e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended: March 31, 2008
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Commission File Number: 0-19871 |
(Exact name of registrant as specified in its charter)
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DELAWARE
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94-3078125 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
identification No) |
3155 PORTER DRIVE
PALO ALTO, CA 94304
(Address of principal executive offices including zip code)
(650) 475-3100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter periods that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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o Large accelerated filer
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þ Accelerated filer
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o
Non-accelerated filer |
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o Smaller reporting company
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At May 1, 2008, there were 80,810,302 shares of Common Stock, $.01 par value, issued and
outstanding.
STEMCELLS, INC.
INDEX
NOTE REGARDING REFERENCES TO OUR COMMON STOCK
Throughout this Form 10-Q, the words we, us, our, and StemCells refer to StemCells, Inc.,
including StemCells California, Inc., our-owned subsidiary, and the owner or licensee of most of
our intellectual property. Common stock refers to our common stock, $.01 par value.
2
PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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March 31, 2008 |
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December 31, 2007 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
12,610,351 |
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$ |
9,759,169 |
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Marketable securities, current |
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16,748,166 |
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26,696,413 |
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Other receivables |
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238,944 |
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264,631 |
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Note receivable |
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1,000,000 |
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1,000,000 |
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Prepaid assets |
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809,301 |
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1,032,482 |
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Total current assets |
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31,406,762 |
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38,752,695 |
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Marketable securities, non-current |
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1,998,976 |
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3,150,971 |
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Property, plant and equipment, net |
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3,700,466 |
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3,905,404 |
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Other assets, non-current |
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1,760,061 |
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1,710,829 |
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Intangible assets, net |
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723,385 |
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762,667 |
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Total assets |
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$ |
39,589,650 |
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$ |
48,282,566 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
807,441 |
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$ |
1,813,595 |
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Accrued expenses |
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1,506,232 |
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2,462,252 |
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Accrued wind-down expenses, current |
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1,382,842 |
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1,374,632 |
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Deferred rent, current |
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305,145 |
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290,391 |
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Deferred revenue, current |
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33,753 |
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43,909 |
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Capital lease obligation, current |
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17,825 |
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17,530 |
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Bonds payable, current |
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168,750 |
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136,250 |
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Total current liabilities |
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4,221,988 |
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6,138,559 |
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Capital lease obligation, non-current |
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20,700 |
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25,269 |
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Bonds payable, non-current |
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944,167 |
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1,009,166 |
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Deposits and other long-term liabilities |
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527,804 |
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527,804 |
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Accrued wind-down expenses, non-current |
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4,538,699 |
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4,768,859 |
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Deferred rent, non-current |
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360,858 |
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437,144 |
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Deferred revenue, non-current |
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159,658 |
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163,865 |
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Total liabilities |
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10,773,874 |
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13,070,666 |
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Commitment and contingencies (Note 5) |
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Stockholders equity: |
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Common stock, $.01 par value;
125,000,000 shares authorized; issued
and outstanding 80,768,042 at March 31,
2008 and 80,681,087 at December 31, 2007 |
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807,680 |
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806,810 |
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Additional paid-in capital |
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265,614,200 |
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264,603,711 |
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Accumulated deficit |
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(236,459,736 |
) |
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(229,914,747 |
) |
Accumulated other comprehensive loss |
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(1,146,368 |
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(283,874 |
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Total stockholders equity |
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28,815,776 |
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35,211,900 |
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Total liabilities and stockholders equity |
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$ |
39,589,650 |
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$ |
48,282,566 |
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See Notes to Condensed Consolidated Financial Statements.
3
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Revenue: |
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Revenue from licensing agreements |
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$ |
17,350 |
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$ |
5,946 |
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Operating expenses: |
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Research and development |
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4,499,751 |
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4,019,138 |
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General and administrative |
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2,254,203 |
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2,264,548 |
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Wind-down expenses |
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160,250 |
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221,765 |
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Total operating expenses |
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6,914,204 |
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6,505,451 |
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Loss from operations |
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(6,896,854 |
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(6,499,505 |
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Other income (expense): |
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License and settlement agreement, net |
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550.467 |
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Realized gain on sale of marketable securities |
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717,621 |
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Interest income |
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383,665 |
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653,606 |
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Interest expense |
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(28,191 |
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(33,317 |
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Other expense |
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(3,609 |
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(8,624 |
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Total other income, net |
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351,865 |
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1,879,753 |
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Net loss |
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($6,544,989 |
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($4,619,752 |
) |
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Basic and diluted net loss per share |
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($0.08 |
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($0.06 |
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Shares used to compute basic and diluted loss per share |
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80,703,962 |
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78,566,195 |
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See Notes to Condensed Consolidated Financial Statements.
4
STEMCELLS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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($6,544,989 |
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($4,619,752 |
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Adjustments to reconcile net loss to net cash used
in operating activities: |
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Depreciation and amortization |
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302,647 |
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266,481 |
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Stock-based compensation |
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1,011,359 |
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701,253 |
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Gain on sale of marketable securities |
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(717,621 |
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Non-cash income
from license and settlement agreement, net |
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(550,467 |
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Changes in operating assets and liabilities: |
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Accrued interest and other receivables |
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25,687 |
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135,759 |
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Prepaid and other assets, current |
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223,181 |
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53,116 |
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Other assets, non-current |
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(49,232 |
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Accounts payable and accrued expenses |
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(1,962,174 |
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(236,271 |
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Accrued wind-down expenses |
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(221,950 |
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(151,555 |
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Deferred revenue |
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(14,363 |
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(4,207 |
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Deferred rent |
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(61,532 |
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(47,603 |
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Deposits and other long-term liabilities |
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(81,181 |
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Net cash used in operating activities |
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(7,291,366 |
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(5,252,048 |
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Cash flows from investing activities: |
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Proceeds from the sale of marketable securities |
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10,237,748 |
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3,076,691 |
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Purchases of property, plant and equipment |
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(58,427 |
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(124,906 |
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Net cash provided by investing activities |
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10,179,321 |
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2,951,785 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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1,290,437 |
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Proceeds from the exercise of stock options |
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200,908 |
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Repayment of capital lease obligations |
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(4,274 |
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Repayment of debt obligations |
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(32,499 |
) |
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(65,000 |
) |
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Net cash (used in) provided by financing activities |
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(36,773 |
) |
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1,426,345 |
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Increase (decrease) in cash and cash equivalents |
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2,851,182 |
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(873,918 |
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Cash and cash equivalents, beginning of period |
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9,759,169 |
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51,795,529 |
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Cash and cash equivalents, end of period |
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$ |
12,610,351 |
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$ |
50,921,611 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
28,191 |
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$ |
33,317 |
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See Notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2008 and 2007
Note 1. Summary of Significant Accounting Policies
Nature of Business
StemCells, Inc., a Delaware corporation, 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 financial data as of and for the three months ended March 31, 2008 and 2007
has been prepared by us, without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States (US GAAP) have been condensed or omitted pursuant to such rules and regulations. The
December 31, 2007 condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by US GAAP. However, we believe that the
disclosures are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
We expect to incur additional operating losses over the foreseeable future. We have very
limited liquidity and capital resources and must obtain significant additional capital and other
resources in order to sustain our product development efforts, to provide funding for the
acquisition of technologies, businesses and intellectual property rights, preclinical and clinical
testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, laboratory and office facilities, establishment of production capabilities, general and
administrative expenses and other working capital requirements. We rely on our cash reserves,
proceeds from equity and debt offerings, proceeds from the transfer or sale of intellectual
property rights, equipment, facilities or investments, government grants and funding from
collaborative arrangements, to fund our operations. If we exhaust our cash reserves and are unable
to obtain adequate financing, we may be unable to meet our operating obligations and we may 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 condensed consolidated financial statements include the accounts of StemCells, Inc., and
our wholly-owned subsidiary, StemCells California, Inc. Material intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make
judgments, assumptions and estimates that affect the amounts reported in our condensed consolidated
financial statements and accompanying notes. Actual results could differ materially from those
estimates.
Significant estimates include the following:
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The grant date fair value of stock-based awards recognized as compensation expense in
accordance with the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004) Share Based Payment (SFAS 123R). (See Note 3). |
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Accrued wind-down expenses (See Note 4). |
Reclassification
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. Deferred rent of approximately $290,000 as of December 31, 2007 has been
reclassified from Deferred rent, non-
6
current to Deferred rent, current on the condensed consolidated balance sheet to conform
with the current year presentation. The reclassifications had no effect on total assets,
liabilities, equity, or net loss previously reported.
Financial Instruments
Cash Equivalents and Marketable Securities
All money market and highly liquid investments with a maturity of 90 days or less at the date
of purchase are classified as cash equivalents. Investments with remaining maturities of 365 days
or less not classified as cash equivalents are classified as marketable securities, current.
Investments with remaining maturities greater than 365 days are classified as marketable
securities, non-current. Our marketable debt and equity securities have been accounted for as
available-for-sale. Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of purchase and reevaluates the
available-for-sale designations as of each balance sheet date. These securities are carried at fair
value (see Note 2, Financial Instruments), with the unrealized gains and losses reported as a
component of stockholders equity. The cost of securities sold is based upon the specific
identification method.
If the estimated fair value of a security is below its carrying value, we evaluate whether we
have the intent and ability to retain our investment for a period of time sufficient to allow for
any anticipated recovery to the cost of the investment, and whether evidence indicating that the
cost of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Other-than-temporary declines in estimated fair value of all marketable securities are
charged to other income (expense), net. No such impairment was recognized during the three months
ended March 31, 2008 and March 31, 2007.
Other Receivables
Our receivables generally consist of interest income on our financial instruments, revenue
from licensing agreements and rent from our sub-lease tenants.
Estimated Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157),
defines and establishes a framework for measuring fair value and expands disclosures about fair
value measurements. In accordance with SFAS 157, we have categorized our financial assets and
liabilities, based on the priority of the inputs to the valuation technique, into a three-level
fair value hierarchy as set forth below. If the inputs used to measure the financial instruments
fall within different levels of the hierarchy, the categorization is based on the lowest level
input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on the condensed consolidated balance sheets are
categorized based on the inputs to the valuation techniques as follows:
Level 1 Financial assets and liabilities whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market that the company has the ability to access
at the measurement date (examples include active exchange-traded equity securities, listed
derivatives, and most U.S. Government and agency securities).
Level 2 Financial assets and liabilities whose values are based on quoted prices in markets
where trading occurs infrequently or whose values are based on quoted prices of instruments with
similar attributes in active markets. Level 2 inputs include the following:
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Quoted prices for identical or similar assets or liabilities in non-active
markets (examples include corporate and municipal bonds which trade
infrequently); |
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Inputs other than quoted prices that are observable for substantially the
full term of the asset or liability (examples include interest rate and
currency swaps); and |
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Inputs that are derived principally from or corroborated by observable
market data for substantially the full term of the asset or liability (examples
include certain securities and derivatives). |
7
Level 3 Financial assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the overall fair value
measurement. These inputs reflect managements own assumptions about the assumptions a market
participant would use in pricing the asset or liability. We currently do not have any Level 3
financial assets or liabilities.
The following table presents the financial assets and liabilities we measure at fair value on
a recurring basis, based on the fair value hierarchy as of March 31, 2008:
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Level 1 |
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Level 2 |
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Total |
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Financial Assets: |
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Money market funds |
|
$ |
10,184,570 |
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$ |
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$ |
10,184,570 |
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Marketable equity securities |
|
|
1,077,066 |
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1,077,066 |
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Commercial paper |
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6,375,615 |
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6,375,615 |
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Corporate bonds |
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|
9,374,936 |
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|
9,374,936 |
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Asset-Backed securities |
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|
3,810,654 |
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|
3,810,654 |
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Total |
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$ |
11,261,636 |
|
|
$ |
19,561,205 |
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|
$ |
30,822,841 |
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Financial Liabilities: |
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Bond obligation |
|
$ |
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|
$ |
1,112,917 |
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$ |
1,112,917 |
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Revenue Recognition
We currently recognize revenue resulting from the licensing and use of our technology and
intellectual property. Such licensing agreements may contain multiple elements, such as upfront
fees, payments related to the achievement of particular milestones and royalties. Revenue from
upfront fees for licensing agreements that contain multiple elements are generally deferred and
recognized on a straight-line basis over the term of the agreement. Fees associated with
substantive at risk performance-based milestones are recognized as revenue upon completion of the
scientific or regulatory event specified in the agreement, and royalties received are recognized as
earned. Revenue 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 relevant
collaborative agreement or grant.
Stock-Based Compensation
We account for stock-based compensation awards to employees in accordance with SFAS 123R. The
compensation expense we record for these awards is based on their grant-date fair value as
calculated and amortized over their vesting period. See Note 3, Stock-Based Compensation for
further information.
We account for stock-based awards 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,
expense the estimated fair value of such options as calculated using the Black-Scholes model. The
estimated fair value is re-measured at each reporting date and is amortized over the remaining
vesting period.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share is computed based
on the weighted-average number of shares of common stock and other dilutive securities. To the
extent these securities are anti-dilutive, they are excluded from the calculation of diluted
earnings per share.
The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:
8
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
2008 |
|
2007 |
Net loss |
|
$ |
(6,544,989 |
) |
|
$ |
(4,619,752 |
) |
Weighted average shares outstanding
used to compute basic and diluted
net loss per share |
|
|
80,703,962 |
|
|
|
78,566,195 |
|
Basic and diluted net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.06 |
) |
The following outstanding potentially dilutive common stock equivalents were excluded from the
computation of diluted net loss per share because the effect would have been anti-dilutive as of
March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Options |
|
|
8,798,903 |
|
|
|
8,607,859 |
|
Restricted stock units |
|
|
1,650,000 |
|
|
|
|
|
Warrants |
|
|
1,255,000 |
|
|
|
1,930,658 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,703,903 |
|
|
|
10,538,517 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
Comprehensive loss is comprised of net losses and other comprehensive loss (or OCL). OCL
includes certain changes in stockholders equity that are excluded from net losses. Specifically,
we include in OCL changes in unrealized gains and losses on our marketable securities. Accumulated
other comprehensive loss was $1,146,368 as of March 31, 2008 and $283,874 as of December 31, 2007.
The activity in OCL was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(6,544,989 |
) |
|
$ |
(4,619,752 |
) |
Net change in unrealized gains and losses on marketable securities |
|
|
(862,494 |
) |
|
|
(2,852,133 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(7,407,483 |
) |
|
$ |
(7,471,885 |
) |
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, 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. We adopted the
provisions of SFAS 157 that became effective in our first quarter of
2008. See Estimated Fair Value of Financial Instruments above
for further information about the adoption of the required provisions of SFAS 157 above.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). We are currently
evaluating the impact of SFAS 157 on our consolidated financial statements for items within the
scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). Under SFAS 159,
a company may choose, at specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. SFAS 159 became effective beginning with our first
quarter of 2008. At this time, we have chosen not to adopt the provisions of SFAS 159 for our
existing financial instruments.
9
Note
2. Financial Assets
The following table summarizes the fair value of our cash, cash equivalents and
available-for-sale marketable securities held in our current and non-current investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized |
|
|
Gross unrealized |
|
|
|
|
|
|
Amortized cost |
|
|
gains |
|
|
losses |
|
|
Fair value |
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
534,652 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
534,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
|
10,184,570 |
|
|
|
|
|
|
|
|
|
|
|
10,184,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
(maturity within 90 days) |
|
|
1,891,129 |
|
|
|
|
|
|
|
|
|
|
|
1,891,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
|
12,075,699 |
|
|
|
|
|
|
|
|
|
|
|
12,075,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
(maturity within 1 year) |
|
|
16,706,595 |
|
|
|
47,144 |
|
|
|
(5,573 |
) |
|
|
16,748,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable
securities, current |
|
|
16,706,595 |
|
|
|
47,144 |
|
|
|
(5,573 |
) |
|
|
16,748,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities |
|
|
917,217 |
|
|
|
4,693 |
|
|
|
|
|
|
|
921,910 |
|
Marketable equity securities |
|
|
2,269,697 |
|
|
|
|
|
|
|
(1,192,631 |
) |
|
|
1,077,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable
securities,
non-current |
|
|
3,186,914 |
|
|
|
4,693 |
|
|
|
(1,192,631 |
) |
|
|
1,998,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash
equivalents, and marketable
securities, current and
non-current |
|
$ |
32,503,860 |
|
|
$ |
51,837 |
|
|
$ |
(1,198,204 |
) |
|
$ |
31,357,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
549,544 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
549,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts |
|
|
5,079,564 |
|
|
|
|
|
|
|
|
|
|
|
5,079,564 |
|
Marketable debt securities
(maturity within 90 days) |
|
|
4,130,404 |
|
|
|
|
|
|
|
(343 |
) |
|
|
4,130,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
|
9,209,968 |
|
|
|
|
|
|
|
(343 |
) |
|
|
9,209,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
(maturity within 1 year) |
|
|
26,680,824 |
|
|
|
19,137 |
|
|
|
(3,548 |
) |
|
|
26,696,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable
securities, current |
|
|
26,680,824 |
|
|
|
19,137 |
|
|
|
(3,548 |
) |
|
|
26,696,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities |
|
|
1,180,394 |
|
|
|
9,109 |
|
|
|
|
|
|
|
1,189,503 |
|
Marketable equity securities |
|
|
2,269,697 |
|
|
|
|
|
|
|
(308,229 |
) |
|
|
1,961,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable
securities,
non-current |
|
|
3,450,091 |
|
|
|
9,109 |
|
|
|
(308,229 |
) |
|
|
3,150,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash
equivalents, and marketable
securities, current and
non-current |
|
$ |
39,890,427 |
|
|
$ |
28,246 |
|
|
$ |
(312,120 |
) |
|
$ |
39,606,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Our investment in marketable debt securities consist primarily of commercial paper, corporate
bonds, and asset-backed securities.
Our investment in marketable equity securities consists of shares in ReNeuron Group plc, a
publicly listed UK corporation. In July 2005, we entered into a license and settlement agreement
with ReNeuron Limited, a wholly owned subsidiary of ReNeuron Group plc, (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. 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 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. In February 2007, we sold 5,275,000 ordinary
shares of ReNeuron for net proceeds of approximately $3,075,000 and we recognized a realized gain
of approximately $716,000. In February 2007, as a consequence of certain anti-dilution provisions
in the agreement, ReNeuron issued us an additional 822,000 shares of common stock net of
approximately 12,000 shares which were transferred to NeuroSpheres
Ltd., (NeuroSpheres) a Canadian
corporation from which we have licensed some of the patent rights that are subject to the agreement
with ReNeuron. We recorded approximately $550,000 as other income for the additional shares. We
owned 4,821,924 ordinary shares of ReNeuron at March 31, 2008 and December 31, 2007 and the fair
value of those shares was approximately $1,077,000 at March 31, 2008 and approximately $1,961,000
at December 31, 2007.
Changes in the market value of our ReNeuron shares 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 and are not recorded as other income or
loss until the shares are disposed of and a gain or loss realized.
Note 3. Stock-Based Compensation
We currently grant stock-based awards under three equity incentive plans. We had 15,227,244
shares authorized under the three plans as of March 31, 2008. Under these plans we may grant
incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, and performance-based shares to our employees, directors and consultants,
at prices determined by our Board of Directors. Incentive stock options may only be granted to
employees under these plans with a grant price not less than the fair market value on the date of
grant.
Our compensation expense for stock options and restricted stock units issued from our equity
incentive plans for the three months ended March 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Research and development expense |
|
$ |
480,349 |
|
|
$ |
262,279 |
|
General and administrative expense |
|
|
490,578 |
|
|
|
356,706 |
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense and effect on net loss |
|
$ |
970,927 |
|
|
$ |
618,985 |
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
As of March 31, 2008, we have approximately $7,780,000 of total unrecognized compensation
expense related to unvested awards granted under our various stock-based plans that we expect to
recognize over a weighted-average vesting period of 2.7 years.
Incentive Stock Options
Generally, stock options granted to employees have a maximum term of ten years, and vest over
a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly
over the remaining three-year service period. We may grant options with different vesting terms
from time to time. Upon employee termination of
service, any unexercised vested option will be forfeited three months following termination or
the expiration of the option, whichever is earlier. Unvested options are forfeited on termination.
11
The fair value of options granted is estimated as of the date of grant using the Black-Scholes
option pricing model, which requires certain assumptions as of the date of grant. The
weighted-average assumptions used at March 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
2008 |
|
2007 |
Expected life (years)(1) |
|
|
6.22 |
|
|
|
6.25 |
|
Risk-free interest rate(2) |
|
|
2.80 |
% |
|
|
4.49 |
% |
Expected volatility(3) |
|
|
74.75 |
% |
|
|
100.19 |
% |
Expected dividend yield(4) |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
(1) |
|
The expected term represents the period during which our stock-based awards are expected to be
outstanding. In 2008 we estimated this amount based on historical experience of similar
awards, giving consideration to the contractual terms of the awards, vesting requirements, and
expectation of future employee behavior, including post-vesting terminations. In 2007 the
expected term is equal to the average of the contractual life of the stock option and its
vesting period as of the date of grant. |
|
(2) |
|
The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to
the expected term of the option as of the date of grant. |
|
(3) |
|
Expected volatility is based on historical volatility over the most recent historical period
equal to the length of the expected term of the option as of the date of grant. |
|
(4) |
|
We have not historically issued any dividends and we do not expect to in the foreseeable future. |
At the end of each reporting period we estimate forfeiture rates based on our historical
experience within separate groups of employees and adjust the stock-based compensation expense
accordingly.
A summary of our stock option activity for the three months ended March 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
Number of options |
|
|
exercise price |
|
Balance at December 31, 2007 |
|
|
9,028,810 |
|
|
$ |
2.36 |
|
Granted |
|
|
110,000 |
|
|
|
1.48 |
|
Exercised |
|
|
(60,000 |
) |
|
|
1.04 |
|
Cancelled |
|
|
(279,907 |
) |
|
|
2.47 |
|
|
|
|
|
|
|
|
Outstanding options at March 31, 2008 |
|
|
8,798,903 |
|
|
$ |
2.35 |
|
|
|
|
|
|
|
|
The estimated weighted average fair value per share of options granted was approximately $1.48
in the three months ended March 31, 2008, based on the Black-Scholes model and the assumptions
discussed above. Total intrinsic value of options exercised at time of exercise was approximately
$32,000 for the three months ended March 31, 2008.
A summary of changes in unvested options for the three months ended March 31, 2008 is as
follows:
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant |
|
|
|
Number of options |
|
|
date fair value |
|
Unvested options at December 31, 2007 |
|
|
4,428,192 |
|
|
$ |
2.00 |
|
Granted |
|
|
110,000 |
|
|
|
1.48 |
|
Vested |
|
|
(387,146 |
) |
|
|
2.17 |
|
Cancelled |
|
|
(35,341 |
) |
|
|
1.89 |
|
|
|
|
|
|
|
|
Unvested options at March 31, 2008 |
|
|
4,115,705 |
|
|
$ |
1.97 |
|
|
|
|
|
|
|
|
The estimated fair value of shares vested were approximately $838,000 in the three months
ended March 31, 2008.
Restricted Stock Units
In March 2008, we granted restricted stock units to certain employees that entitle the holders
to receive shares of our common stock upon vesting. These restricted stock units vest over a three
year period from the date of grant: one-third of the award will vest on each grant date anniversary
over the following three years. The fair value of restricted stock units granted are based upon the
market price of the underlying common stock as if it were vested and issued on the date of grant.
A summary of our restricted stock unit activity for the three months ended March 31, 2008 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date |
|
|
|
Number of RSUs |
|
|
fair value |
|
Balance at December 31, 2007 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
1,650,000 |
|
|
|
1.26 |
|
Exercised |
|
|
|
|
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
|
1,650,000 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
Stock Appreciation Rights
In July 2006, we granted cash-settled Stock Appreciation Rights (SARs) to certain employees
that 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
SAR is equal to the market price of our common stock at the date of grant. The SARs vest 25% on the
first anniversary of the grant date and 75% vest monthly over the remaining three-year service
period. Compensation expense is based on the fair value of SARs which is calculated using the
Black-Scholes option pricing model. The stock-based compensation expense and liability are
re-measured at each reporting date through the date of settlement.
A summary of the changes in SARs for the three months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average exercise |
|
|
|
Number of shares |
|
|
price |
|
Outstanding at December 31, 2007 |
|
|
1,478,219 |
|
|
$ |
2.00 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited and expired |
|
|
(47,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares at March 31, 2008 |
|
|
1,430,849 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
SARs exercisable at March 31, 2008 |
|
|
596,181 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
In the first three months of 2008 we re-measured the compensation expense and liability
related to the SARs and reduced total compensation expense by approximately $42,000 due to the
forfeiture of SARs and a
13
decrease in our common stock price. The total compensation expense related to SARs was
approximately $168,000 in the first three months of 2007.
At March 31, 2008, approximately $681,000 of unrecognized compensation expense related to SARs
is expected to be recognized over a weighted average vesting period of approximately 1.3 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.
Note 4. Wind-down expenses
In October 1999, we relocated to California from Rhode Island and established a wind down
reserve for the estimated lease payments and operating costs of the scientific and administrative
facility in Rhode Island. Even though we intend to dispose of the facility at the earliest possible
time, we cannot determine with certainty a fixed date by which such disposal will occur. In light
of this uncertainty, we periodically re-evaluate and adjust the reserve. We consider various
factors such as our 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.
The summary of the changes to our wind-down reserve as of March 31, 2008 and December 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
January to March |
|
|
January to December |
|
|
|
31, 2008 |
|
|
31, 2007 |
|
Accrued wind-down reserve at beginning of period |
|
$ |
4,875,000 |
|
|
$ |
5,512,000 |
|
Less actual expenses recorded against estimated reserve during the period |
|
|
(331,000 |
) |
|
|
(1,420,000 |
) |
|
|
|
|
|
|
|
|
|
Additional expense recorded to revise estimated reserve at period-end |
|
|
160,000 |
|
|
|
783,000 |
|
|
|
|
|
|
|
|
Revised reserve at period-end |
|
|
4,704,000 |
|
|
|
4,875,000 |
|
Add deferred rent at period-end |
|
|
1,218,000 |
|
|
|
1,268,000 |
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end (current and non current) |
|
$ |
5,922,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down expenses, current |
|
$ |
1,383,000 |
|
|
$ |
1,374,000 |
|
Accrued wind-down expenses, non-current |
|
|
4,539,000 |
|
|
|
4,769,000 |
|
|
|
|
|
|
|
|
Total accrued wind-down expenses |
|
$ |
5,922,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
Note 5. Commitments and Contingencies
Leases
Capital leases
We entered into 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 our pilot manufacturing facility in Rhode Island. The related lease agreements are
structured such that lease payments fully fund all semiannual interest payments and annual
principal payments through maturity in August 2014. The interest rate for the remaining bond series
is 9.5%. The bond contains certain restrictive covenants which limit, among other things, the
payment of cash dividends and the sale of the related assets. The outstanding principal was
approximately $1,113,000 at March 31, 2008 and $1,145,000 at December 31, 2007.
Operating leases
We entered into a fifteen-year lease agreement for a scientific and administrative facility in
Rhode Island in connection with a sale and leaseback arrangement in 1997. The lease term expires
June 30, 2013. The lease contains
14
escalating rent payments, which we recognize on a straight-line basis. Deferred rent expense
for this facility was approximately $1,218,000 at March 31, 2008 and $1,268,000 at December 31,
2007, and is included as part of the wind-down accrual on the accompanying condensed consolidated
balance sheet.
We entered into and amended a lease agreement for an approximately 68,000 square foot facility
located at the Stanford Research Park in Palo Alto, California. 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. The lease term expires March 31, 2010. Under
the term of the agreement we were required to provide a letter of credit for a total of
approximately $778,000, which serves as a security deposit for the duration of the lease term. The
letter of credit issued by our financial institution is collateralized by a certificate of deposit
for the same amount, which is reflected as restricted cash in other assets, non-current on our
condensed consolidated balance sheets. The lease contains escalating rent payments, which we
recognize as operating lease expense on a straight-line basis. Deferred rent was approximately
$666,000 as of March 31, 2008 and $728,000 as of December 31, 2007, and is reflected as deferred
rent on our condensed consolidated balance sheet. At March 31, 2008, we had a space-sharing
agreement covering approximately 10,451 square feet of this facility. We receive base payments plus
a proportionate share of the operating expenses based on square footage over the term of the
agreement.
Contingencies
In July 2006, we filed suit against Neuralstem, Inc., in the Federal District Court for the
District of Maryland, alleging that Neuralstems activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres. Neuralstem has filed a motion for dismissal or summary
judgment in the alternative, 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 because 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. Subsequent to
filing its motion to dismiss, in December 2006, Neuralstem petitioned the U.S. Patent and Trademark
Office (PTO) to reexamine two of the patents in our infringement action against Neuralstem, namely
U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug screening) and U.S.
Patent No. 7,101,709 (claiming the use of human neural stem cells for screening biological agents).
In April 2007, Neuralstem petitioned the PTO to reexamine the remaining two patents in the suit,
namely U.S. Patent No. 5,851,832 (claiming methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural stem cells). These
requests were granted by the PTO and, in June 2007, the parties voluntarily agreed to stay the
pending litigation while the PTO considers these reexamination requests. In October 2007,
Neuralstem petitioned the PTO to reexamine a fifth patent, namely U.S. Patent No. 6,103,530, which
claims a culture medium for proliferating mammalian neural stem cells. In April 2008, the PTO
upheld the 832 and 872 patents, as amended, and issued Notices of Intent to Issue an Ex Parte
Reexamination Certificate for both.
Note 6. Subsequent Event
In April 2008, Progenitor Cell Therapy, LLC (PCT), a provider of cGMP-quality cell
processing services headquartered in Hackensack, NJ, prepaid the $1.0 million advanced to PCT under
a note purchase agreement we entered into on December 3, 2007. On that date, we announced that we
were exploring the possible acquisition of PCT and that PCT had agreed to a period of exclusivity
to allow for due diligence and negotiations. In consideration of the exclusivity period, we made a
secured loan of $1.0 million. However, the parties were unable to reach agreement on mutually
acceptable terms and conditions, and on March 4, 2008, we announced we had terminated discussions
regarding the acquisition of PCT. Effective March 18, 2008, we and PCT amended the note purchase
agreement to accelerate the date for repayment of the loan to June 26, 2008 and to relax certain
restrictive covenants and exclusivity provisions.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act that involve substantial risks and
uncertainties. Such statements include, without limitation, all statements as to expectation or
belief and statements as to our future results of operations; the progress of our research, product
development and clinical programs; the need for, and timing of, additional capital and capital
expenditures; partnering prospects; costs of manufacture of products; the protection of, and the
need for, additional intellectual property rights; effects of regulations; the need for additional
facilities; and potential market opportunities. Our actual results may vary materially from those
contained in such forward-looking statements because of risks to which we are subject, including
uncertainty as to whether the U.S. Food and Drug Administration (FDA) or other regulatory
authorities will permit us to proceed with clinical testing of proposed products despite the novel
and unproven nature of our technologies; the risk that our initial clinical trial and any other
clinical trials or studies could be substantially delayed beyond their expected dates or cause us
to incur substantial unanticipated costs; uncertainties in 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; the
uncertainty regarding our ability to obtain a corporate partner or partners, if needed, to support
the development and commercialization of our potential cell-based therapeutics products; the
uncertainty regarding the outcome of our Phase I clinical trial in NCL and any other clinical
trials or studies we may conduct in the future; the uncertainty regarding the validity and
enforceability of our issued patents; the uncertainty whether any products that may be generated in
our cell-based therapeutics programs will prove clinically safe and effective; the uncertainty
whether we will achieve revenue from product sales or become profitable; uncertainties regarding
our obligations with respect to our former encapsulated cell therapy facilities in Rhode Island;
obsolescence of our technologies; competition from third parties; intellectual property rights of
third parties; litigation risks; and other risks to which we are subject. All forward-looking
statements attributable to us or to persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements and risk factors set forth in Risk Factors in Part I, Item
1A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Overview
The Company
Our research and development (R&D) programs are focused on identifying and developing
potential cell-based therapeutics which can either restore or support organ function. Since we
relocated our corporate headquarters and research laboratories to California in 1999 our R&D
efforts have primarily been directed at refining our methods for identifying, isolating, culturing,
and purifying the human neural stem cell and human liver engrafting cells (hLEC) and developing
these as potential cell-based therapeutics for the central nervous system (CNS) and the liver,
respectively. We are currently conducting a Phase I clinical trial of our HuCNS-SC®
product candidate (purified 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. We have completed enrollment and dosing for this six-patient trial and expect it
to be completed in early 2009. Our CNS Program is continuing research and preclinical development
for additional potential indications in the CNS field. We are targeting to initiate clinical trials
to test our HuCNS-SC product candidate for a spinal cord indication in 2008 and for a myelin
disorder in the brain by the end of 2008. In our Liver Program, we are in preclinical development
with our human liver engrafting cells and are exploring their applicability as a cellular therapy
to restore function to liver tissue by replacing dysfunctional or damaged cells. For a brief
description of our significant research and development programs see Overview Research and
Development Programs in the Business Section of Part I, Item 1 included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. We have also conducted research on several
other cell types and in other areas, which could lead to other possible product candidates, process
improvements or further research activities.
We have not derived any revenue or cash flows from the sale or commercialization of any
products except for license revenue for certain of our patented cells and media for use in
research. As a result, we have incurred annual operating losses since inception and expect to incur
substantial operating losses in the future. Therefore, we
16
are dependent upon external financing from equity and debt offerings and revenue from
collaborative research arrangements with corporate sponsors to finance our operations. We have no
such collaborative research arrangements at this time and there can be no assurance that such
financing or partnering revenue will be available when needed or on terms acceptable to us.
Before we can derive revenue or cash inflows from the commercialization of any of our product
candidates, we will need to: (i) conduct substantial in vitro testing and characterization of our
proprietary cell types, (ii) undertake preclinical and clinical testing for specific disease
indications; (iii) develop, validate and scale-up manufacturing processes to produce these
cell-based therapeutics, and (iv) pursue required regulatory approvals. These steps are risky,
expensive and time consuming.
Overall, we expect our R&D expenses to be substantial and to increase for the foreseeable
future as we continue the development and clinical investigation of our current and future product
candidates. However, expenditures on R&D programs are subject to many uncertainties, including
whether we develop our product candidates with a partner or independently. We cannot forecast with
any degree of certainty which of our current product candidates will be subject to future
collaboration, when such collaboration agreements will be secured, if at all, and to what degree
such arrangements would affect our development plans and capital requirements. In addition, there
are numerous factors associated with the successful commercialization of any of our cell-based
therapeutics, including future trial design and regulatory requirements, many of which cannot be
determined with accuracy at this time given the stage of our development and the novel nature of
stem cell technologies. The regulatory pathways, both in the United States and internationally, are
complex and fluid given the novel and, in general, clinically unproven nature of stem cell
technologies. At this time, due to such uncertainties and inherent risks, we cannot estimate in a
meaningful way the duration of, or the costs to complete, our R&D programs or whether, when or to
what extent we will generate revenues or cash inflows from the commercialization and sale of any of
our product candidates. While we are currently focused on advancing each of our product development
programs, our future R&D expenses will depend on the determinations we make as to the scientific
and clinical prospects of each product candidate, as well as our ongoing assessment of the
regulatory requirements and each product candidates commercial potential.
Given the early stage of development of our product candidates, any estimates of when we may
be able to commercialize one or more of these products would not be meaningful. Moreover, any
estimate of the time and investment required to develop potential products based upon our
proprietary HuCNS-SC and hLEC technologies will change depending on the ultimate approach or
approaches we take to pursue them, the results of preclinical and clinical studies, and the content
and timing of decisions made by the FDA and other regulatory authorities. There can be no assurance
that we will be able to develop any product successfully, or that we will be able to recover our
development costs, whether upon commercialization of a developed product or otherwise. We cannot
provide assurance that any of these programs will result in products that can be marketed or
marketed profitably. If certain of our development-stage programs do not result in commercially
viable products, our results of operations could be materially adversely affected.
Significant Events
On April 23, 2008 we announced that the U.S. Patent and Trademark Office (PTO) issued U.S.
Patent Number 7,361,505 (505) with broad claims covering human neural stem cells derived from any
tissue source, including embryonic, fetal, juvenile, or adult tissue. The 505 patent is
exclusively licensed to StemCells.
On April 15, 2008 we announced that the PTO upheld two of our neural stem cell patents, (U.S.
Patent Number 5,851,832 and U.S. Patent Number 6,497,872), as amended, in reexamination proceedings
commenced in 2007. The patents are two of four patents which are the basis of our patent
infringement suit against Neuralstem. See Item 1 of Part II, Legal Proceedings, below.
On March 4, 2008 we announced that we were no longer pursuing a possible acquisition of
Progenitor Cell Therapy, LLC (PCT), a provider of cGMP-quality cell processing services
headquartered in Hackensack, NJ. On December 3, 2007 we had announced that we were exploring such
an acquisition and that PCT had agreed to a period of exclusivity to allow for due diligence and
negotiations. In consideration of the exclusivity period, we made
17
a secured loan of $1.0 million to PCT. However, the parties were unable to reach agreement on
mutually acceptable terms and conditions, and terminated discussions. The $1.0 million loan was
prepaid in April 2008.
Critical Accounting Policies and the Use of Estimates
The accompanying discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements and the related disclosures, which
have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these condensed consolidated financial statements requires management to
make estimates, assumptions, and judgments that affect the reported amounts in our condensed
consolidated financial statements and accompanying notes. These estimates form the basis for making
judgments about the carrying values of assets and liabilities. We base our estimates and judgments
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances, and we have established internal controls related to the preparation of these
estimates. Actual results and the timing of the results could differ materially from these
estimates.
Stock-Based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards 123 (revised 2004),
Share-Based Payment, (SFAS 123R). SFAS 123R requires us to recognize expense related to the fair
value of our stock-based compensation awards, including employee stock options. Under the
provisions of SFAS 123R, employee stock-based compensation is estimated at the date of grant based
on the awards fair value using the Black-Scholes-Merton (Black-Scholes) option-pricing model and
is recognized as expense ratably over the requisite service period. The Black-Scholes
option-pricing model requires the use of certain assumptions, the most significant of which are our
estimates of the expected volatility of the market price of our stock and the expected term of the
award. Our estimate of the expected volatility is based on historical volatility. The expected term
represents the period during which our stock-based awards are expected to be outstanding. From our
adoption date of SFAS 123R to December 31, 2007, and in accordance with Staff Accounting Bulletin
107, Share-Based Payment (SAB 107), the expected term was equal to the average of the contractual
life of the stock option and its vesting period as of the date of
grant (the simplified method). In
December 2007, the SEC issued Staff Accounting Bulletin 110,
Share-Based Payment (SAB 110),
extending the availability of SAB 107 beyond its original deadline of December 31, 2007. The
extension is available for companies under specified conditions that include, a lack of sufficient
historical exercise data related to their stock based awards. Effective January 01, 2008, in
accordance with SAB 110, we no longer use the simplified method and estimate the expected term
based on historical experience of similar awards, giving consideration to the contractual terms of
the awards, vesting requirements, and expectation of future employee behavior, including
post-vesting terminations. The change of method in estimating the expected term did not have a
material impact on our condensed consolidated financial statements.
As required under SFAS 123R, we review our valuation assumptions at each grant date and, as a
result, our assumptions in future periods may change. Employee stock-based compensation expense was
approximately $929,000 for the three months ended March 31, 2008. As of March 31, 2008, total
compensation cost related to unvested stock-based awards not yet recognized was approximately
$8,499,000, which is expected to be recognized as expense over a weighted-average period of 2.5
years.
Wind-down expenses
In connection with our wind-down of our research and manufacturing operations in Lincoln,
Rhode Island, and the relocation of our corporate headquarters and remaining research laboratories
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 scientific 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.
18
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 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 over the last five years (2003 through 2007) was approximately 73%, varying from 66% to
89%. As of March 31, 2008, based on current information available to management, the vacancy rate
is projected to be approximately 80% for the remainder of 2008, and approximately 70% from 2009
through the end of the lease. These estimates are based on actual occupancy as of March 31, 2008,
predicted lead time for acquiring new subtenants, historical vacancy rates for the area, and
assessments by our broker/realtor of future real estate market conditions. If the assumed vacancy
rate for 2009 to the end of the lease had been 5% higher or lower at March 31,
2008, then the reserve would have increased or decreased by approximately $205,000. Similarly, a 5%
increase or decrease in the operating expenses for the facility from 2008 on would have increased
or decreased the reserve by approximately $118,000, and a 5% increase or decrease in the assumed
average rental charge per square foot would have increased or decreased the reserve by
approximately $77,000. Management does not wait for specific events to change its estimate, but
instead uses its best efforts to anticipate them on a quarterly basis.
We recorded actual expenses against this reserve of approximately $331,000 for the three
months ended March 31, 2008. Based on managements evaluation of the factors mentioned above, and
particularly the projected vacancy rates described above, we adjusted the reserve to $5,922,000 at
March 31, 2008 by recording an additional $160,000 for the three months ended March 31, 2008.
Results of Operations
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 Rhode Island facilities, and the increasing costs
associated with operating our California facility.
Revenue
Revenue totaled approximately $17,000 for the three months ended March 31, 2008 and $6,000 for
the three months ended March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change in 2008 versus 2007 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreements |
|
$ |
17,350 |
|
|
$ |
5,946 |
|
|
$ |
11,404 |
|
|
|
192 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in licensing revenue in the three months ended March 31, 2008 as compared to the
three months ended March 31, 2007 was primarily attributable to increased licensing fees from
existing licensing agreements.
19
Operating Expenses
Operating expenses totaled approximately $6,914,000 for the three months ended March 31, 2008
and $6,505,000 for the three months ended March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change in 2008 versus 2007 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
4,499,751 |
|
|
$ |
4,019,138 |
|
|
$ |
480,613 |
|
|
|
12 |
% |
General and administrative |
|
|
2,254,203 |
|
|
|
2,264,548 |
|
|
|
(10,345 |
) |
|
|
|
% |
Wind-down expenses |
|
|
160,250 |
|
|
|
221,765 |
|
|
|
(61,515 |
) |
|
|
(28 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
6,914,204 |
|
|
$ |
6,505,451 |
|
|
$ |
408,753 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
Our R&D expenses consist primarily of salaries and related personnel expenses; costs
associated with clinical trials and regulatory submissions; costs associated with preclinical
activities such as toxicology studies; certain patent-related costs such as licensing;
facilities-related costs such as depreciation; and lab equipment and supplies. Clinical trial expenses
include payments to vendors such as clinical research organizations, contract manufacturers,
clinical trial sites, laboratories for testing clinical samples, and consultants. Cumulative R&D
costs incurred since we refocused our activities on developing cell-based therapeutics (fiscal
years 2000 through 2007) were approximately $80 million. Over this period, the majority of these
cumulative costs were related to: (i) characterization of our proprietary HuCNS-SC cell, (ii)
expenditures for toxicology and other preclinical studies, preparation and submission of our
Investigational New Drug (IND) application for our Phase I trial for NCL to the FDA, and obtaining
FDA clearance; and (iii) expenditures in connection with our HuCNS-SC Phase I clinical trial.
We use and manage our R&D resources, including our employees and facilities, across various
projects rather than on a project-by-project basis for the following reasons. The allocations of
time and resources change as the needs and priorities of individual projects and programs change,
and many of our researchers are assigned to more than one project at any given time. Furthermore,
we are exploring multiple possible uses for each of our proprietary cell types, so much of our R&D
effort is complementary to and supportive of each of these projects. Lastly, much of our R&D effort
is focused on manufacturing processes, which can result in process improvements useful across cell
types. We also use external service providers to assist in the conduct of our clinical trials, to
manufacture certain of our product candidates and to provide various other R&D related products and
services. Many of these costs and expenses are complementary to and supportive of each of our
programs. Because we do not have a development collaborator for any of our product programs, we are
currently responsible for all costs incurred with respect to our product candidates.
R&D expense totaled approximately $4,500,000 in the first three months of 2008, as compared to
$4,019,000 for the same period in 2007. The increase of approximately $481,000, or 12%, from 2007
to 2008 was primarily attributable to an increase in personnel costs of approximately $463,000,
primarily resulting from an increase in headcount to support the continued expansion of our
operations in cell processing and our product development programs, and of which approximately
$163,000 was attributable to stock-based compensation expense. The remainder of the increase in
2008 was due to increases in other R&D expenses. At March 31, 2008, we had 46 full-time employees
working in research and development and laboratory support services as compared to 36 at March 31,
2007.
General and Administrative Expenses
General and administrative (G&A) expenses totaled approximately $2,254,000 in the first three
months of 2008, compared with $2,265,000 for the same period in 2007. The decrease of approximately
$11,000, or less than 1%, from 2007 to 2008 was primarily attributable to a decrease in external
services of approximately $160,000, primarily due to lower recruiting, legal and investor
relations-related services, and a decrease in other operating
20
expenses of approximately $50,000. Those decreased expenses were mostly offset by an increase
of approximately $166,000 in operating expenses for our vacant pilot manufacturing facility in
Rhode Island and an increase in personnel costs of $33,000, primarily resulting from an increase in
headcount. Stock-based compensation expense in the first three months of 2008 was comparable to the
same period in 2007.
Wind-down Expenses
In 1999, in connection with exiting our former research facility in Rhode Island, we created a
reserve for the estimated lease payments and operating expenses related to it. The reserve has been
re-evaluated and adjusted based on assumptions relevant to real estate market conditions and the
estimated time until we could either fully sublease, assign or sell our remaining interests in the
property. The reserve was approximately $6,143,000 at December 31, 2007. For the three-month period
ending March 31, 2008, payments net of subtenant income of approximately $331,000 were recorded
against this reserve. At March 31, 2008, we re-evaluated the estimate and adjusted the reserve to
approximately $5,922,000 by recording in aggregate, additional wind-down expenses of approximately
$160,000. For the same period in 2007, we recorded against this reserve, actual expenses of
approximately $381,000 and at March 31, 2007 after re-evaluating the estimate, an additional
$222,000 to adjust the reserve. 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. See Note 4 Wind-down expenses, in the Notes to condensed
consolidated financial statements of Part I, Item 1 of this Form 10-Q for further information.
Other Income
Other income totaled approximately $352,000 in the three months ended March 31, 2008, compared
with $1,880,000 for the same period in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change in 2008 versus 2007 |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net |
|
$ |
|
|
|
$ |
550,467 |
|
|
$ |
(550,467 |
) |
|
|
* |
|
Gain on sale of marketable securities |
|
|
|
|
|
|
717,621 |
|
|
|
(717,621 |
) |
|
|
* |
|
Interest income |
|
|
383,665 |
|
|
|
653,606 |
|
|
|
(269,941 |
) |
|
|
(41 |
)% |
Interest expense |
|
|
(28,191 |
) |
|
|
(33,317 |
) |
|
|
5,126 |
|
|
|
(15 |
)% |
Other expense, net |
|
|
(3,609 |
) |
|
|
(8,624 |
) |
|
|
5,015 |
|
|
|
(58 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
$ |
351,865 |
|
|
$ |
1,879,753 |
|
|
$ |
(1,527,888 |
) |
|
|
(81 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Calculation is not meaningful. |
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.
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 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.
Other income from the license and settlement agreement totaled approximately $550,000 in the
first three months of 2007, which was the fair value of the ReNeuron shares we received under such
agreement, net of legal
21
fees and
the value of the shares that were transferred to NeuroSpheres Ltd., a
Canadian
corporation from which we have licensed some of the patent rights that are the subject of the
agreement with ReNeuron. See Note 2 Financial Assets, in the
notes to condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for
further information regarding this transaction.
Gain on Sale of Marketable Equity Securities
The gain on sale of marketable equity securities of approximately $716,000 in the first three
months of 2007 was attributable to sales of ReNeuron shares. See Note 2 Financial
Assets, in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information on this transaction.
Interest Income
Interest income totaled approximately $384,000 in the first three months of 2008 and $654,000
for the same period in 2007. Interest income in 2008 was lower compared to 2007 primarily as a
result of lower average yield and lower average investment balances.
See Cash Used in Investing Activities, in Liquidity and Capital Resources below for further information.
Interest Expense
Interest expense was approximately $28,000 in the first three months of 2008 and $33,000 for
the same period in 2007. Interest expense in 2008 was lower compared to 2007 primarily attributable
to lower outstanding debt and capital lease balances. See Note 5 Commitment and Contingencies, in
the notes to condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for
further information.
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, revenue from collaborative
agreements, research grants, license fees, and interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
March 31, |
|
December 31, |
|
Versus 2007 |
|
|
2008 |
|
2007 |
|
$ |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and highly liquid investments (1) |
|
$ |
30,280,427 |
|
|
$ |
37,645,085 |
|
|
$ |
(7,364,658 |
) |
|
|
(20 |
)% |
|
|
|
(1) |
|
Cash and highly liquid investments include unrestricted cash, cash
equivalents, and current and non-current marketable debt securities.
Marketable equity securities, which are comprised of 4,821,924
ordinary shares of ReNeuron, are excluded from the amounts above
because management does not consider them highly liquid. See Note 2,
Financial Assets, in the notes to
the condensed consolidated financial statements of Part I, Item 1 of
this Form 10-Q for further information. |
Total cash and highly liquid investments were approximately $30,280,000 at March 31, 2008,
compared with approximately $37,645,000 at December 31, 2007. The decrease in our cash and highly
liquid investments of approximately $7,365,000, or 20%, from December 31, 2007 to March 31, 2008
was primarily attributable to cash used in operating activities.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
March 31, |
|
Versus 2007 |
|
|
2008 |
|
2007 |
|
$ |
|
% |
Three months ended March 31, 2008 and
March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(7,291,366 |
) |
|
$ |
(5,252,048 |
) |
|
$ |
(2,039,318 |
) |
|
|
39 |
% |
Net cash provided by investing activities |
|
$ |
10,179,321 |
|
|
$ |
2,951,785 |
|
|
$ |
7,227,536 |
|
|
|
245 |
% |
Net cash (used in) provided by financing
activities |
|
$ |
(36,773 |
) |
|
$ |
1,426,345 |
|
|
$ |
(1,463,118 |
) |
|
|
* |
% |
|
|
|
* |
|
Calculation is not meaningful. |
In April 2008, Progenitor Cell Therapy, LLC prepaid a $1.0 million loan that we had made to
them in connection with a possible acquisition of PCT. See Note 6 Subsequent Event.
Net Cash Used in Operating Activities
Net cash used in operating activities is primarily driven by increases in our net loss.
However, operating cash flows differ from net loss as a result of non-cash charges or differences
in the timing of cash flows and expense recognition.
In our operating activities we used approximately $7,291,000 in cash in the first three months
of 2008, compared with $5,252,000 for the same period in 2007. The increase in cash used in
operating activities in 2008 as compared to 2007 was primarily attributable to the expansion of our
operations in cell processing and our product development programs, including increases in
headcount and headcount related expenses and external services.
Net Cash Used in Investing Activities
The increase from 2007 to 2008 of approximately $7,228,000 for net cash provided by investing
activities was primarily attributable to the maturity of marketable debt securities held to
maturity, which were used to fund operating activities for the first three months of 2008.
Net Cash (Used in) Provided by Financing Activities
The decrease from 2007 to 2008 of approximately $1,463,000 for net cash (used in) provided by
financing activities was primarily attributable to the sale of approximately 397,000 shares of our
common stock at an average price of $3.51 per share for net proceeds of approximately $1,325,000,
in the quarter ended March 31, 2007. These shares were sold under a sales agreement with Cantor
Fitzgerald & Co. (Cantor).
Listed below are key financing transactions entered into by us in the last three years:
|
|
|
In April 2007, a warrant issued as part of a June 16, 2004 financing arrangement, was
exercised to purchase an aggregate of 575,658 shares of our common stock at $1.90 per
share. We issued 575,658 shares of our common stock and received proceeds of approximately
$1,094,000. |
|
|
|
|
On December 29, 2006, we filed a Prospectus Supplement announcing the entry of a sales
agreement with Cantor under which up to 10,000,000 shares may be sold from time to time
under a shelf registration statement. In 2007, we sold a total of 1,807,000 shares of our
common stock under this agreement at an average price per share of $2.84 for gross proceeds
of approximately $5,133,000. Cantor is paid compensation equal to 5.0% of the gross
proceeds pursuant to the terms of the agreement. |
|
|
|
|
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. |
23
|
|
|
In March 2006, a warrant issued as part of a June 16, 2004 financing arrangement was
exercised to purchase an aggregate of 526,400 shares of our common stock at $1.89 per
share. We issued 526,400 shares of our common stock and received proceeds of approximately
$995,000. |
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 revenue 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 March 31, 2008, covered shares of our common stock up to a value of
approximately $59 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 under
which up to 10,000,000 shares may be sold from time to time under the shelf registration statement,
of which approximately 8.2 million shares remain available at March 31, 2008. 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, among other things, to delay, scale back or eliminate
some or all of our research and product development programs, planned clinical trials, and/or our
capital expenditures or to license our potential products or technologies to third parties.
Commitments
See Note 5, Commitments and Contingencies in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.
Off-Balance Sheet Arrangements
We have certain contractual arrangements that create potential risk for us and are not
recognized in our condensed consolidated balance sheets. Discussed below are those off-balance
sheet arrangements that have or are reasonably likely to have a material current or future effect
on our financial condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Operating Leases
We lease various real properties under operating leases that generally require us to pay
taxes, insurance, maintenance, and minimum lease payments. Some of our leases have options to
renew.
We entered into and amended a lease agreement for an approximately 68,000 square foot facility
located at the Stanford Research Park in Palo Alto, California. At March 31, 2008, we had a
space-sharing agreement covering approximately 10,451 square feet of this facility. We receive base
payments plus a proportionate share of the operating expenses based on square footage over the term
of the agreement. We expect to receive, in aggregate, approximately $284,000 as part of the
space-sharing agreement for the remainder of 2008. As a result of the above transactions, our
estimated net cash outlay for rent will be approximately $1,452,000 for the remainder of 2008.
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. We expect to pay approximately $879,000 in operating lease payments and estimated
operating expenses of approximately $413,000, before receipt of sub-tenant
24
income, for the remainder of 2008. We expect to receive, in aggregate, approximately $206,000
in sub-tenant rent and operating expense for the remainder of 2008. As a result of the above
transactions, our estimated cash outlay net of sub-tenant rent for the SAF will be approximately
$1,086,000 for the remainder of 2008.
With the exception of leases discussed above, 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.
Contractual Obligations
During the first three months of 2008, we believe that there have been no significant changes
in our payments due under contractual obligations, as disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2007.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, 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. We adopted the
provisions of SFAS 157 that became effective in our first quarter of 2008. See Note 4 Summary of
Significant Accounting Policies-Fair Value, in the Notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information about the adoption of the
required provisions of SFAS 157.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). We are currently
evaluating the impact of SFAS 157 on our consolidated financial statements for items within the
scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). Under SFAS 159,
a company may choose, at specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
SFAS 159 became effective beginning with our first quarter of 2008. At this time, we have chosen
not to adopt the provisions of SFAS 159 for our existing financial instruments.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at March 31, 2008 have not changed materially from those discussed in Item 7A
of our Form 10-K for the year ended December 31, 2007 on file with the U.S. Securities and Exchange
Commission.
See
also Note 2, Financial Assets, in the notes to condensed consolidated financial
statements in Part I, Item 1 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
In response to the requirement of the Sarbanes-Oxley Act of 2002, as of the end of the period
covered by this report, our chief executive officer and chief financial officer, along with other
members of management, reviewed the effectiveness of the design and operation of our disclosure
controls and procedures. Such controls and procedures are designed to ensure that information
required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to management, including the chief executive officer
and the chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, the chief executive officer and chief financial officer have
concluded that the Companys disclosure controls and procedures are effective.
During the most recent quarter, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, these controls of the Company.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2006, we filed suit against Neuralstem, Inc., in the Federal District Court for the
District of Maryland, alleging that Neuralstems activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres. Neuralstem has filed a motion for dismissal or summary
judgment in the alternative, 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 because 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. Subsequent to
filing its motion to dismiss, in December 2006, Neuralstem petitioned the U.S. Patent and Trademark
Office (PTO) to reexamine two of the patents in our infringement action against Neuralstem, namely
U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug screening) and U.S.
Patent No. 7,101,709 (claiming the use of human neural stem cells for screening biological agents).
In April 2007, Neuralstem petitioned the PTO to reexamine the remaining two patents in the suit,
namely U.S. Patent No. 5,851,832 (claiming methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural stem cells). These
requests were granted by the PTO and, in June 2007, the parties voluntarily agreed to stay the
pending litigation while the PTO considers these reexamination requests. In October 2007,
Neuralstem petitioned the PTO to reexamine a fifth patent, namely U.S. Patent No. 6,103,530, which
claims a culture medium for proliferating mammalian neural stem cells. In April 2008, the PTO
upheld the 832 and 872 patents, as amended, and issued Notices of Intent to Issue an Ex Parte
Reexamination Certificate for both. We expect the PTO to do the same for the remaining three
patents under reexamination review later this year.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our
Annual Report on Form 10-K for the fiscal year ending December 31, 2007.
26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
There were no matters required to be disclosed in a current report on Form 8-K during the
fiscal quarter covered by this report that were not so disclosed.
ITEM 6. EXHIBITS
Exhibit 31.1 Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
STEMCELLS, INC.
(name of Registrant)
|
|
May 5, 2008 |
/s/ Rodney K. B. Young
|
|
|
Rodney K. B. Young |
|
|
Chief Financial Officer |
|
28
Exhibit Index
|
|
|
|
|
Exhibit 31.1 Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
Exhibit 31.2 Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
|
|
|
Exhibit 32.1 Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
Exhibit 32.2 Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
exv31w1
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Martin McGlynn, certify that:
|
(1) |
|
I have reviewed this quarterly report on Form 10-Q of StemCells, Inc.; |
|
|
(2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
(3) |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report; |
|
|
(4) |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
(a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; |
|
|
|
|
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles; |
|
|
|
|
(c) evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and |
|
|
|
|
(d) disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
|
(5) |
|
The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
|
|
|
(a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
|
|
|
(b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
Date: May 5, 2008
|
|
|
|
|
/s/ Martin McGlynn
|
|
|
Martin McGlynn |
|
|
President and Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
UNDER SECTION 302 OF THE SARBANES-OXLEY ACT
I, Rodney K. B. Young, certify that:
|
(1) |
|
I have reviewed this quarterly report on Form 10-Q of StemCells, Inc.; |
|
|
(2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
(3) |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report; |
|
|
(4) |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) 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) 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) 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) 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) 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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The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of the registrants board of directors (or persons
performing the equivalent functions): |
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(a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
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(b) any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
Date: May 5, 2008
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/s/ Rodney K. B. Young
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Rodney K. B. Young |
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Chief Financial Officer |
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exv32w1
Exhibit 32.1
Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the StemCells, Inc. (the Company) quarterly report on Form 10-Q for the period
ending March 31, 2008 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) |
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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) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date: May 5, 2008
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/s/ Martin McGlynn
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Martin McGlynn |
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President and Chief Executive Officer |
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exv32w2
Exhibit 32.2
Certification Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the StemCells, Inc. (the Company) quarterly report on Form 10-Q for the period
ending March 31, 2008 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) |
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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) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date: May 5, 2008
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/s/ Rodney K. B. Young
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Rodney K. B. Young |
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Chief Financial Officer |
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