and laboratory support
services as compared to thirty-three at December 31, 2005.
2005 versus 2004. The increase of $383,000 or
5% from 2004 to 2005 was primarily attributable to increased
head count and related costs of $848,000 in 2005 as compared to
2004. At December 31, 2005, we had thirty-three full-time
employees working in research and development and laboratory
support services as compared to twenty-eight at
December 31, 2004. This increase in 2005 was partially
offset by a net decrease in expenses of $465,000 primarily
related to external services. We required a high level of
external services in 2004 for preclinical pharmacology and
toxicology studies and other external services in preparation
for submitting our first IND to the FDA. The decrease in
expenses related to external services was also attributable to a
decrease in valuation in 2005 of stock options granted as
compensation to non-employees as compared to the valuation in
2004. The valuation computed by the Black Scholes
Method is dependant on variable factors at the time
of such valuation such as stock price, stock price volatility,
interest rate and remaining life of the option. Our stock price
at December 31, 2005 was $3.45 as compared to $4.23 at
December 31, 2004.
General &
administrative expenses
General and administrative expenses were approximately
$7,154,000 in 2006, compared with $5,540,000 in 2005 and
$4,870,000 in 2004.
2006 versus 2005. The increase of $1,614,000
or 29% from 2005 to 2006 was primarily attributable to the
increase in personnel costs of approximately $1,826,000, of
which approximately $1,423,000 was attributable to the expensing
of stock-based compensation (which includes the grant of stock
options and stock appreciation rights) as required by the new
accounting pronouncement SFAS 123R (see Stock-Based
Compensation under Note 1). The increase in personnel
costs was partially offset by a net decrease in other costs
primarily attributable to the expensing of the fair value of
options granted to a consultant in 2005. No such options were
granted in 2006.
2005 versus 2004. The increase of $670,000 or
14% from 2004 to 2005 was primarily attributable to expensing
the fair value of stock options granted to our previous chief
financial officer, which was approximately $457,000. The vesting
of the options was accelerated as part of an agreement that
retained our previous chief financial officer as a consultant
for approximately six months following her employment
termination date. The increase was also attributable to the
increase in head count and related costs of approximately
$394,000; increase in recruiting fees of approximately $145,000;
and the increase in listing fees of approximately $114,000
incurred in 2005 for moving the listing of our shares from the
Nasdaq Capital Market to the Nasdaq Global Market. The
aforementioned increases were partially offset by a decrease in
2005 of approximately $186,000 for external services to evaluate
and test our internal financial control systems so as to meet
the requirements of and be in compliance with the Securities and
Exchange Commission rules issued under Section 404 of the
Sarbanes-Oxley Act, and a net decrease of approximately $254,000
in other expenses.
Wind-down
expenses
In connection with our wind-down of 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,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring. 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.
In determining the facility exit cost reserve amount, we are
required to consider our 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
42
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 2006 was
approximately 67%, varying from 49% to 84%. As of
December 31, 2006, based on current information available
to management, the vacancy rate is projected to be 91% for 2007,
and approximately 70% from 2008 through the end of the lease.
These estimates are based on actual occupancy as of
December 31, 2006, 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
December 31, 2006, then the reserve would have increased or
decreased by approximately $239,000. 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 year ended December 31, 2006, we
recorded actual expenses against this reserve of approximately
$1,295,000. Based on managements evaluation of the factors
mentioned, and particularly the projected vacancy rates
described above, we adjusted the reserve to $5,512,000 by
recording an additional $709,000 for the year ended
December 31, 2006. See Note 8 for a breakdown of these
figures by quarter.
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
|
|
|
previous year:
|
|
|
previous year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 versus 2005
|
|
|
2005 versus 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement
|
|
$
|
103,359
|
|
|
$
|
3,735,556
|
|
|
|
|
|
|
$
|
(3,632,197
|
)
|
|
|
(97
|
)%
|
|
$
|
3,735,556
|
|
|
*
|
N/M
|
|
Interest income
|
|
|
2,479,740
|
|
|
|
1,122,963
|
|
|
$
|
322,227
|
|
|
|
1,356,777
|
|
|
|
(121
|
)%
|
|
|
800,736
|
|
|
|
249
|
%
|
Interest expense
|
|
|
(143,001
|
)
|
|
|
(171,909
|
)
|
|
|
(191,006
|
)
|
|
|
28,908
|
|
|
|
(17
|
)%
|
|
|
19,097
|
|
|
|
(10
|
)%
|
Other income (expense), net
|
|
|
(17,644
|
)
|
|
|
(36,892
|
)
|
|
|
(61,680
|
)
|
|
|
19,248
|
|
|
|
(52
|
)%
|
|
|
24,788
|
|
|
|
(40
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
$
|
2,422,454
|
|
|
$
|
4,649,718
|
|
|
$
|
(69,541
|
)
|
|
$
|
(2,227,264
|
)
|
|
|
(48
|
)%
|
|
$
|
4,580,177
|
|
|
*
|
N/M
|
|
License
and settlement agreement
In July 2005, we entered into an agreement with ReNeuron
Limited, a wholly owned subsidiary of ReNeuron Group plc, a
listed UK corporation (collectively referred to as
ReNeuron). As part of the agreement, we 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. StemCells received a
7.5% fully-diluted equity interest
43
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 we 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 our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005.
We recorded approximately $103,000 and $3,736,000 as other
income in 2006 and 2005 respectively, which was the fair value
of the ReNeuron shares net of legal fees and the value shares
that was transferred to NeuroSpheres Ltd., an Alberta
corporation from which we have licensed some of the patent
rights that are the subject of the agreement with ReNeuron. See
Note 2 for more details on this transaction.
Interest
income
Interest income for the years ended December 31, 2006, 2005
and 2004 totaled approximately $2,480,000, $1,123,000 and
$322,000, respectively. The increase in interest income from
2004 to 2006 was primarily attributable to a higher average bank
balance as a result of our financing transactions. (See
Liquidity and Capital Resources below for further
detail on these transactions) and a higher yield on overnight
and money market funds.
Interest
expense
In 2006, interest expense was approximately $143,000, compared
to approximately $172,000 in 2005 and approximately $191,000 in
2004. The decrease from 2004 to 2006 was attributable to lower
outstanding debt and capital lease balances.
Other
income/expense, net
Other expenses for 2006 were approximately $18,000, which
include approximately $20,000 for state franchise taxes paid,
partially offset by a gain of approximately $2,000 from the
disposal of old equipment. Other expenses for 2005 were
approximately $37,000, which include approximately $36,000 for
state franchise taxes and approximately $1,000 from a write-off
of obsolete equipment. Other expenses for 2004 were
approximately $62,000, which include a loss of approximately
$56,000 resulting from a write-off of obsolete lab equipment and
approximately $6,000 for state franchise taxes.
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, license fees and
interest income.
44
We had cash and cash equivalents totaling approximately
$51,796,000 at December 31, 2006. Cash equivalents are
generally invested in U.S. Treasuries with maturities of
less than 90 days. The table below summarizes our cash
flows for the respective fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
|
|
|
|
|
|
previous year:
|
|
|
previous year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 versus 2005
|
|
|
2005 versus 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Net cash used in operating
activities
|
|
$
|
(16,104,120
|
)
|
|
$
|
(11,870,568
|
)
|
|
$
|
(11,273,908
|
)
|
|
$
|
(4,233,552
|
)
|
|
|
36
|
%
|
|
$
|
(596,660
|
)
|
|
|
5
|
%
|
Net cash used in investing
activities
|
|
|
(1,297,124
|
)
|
|
|
(847,505
|
)
|
|
|
(748,305
|
)
|
|
|
(449,619
|
)
|
|
|
53
|
%
|
|
|
(99,200
|
)
|
|
|
13
|
%
|
Net cash provided by financing
activities
|
|
|
34,655,865
|
|
|
|
6,199,449
|
|
|
|
40,000,042
|
|
|
|
28,456,416
|
|
|
|
459
|
%
|
|
|
(33,800,592
|
)
|
|
|
(85
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
$
|
17,254,621
|
|
|
$
|
(6,518,624
|
)
|
|
$
|
27,977,829
|
|
|
$
|
23,773,245
|
|
|
|
365
|
%
|
|
$
|
(34,496,452
|
)
|
|
|
(123
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We used approximately $16,104,000, $11,871,000, and $11,274,000
of cash, in 2006, 2005 and 2004 respectively, in our operating
activities. The increase in cash used in operating activities in
2006 as compared to 2005 was primarily attributable to the
expansion of our operations in cell processing and clinical
development in 2006. The increase in cash used in operating
activities in 2005 as compared to 2004 was primarily
attributable to an increase in head count to strengthen our
scientific and management team.
The increase from 2005 to 2006 of approximately $28,456,000 for
net cash provided by financing activities was primarily
attributable to the sale on April 6, 2006, of
11,750,820 shares of our common stock to a limited number
of institutional investors at a price of $3.05 per share.
The Company received total proceeds, net of offering expenses
and placement agency fees, of approximately $33,422,000.
Listed below are key financing transactions entered into by us
in the last three years:
|
|
|
|
|
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 offering under an effective shelf registration
statement previously filed with and declared effective by the
Securities and Exchange Commission. We received total proceeds,
net of offering expenses and placement agency fees, of
approximately $33,422,000. No warrants were issued as part of
this financing transaction.
|
|
|
|
In 2005, an aggregate of 2,958,348 warrants were exercised. For
the exercise of these warrants, we issued 2,842,625 shares
of our common stock and received proceeds of approximately
$5,939,000.
|
|
|
|
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 U.S. Securities and Exchange Commission.
For acting as our placement agent Unterberg and Shoreline
received fees of approximately $1,350,000 and expense
reimbursement of approximately $40,000. No warrants were issued
as part of this financing transaction.
|
|
|
|
On June 16, 2004, we entered into an agreement with
institutional and other accredited investors with respect to the
private placement of approximately 13,160,000 shares of our
common stock at a purchase price of $1.52 per share, for
gross proceeds of approximately $20,000,000. Investors also
received warrants exercisable for five years to purchase
approximately 3,290,000 shares of common stock at an
exercise price of $1.90 per share. During the period
October 2004 to December 2005, part of these warrants were
|
45
|
|
|
|
|
exercised to purchase an aggregate of 1,459,342 shares of
our common stock at $1.90 per share. We received proceeds
of $2,772,750 on issuance of the shares. Unterberg served as
placement agent for the private placement. For acting as our
placement agent, Unterberg received fees of approximately
$1,200,000, expense reimbursement of approximately $25,000 and a
five year warrant to purchase 526,400 shares of our common
stock at an exercise price of $1.89 per share.
|
We continue to have outstanding obligations in regard to our
former facilities in Lincoln, Rhode Island. In 1997, we had
entered into a fifteen-year lease for a scientific and
administrative facility (the SAF) in a sale and leaseback
arrangement. The lease includes escalating rent payments. For
the year 2007, we expect to pay approximately $938,000 in
operating lease payments and estimated operating expenses of
approximately $490,000, before receipt of
sub-tenant
income. In 1992 and 1994 we had undertaken direct financing
transactions with the State of Rhode Island and received
proceeds from the issuance of industrial revenue bonds totaling
$5,000,000 to finance the construction of a pilot manufacturing
facility and a related cell processing facility. The related
leases are structured such that lease payments will fully fund
all semiannual interest payments and annual principal payments
through maturity in August 2014. For these related facilities we
expect to pay approximately $365,000 in principal, interest and
related expenses in 2007, before receipt of
sub-tenant
income. We have subleased the pilot manufacturing facility and
the cell processing facility, as well as approximately
one-fourth of the SAF. For the year 2007, we expect to receive,
in aggregate, approximately $573,000 in
sub-tenant
rent for all of the Rhode Island facilities. As a result of the
above transactions, our estimated cash outlay net of
sub-tenant
rent for the Rhode Island facilities will be approximately
$1,220,000 for 2007. We are actively seeking to sublease, assign
or sell our remaining interests in these facilities. Failure to
do so within a reasonable period of time will have a material
adverse effect on our liquidity and capital resources.
The following table summarizes our future contractual cash
obligations (including both Rhode Island and California leases,
but excluding interest income and
sub-lease
income with respect to the Rhode Island properties):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
Obligations
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
and
|
|
|
|
at
12/31/06
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Beyond
|
|
|
Bonds Payable
(principal & interest)
|
|
$
|
1,921,639
|
|
|
$
|
332,545
|
|
|
$
|
244,531
|
|
|
$
|
244,572
|
|
|
$
|
242,560
|
|
|
$
|
242,321
|
|
|
$
|
615,110
|
|
Operating lease payments
|
|
|
15,014,498
|
|
|
|
3,165,162
|
|
|
|
3,469,017
|
|
|
|
3,536,843
|
|
|
|
1,767,304
|
|
|
|
1,171,875
|
|
|
|
1,904,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
16,936,137
|
|
|
$
|
3,497,707
|
|
|
$
|
3,713,548
|
|
|
$
|
3,781,415
|
|
|
$
|
2,009,864
|
|
|
|
1,414,196
|
|
|
$
|
2,519,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have incurred significant operating losses and negative cash
flows since inception. We have not achieved profitability and
may not be able to realize sufficient revenues to achieve or
sustain profitability in the future. We do not expect to be
profitable in the next several years, but rather expect to incur
additional operating losses. We have limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain our product development efforts,
for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, for general and
administrative expenses and other working capital requirements.
We rely on cash balances and proceeds from equity and debt
offerings, proceeds from the transfer or sale of our
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund our
operations.
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 statement which, as of December 31, 2006,
covered shares of our common stock up to a value of
$64 million that could be available for financings. On
December 29, 2006, we filed a Prospectus Supplement
announcing the entry of a sales agreement with Cantor
Fitzgerald & Co. under which up to
10,000,000 shares may be sold from time to time under the
shelf registration statement. The source, timing and
availability of any future financing will depend principally
upon market conditions, interest rates and, more specifically,
on our progress in our exploratory, preclinical and future
clinical development programs. Funding may not be available when
needed at all, or on terms acceptable to us. Lack of
necessary funds may require us to delay, scale back or eliminate
some or all of our research and product
46
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.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
an interpretation of SFAS No. 109, Accounting
for Income Taxes (SFAS 109). This Interpretation
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS 109. This Interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Interpretation is
effective for fiscal years beginning after December 15,
2006. While our analysis of the impact of this Interpretation is
not yet complete, we do not anticipate that it will have a
material impact on its consolidated financial statements at the
time of adoption.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). This Standard defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The adoption of FAS 157 is not expected to have a
material impact on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), to address diversity in
practice in quantifying financial statement misstatements.
SAB 108 requires that we quantify misstatements based on
their impact on each of our financial statements and related
disclosures. SAB 108 is effective for fiscal years ending
after November 15, 2006. Our adoption of this bulletin did
not have a material impact on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
In July 2005, we entered into an agreement with ReNeuron. As
part of the agreement, we granted ReNeuron a license that allows
ReNeuron to exploit its c-mycER conditionally
immortalized adult human neural stem cell technology for therapy
and other purposes. In return for the license, we 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 our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005. On July 1, 2005,
we were entitled to approximately 3,775,000 shares of
ReNeuron, representing 7.5% of its fully-diluted share capital.
On August 12, 2005 ReNeuron listed its shares on the London
Stock Exchanges Alternative Investment Market
(AIM), a market for smaller, growing companies. In
accordance with the anti-dilution provisions of the agreement,
the placement and listing of additional shares by ReNeuron
resulted in StemCells receiving an additional
5,165,000 shares. Of the total of approximately
8.9 million shares of ReNeuron received by StemCells on
account of these events, 104,000 was transferred 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. On June 29, 2006, ReNeuron issued additional
shares of common stock, of which StemCells was entitled to
approximately 439,000 shares under the anti-dilution
provisions of the agreement and net of approximately
5,600 shares due to Neurospheres Ltd. The Company recorded
approximately $103,000 as other income for the additional shares
due in 2006. The fair market value of the Companys
holdings in ReNeuron common stock as of December 31, 2005
(8,835,766 shares) and December 31,
47
2006 (9,274,837 shares) was approximately $3,721,000 and
$7,266,000 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 income (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 gain as of December 31,
2006, was approximately $3,188,000. A decline in the fair value
of securities that is deemed other than temporary would be
charged to earnings. In February 2007, ReNeuron issued
additional shares of common stock; as a consequence of the
anti-dilution provisions, StemCells was entitled to
approximately 823,000 shares net of approximately
10,000 shares to be transferred to NeuroSpheres. These
shares satisfy ReNeurons obligations under the
anti-dilution provision of the agreement. As of
February 26, 2007, StemCells had sold approximately
5,275,000 shares of ReNeuron, realizing net proceeds of
approximately $3.1 million, and still held approximately
4.8 million shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
price at
|
|
Exchange
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
December 31,
|
|
Rate at
|
|
Value
|
|
|
Expected
|
|
Company/
|
|
|
|
|
|
at
|
|
2006
|
|
December 31,
|
|
in USD at
|
|
|
Future
|
|
Stock
|
|
|
|
Associated
|
|
December
|
|
in
|
|
2006
|
|
December 31,
|
|
|
Cash
|
|
Symbol
|
|
Exchange
|
|
Risks
|
|
31, 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
|
|
0.40
|
|
1.9586
|
|
$
|
7,266,278
|
|
|
|
(1)
|
|
|
|
|
(1) |
|
It is our intention to liquidate this investment when we can do
so at prices acceptable to us. Although we are not legally
restricted from selling the stock, the share price is subject to
change and the volume traded has often 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. |
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders of
StemCells, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting as of December 31, 2006, that
StemCells, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). StemCells, Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment, and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that StemCells,
Inc. maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on Internal Control
Integrated Framework issued by COSO. Furthermore, in our
opinion, StemCells, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2006, based on Internal Control
Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of StemCells, Inc. as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2006 and our report dated March 1, 2007
expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
San Jose, CA
March 1, 2007
49
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
STEMCELLS,
INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
StemCells, Inc.
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. and subsidiary as of December 31, 2006 and
2005, and the related consolidated statements of operations,
changes in stockholders equity, and cash flows for each of
the three years in the period ended December 31, 2006.
These financial statements are the responsibility of management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of StemCells, Inc. as of December 31, 2006 and
2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2006, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006 the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, applying the
modified-prospective method.
We also have audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the
effectiveness of StemCells, Inc.s internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated March 1, 2007
expressed an unqualified opinion on managements assessment
of, and an unqualified opinion on the effective operation of,
internal control over financial reporting.
San Jose, California
March 1, 2007
51
StemCells,
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,795,529
|
|
|
$
|
34,540,908
|
|
Other receivables
|
|
|
482,850
|
|
|
|
201,919
|
|
Other current assets
|
|
|
1,119,467
|
|
|
|
386,966
|
|
Marketable securities
|
|
|
4,132,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
57,530,492
|
|
|
|
35,129,793
|
|
Marketable securities
|
|
|
3,133,632
|
|
|
|
3,720,794
|
|
Property, plant and equipment, net
|
|
|
3,596,150
|
|
|
|
3,282,588
|
|
Other assets, net
|
|
|
2,596,543
|
|
|
|
2,705,513
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
66,856,817
|
|
|
$
|
44,838,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
620,765
|
|
|
$
|
637,122
|
|
Accrued expenses and other
|
|
|
2,053,902
|
|
|
|
1,483,300
|
|
Accrued wind-down expenses
|
|
|
1,252,483
|
|
|
|
1,118,796
|
|
Deferred revenue
|
|
|
16,826
|
|
|
|
|
|
Capital lease obligations, current
portion
|
|
|
|
|
|
|
54,676
|
|
Bonds payable, current portion
|
|
|
205,833
|
|
|
|
254,167
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,149,809
|
|
|
|
3,548,061
|
|
Bonds payable, less current
maturities
|
|
|
1,145,416
|
|
|
|
1,351,250
|
|
Deposits and other long-term
liabilities
|
|
|
547,392
|
|
|
|
522,866
|
|
Accrued wind-down expenses non
current
|
|
|
5,497,774
|
|
|
|
6,186,930
|
|
Deferred rent
|
|
|
959,732
|
|
|
|
853,997
|
|
Deferred revenue, less current
portion
|
|
|
180,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,480,814
|
|
|
|
12,463,104
|
|
Commitments (Note 6)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
125,000,000 shares authorized; 78,046,304 and
65,396,022 shares issued and outstanding at
December 31, 2006 and 2005, respectively
|
|
|
780,462
|
|
|
|
653,960
|
|
Additional paid-in capital
|
|
|
255,299,508
|
|
|
|
217,919,335
|
|
Accumulated deficit
|
|
|
(204,891,945
|
)
|
|
|
(185,943,564
|
)
|
Accumulated other comprehensive
gain (loss)
|
|
|
3,187,978
|
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
54,376,003
|
|
|
|
32,375,584
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
66,856,817
|
|
|
$
|
44,838,688
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
StemCells,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenue from collaborative and
licensing agreements
|
|
$
|
55,299
|
|
|
$
|
19,526
|
|
|
$
|
22,206
|
|
Revenue from grants
|
|
|
37,551
|
|
|
|
186,388
|
|
|
|
118,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
92,850
|
|
|
|
205,914
|
|
|
|
141,034
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,600,433
|
|
|
|
8,226,734
|
|
|
|
7,843,981
|
|
General and administrative
|
|
|
7,154,042
|
|
|
|
5,539,845
|
|
|
|
4,870,014
|
|
Wind-down expenses
|
|
|
709,209
|
|
|
|
2,827,403
|
|
|
|
2,826,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,463,684
|
|
|
|
16,593,982
|
|
|
|
15,540,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(21,370,834
|
)
|
|
|
(16,388,068
|
)
|
|
|
(15,399,840
|
)
|
Other Income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement,
net
|
|
|
103,359
|
|
|
|
3,735,556
|
|
|
|
|
|
Interest income
|
|
|
2,479,740
|
|
|
|
1,122,963
|
|
|
|
322,227
|
|
Interest expense
|
|
|
(143,001
|
)
|
|
|
(171,909
|
)
|
|
|
(191,006
|
)
|
Other income (expense)
|
|
|
(17,644
|
)
|
|
|
(36,892
|
)
|
|
|
(61,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,422,454
|
|
|
|
4,649,718
|
|
|
|
69,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(18,948,380
|
)
|
|
|
(11,738,350
|
)
|
|
|
(15,330,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
basic and diluted loss per share calculations
|
|
|
74,611,196
|
|
|
|
63,643,176
|
|
|
|
49,606,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
STEMCELLS,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
Equity
|
|
|
Balances, December 31, 2003
|
|
|
40,998,858
|
|
|
$
|
409,989
|
|
|
$
|
170,406,393
|
|
|
$
|
(158,874,916
|
)
|
|
$
|
|
|
|
$
|
(977,908
|
)
|
|
$
|
10,963,558
|
|
Issuance of common stock related to
equity financing net of issuance cost of $2,863,021
|
|
|
20,660,000
|
|
|
|
206,600
|
|
|
|
39,433,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,640,178
|
|
Common stock issued for licensing
agreements
|
|
|
11,351
|
|
|
|
114
|
|
|
|
17,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,833
|
|
Common stock issued for external
services
|
|
|
41,050
|
|
|
|
410
|
|
|
|
72,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,050
|
|
Common stock issued pursuant to
employee benefit plan
|
|
|
48,707
|
|
|
|
487
|
|
|
|
93,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,013
|
|
Exercise of employee and consultant
stock options
|
|
|
62,916
|
|
|
|
629
|
|
|
|
44,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,379
|
|
Exercise of warrants
|
|
|
306,525
|
|
|
|
3,065
|
|
|
|
579,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582,398
|
|
Compensation expense from grant of
options
|
|
|
|
|
|
|
|
|
|
|
33,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,868
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
737,493
|
|
|
|
|
|
|
|
|
|
|
|
(737,493
|
)
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829,569
|
|
|
|
829,569
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,330,299
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,330,299
|
)
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
62,129,407
|
|
|
|
621,294
|
|
|
|
211,419,300
|
|
|
|
(174,205,215
|
)
|
|
|
|
|
|
|
(885,832
|
)
|
|
|
36,949,547
|
|
Expenses related to equity financing
|
|
|
|
|
|
|
|
|
|
|
(193,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,946
|
)
|
Common stock issued for external
services
|
|
|
2,022
|
|
|
|
20
|
|
|
|
8,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,330
|
|
Common stock issued pursuant to
employee benefit plan
|
|
|
28,459
|
|
|
|
285
|
|
|
|
110,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,057
|
|
Compensation expense from grant of
options and stock (fair value)
|
|
|
|
|
|
|
|
|
|
|
461,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,675
|
|
Exercise of employee and consultant
stock options
|
|
|
393,509
|
|
|
|
3,935
|
|
|
|
733,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,688
|
|
Exercise of warrants
|
|
|
2,842,625
|
|
|
|
28,426
|
|
|
|
5,910,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,939,106
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(531,208
|
)
|
|
|
|
|
|
|
|
|
|
|
531,208
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,624
|
|
|
|
354,624
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
(254,147
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,738,350
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,738,350
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,992,497
|
)
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
65,396,022
|
|
|
|
653,960
|
|
|
|
217,919,336
|
|
|
|
(185,943,565
|
)
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
32,375,584
|
|
Issuance of common stock related to
equity financing net of issuance cost of $2,418,467
|
|
|
11,750,820
|
|
|
|
117,508
|
|
|
|
33,304,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,421,534
|
|
Common stock issued for licensing
agreements
|
|
|
3,848
|
|
|
|
38
|
|
|
|
9,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Common stock issued pursuant to
employee benefit plan
|
|
|
50,120
|
|
|
|
501
|
|
|
|
121,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,456
|
|
Compensation expense from grant of
options and stock (fair value)
|
|
|
|
|
|
|
|
|
|
|
2,409,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,409,509
|
|
Exercise of employee and consultant
stock options
|
|
|
319,094
|
|
|
|
3,191
|
|
|
|
545,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
548,279
|
|
Exercise of warrants
|
|
|
526,400
|
|
|
|
5,264
|
|
|
|
989,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
994,896
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,442,125
|
|
|
|
|
|
|
|
3,442,125
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,948,380
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,948,380
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,506,255
|
)
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
78,046,304
|
|
|
$
|
780,462
|
|
|
$
|
255,299,508
|
|
|
$
|
(204,891,945
|
)
|
|
$
|
3,187,978
|
|
|
|
|
|
|
$
|
54,376,003
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
StemCells,
Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(18,948,380
|
)
|
|
$
|
(11,738,350
|
)
|
|
$
|
(15,330,299
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,044,688
|
|
|
|
1,082,793
|
|
|
|
1,037,719
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
354,624
|
|
|
|
829,569
|
|
Issue of shares and options in
exchange for services
|
|
|
2,531,966
|
|
|
|
581,062
|
|
|
|
200,931
|
|
Loss on disposal of fixed assets
|
|
|
1,573
|
|
|
|
1,377
|
|
|
|
54,644
|
|
Non-cash income from license and
settlement agreement, net
|
|
|
(103,359
|
)
|
|
|
(3,974,941
|
)
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(112,542
|
)
|
|
|
(47,928
|
)
|
|
|
(61,660
|
)
|
Other receivables
|
|
|
(168,389
|
)
|
|
|
26,972
|
|
|
|
26,160
|
|
Other current assets
|
|
|
(732,501
|
)
|
|
|
(177,892
|
)
|
|
|
(29,026
|
)
|
Other assets, net
|
|
|
56,270
|
|
|
|
(47,053
|
)
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
554,245
|
|
|
|
48,135
|
|
|
|
665,409
|
|
Accrued wind-down expenses
|
|
|
(555,469
|
)
|
|
|
1,777,697
|
|
|
|
1,705,045
|
|
Deferred revenue
|
|
|
197,517
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
105,735
|
|
|
|
330,196
|
|
|
|
(372,400
|
)
|
Deposits and other long-term
liabilities
|
|
|
24,526
|
|
|
|
(87,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(16,104,120
|
)
|
|
|
(11,870,568
|
)
|
|
|
(11,273,908
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(1,258,749
|
)
|
|
|
(817,505
|
)
|
|
|
(676,138
|
)
|
Acquisition of other assets
|
|
|
(38,375
|
)
|
|
|
(30,000
|
)
|
|
|
(72,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,297,124
|
)
|
|
|
(847,505
|
)
|
|
|
(748,305
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds (expense) from issuance of
common stock, net
|
|
|
33,421,534
|
|
|
|
(193,946
|
)
|
|
|
39,640,178
|
|
Proceeds from the exercise of stock
options
|
|
|
548,279
|
|
|
|
737,688
|
|
|
|
45,379
|
|
Proceeds from the exercise of
warrants
|
|
|
994,896
|
|
|
|
5,939,106
|
|
|
|
582,398
|
|
Repayments of capital lease
obligations
|
|
|
(54,676
|
)
|
|
|
(39,232
|
)
|
|
|
(30,830
|
)
|
Repayments of debt obligations
|
|
|
(254,168
|
)
|
|
|
(244,167
|
)
|
|
|
(237,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
34,655,865
|
|
|
|
6,199,449
|
|
|
|
40,000,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
17,254,621
|
|
|
|
(6,518,624
|
)
|
|
|
27,977,829
|
|
Cash and cash equivalents at
beginning of year
|
|
|
34,540,908
|
|
|
|
41,059,532
|
|
|
|
13,081,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
the year
|
|
$
|
51,795,529
|
|
|
$
|
34,540,908
|
|
|
$
|
41,059,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
143,001
|
|
|
$
|
171,909
|
|
|
$
|
191,006
|
|
Supplemental schedule of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for licensing
agreements
|
|
$
|
10,000
|
(1)
|
|
|
|
|
|
$
|
17,833
|
(2)
|
|
|
|
(1) |
|
Under terms of a license agreement with the California Institute
of Technology (Cal Tech), annual fees of $5,000 were due on each
of two patents to which StemCells holds a license from Cal Tech,
payable in cash or stock at the Companys choice. The
Company elected to pay the fees in stock and issued
3,848 shares to Cal Tech. |
|
(2) |
|
Under the terms of a license agreement with Cal Tech, fees of
$10,000 and $5,000 were due on the issuance of two patents to
which StemCells holds a license from Cal Tech, payable in cash
or stock at the Companys choice. The Company elected to
pay the fees in stock and issued 9,535 unregistered shares to
Cal Tech. The Company also paid $2,833 in stock
(1,816 shares) as part of an option agreement with the
Board of Trustees of the Leland Stanford Junior University to
acquire an exclusive license to an invention. |
See accompanying notes to consolidated financial statements.
55
StemCells,
Inc.
Notes to
Consolidated Financial Statements
December 31,
2006
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
Nature of
Business
StemCells, Inc., a Delaware corporation, (the Company) is a
biopharmaceutical company that operates in one segment, the
development of novel cell-based therapeutics designed to treat
human diseases and disorders.
The accompanying consolidated financial statements have been
prepared on the basis that the Company will continue as a going
concern. Since inception, the Company has incurred annual losses
and negative cash flows from operations and has an accumulated
deficit of approximately $204.9 million at
December 31, 2006. The Company has not derived revenues
from the sale of products, and does not expect to receive
revenues from product sales for at least several years. It may
not be able to realize sufficient revenues to achieve or sustain
profitability in the future.
StemCells expects to incur additional operating losses over the
next several years. The Company has very limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain its product development efforts,
for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, for general and
administrative expenses and other working capital requirements.
StemCells relies on cash reserves and proceeds from equity and
debt offerings, proceeds from the transfer or sale of
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund its
operations. If the Company exhausts its cash reserves and is
unable to realize adequate financing, it may be unable to meet
operating obligations and be required to initiate bankruptcy
proceedings. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome
of this uncertainty.
Principles
of Consolidation
The consolidated financial statements include accounts of the
Company and StemCells California, Inc., a wholly owned
subsidiary. All significant inter-company balances and
transactions have been eliminated on consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires our 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
following:
|
|
|
|
|
Accrued wind-down expenses (See Note 8).
|
|
|
|
The grant date fair value of share-based awards recognized as
compensation expense in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004) Share Based Payment
(SFAS 123R). (See Note 10).
|
|
|
|
Valuation allowance against net deferred tax assets (See
Note 12).
|
Marketable
securities
In accordance with SFAS No. 115 Accounting for
Certain Investments in Debt and Equity Securities, the
Company has classified its 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
56
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
than temporary impairment. A decline in the fair value of
securities that is deemed other than temporary is charged to
earnings when so deemed (See Note 2).
Reclassification
Certain reclassifications of prior year amounts have been made
to conform to current year presentation. Patent related expenses
of approximately $703,000 and $916,000 for prior years ended
December 31, 2005 and 2004 respectively 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 the current year
presentation. The reclassifications had no effect on total
assets, liabilities, equity, or net loss previously reported.
Cash and
Cash Equivalents
The Company considers cash equivalents to be only those
investments that are highly liquid, readily convertible to cash
and which mature within three months from the date of purchase.
Estimated
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, other
receivables, accounts payable and the current portion of the
bonds payable approximates their estimated fair values due to
the short maturities of these instruments. The carrying value of
long-term debt approximates its fair value based on current
rates available to the Company for similar debt.
Property,
Plant and Equipment
Property, plant and equipment, including that held under capital
lease obligations, is stated at cost and depreciated using the
straight-line method over the estimated life of the respective
asset, or the lease term if shorter, as follows:
|
|
|
Building and improvements
|
|
3 - 20 years
|
Machinery and equipment
|
|
3 - 10 years
|
Furniture and fixtures
|
|
3 - 10 years
|
Leasehold improvements are amortized on a straight-line basis
over the shorter of their estimated useful lives or lease terms.
Patent
and License Costs
Prior to fiscal year 2001, the Company capitalized certain
patent costs related to patent applications. Accumulated costs
were amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method,
commencing at the time the patent was issued. Costs related to
patent applications are charged to expense at the time such
patents are deemed to have no continuing value. Since 2001, the
Companys policy has been to expense all patent costs as
incurred. At December 31, 2006 and 2005, total costs
capitalized amounted to approximately $980,000 and the related
accumulated amortization was approximately $404,000 and
$348,000, respectively. Patent related expenses totaled
approximately $852,000, $703,000, and $753,000 in 2006, 2005 and
2004, respectively. License costs are capitalized and amortized
over the period of the license agreement.
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,
57
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
pursuant to which it granted 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 typically the period over
which the stock-based compensation awards vest. 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 fair value compensation expense related
to stock option grants for those periods. In accordance with
SFAS 123R, the Company recognized stock option related
compensation expense of approximately $2,285,000 for the year
ended December 31, 2006. Stock option related compensation
expense was recognized on a straight line basis over the vesting
period of each grant net of estimated forfeitures. The Company
estimated forfeiture rates 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 by quarter for the year ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Risk free interest
rate(1)
|
|
|
4.72
|
%
|
|
|
5.08
|
%
|
|
|
4.68
|
%
|
|
|
4.54
|
%
|
Volatility(2)
|
|
|
119.5
|
%
|
|
|
110.8
|
%
|
|
|
106.6
|
%
|
|
|
103.3
|
%
|
Dividend yield(3)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years until
exercise)(4)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
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. |
The adoption of SFAS 123R had the following impact on our
consolidated statement of operations for the year ended
December 31, 2006:
|
|
|
|
|
Increase in net loss
|
|
$
|
2,285,000
|
|
Increase in basic and diluted net
loss per share
|
|
$
|
0.03
|
|
At December 31, 2006, approximately $5,775,000 of
unrecognized compensation expense related to stock options is
expected to be recognized over a weighted average period of
approximately 1.6 years. The resulting effect on net loss
and net loss per share attributable to common stockholders may
not be representative of the effects in future periods, due to
changes in forfeiture rates, additional grants and subsequent
periods of vesting.
58
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 generally recognized no compensation expense for
qualified stock option grants, as the options were usually
granted 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 fair value
compensation expense was disclosed but not recognized in periods
prior to January 1, 2006, no cumulative adjustment for
forfeitures was recorded in 2006. See table below for an
illustration of the effect on net loss and net loss per share if
we had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation in the prior
years ended December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss applicable to common
stockholders as reported
|
|
$
|
(11,738,350
|
)
|
|
$
|
(15,330,299
|
)
|
Add: Stock-based employee/
director compensation expense included in reported net loss
under the intrinsic value method
|
|
|
|
|
|
|
33,868
|
|
Deduct: Total stock-based
employee/director compensation expense under the fair value
based method for all awards
|
|
|
(1,019,120
|
)
|
|
|
(819,317
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(12,757,470
|
)
|
|
$
|
(16,115,748
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share as reported
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
Basic and diluted net loss per
share pro forma
|
|
$
|
(0.20
|
)
|
|
$
|
(0.32
|
)
|
Shares used in computing basic and
diluted loss per share amounts
|
|
|
63,643,176
|
|
|
|
49,606,277
|
|
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
re-measured at each reporting date 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 during the year ended
December 31, 2006 other than options granted to
non-employee members of the Board of Directors for service as
Board members.
In July 2006, pursuant to the 2006 Equity Incentive Plan, the
Company granted cash-settled Stock Appreciation Rights (SARs) to
certain employees. The SARs give the holder the right, upon
exercise, to the difference between the price per share of our
common stock at the time of exercise and the exercise price of
the SAR. The exercise price of the SARs is equal to the market
price of our common shares at the date of grant. The SARs will
vest on the same schedule as our qualified options issued to
employees, i.e., 25% on the first anniversary of the grant date
and then 1/48th every month thereafter. The maximum
contractual term for the SARs granted is ten years. We will
recognize compensation expense for the SARs over the requisite
service period which is typically the period over which the
awards vest. Since the vesting schedule of the SARs is identical
to the vesting schedule of options granted this period, our fair
value calculation of the SARs issued using the Black Scholes
model were based on the same assumptions used in calculating
compensation expense for stock options granted this period. The
fair value of the share-based compensation liability for the
cost of the requisite service that has been rendered at the
reporting date is
59
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
re-measured at each reporting date through the date of
settlement. The following table presents the activity of the
Companys SARs awards for the year ended December 31,
2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Exercise
|
|
|
|
|
|
Average Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
SARs
|
|
|
Price
|
|
|
Outstanding at January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable at
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the Company recorded
approximately $294,000 as compensation expense related to SARs
granted. At December 31, 2006, approximately $2,336,000 of
unrecognized compensation expense related to SARs is expected to
be recognized over a weighted average period of approximately
1.9 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 the fair value calculation which is dependent on the
stock price, volatility, interest and forfeiture rates,
additional grants and subsequent periods of vesting.
Long-Lived
Assets
The Company routinely evaluates the carrying value of its
long-lived assets. The Company records impairment losses on
long-lived assets used in operations when events and
circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets
are less than the carrying amount of those assets. If an
impairment exists, the charge to operations is measured as the
excess of the carrying amount over the fair value of the assets.
No such impairment was recognized during the years ended
December 31, 2006, 2005 and 2004.
Income
Taxes
The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax bases of
assets and liabilities as well as net operating loss carry
forwards and tax credits carryforwards and are measured using
the enacted tax rates and laws that are expected to be in effect
when the differences reverse. Deferred tax assets may be reduced
by a valuation allowance to reflect the uncertainty associated
with their ultimate realization.
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. The Company recognizes non-refundable upfront license
fees and certain other related fees on a straight-line basis
over the development period. Fees associated with substantive at
risk, performance based milestones are recognized as revenue
upon their completion, as defined in the respective agreements.
Incidental assignment of technology rights is recognized as
revenue at time of receipt.
60
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Research
and Development Costs
The Company expenses all research and development costs as
incurred. Research and development costs include costs of
personnel, external services, supplies, facilities and
miscellaneous other costs.
Net Loss
per Share
Basic and diluted net loss per share have been computed using
the weighted-average number of shares of common stock
outstanding during the period. Basic earnings per share excludes
any dilutive effects of options, shares subject to repurchase,
warrants and convertible securities. Diluted earnings per share
includes the impact of potentially dilutive securities if
dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net loss
|
|
$
|
(18,948,380
|
)
|
|
$
|
(11,738,350
|
)
|
|
$
|
(15,330,299
|
)
|
Weighted average shares used in
computing basic and diluted net loss per share amounts
|
|
|
74,611,196
|
|
|
|
63,643,176
|
|
|
|
49,606,277
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
The Company has excluded outstanding stock options and warrants
from the calculation of diluted loss per common share because
all such securities are anti-dilutive for all applicable periods
presented. These outstanding securities consist of the following
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Outstanding options
|
|
|
8,501,503
|
|
|
|
6,608,109
|
|
|
|
6,682,201
|
|
Outstanding warrants
|
|
|
1,930,658
|
|
|
|
2,521,400
|
|
|
|
5,490,285
|
|
Comprehensive
Income (Loss)
Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). The only component of
other comprehensive income (loss) is an unrealized gain of
$3,187,978 related to our marketable securities.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
an interpretation of SFAS No. 109, Accounting
for Income Taxes (SFAS 109). This Interpretation
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS 109. This Interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Interpretation is
effective for fiscal years beginning after December 15,
2006. While the Companys analysis of the impact of this
Interpretation is not yet complete, it does not anticipate that
it will have a material impact on its consolidated financial
statements at the time of adoption.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). This Standard defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The adoption of FAS 157 is not expected to have a
material impact on the Companys consolidated financial
statements.
61
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), to address diversity in
practice in quantifying financial statement misstatements.
SAB 108 requires that the Company quantify misstatements
based on their impact on each of its financial statements and
related disclosures. SAB 108 is effective for fiscal years
ending after November 15, 2006. The Companys adoption
of this bulletin did not have a material impact on its
consolidated financial statements.
|
|
Note 2.
|
ReNeuron
License 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 December 31, 2006
(9,274,837 shares) was approximately $3,721,000 and
$7,266,000 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 income (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 gain as of December 31,
2006 is approximately $3,188,000. A decline in the fair value of
securities that is deemed other than temporary would be charged
to earnings. See also Note 15 Subsequent Events.
|
|
Note 3.
|
Property,
Plant and Equipment, Net
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Building and improvements
|
|
$
|
3,369,775
|
|
|
$
|
3,359,417
|
|
Machinery and equipment
|
|
|
4,712,950
|
|
|
|
3,489,695
|
|
Furniture and fixtures
|
|
|
366,053
|
|
|
|
348,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,448,778
|
|
|
|
7,198,075
|
|
Less accumulated depreciation and
amortization
|
|
|
(4,852,628
|
)
|
|
|
(3,915,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,596,150
|
|
|
$
|
3,282,588
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $944,000, $958,000, and
$933,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
62
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 4.
|
Other
Assets, Net
|
Other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Patents, net
|
|
$
|
575,962
|
|
|
$
|
631,764
|
|
License agreements, net
|
|
|
300,220
|
|
|
|
437,117
|
|
Security deposit
building lease
|
|
|
942,282
|
|
|
|
752,500
|
|
Restricted Cash-(Letter of Credit)
|
|
|
778,079
|
|
|
|
884,132
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,596,543
|
|
|
$
|
2,705,513
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, accumulated amortization was
approximately $1,816,000 and $1,715,000, respectively, for
patents and license agreements. Amortization expense was
approximately $101,000, $125,000 and $104,000 for the years
ended December 31, 2006, 2005, and 2004, respectively. Over
the next five years, the estimated aggregate annual amortization
expense based on current balances for patents and license
agreements is expected to be approximately $116,000.
|
|
Note 5.
|
Accrued
Expenses and Other
|
Accrued expenses and other current liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
External services
|
|
$
|
323,162
|
|
|
$
|
404,875
|
|
Employee compensation
|
|
|
1,570,915
|
|
|
|
972,906
|
|
Other
|
|
|
159,825
|
|
|
|
105,519
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,053,902
|
|
|
$
|
1,483,300
|
|
|
|
|
|
|
|
|
|
|
The Company has undertaken direct financing transactions with
the State of Rhode Island and received proceeds from the
issuance of industrial revenue bonds totaling $5,000,000 to
finance the construction of its pilot manufacturing facility.
The related leases are structured such that lease payments will
fully fund all semiannual interest payments and annual principal
payments through maturity in August 2014. Interest rates vary
with the respective bonds maturities, ranging from 8.2% to
9.5%. The bonds contain certain restrictive covenants which
limit, among other things, the payment of cash dividends and the
sale of the related assets. The Company entered into a
fifteen-year lease for a laboratory facility in Rhode Island 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, 2006, the Company had $1,238,000 in deferred
rent expense for this facility which is presented as part of the
wind-down accrual.
As of February 1, 2001, the Company entered into a
5-year lease
for 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
63
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 has sublet some of the additional space for the
period from April 1, 2005 through June 30, 2006. The
average annual rent for the period commencing April 1, 2005
to March 31, 2010 will be approximately $2 million
before subtenant income. The lease has escalating rent payments,
which the Company is recognizing on a straight-line basis. At
December 31, 2006, the Company had deferred rent liability
for this facility of $960,000. At December 31, 2006 the
Company has space-sharing agreements 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.
As of December 31, 2006, future minimum lease payments and
sublease income under operating and capital leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Payable
|
|
|
Leases
|
|
|
Income
|
|
|
2007
|
|
$
|
332,545
|
|
|
$
|
3,165,162
|
|
|
$
|
909,846
|
|
2008
|
|
|
244,531
|
|
|
|
3,469,017
|
|
|
|
407,389
|
|
2009
|
|
|
244,572
|
|
|
|
3,536,843
|
|
|
|
387,210
|
|
2010
|
|
|
242,560
|
|
|
|
1,767,304
|
|
|
|
97,508
|
|
2011
|
|
|
242,321
|
|
|
|
1,171,875
|
|
|
|
|
|
Thereafter
|
|
|
615,110
|
|
|
|
1,904,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,921,639
|
|
|
$
|
15,014,498
|
|
|
$
|
1,801,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
570,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of bonds payable
payments
|
|
|
1,351,249
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
205,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds payable, less current
maturities
|
|
$
|
1,145,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2006, 2005
and 2004, was $1,868,000, $1,611,000 and $1,109,000 respectively.
In September 2003 the Company was awarded a one year, $342,000
Small Business Innovation Research grant from the National
Institute of Neurological Disease and Stroke (NINDS), to further
its work in the treatment of spinal cord injuries. For this
award, the Company has recognized approximately $143,000 and
$93,000 as grant revenue for 2003 and 2004, respectively. The
remaining $106,000 was reimbursed to a subcontractor.
In September 2004 the Company was awarded a Small Business
Technology Transfer (STTR) grant for approximately $464,000 over
one and one half years for studies in Alzheimers disease.
The grant supports joint work with Dr. George A. Carlson of
the McLaughlin Research Institute (MRI) in Great Falls, Montana.
The Company received and recognized approximately $26,000,
$186,000 and $38,000 as grant revenue for 2004, 2005 and 2006
respectively. The remainder was reimbursed to MRI.
|
|
Note 8.
|
Wind-down
of Encapsulated Cell Technology Research and Development
Program
|
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
64
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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.
In 2006, the company recorded $1,295,000 in operating expenses
against the reserve. The Company re-valued the reserve to
$5,970,000, $5,847,000, $5,647,000 and $5,512,000 at
March 31, 2006, June 30, 2006, September 30,
2006, and December 31, 2006, respectively, by recording an
additional $156,000, $175,000, $168,000 and $210,000
respectively as wind-down expenses. At December 31, 2006,
the adjusted reserve was $5,512,000. Even though it is the
intent of the Company to dispose of the facility at the earliest
possible time, it cannot determine with certainty a fixed date
by which such disposal will occur. In light of this uncertainty,
based on estimates, the Company will periodically re-evaluate
and adjust the reserve.
Wind-down
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January to
|
|
|
April to
|
|
|
July to
|
|
|
October to
|
|
|
January to
|
|
|
January to
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
Accrued wind-down reserve at
beginning of period
|
|
$
|
6,098,000
|
|
|
|
5,970,000
|
|
|
|
5,847,000
|
|
|
|
5,647,000
|
|
|
$
|
6,098,000
|
|
|
$
|
4,350,000
|
|
Less actual expenses recorded
against estimated reserve during the period
|
|
|
(284,000
|
)
|
|
|
(298,000
|
)
|
|
|
(368,000
|
)
|
|
|
(345,000
|
)
|
|
|
(1,295,000
|
)
|
|
|
(1,079,000
|
)
|
Additional expense recorded to
revise estimated reserve at period-end
|
|
|
156,000
|
|
|
|
175,000
|
|
|
|
168,000
|
|
|
|
210,000
|
|
|
|
709,000
|
|
|
|
2,827,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised reserve at period-end
|
|
|
5,970,000
|
|
|
|
5,847,000
|
|
|
|
5,647,000
|
|
|
|
5,512,000
|
|
|
|
5,512,000
|
|
|
|
6,098,000
|
|
Add deferred rent at period end
|
|
|
1,215,000
|
|
|
|
1,223,000
|
|
|
|
1,230,000
|
|
|
|
1,238,000
|
|
|
|
1,238,000
|
|
|
|
1,208,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses
at period-end (current and non current portion)
|
|
$
|
7,185,000
|
|
|
$
|
7,070,000
|
|
|
$
|
6,877,000
|
|
|
$
|
6,750,000
|
|
|
$
|
6,750,000
|
|
|
$
|
7,306,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
1,182,000
|
|
|
$
|
1,255,000
|
|
|
$
|
950,000
|
|
|
$
|
1,252,000
|
|
|
$
|
1,252,000
|
|
|
$
|
1,119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current portion
|
|
|
6,003,000
|
|
|
|
5,815,000
|
|
|
|
5,927,000
|
|
|
|
5,498,000
|
|
|
|
5,498,000
|
|
|
|
6,187,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued wind-down expenses
|
|
$
|
7,185,000
|
|
|
$
|
7,070,000
|
|
|
$
|
6,877,000
|
|
|
$
|
6,750,000
|
|
|
$
|
6,750,000
|
|
|
$
|
7,306,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Consulting
Arrangements
|
In September 1997, the Company entered into consulting
arrangements with the principal scientific founders of StemCells
California, Dr. Irving Weissman, Dr. Fred H. Gage and
Dr. David Anderson and with Dr. Richard M. Rose, then
President and CEO of StemCells California. To attract and retain
Drs. Rose, Weissman, Gage and Anderson, and to expedite the
progress of the Companys stem cell program, the Company
awarded these individuals options to acquire a total of
approximately 1.6 million shares of the Companys
common stock, vesting
65
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
over a period of eight years and at an exercise price of
$5.25 per share, the quoted market price at the grant date.
Based on the fair value of these options and their respective
vesting schedules, the Company recorded an expense of $0,
$355,000 and $830,000 for the years 2006, 2005 and 2004,
respectively. The fair value was determined using the Black
Scholes method. As of December 31, 2005, these options have
been fully vested and expensed.
|
|
Note 10.
|
Stockholders
Equity
|
Sale
of Common Stock
Listed below are key financing transactions entered into by the
Company through the sale of its common stock during the last
three years:
|
|
|
|
|
On April 6, 2006, the Company 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 offering under an effective shelf registration
statement previously filed with the Securities and Exchange
Commission. The Company received total proceeds, net of offering
expenses and placement agency fees, of approximately
$33,422,000. No warrants were issued as part of this financing
transaction.
|
|
|
|
On June 16, 2004, the Company entered into an agreement
with institutional and other accredited investors with respect
to the private placement of approximately 13,160,000 shares
of the Companys 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
the Companys common stock at an exercise price of
$1.90 per share. During the period October 2004 to December
2005, part of these warrants were exercised to purchase an
aggregate of 1,459,342 shares of the Companys common
stock at $1.90 per share. The Company received proceeds of
$2,772,750 on issuance of the shares. C.E. Unterberg, Towbin LLC
(Unterberg) served as placement agent for the private placement.
For acting as the Companys placement agent, Unterberg
received fees of approximately $1,200,000, expense reimbursement
of approximately $25,000 and a five year warrant to purchase
526,400 shares of the Companys common stock at an
exercise price of $1.89 per share.
|
|
|
|
In October 2004, the Company entered into agreements with
institutional investors with respect to the registered direct
placement of 7,500,000 shares of its common stock at a
purchase price of $3.00 per share, for gross proceeds of
$22,500,000. Unterberg and Shoreline Pacific, LLC (Shoreline)
served as placement agents for the transaction. For acting as
the Companys placement agent, Unterberg and Shoreline
received fees totaling $1,350,000 and expense reimbursement of
approximately $40,000.
|
Stock
Issued For Technology Licenses
Under License Agreements with NeuroSpheres, Ltd., the Company
obtained an exclusive patent license covering all uses of
certain neural stem cell technology. The Company made up-front
payments to NeuroSpheres of 65,000 shares of its common
stock and $50,000, and will make additional cash payments when
milestones are achieved. Effective in 2004, the Company began
making annual $50,000 payments, creditable against certain
royalties.
Pursuant to the terms of a license agreement with the California
Institute of Technology (Cal Tech) and the Companys
acquisition of its wholly owned subsidiary, StemCells
California, StemCells issued 14,513 shares of common stock
to Cal Tech. The Company issued an additional 12,800 shares
of common stock to Cal Tech with a market value of approximately
$40,000 in May 2000, upon execution of an amendment adding four
families of patent applications to the license agreement. In
August 2002 the Company acquired an additional license from Cal
Tech to a different technology, pursuant to which the Company
issued 27,535 shares of its common stock with a market
value of approximately $35,000. The Company also issued
9,535 shares(market value of approximately $15,000)and
3,848 shares (market value of approximately $10,000) of its
common stock in 2004 and 2006
66
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
respectively to Cal Tech for the issuance and annual license
fees of two patents covered under this additional license.
In December 2004, the Company made part payment of $2,833 in
stock (1,816 shares) as part of an option agreement with
the Board of Trustees of the Leland Stanford Junior University
to acquire an exclusive license to an invention. The remainder
of the option fee ($7,167) was paid in cash. The Company did not
exercise this option but retains a non-exclusive license to the
invention.
Stock
Option Plans
The Company has adopted several stock plans that provide for the
issuance of incentive and nonqualified stock options, various
stock and performance awards and stock appreciation rights, at
prices to be determined by the Board of Directors. In the case
of incentive stock options, such price will not be less than the
fair market value on the date of grant. Options granted to
employees generally vest ratably over four years and are
exercisable for ten years from the date of grant or within three
months of termination. Prior to April, 2004, the Company
sometimes paid its directors and some of its consultants in
below-market options or in stock awards from its stock plans.
The Company has four active stock option plans that were
authorized to award 14,000,000 shares in aggregate. 5,320,935
shares were available for grant from these four plans at
December 31, 2006.
The following table presents the combined activity of the
Companys stock option plans for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding at January 1
|
|
|
6,608,109
|
|
|
$
|
3.02
|
|
|
|
6,682,201
|
|
|
$
|
2.67
|
|
|
|
5,025,374
|
|
|
$
|
2.91
|
|
Granted
|
|
|
2,818,684
|
|
|
|
2.38
|
|
|
|
1,075,481
|
|
|
|
4.75
|
|
|
|
1,932,772
|
|
|
|
1.92
|
|
Exercised
|
|
|
(369,214
|
)
|
|
|
1.82
|
|
|
|
(423,989
|
)
|
|
|
1.76
|
|
|
|
(152,673
|
)
|
|
|
0.30
|
|
Canceled
|
|
|
(556,076
|
)
|
|
|
2.82
|
|
|
|
(725,584
|
)
|
|
|
3.11
|
|
|
|
(123,272
|
)
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31
|
|
|
8,501,503
|
|
|
$
|
2.88
|
|
|
|
6,608,109
|
|
|
$
|
3.02
|
|
|
|
6,682,201
|
|
|
$
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31
|
|
|
4,862,717
|
|
|
$
|
3.07
|
|
|
|
4,265,713
|
|
|
$
|
3.03
|
|
|
|
3,687,243
|
|
|
$
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised during the
year ended December 31, 2006 was approximately $453,000.
Cash received from stock option exercises during the year ended
December 31, 2006 was approximately $548,000. The aggregate
intrinsic value of the options outstanding as at
December 31, 2006 was approximately $5,028,000.
67
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The maximum contractual term for stock options is ten years. The
following table presents weighted average price and life
information about significant option groups outstanding at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at December 31, 2006
|
|
|
Options vested as at December 31, 2006
|
|
|
Options expected to vest after December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Life
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Prices
|
|
Outstanding
|
|
|
(years)
|
|
|
Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
(years)
|
|
|
Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
(years)
|
|
|
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Less than
$2.00
|
|
|
2,479,787
|
|
|
|
6.24
|
|
|
$
|
1.16
|
|
|
$
|
3,688,645
|
|
|
|
1,936,757
|
|
|
|
5.85
|
|
|
$
|
1.06
|
|
|
$
|
3,081,834
|
|
|
|
446,877
|
|
|
|
7.66
|
|
|
$
|
1.53
|
|
|
$
|
500,148
|
|
$2.00 -
$3.99
|
|
|
3,637,611
|
|
|
|
8.10
|
|
|
$
|
2.51
|
|
|
|
1,339,625
|
|
|
|
966,711
|
|
|
|
4.43
|
|
|
$
|
2.80
|
|
|
|
109,381
|
|
|
|
2,221,054
|
|
|
|
9.43
|
|
|
$
|
2.40
|
|
|
|
1,027,682
|
|
$4.00 -
$5.99
|
|
|
2,384,105
|
|
|
|
3.43
|
|
|
$
|
5.20
|
|
|
|
|
|
|
|
1,959,248
|
|
|
|
2.30
|
|
|
$
|
5.17
|
|
|
|
|
|
|
|
360,504
|
|
|
|
8.67
|
|
|
$
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,501,503
|
|
|
|
|
|
|
|
|
|
|
$
|
5,028,270
|
|
|
|
4,862,716
|
|
|
|
|
|
|
|
|
|
|
$
|
3,191,215
|
|
|
|
3,028,435
|
|
|
|
|
|
|
|
|
|
|
$
|
1,527,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted
during 2006, 2005 and 2004 was $2.37, $3.75 and $1.64,
respectively. The fair value of options at the date of grant
were estimated using the Black Scholes model with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life (years)
|
|
|
6.25
|
|
|
|
5
|
|
|
|
5
|
|
Risk-free interest rate
|
|
|
4.72
|
%
|
|
|
4.14
|
%
|
|
|
3.60
|
%
|
Expected volatility
|
|
|
109.0
|
%
|
|
|
100.7
|
%
|
|
|
111.6
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The Company has neither declared nor paid dividends on any share
of its common stock and does not expect to do so in the
foreseeable future.
Common
Stock Reserved
The Company has the following shares of common stock reserved
for the exercise of options, warrants and other contingent
issuances of common stock, as of December 31, 2006:
|
|
|
|
|
Shares reserved for exercise of
stock options
|
|
|
13,822,438
|
|
Shares reserved for warrants
related to financing transactions
|
|
|
1,830,658
|
|
Shares reserved for compensation
related to external services
|
|
|
100,000
|
|
Shares reserved for warrants
related to previously converted 3% convertible preferred stock
|
|
|
514,072
|
|
Shares reserved for license
agreements
|
|
|
96,152
|
|
Shelf reserve for possible future
issuances of shares(1)
|
|
|
4,721,142
|
|
|
|
|
|
|
Total
|
|
|
21,084,462
|
|
|
|
|
|
|
|
|
|
(1) |
|
On October 4, 2005, the Company filed a shelf registration
statement providing for the sale of up to $100,000,000 of its
common stock (see Liquidity and Capital Resources
and Note 15 Subsequent Events for details of
shares sold under this registration); no specific number of
shares has been reserved for this purpose. |
68
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 11.
|
Research
Agreements
|
The Company has entered various research agreements and
collaborations with academic institutions. Under such
arrangements, the Company is typically granted rights to the
related intellectual property or an option to obtain such rights
on terms to be agreed, in exchange for research funding and
specified royalties on any resulting product revenue. In
addition, StemCells occasionally makes grants to academic
institutions to support research of interest to the Company
without requesting any intellectual property interests in return.
Under a November 1997 Research Funding and Option Agreement with
The Scripps Research Institute (Scripps), StemCells funded
certain research in the total amount of approximately $931,000
and issued 4,837 shares of the Companys common stock
and a stock option to purchase 9,674 shares of the
Companys Common Stock with an exercise price of
$.01 per share upon the achievement of specified
milestones. As a result of the agreement, StemCells acquired an
exclusive license to certain inventions resulting from the
sponsored research, subject to the payment of royalties and
certain other amounts, including payments totaling $425,000 on
the achievement of certain milestones. The Company has also
entered Sponsored Research Agreements and License Agreements
with Oregon Health & Science University (OHSU) under
which it paid OHSU approximately $295,000, 4,838 shares of
the Companys common stock and issued an option to OHSU to
purchase an additional 62,888 shares with an exercise price
of $.01 per share. The option has vested as to
9,675 shares for which shares were issued on March 31,
2002; the remaining option was terminated and the Company issued
4,000 shares of its common stock, with a market value of
approximately $3,900, to OHSU in January 2003, pursuant to an
amendment to the license agreement.
In 2006, 2005 and 2004, the Company made research grants and
gifts to support relevant research totaling approximately
$25,000, $200,000 and $61,000 respectively to academic
institutions.
Deferred income taxes reflect net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Capitalized research and
development costs
|
|
$
|
25,058,000
|
|
|
$
|
19,618,000
|
|
Net operating losses
|
|
|
41,015,000
|
|
|
|
39,894,000
|
|
Research and development credits
|
|
|
5,671,000
|
|
|
|
5,130,000
|
|
Accrued wind down cost
|
|
|
2,205,000
|
|
|
|
2,439,000
|
|
Stock-based compensation
|
|
|
180,000
|
|
|
|
|
|
Other
|
|
|
361,000
|
|
|
|
305,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,490,000
|
|
|
|
67,386,000
|
|
Valuation allowance
|
|
|
(74,490,000
|
)
|
|
|
(67,386,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased by
approximately $7,105,000, $5,027,000, and $1,974,000 during
2006, 2005, and 2004 respectively
69
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
As of December 31, 2006, the Company had the following:
|
|
|
|
|
Net operating loss carry forwards for federal income tax
purposes of approximately $118,560,000 which expire in the years
2007 through 2026.
|
|
|
|
Federal research and development tax credits of approximately
$4,624,000 which expire in the years 2007 through 2026.
|
|
|
|
Net operating loss carry forwards for state income tax purposes
of approximately $11,747,000 which expire in the years 2009
through 2016.
|
|
|
|
State research and development tax credits of approximately
$1,586,000 which do not expire.
|
The effective tax rate as a percentage of income before income
taxes differs from the statutory federal income tax rate (when
applied to income before income taxes) for the years ended
December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory federal income tax
(benefit) rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for taxes
|
|
|
4.5
|
|
|
|
2.4
|
|
|
|
1.9
|
|
Increase in valuation allowance
|
|
|
29.5
|
|
|
|
31.6
|
|
|
|
32.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax (benefit) rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Employee
Retirement Plan
|
The Company has a qualified defined contribution plan covering
substantially all employees. Participants are allowed to
contribute a fixed percentage of their total annual cash
compensation to the plan (subject to the maximums defined by
law) and the Company matches 50% of employee contributions, up
to a maximum of 6% of the employees compensation, with the
Companys common stock. The related expense was $157,000,
$111,000, and $78,000 for the years ended December 31,
2006, 2004 and 2003, respectively.
|
|
Note 14.
|
Quarterly
Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Year ended December 31, 2006:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenue
|
|
$
|
42
|
|
|
$
|
21
|
|
|
$
|
18
|
|
|
$
|
12
|
|
Operating expenses
|
|
|
4,525
|
(1)
|
|
|
4,775
|
(1)
|
|
|
5,581
|
(1)
|
|
|
6,583
|
(1)
|
Other income (expense)
|
|
|
291
|
|
|
|
765
|
|
|
|
699
|
|
|
|
668
|
|
Net loss
|
|
|
(4,193
|
)
|
|
|
(3,989
|
)
|
|
|
(4,863
|
)
|
|
|
(5,903
|
)
|
Basic and diluted (loss) per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
35
|
|
|
$
|
37
|
|
|
$
|
91
|
|
|
$
|
43
|
|
Operating expenses
|
|
|
3,645
|
(1)
|
|
|
4,121
|
(1)
|
|
|
4,183
|
(1)
|
|
|
4,645
|
(1)
|
Other income (expense)
|
|
|
161
|
|
|
|
216
|
|
|
|
3,998
|
(2)
|
|
|
275
|
|
Net loss
|
|
|
(3,449
|
)
|
|
|
(3,868
|
)
|
|
|
(94
|
)
|
|
|
(4,327
|
)
|
Basic and diluted (loss) per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
(1) |
|
Includes adjustment of wind-down accrual see
Note 8. |
|
(2) |
|
Includes income recognized on receipt of shares received from
ReNeuron see Note 2. |
70
StemCells,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 15.
|
Subsequent
Events
|
On December 29, 2006, the Company entered into a sales
agreement with Cantor Fitzgerald & Co.
(Cantor) for the purpose of selling up to
10,000,000 shares of its common stock shares of the
Companys common stock in
at-the-market
offerings or negotiated transactions from time to time. Cantor
will be paid compensation equal to 5.0% of the gross proceeds
from the sales of common stock pursuant to the terms of the
agreement. A copy of the agreement is attached as
Exhibit 10.1 to our
form 8-K
dated December 29, 2006. In January 2007, the Company sold
a total of 397,000 shares at an average price of
$3.51 per share and received net proceeds of approximately
$1,325,000 under this agreement.
In February 2007, the Company sold approximately 5,275,000
ordinary shares of ReNeuron for net proceeds of approximately
$3.1 million. In February 2007, ReNeuron issued additional
shares of common stock; as a consequence of the anti-dilution
provisions. StemCells was entitled to approximately
823,000 shares net of approximately 10,000 shares to
be transferred to Neurosphere. As of February 26, 2007, the
Company owned approximately 4.8 million ordinary shares of
ReNeuron.
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of its
chief executive officer and chief financial officer, evaluated
the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this annual report. Based on this
evaluation, the Companys principal executive officer and
principal financial officer concluded that these disclosure
controls and procedures are effective to ensure that the
information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time
periods, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Companys management,
including its chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Controls
There have been no changes in the Companys internal
control over financial reporting during the quarter ended
December 31, 2006, that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Managements
Report on Internal Control Over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting.
The Companys management, including its principal executive
officer and principal financial officer, assessed the
effectiveness of its internal control over financial reporting
based on the framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The evaluation
of the design and operating effectiveness of internal controls
over financial reporting include among others those policies and
procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
During the fiscal year 2006, the Company periodically tested the
design and operating effectiveness of its internal controls.
Among other matters, the Company sought in its evaluation to
determine whether there were any significant
deficiencies or material weakness in its
internal control over financial reporting, or whether it had
identified any acts of fraud involving management or other
employees.
72
Based on the above evaluation, the Companys chief
executive officer and chief financial officer have assessed that
as of December 31, 2006, the Companys internal
controls over financial reporting were effective. Nonetheless,
it is important to acknowledge that due to its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even systems
determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006 has been audited by Grant Thornton LLP,
an independent registered public accounting firm, as stated in
their report which appears herein.
|
|
Item 9B.
|
Other
Information
|
None
73
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2007 Annual Meeting
of Shareholders.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference from Item 5 of this Annual Report on
Form 10-K
and our Proxy Statement for the 2007 Annual Meeting of
Shareholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2007 Annual Meeting
of Shareholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2007 Annual Meeting
of Shareholders.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2007 Annual Meeting
of Shareholders.
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
(a) DOCUMENTS FILED AS PART OF THIS
FORM 10-K.
(1) Financial Statements:
The financial statements filed as part of this Report are listed
and indexed under Item 8 above.
(2) Financial Statement Schedules:
Schedules are not included herein because they are not
applicable or the required information appears in the Financial
Statements or Notes thereto.
(b) Exhibits.
|
|
|
EXHIBIT NO.
|
|
TITLE OR DESCRIPTION
|
|
3.1
|
|
Restated Certificate of
Incorporation of the Registrant
|
3.2+
|
|
Amended and Restated By-Laws of
the Registrant
|
4.1^^
|
|
Specimen Common Stock Certificate
|
4.2++
|
|
Form of Warrant Certificate issued
to a certain purchaser of the Registrants Common Stock in
April 1995
|
4.3X
|
|
Common Stock Purchase Warrant
|
4.4X
|
|
Callable Warrant
|
4.5XXX
|
|
Callable Warrant, dated
June 21, 2001, issued to Millennium Partners, L.P.
|
4.6XXX
|
|
Common Stock Purchase Warrant,
Class A, dated June 21, 2001, issued to Millennium
Partners, L.P.
|
74
|
|
|
EXHIBIT NO.
|
|
TITLE OR DESCRIPTION
|
|
4.7{*}
|
|
Certificate of Designations of the
Powers, Preferences and Relative, Participating, Optional and
other Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of 3% Cumulative
Convertible Preferred Stock for StemCells, Inc.
|
4.8{*}
|
|
Warrant to Purchase Common
Stock Riverview Group, LLC
|
4.9XXXX
|
|
Warrant to Purchase Common
Stock Cantor Fitzgerald & Co.
|
4.10&&
|
|
Warrant to Purchase Common
Stock Riverview Group, LLC
|
10.1*
|
|
Form of at-will Employment
Agreement between the Registrant and most of its employees
|
10.2*
|
|
Form of Agreement for Consulting
Services between the Registrant and members of its Scientific
Advisory Board
|
10.3*
|
|
Form of Nondisclosure Agreement
between the Registrant and its Contractors
|
10.4*
|
|
1992 Equity Incentive Plan
|
10.5*
|
|
1992 Stock Option Plan for
Non-Employee Directors
|
10.7+
|
|
Research Agreement dated as of
March 16, 1994 between NeuroSpheres, Ltd. and Registrant
|
10.8+
|
|
Lease Agreement between the
Registrant and Rhode Island Industrial Facilities Corporation,
dated as of August 1, 1992
|
10.9+
|
|
First Amendment to Lease Agreement
between Registrant and The Rhode Island Industrial Facilities
Corporation dated as of September 15, 1994
|
10.10#
|
|
Lease Agreement dated as of
November 21, 1997 by and between Hub RI Properties Trust,
as Landlord, and CytoTherapeutics, Inc., as Tenant
|
10.11!!
|
|
CTI individual stockholders option
agreement dated as of July 10, 1996 among the Company and
the individuals listed therein
|
10.12!
|
|
Consulting Agreement dated as of
September 25, 1997 between Dr. Irving Weissman and the
Registrant
|
10.13!!!
|
|
StemCells, Inc. 1996 Stock Option
Plan
|
10.14!!!
|
|
1997 StemCells Research Stock
Option Plan (the 1997 Plan)
|
10.15!!!
|
|
Form of Performance-Based
Incentive Option Agreement issued under the 1997 Plan
|
10.16$**
|
|
License Agreement dated as of
October 27, 1998 between The Scripps Research Institute and
the Registrant
|
10.17$**
|
|
License Agreement dated as of
October 27, 1998 between The Scripps Research Institute and
the Registrant
|
10.18$**
|
|
License Agreement dated as of
November 20, 1998 between The Scripps Research Institute
and the Registrant
|
10.19++**
|
|
License Agreement dated as of June
1999 between The Scripps Research Institute and the Registrant
|
10.20++**
|
|
License Agreement dated as of June
1999 between The Scripps Research Institute and the Registrant
|
10.21XX
|
|
License Agreement, dated as of
October 30, 2000, between the Registrant and NeuroSpheres
Ltd.
|
10.22XX
|
|
Letter Agreement, dated
January 2, 2001, between the Registrant and Martin McGlynn
|
10.23XX
|
|
Lease, dated February 1,
2001, between the Board of Trustees of Stanford University and
the Registrant
|
10.24$$
|
|
$2001 Equity Incentive Plan
|
10.25&
|
|
Agreement, dated as of
April 9, 2003, between the Registrant and Riverview Group,
L.L.C.
|
10.26&&
|
|
Form of Registration Rights
Agreement between the Registrant and Riverview Group, L.L.C.
|
10.27&&&
|
|
Securities Purchase Agreement,
dated as of May 7, 2003, between the Registrant and
Riverview Group, L.L.C.
|
10.28%
|
|
Securities Purchase Agreement
dated as of December 9, 2003, between the Registrant and
Riverview Group, L.L.C.
|
75
|
|
|
EXHIBIT NO.
|
|
TITLE OR DESCRIPTION
|
|
10.29^^^
|
|
Form of Securities Purchase
Agreement dated as of June 16, 2004 between the Registrant
and certain Purchasers parties thereto
|
10.30^^^
|
|
Form of Warrant
|
10.31^^^^
|
|
Amended and Restated 2004 Equity
Incentive Plan of the Registrant
|
10.32§
|
|
License Agreement dated as of
July 1, 2005 between the Registrant and ReNeuron Limited
|
10.33§§
|
|
Letter Agreement effective as of
September 6, 2005, between the Registrant and Rodney K.B.
Young
|
10.34§§
|
|
Consulting Agreement effective as
of September 6, 2005 between the Registrant and Judi R. Lum
|
10.35^
|
|
Sales Agreement with Cantor
Fitzgerald
|
10.35XX
|
|
Side Letter, dated March 17,
2001, between the Company and Oleh S. Hnatiuk regarding
NeuroSpheres License Agreement, dated October 30, 2000
|
14.1%%
|
|
Code of Ethics
|
21X
|
|
Subsidiaries of the Registrant
|
23.1
|
|
Consent of Grant Thornton, LLP ,
Independent Registered Public Accounting Firm
|
31.1
|
|
Certification Pursuant to
Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Martin McGlynn, Chief Executive Officer)
|
31.2
|
|
Certification Pursuant to
Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
32.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Martin
McGlynn, Chief Executive Officer)
|
32.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Rodney K.B.
Young, Chief Financial Officer)
|
|
|
|
! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1997 and filed on
November 14, 1997. |
|
!! |
|
Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 1996. |
|
!!! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-37313. |
|
$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1998 and filed on
March 31, 1999. |
|
$$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 10, 2003. |
|
%% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 |
|
& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on April 15, 2003. |
|
&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 13, 2003. |
|
&&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 15, 2003. |
|
* |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1,
File No. 33-45739. |
76
|
|
|
** |
|
Confidential treatment requested as to certain portions. The
term confidential treatment and the mark
** as used throughout the indicated Exhibits mean
that material has been omitted and separately filed with the
Commission. |
|
^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 29, 2006. |
|
^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants Registration
Statement on Form
S-3, File
No. 333-117360. |
|
^^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on June 17, 2004. |
|
^^^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-118263. |
|
{*} |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on December 7, 2001. |
|
+ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 33-85494. |
|
++ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 33-91228. |
|
§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
Quarterly Report on Form
10-Q for the
quarter ended June 30, 2005. |
|
§§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on September 7, 2005. |
|
X |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 333-45496. |
|
XX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000 and filed on
April 2, 2001. |
|
XXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-1
as amended to
Form S-3,
File
No. 333-61726. |
|
XXXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-3,
File
No. 333-75806. |
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STEMCELLS, INC.
Martin McGlynn
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 9, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
/s/ MARTIN
McGLYNN
Martin
McGlynn
|
|
President and Chief Executive
Officer
and Director (principal executive officer)
|
|
March 9, 2007
|
|
|
|
|
|
/s/ RODNEY
K.B. YOUNG
Rodney
K.B. Young
|
|
Chief Financial Officer
(principal financial officer)
|
|
March 9, 2007
|
|
|
|
|
|
/s/ GEORGE
KOSHY
George
Koshy
|
|
Chief Accounting Officer
(principal accounting officer)
|
|
March 9, 2007
|
|
|
|
|
|
/s/ ERIC
BJERKHOLT
Eric
Bjerkholt
|
|
Director
|
|
March 7, 2007
|
|
|
|
|
|
/s/ RICARDO
B. LEVY PH.D.
Ricardo
B. Levy, Ph.D.
|
|
Director
|
|
March 10, 2007
|
|
|
|
|
|
/s/ DESMOND
H. OCONNELL,
JR.
Desmond
H. OConnell, Jr.
|
|
Director
|
|
March 7, 2007
|
|
|
|
|
|
/s/ ROGER M.
PERLMUTTER, M.D.
Roger M.
Perlmutter, M.D.
|
|
Director
|
|
March 7, 2007
|
|
|
|
|
|
/s/ JOHN
J. SCHWARTZ, PH.D.
John
J. Schwartz, Ph.D.
|
|
Director, Chairman of the Board
|
|
March 9, 2007
|
|
|
|
|
|
/s/ IRVING
L.
WEISSMAN, M.D.
Irving
L. Weissman, M.D.
|
|
Director
|
|
March 12, 2007
|
78
EXHIBIT INDEX
|
|
|
EXHIBIT NO.
|
|
TITLE OR DESCRIPTION
|
|
3.1
|
|
Restated Certificate of
Incorporation of the Registrant
|
3.2+
|
|
Amended and Restated By-Laws of
the Registrant
|
4.1^^
|
|
Specimen Common Stock Certificate
|
4.2++
|
|
Form of Warrant Certificate issued
to a certain purchaser of the Registrants Common Stock in
April 1995
|
4.3X
|
|
Common Stock Purchase Warrant
|
4.4X
|
|
Callable Warrant
|
4.5XXX
|
|
Callable Warrant, dated
June 21, 2001, issued to Millennium Partners, L.P.
|
4.6XXX
|
|
Common Stock Purchase Warrant,
Class A, dated June 21, 2001, issued to Millennium
Partners, L.P.
|
4.7{*}
|
|
Certificate of Designations of the
Powers, Preferences and Relative, Participating, Optional and
other Special Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of 3% Cumulative
Convertible Preferred Stock for StemCells, Inc.
|
4.8{*}
|
|
Warrant to Purchase Common
Stock Riverview Group, LLC
|
4.9XXXX
|
|
Warrant to Purchase Common
Stock Cantor Fitzgerald & Co.
|
4.10&&
|
|
Warrant to Purchase Common
Stock Riverview Group, LLC
|
10.1*
|
|
Form of at-will Employment
Agreement between the Registrant and most of its employees
|
10.2*
|
|
Form of Agreement for Consulting
Services between the Registrant and members of its Scientific
Advisory Board
|
10.3*
|
|
Form of Nondisclosure Agreement
between the Registrant and its Contractors
|
10.4*
|
|
1992 Equity Incentive Plan
|
10.5*
|
|
1992 Stock Option Plan for
Non-Employee Directors
|
10.7+
|
|
Research Agreement dated as of
March 16, 1994 between NeuroSpheres, Ltd. and Registrant
|
10.8+
|
|
Lease Agreement between the
Registrant and Rhode Island Industrial Facilities Corporation,
dated as of August 1, 1992
|
10.9+
|
|
First Amendment to Lease Agreement
between Registrant and The Rhode Island Industrial Facilities
Corporation dated as of September 15, 1994
|
10.10#
|
|
Lease Agreement dated as of
November 21, 1997 by and between Hub RI Properties Trust,
as Landlord, and CytoTherapeutics, Inc., as Tenant
|
10.11!!
|
|
CTI individual stockholders option
agreement dated as of July 10, 1996 among the Company and
the individuals listed therein
|
10.12!
|
|
Consulting Agreement dated as of
September 25, 1997 between Dr. Irving Weissman and the
Registrant
|
10.13!!!
|
|
StemCells, Inc. 1996 Stock Option
Plan
|
10.14!!!
|
|
1997 StemCells Research Stock
Option Plan (the 1997 Plan)
|
10.15!!!
|
|
Form of Performance-Based
Incentive Option Agreement issued under the 1997 Plan
|
10.16$**
|
|
License Agreement dated as of
October 27, 1998 between The Scripps Research Institute and
the Registrant
|
10.17$**
|
|
License Agreement dated as of
October 27, 1998 between The Scripps Research Institute and
the Registrant
|
10.18$**
|
|
License Agreement dated as of
November 20, 1998 between The Scripps Research Institute
and the Registrant
|
10.19++**
|
|
License Agreement dated as of June
1999 between The Scripps Research Institute and the Registrant
|
10.20++**
|
|
License Agreement dated as of June
1999 between The Scripps Research Institute and the Registrant
|
10.21XX
|
|
License Agreement, dated as of
October 30, 2000, between the Registrant and NeuroSpheres
Ltd.
|
79
|
|
|
EXHIBIT NO.
|
|
TITLE OR DESCRIPTION
|
|
10.22XX
|
|
Letter Agreement, dated
January 2, 2001, between the Registrant and Martin McGlynn
|
10.23XX
|
|
Lease, dated February 1,
2001, between the Board of Trustees of Stanford University and
the Registrant
|
10.24$$
|
|
2001 Equity Incentive Plan
|
10.25&
|
|
Agreement, dated as of
April 9, 2003, between the Registrant and Riverview Group,
L.L.C.
|
10.26&&
|
|
Form of Registration Rights
Agreement between the Registrant and Riverview Group, L.L.C.
|
10.27&&&
|
|
Securities Purchase Agreement,
dated as of May 7, 2003, between the Registrant and
Riverview Group, L.L.C.
|
10.28%
|
|
Securities Purchase Agreement
dated as of December 9, 2003, between the Registrant and
Riverview Group, L.L.C.
|
10.29^^^
|
|
Form of Securities Purchase
Agreement dated as of June 16, 2004 between the Registrant
and certain Purchasers parties thereto
|
10.30^^^
|
|
Form of Warrant
|
10.31^^^^
|
|
Amended and Restated 2004 Equity
Incentive Plan of the Registrant
|
10.32§
|
|
License Agreement dated as of
July 1, 2005 between the Registrant and ReNeuron Limited
|
10.33§§
|
|
Letter Agreement effective as of
September 6, 2005, between the Registrant and Rodney K.B.
Young
|
10.34§§
|
|
Consulting Agreement effective as
of September 6, 2005 between the Registrant and Judi R. Lum
|
10.35^
|
|
Sales Agreement with Cantor
Fitzgerald
|
10.35XX
|
|
Side Letter dated March 17,
2001, between the Company and Oleh S. Hnatiuk regarding
NeuroSpheres License Agreement dated October 30, 2000.
|
14.1%%
|
|
Code of Ethics
|
21X
|
|
Subsidiaries of the Registrant
|
23.1
|
|
Consent of Grant Thornton, LLP ,
Independent Registered Public Accounting Firm
|
31.1
|
|
Certification Pursuant to
Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Martin McGlynn, Chief Executive Officer)
|
31.2
|
|
Certification Pursuant to
Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
32.1
|
|
Certification Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Martin
McGlynn, Chief Executive Officer)
|
32.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Rodney K.B.
Young, Chief Financial Officer)
|
|
|
|
! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1997 and filed on
November 14, 1997. |
|
!! |
|
Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 1996. |
|
!!! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-37313. |
|
$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1998 and filed on
March 31, 1999. |
|
$$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 10, 2003. |
80
|
|
|
%% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 |
|
& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on April 15, 2003. |
|
&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 13, 2003. |
|
&&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 15, 2003. |
|
* |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1,
File No. 33-45739. |
|
** |
|
Confidential treatment requested as to certain portions. The
term confidential treatment and the mark
** as used throughout the indicated Exhibits mean
that material has been omitted and separately filed with the
Commission. |
|
^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 29, 2006. |
|
^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants Registration
Statement on Form
S-3, File
No. 333-117360. |
|
^^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on June 17, 2004. |
|
^^^^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-118263. |
|
{*} |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on December 7, 2001. |
|
+ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 33-85494. |
|
++ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 33-91228. |
|
§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
Quarterly Report on Form
10-Q for the
quarter ended June 30, 2005. |
|
§§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on September 7, 2005. |
|
X |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 333-45496. |
|
XX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000 and filed on
April 2, 2001. |
|
XXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-1
as amended to
Form S-3,
File
No. 333-61726. |
|
XXXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-3,
File
No. 333-75806. |
81
exv3w1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
STEMCELLS, INC.
STEMCELLS, INC. (Corporation), a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (GCL), hereby certifies as follows:
1. The name of the Corporation is StemCells, Inc. StemCells, Inc. was originally incorporated
under the name Cellular Transplants, Inc. and the original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of Delaware on August 2, 1988. The
original Certificate of Incorporation was then restated on February 14, 1992 to change the name of
the corporation to Cytotheraputics, Inc. The certificate of incorporation as restated was further
amended on May 24, 2000 to change the name of the corporation to StemCells, Inc.
2. This Restated Certificate of Incorporation, which restates and integrates but does not further
amend the Restated Certificate of Incorporation of the Corporation, was duly adopted in accordance
with the provisions of Section 245 of the GCL, and was approved by written consent of the directors
of the Corporation given in accordance with the provisions of Section 141 of the GCL.
3. The text of the Restated Certificate of Incorporation of the Corporation is hereby restated to
read in its entirety as follows:
ONE. The name of this corporation is StemCells, Inc.
TWO. The address of the corporations registered office in the State of Delaware
is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered
agent at such office is The Corporation Trust Company. The nature of the business or the purposes
to be conducted by this Corporation is to engage in any lawful act or activity for which a
corporation may be organized under the General Corporation Law of Delaware.
THREE. The total number of shares of stock that this Corporation shall have
authority to issue is 126,000,000, consisting of 125,000,000 share of Common Stock, with a par
value of $.01 per share (the Common Stock), and 1,000,000 shares of Undesignated Preferred Stock
with a par value of $.01 per shares (the Undesignated Preferred Stock).
The relative rights, preferences, privileges and restrictions granted to or imposed on the
respective classes of the shares of capital stock or the holders thereof are as follows:
|
|
|
Section 1. |
|
Designation and Amount. The shares of such series shall be designated as
Junior Preferred Stock (the Junior Stock) and the number of shares constituting such
series shall be 450,000. The number of shares of Junior Stock may be increased or
decreased by a resolution duly adopted by the Board of Directors, but may not be
decreased below the number of shares of Junior Stock then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon conversion of any outstanding securities convertible into Junior Stock. |
|
|
|
Section 2. |
|
Dividends and Distributions. |
|
(a) |
|
Subject to the prior and superior rights of the holders of any shares of any
series of Preferred Stock ranking prior and superior to the shares of Junior Stock with
respect to dividends, the holders of shares of Junior Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the last day of March, |
|
|
|
June, September and December in each year (each such date being referred to herein as a
Quarterly Dividend Payment Date), commencing on the first Quarterly Dividend Payment
Date after the first issuance of a share or fraction of a share of Junior Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment set forth in Section 8 hereof, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate per share
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock, par value $.01 per share, of the
Corporation (the Common Stock) or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Junior Stock. |
|
|
(b) |
|
The Corporation shall declare a dividend or distribution on the Junior Stock as
provided in paragraph (a) of this Section 2 immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of or a
subdivision with respect to Common Stock); provided, however, that, in
the event no dividend or distribution shall have been declared on the Common Stock during
the period between any Quarterly Dividend Payment Date, a dividend of $1.00 per share on
the Junior Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date. |
|
|
(c) |
|
Dividends shall begin to accrue and be cumulative on outstanding shares of Junior
Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such
shares of Junior Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Junior Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Junior Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Junior Stock entitled to
receive payment of a dividend or distribution declared thereon, which record date shall
be no more than 60 days prior to the date fixed for the payment thereof. |
|
|
|
Section 3. |
|
Voting Rights. The holders of shares of Junior Stock shall have the
following rights: |
|
(a) |
|
Subject to the provisions for adjustment set forth in Section 8 hereof, each
share of Junior Stock shall entitle the holder thereof to one hundred votes on all
matters submitted to a vote of the stockholders of the Corporation. |
|
|
(b) |
|
Except as otherwise provided herein or required by applicable law, the holders of
shares of Junior Stock and the holders of shares of Common Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation. |
|
|
(c) |
|
Except as set forth herein or required by applicable law, holders of Junior Stock
shall have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth herein)
for taking any corporate action. |
|
|
|
Section 4. |
|
Certain Restrictions. |
|
(a) |
|
Whenever quarterly dividends or other dividends or distributions payable on the
Junior Stock as provided in Section 2 are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on shares of Junior
Stock outstanding shall have been paid in full, the Corporation shall not: |
|
i. |
|
declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Junior Stock; |
|
|
ii. |
|
declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Junior Stock, except dividends paid ratably on the Junior Stock and
all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such
shares are then entitled; |
|
|
iii. |
|
redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Junior Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock (A) in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding
up) to the Junior Stock or (B) in accordance with subparagraph (iv) of
this Section 4(a); or |
|
|
iv. |
|
redeem or purchase or otherwise acquire for
consideration any shares of Junior Stock, or any shares of stock
ranking on a parity with the Junior Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of the outstanding shares of such
stock upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in
good faith will result in fair and equitable treatment among the
respective series or classes. |
|
(b) |
|
The Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation unless the
Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire
such shares at such time and in such manner. |
|
|
|
Section 5. |
|
Required Shares. Any shares of Junior Stock redeemed, purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein. |
|
|
|
Section 6. |
|
Liquidation, Dissolution or Winding Up. |
|
(a) |
|
Upon any liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of Common Stock or
any other stock of the Corporation ranking junior (upon liquidation, dissolution or
winding up) to the Junior Stock, unless, prior thereto, the holders of share of Junior
Stock shall have received $100.00 per share plus an amount equal to all accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date of such
payment (the Junior Liquidation Preference). Following the payment of the full amount
of the Junior Liquidation Preference, no additional distributions shall be made to the
holders of shares of Junior Stock unless, prior thereto, the holders of shares of Common
Stock (which term shall include, for the purposes only of this Section 6, any series of
the Corporations Preferred Stock ranking on a parity with the Common Stock upon
liquidation, dissolution or winding up) shall have received an amount per share (the
Common Adjustment) equal to the quotient obtained by dividing the Junior Liquidation
Preference by 100 (as |
|
|
|
appropriately adjusted as set forth in Section 8 hereof to reflect such events as stock
splits, stock dividends and recapitalization with respect to the Common Stock; such number
in this clause (ii), as the same may be adjusted from time to time, is hereinafter
referred to as the Adjustment Number. In the event, however, that there are not
sufficient assets available to permit payment in full of the Common Adjustment, then any
remaining assets shall be distributed ratably to the holders of Common Stock. Following
the payment of the full amount of the Junior Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Junior Stock and Common Stock,
respectively, holders of shares of Junior Stock and holders of shares of Common Stock
shall receive their ratable and proportionate share of any remaining assets to be
distributed in the ratio of the Adjustment Number to one (1) with respect to such Junior
Stock and Common Stock, on a per share basis, respectively. |
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(b) |
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In the event, however, that there are not sufficient assets available to permit
payment in full of the Junior Liquidation Preference and the liquidation preferences of
all other series of Preferred Stock, if any, which rank on a parity with the Junior
Stock, then any remaining assets shall be distributed ratably to the holders of the
Junior Stock and the holders of such parity stock in proportion to their respective
liquidation preferences. |
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(c) |
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None of the merger or consolidation of the Corporation into or with any other
entity, the sale of all or substantially all of the property and assets of the
Corporation or the distribution to the stockholders of the Corporation of all or
substantially all of the consideration for such sale, unless such consideration (apart
from the assumption of liabilities) or the net proceeds thereof consists substantially
entirely of cash, shall be deemed to be a liquidation, dissolution or winding up within
the meaning of this Section 6. |
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(d) |
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Each share of Junior Stock shall stand on a parity with each other share of
Junior Stock or any other series of the same class of Preferred Stock upon voluntary or
involuntary liquidation, dissolution or distribution of assets or winding up of the
Corporation. |
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Section 7. |
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Consolidation, Merger, etc. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the outstanding shares
of Common Stock are exchanged for or changed into other stock or securities, cash and/or
any other property, then in any such case the outstanding shares of Junior Stock shall
at the same time be similarly exchanged or changed in an amount per share (subject to
the provision for adjustment set forth in Section 8 hereof) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is changed or
exchanged. |
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Section 8. |
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Certain Adjustments. In the event the Corporation shall at any time
declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect
a subdivision or combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then, in each such
case, the amounts set forth in Sections 2(a) and (b), 3(a), 6(a) and 7 hereof with
respect to the multiple of cash and non-cash dividends, votes, the Junior Liquidation
Preference and an aggregate amount of stock, securities, cash and/or other property
referred to in Section 7 hereof, shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event. |
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Section 9. |
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Ranking. The Junior Stock shall rank pari passu with (or if determined by
the Board of Directors in any vote establishing any other series of Preferred Stock,
either senior and prior in preference to, or junior and subordinate to, as the case may
be) each other series of Preferred Stock of the Corporation with respect to dividends
and/or preference upon liquidation, dissolution or winding up. |
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Section 10. |
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Redemption. The shares of Junior Stock may be purchased by the
Corporation at such times and on such terms as may be agreed to between the Corporation
and the redeeming stockholder, subject to any limitations which may be imposed by law or
the Restated Certificate of Incorporation, as amended. |
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Section 11. |
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Amendment. The Restated Certificate of Incorporation of the Corporation,
as amended, shall not be amended in any manner which would materially alter or change
the powers, preferences or special rights of the Junior Stock so as to effect them
adversely without the affirmative vote of the holders of two-thirds or more of the
outstanding shares of Junior Stock, voting together as a single class. |
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Section 12. |
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Fractional Shares. Junior Stock may be issued in fractions of a share
which shall entitle the holder, in proportion to such holders fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Junior Stock. |
FIVE. The corporation is to have perpetual existence.
SIX. In furtherance and not in limitation of the power conferred upon the Board of
Directors by law, the Board of Directors shall have the power to make, adopt, alter, amend and
repeal from time to time By-Laws of this Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal By-Laws made by the Board of Directors as
provided for in this Restated Certificate of Incorporation. The affirmative vote of 80% of the
total number of votes of the then outstanding shares of capital stock of this Corporation entitled
to vote generally in the election of directors, voting together as a single class, shall be
required for the adoption, amendment or repeal of By-Laws by the stockholders of this Corporation.
SEVEN. If at any time this Corporation shall have a class of stock registered pursuant
to the provisions of the Securities Exchange Act of 1934, for so long as such class is so
registered, any action by the stockholders of such class must be taken at an annual or special
meeting of stockholders and may not be taken by written consent.
EIGHT. A director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent
that exculpation from liability is not permitted under the Delaware General Corporation Law as in
effect at the time such liability is determined. No amendment or repeal of this Section EIGHT
shall apply to or have any effect on the liability or alleged liability of any director of the
corporation for or with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
NINE. The Corporation shall, to the maximum extent permitted from time to time under
the law of the State of Delaware, indemnify and upon request shall advance expenses to any person
who is or was a party or is threatened to be made a party to any threatened, pending or completed
action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was or has agreed to be a director or officer of the
Corporation of while a director or officer is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of any corporation, partnership, joint
venture, trust or other enterprise, including service with respect to employee benefit plans,
against expenses (including attorneys fees and expenses), judgments, fines, penalties and amounts
paid in settlement incurred in connection with the investigation preparation to defend of defense
or such action, suit, proceeding or claim; provided, however, that the foregoing
shall not require the Corporation to indemnify or advance expenses to any person in connection with
any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person. Such
indemnification shall not be exclusive of other indemnification rights arising under any by-law,
agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the
heirs and legal representatives of such person. Any person seeking indemnification under this
Section EIGHT shall be deemed to have met the standard of conduct required for such
indemnification unless the contrary shall be established. Any repeal or modification of the
foregoing provisions of this Section NINE shall not
adversely affect any right or protection of a director or officer of the Corporation with respect
to any acts or omissions of such director or officer occurring prior to such repeal or
modification.
TEN. Advance notice of new business and stockholder nominations for the election of
directors shall be given in the manner and to the extent provided in the By-laws of the
corporation. Elections of directors need not be by written ballot unless the By-laws of the
corporation shall so provide.
ELEVEN. The Board of Directors of this Corporation, when evaluating any offer of
another party (a) to make a tender or exchange offer for any equity security of this Corporation or
(b) to effect a business combination, shall, in connection with the exercise of its judgment in
determining what is in the best interests of this Corporation as a whole, be authorized to give due
consideration to any such factors as the Board of Directors determines to be relevant, including,
without limitation:
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(i) |
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the interests of this Corporations stockholders, including the
possibility that these interests might be best served by the continued
independence of the corporation; |
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(ii) |
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whether the proposed transaction might violate federal or state laws; |
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(iii) |
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not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the outstanding
capital stock of this Corporation, but also to the market price for the capital
stock of this Corporation over a period of years, the estimated price that might
be achieved in a negotiated sale of this Corporation as a whole or in part or
through orderly liquidation, the premiums over market price for the securities of
other corporations in similar transactions, current political, economic and other
factors bearing on securities prices and this Corporations financial condition
and future prospects; and |
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(iv) |
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the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with this
Corporation, upon the communities in which this Corporation conducts its business
and upon the economy of the state, region and nation. |
In connection with any such evaluation, the Board of Directors is authorized to conduct such
investigations and engage in such legal proceedings as the Board of Directors may determine.
TWELVE. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the By-Laws (and notwithstanding the fact that a lesser percentage may be
specified by law, this Restated Certificate of Incorporation or the By-Laws of this Corporation),
the affirmative vote of 80% or the total number of votes of the then outstanding shares of capital
stock of this Corporation entitled to vote generally in the election of directors, voting together
as s single class, shall be required to amend or repeal, or to adopt any provision inconsistent
with the purpose or intent of Sections FIVE, SIX, SEVEN, EIGHT, NINE, TEN, ELEVEN and this Section
TWELVE. Notice of any such proposed amendment, repeal or adoption, shall be contained in the
notice of the meeting at which it is to be considered. Subject to the provisions set forth herein,
this Corporation reserves the right to amend, alter, repeal or rescind any provision contained in
this Restated Certificate of Incorporation in the manner now or hereafter prescribed by law.
IN WITNESS WHEREOF, said StemCells, Inc. has caused this Restated Certificate of Incorporation
to be signed by Martin McGlynn, its President, this 21st day of August, 2006.
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STEMCELLS, INC.
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By: |
/s/ Martin McGlynn
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Name: |
Martin McGlynn |
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Title: |
President and Chief Executive Officer |
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exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated March 1, 2007, accompanying the consolidated financial
statements and managements assessment of the effectiveness of internal control over financial
reporting included in the Annual Report of Stemcells, Inc. on Form 10-K for the year ended December
31, 2006. We hereby consent to the incorporation by reference of said reports in the Registration
Statements of Stemcells, Inc. on Forms S-3 (File No. 333-128797 effective October 4, 2005 and
amended on November 3, 2005, File No. 333-117360 effective July 14, 2004, File No. 333-105664,
effective May 29, 2003, File No. 333-83992, effective March 8, 2002, File No. 333-75806, effective
December 21, 2001, File No. 333-66692, effective August 3, 2001, and File No. 333-61726, effective
June 29, 2001) and Forms S-8 (File No. 333-118263 effective August 16, 2004, File No. 333-66700,
effective August 3, 2001, File No. 333-37313, effective October 7, 1997, File No. 333-29335,
effective June 16, 1997, File No. 333-10773, effective August 23, 1996, and File No. 33-49524,
effective July 10, 1992) and Registration Statements of CytoTherapeutics, Inc. on Forms S-3 (File
No. 33-91228, effective April 14, 1995, and File No. 33-68900, effective September 15, 1993).
/s/ Grant Thornton LLP
San Jose, California
March 1, 2007
exv31w1
EXHIBIT 31.1
Certification of Chief Executive Officer
under Section 302 of the Sarbanes-Oxley Act
I, Martin McGlynn, certify that:
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(1) |
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I have reviewed this annual report on Form 10-K of StemCells, Inc.; |
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(2) |
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Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
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(3) |
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Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
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(4) |
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The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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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; |
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b. |
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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; |
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c. |
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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 |
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d. |
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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 |
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(5) |
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The registrants other certifying officers 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 registrants board of directors (or persons performing
the equivalent functions): |
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a. |
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all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize, and
report financial information; and |
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b. |
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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: March 9, 2007
/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:
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(1) |
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I have reviewed this annual report on Form 10-K of StemCells, Inc.; |
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(2) |
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Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
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(3) |
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Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
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(4) |
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The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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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; |
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a. |
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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; |
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b. |
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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 |
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c. |
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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 |
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(5) |
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The registrants other certifying officers 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 registrants board of directors (or persons performing
the equivalent functions): |
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a. |
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all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably likely
to adversely affect the registrants ability to record, process, summarize, and
report financial information; and |
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b. |
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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: March 9, 2007
/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) Annual Report on Form 10-K for the year
ended December 31, 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:
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(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 |
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(2). The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
Date: March 9, 2007
/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) Annual Report on Form 10-K for the year
ended December 31, 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:
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(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 |
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(2). The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
Date: March 9, 2007
/s/ Rodney K.B. Young
Rodney K.B. Young
Chief Financial Officer