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: June 30, 2008
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Commission File Number: 0-19871 |
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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94-3078125 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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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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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At July 28, 2008, there were 80,890,578 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 wholly-owned subsidiary, and the owner or licensee of
most of our intellectual property. Common stock refers to our common stock, $.01 par value.
2
PART IFINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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June 30, 2008 |
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December 31, 2007 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,592,723 |
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$ |
9,759,169 |
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Marketable securities, current |
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7,610,694 |
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26,696,413 |
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Other receivables |
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122,254 |
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264,631 |
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Note receivable |
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1,000,000 |
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Prepaid assets |
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833,235 |
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1,032,482 |
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Total current assets |
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27,158,906 |
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38,752,695 |
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Marketable securities, non-current |
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551,915 |
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3,150,971 |
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Property, plant and equipment, net |
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3,633,625 |
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3,905,404 |
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Other assets, non-current |
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1,752,645 |
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1,710,829 |
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Intangible assets, net |
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687,227 |
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762,667 |
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Total assets |
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$ |
33,784,318 |
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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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$ |
916,978 |
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$ |
1,813,595 |
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Accrued expenses |
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2,010,247 |
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2,462,252 |
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Accrued wind-down expenses, current |
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1,379,325 |
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1,374,632 |
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Deferred rent, current |
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319,074 |
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290,391 |
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Deferred revenue, current |
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23,597 |
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43,909 |
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Capital lease obligation, current |
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18,125 |
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17,530 |
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Bonds payable, current |
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201,250 |
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136,250 |
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Total current liabilities |
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4,868,596 |
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6,138,559 |
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Capital lease obligation, non-current |
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16,055 |
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25,269 |
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Bonds payable, non-current |
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879,166 |
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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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4,369,933 |
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4,768,859 |
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Deferred rent, non-current |
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270,643 |
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437,144 |
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Deferred revenue, non-current |
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155,452 |
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163,865 |
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Total liabilities |
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11,087,649 |
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13,070,666 |
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Commitment and contingencies (Note 6) |
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Stockholders equity: |
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Common stock, $.01 par value;
125,000,000 shares authorized; issued
and outstanding 80,858,002 at June 30,
2008 and 80,681,087 at December 31,
2007 |
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808,579 |
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806,810 |
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Additional paid-in capital |
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266,766,740 |
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264,603,711 |
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Accumulated deficit |
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(243,175,212 |
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(229,914,747 |
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Accumulated other comprehensive loss |
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(1,703,438 |
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(283,874 |
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Total stockholders equity |
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22,696,669 |
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35,211,900 |
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Total liabilities and stockholders equity |
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$ |
33,784,318 |
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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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Six months ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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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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$ |
29,832 |
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$ |
7,840 |
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$ |
47,182 |
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$ |
13,786 |
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Operating expenses: |
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Research and development |
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4,415,615 |
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4,498,204 |
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8,915,366 |
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8,517,342 |
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General and administrative |
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2,345,846 |
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1,408,657 |
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4,600,049 |
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3,673,205 |
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Wind-down expenses |
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167,250 |
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134,045 |
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327,500 |
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355,810 |
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Total operating expenses |
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6,928,711 |
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6,040,906 |
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13,842,915 |
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12,546,357 |
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Loss from operations |
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(6,898,879 |
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(6,033,066 |
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(13,795,733 |
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(12,532,571 |
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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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216,109 |
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655,531 |
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599,774 |
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1,309,137 |
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Interest expense |
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(28,970 |
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(34,055 |
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(57,161 |
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(67,372 |
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Other expense |
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(3,736 |
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(12,400 |
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(7,345 |
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(21,024 |
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Total other income, net |
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183,403 |
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609,076 |
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535,268 |
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2,488,829 |
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Net loss |
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$ |
(6,715,476 |
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$ |
(5,423,990 |
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$ |
(13,260,465 |
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$ |
(10,043,742 |
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Basic and diluted net loss per share |
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$ |
(0.08 |
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$ |
(0.07 |
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$ |
(0.16 |
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$ |
(0.13 |
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Shares used to compute basic and diluted loss per share |
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80,814,838 |
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79,787,273 |
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80,759,400 |
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79,180,107 |
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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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Six months ended |
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June 30, |
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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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$ |
(13,260,465 |
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$ |
(10,043,742 |
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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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602,239 |
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568,532 |
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Stock-based compensation |
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2,041,545 |
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1,415,173 |
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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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142,377 |
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112,733 |
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Prepaid and other assets, current |
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199,247 |
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(74,242 |
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Other assets, non-current |
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(41,816 |
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Accounts payable and accrued expenses |
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(1,348,622 |
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(265,240 |
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Accrued wind-down expenses |
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(394,233 |
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(352,091 |
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Deferred revenue |
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(28,725 |
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(8,413 |
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Deferred rent |
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(137,818 |
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(109,134 |
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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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(12,226,271 |
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(10,105,693 |
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Cash flows from investing activities: |
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Proceeds from maturities of marketable securities, net |
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20,265,211 |
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3,076,691 |
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Prepayment of advance |
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1,000,000 |
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Purchases of property, plant and equipment |
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(255,020 |
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(307,554 |
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Acquisition of other assets |
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(49,375 |
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Net cash provided by investing activities |
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21,010,191 |
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2,719,762 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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3,547,376 |
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Proceeds from the exercise of stock options |
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123,253 |
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210,273 |
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Proceeds from the exercise of warrants |
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1,093,750 |
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(Repayment) proceeds of capital lease obligations |
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(8,619 |
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51,105 |
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Repayment of debt obligations |
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(65,000 |
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(130,000 |
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Net cash provided by financing activities |
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49,634 |
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4,772,504 |
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Increase (decrease) in cash and cash equivalents |
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8,833,554 |
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(2,613,427 |
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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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$ |
18,592,723 |
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$ |
49,182,102 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
57,161 |
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$ |
67,372 |
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Supplemental schedule of non-cash investing and
financing activities: |
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Stock issued for licensing agreement(1) |
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$ |
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$ |
10,000 |
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(1) |
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Under terms of a license agreement with the California Institute of
Technology (Cal Tech), annual fees of $5,000 were due on each of two
patents to which we hold a license from Cal Tech, payable in cash or
stock at our choice. We elected to pay the fees in stock and issued
shares of 3,865 in 2007 to Cal Tech. |
See Notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 and six months ended June 30, 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 4). |
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Accrued wind-down expenses. (See Note 5). |
Reclassification
Certain reclassifications of prior year amounts have been made to conform to the current year
presentation. Deferred rent of approximately $290,000 as of December 31, 2007 has been reclassified
from Deferred rent, non- current to Deferred rent, current
6
on the condensed consolidated balance sheet to conform to the current year presentation. The
reclassifications had no effect on total assets, liabilities, equity, or net loss previously
reported.
Financial Assets
Cash and Cash Equivalents
We consider money market accounts and investments with a maturity of 90 days or less at the
date of purchase to be cash equivalents.
Marketable Securities
Our existing marketable debt and equity securities are designated as available-for-sale
securities. These securities are carried at fair value (see Note 2, Financial Assets), with the
unrealized gains and losses reported as a component of stockholders equity. The balance sheet
classification of our marketable debt securities as current or non-current is based on their
maturity dates. 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. Management determines
the appropriate designation of its investments in marketable debt and equity securities at the time
of purchase and reevaluates such designation as of each balance sheet date. 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 and
six months ended June 30, 2008 and June 30, 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.
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 4, 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-Merton
(Black-Scholes) model. The estimated fair value is re-measured at each reporting date and is
amortized over the remaining vesting period.
7
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:
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Three months ended |
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Six months ended |
|
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June 30, |
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June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Net loss |
|
$ |
(6,715,476 |
) |
|
$ |
(5,423,990 |
) |
|
$ |
(13,260,465 |
) |
|
$ |
(10,043,742 |
) |
Weighted average shares outstanding
used to compute basic and diluted
net loss per share |
|
|
80,814,838 |
|
|
|
79,787,273 |
|
|
|
80,759,400 |
|
|
|
79,180,107 |
|
Basic and diluted net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.13 |
) |
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
June 30:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Options |
|
|
8,629,392 |
|
|
|
9,037,194 |
|
Restricted stock units |
|
|
1,650,000 |
|
|
|
|
|
Warrants |
|
|
1,255,000 |
|
|
|
1,355,000 |
|
|
|
|
|
|
|
|
Total |
|
|
11,534,392 |
|
|
|
10,392,194 |
|
|
|
|
|
|
|
|
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 $1,703,438 as of June 30, 2008 and $283,874 as of December 31, 2007.
Comprehensive loss was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(6,715,476 |
) |
|
$ |
(5,423,990 |
) |
|
$ |
(13,260,465 |
) |
|
$ |
(10,043,742 |
) |
Net change in
unrealized gains
and losses on
marketable
securities |
|
|
(557,071 |
) |
|
|
(332,099 |
) |
|
|
(1,419,565 |
) |
|
|
(3,184,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(7,272,547 |
) |
|
$ |
(5,756,089 |
) |
|
$ |
(14,680,030 |
) |
|
$ |
(13,227,974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 3 Fair Value
Measurements for further information about the adoption of the required provisions of SFAS 157.
In February 2008, the FASB issued FASB Staff Position (FSP) 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
8
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.
Note 2. Financial Assets
The following table summarizes our cash, cash equivalents and marketable securities:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
279,304 |
|
|
$ |
549,544 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
Money market accounts |
|
|
389,906 |
|
|
|
5,079,564 |
|
U.S. Treasury obligations and corporate debt securities (due within 90 days) |
|
|
17,923,513 |
|
|
|
4,130,061 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
18,592,723 |
|
|
|
9,759,169 |
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
Corporate debt securities, current (due within 1 year) |
|
|
7,610,694 |
|
|
|
26,696,413 |
|
Corporate debt securities, non-current (due in 1 to 5 years) |
|
|
|
|
|
|
1,189,503 |
|
Equity securities, non-current |
|
|
551,915 |
|
|
|
1,961,468 |
|
|
|
|
|
|
|
|
Total marketable securities |
|
|
8,162,609 |
|
|
|
29,847,384 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities, current and non-current |
|
$ |
26,755,332 |
|
|
$ |
39,606,553 |
|
|
|
|
|
|
|
|
The following table summarizes unrealized gains and losses related to our investments in
marketable securities designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
|
|
|
|
Gross unrealized |
|
|
Gross unrealized |
|
|
Estimated Fair |
|
|
|
Amortized cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Corporate debt securities |
|
$ |
7,596,350 |
|
|
$ |
23,526 |
|
|
$ |
(9,182 |
) |
|
$ |
7,610,694 |
|
Equity securities |
|
|
2,269,697 |
|
|
|
|
|
|
|
(1,717,782 |
) |
|
|
551,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
9,866,047 |
|
|
$ |
23,526 |
|
|
$ |
(1,726,964 |
) |
|
$ |
8,162,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
Gross unrealized |
|
|
Gross unrealized |
|
|
Estimated Fair |
|
|
|
Amortized cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Corporate debt securities |
|
$ |
27,861,218 |
|
|
$ |
28,246 |
|
|
$ |
(3,548 |
) |
|
$ |
27,885,916 |
|
Equity securities |
|
|
2,269,697 |
|
|
|
|
|
|
|
(308,229 |
) |
|
|
1,961,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
30,130,915 |
|
|
$ |
28,246 |
|
|
$ |
(311,777 |
) |
|
$ |
29,847,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses on cash equivalents were not material at June 30, 2008 and
December 31, 2007. Our investments in marketable corporate 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 its c-mycER conditionally immortalized adult human neural stem cell technology for
therapy and other purposes. In return for the
9
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 June
30, 2008 and December 31, 2007 and the fair value of those shares was approximately $552,000 at
June 30, 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 loss if deemed temporary and are not
recorded as other income (expense), net until the shares are disposed of and a gain or loss realized.
Note 3. Fair Value Measurement
Effective January 1, 2008, we adopted SFAS 157, except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FSP SFAS 157-2. SFAS 157 clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
In accordance with SFAS 157, we measure our financial assets and liabilities at fair value.
Our cash equivalents and marketable securities are primarily classified within Level 1 or Level 2.
This is because our cash equivalents and marketable securities are valued primarily using quoted
market prices or alternative pricing sources and models utilizing market observable inputs. We
currently do not have any Level 3 financial assets or liabilities.
The following table presents assets and liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using |
|
|
|
|
|
|
Quoted Prices in Active |
|
|
Significant Other |
|
|
As of |
|
|
|
Markets for Identical Assets |
|
|
Observable Inputs |
|
|
June 30, |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
389,906 |
|
|
$ |
|
|
|
$ |
389,906 |
|
U.S. Treasury obligations |
|
|
17,923,513 |
|
|
|
|
|
|
|
17,923,513 |
|
Marketable Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
551,915 |
|
|
|
|
|
|
|
551,915 |
|
Commercial paper |
|
|
|
|
|
|
998,381 |
|
|
|
998,381 |
|
Corporate bonds |
|
|
|
|
|
|
2,805,305 |
|
|
|
2,805,305 |
|
Asset-Backed securities |
|
|
|
|
|
|
3,807,008 |
|
|
|
3,807,008 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
18,865,334 |
|
|
$ |
7,610,694 |
|
|
$ |
26,476,028 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond obligation |
|
$ |
|
|
|
$ |
1,080,416 |
|
|
$ |
1,080,416 |
|
|
|
|
|
|
|
|
|
|
|
10
Note 4. 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 June 30, 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 and six months ended June 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Research and development expense |
|
$ |
475,980 |
|
|
$ |
305,322 |
|
|
$ |
956,329 |
|
|
$ |
567,602 |
|
General and administrative expense |
|
|
487,859 |
|
|
|
338,215 |
|
|
|
978,437 |
|
|
|
694,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense and
effect on net loss |
|
$ |
963,839 |
|
|
$ |
643,537 |
|
|
$ |
1,934,766 |
|
|
$ |
1,262,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, we have approximately $6,780,000 of total unrecognized compensation
expense related to unvested options and restricted stock units granted under our various
stock-based plans that we expect to recognize over a weighted-average vesting period of 2.5 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 years. 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.
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 as of June 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Expected life (years)(1) |
|
|
7.97 |
|
|
|
6.25 |
|
|
|
6.36 |
|
|
|
6.25 |
|
Risk-free interest rate(2) |
|
|
3.85 |
% |
|
|
4.68 |
% |
|
|
2.89 |
% |
|
|
4.59 |
% |
Expected volatility(3) |
|
|
94.52 |
% |
|
|
98.17 |
% |
|
|
93.87 |
% |
|
|
99.13 |
% |
Expected dividend yield(4) |
|
|
0 |
% |
|
|
0 |
% |
|
|
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. |
11
(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 June 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
Number of options |
|
exercise price |
Outstanding options at March 31, 2008 |
|
|
8,798,903 |
|
|
$ |
2.35 |
|
Granted |
|
|
10,000 |
|
|
$ |
1.41 |
|
Exercised |
|
|
(47,700 |
) |
|
$ |
1.28 |
|
Cancelled |
|
|
(131,811 |
) |
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
Outstanding options at June 30, 2008 |
|
|
8,629,392 |
|
|
$ |
2.36 |
|
|
|
|
|
|
|
|
|
|
The estimated weighted average fair value per share of options granted was approximately $1.19
in the three months ended June 30, 2008, based on the Black-Scholes model and the assumptions
discussed above. For the three months ended June 30, 2008, the total intrinsic value of options
exercised, as of the time of exercise, was approximately $3,000.
A summary of changes in unvested options for the three months ended June 30, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
|
grant |
|
|
Number of options |
|
date fair value |
Unvested options at March 31, 2008 |
|
|
4,115,705 |
|
|
$ |
1.97 |
|
Granted |
|
|
10,000 |
|
|
$ |
1.19 |
|
Vested |
|
|
(407,201 |
) |
|
$ |
2.10 |
|
Cancelled |
|
|
(62,252 |
) |
|
$ |
2.17 |
|
|
|
|
|
|
|
|
|
|
Unvested options at June 30, 2008 |
|
|
3,656,252 |
|
|
$ |
1.95 |
|
|
|
|
|
|
|
|
|
|
The estimated fair value of options vested was approximately $857,000 for the three months
ended June 30, 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 June 30, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant |
|
|
|
|
|
|
date |
|
|
Number of RSUs |
|
fair value |
Balance at March 31, 2008
|
|
|
1,650,000 |
|
|
$ |
1.26 |
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units at June 30, 2008
|
|
|
1,650,000 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
RSUs vested at June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights
12
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 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 years. 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 June 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
average exercise |
|
|
Number of SARs |
|
price |
Outstanding at March 31, 2008
|
|
|
1,430,849 |
|
|
$ |
2.00 |
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding SARs at June 30, 2008
|
|
|
1,430,849 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
SARs exercisable at June 30, 2008
|
|
|
685,610 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2008 we re-measured the compensation expense and liability
related to the SARs and reduced total compensation expense by approximately $116,000 due to a
decrease in the price per share of our common stock. The total compensation expense related to SARs
was approximately $55,000 for the three months ended June 30, 2007.
At June 30, 2008, approximately $476,000 of unrecognized compensation expense related to SARs
is expected to be recognized over a weighted average vesting period of approximately 1.1 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 5. 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, June 30, 3008 and
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January to |
|
|
April to |
|
|
January to |
|
|
January to |
|
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
Accrued wind-down reserve at beginning of period |
|
$ |
4,875,000 |
|
|
$ |
4,704,000 |
|
|
$ |
4,875,000 |
|
|
$ |
5,512,000 |
|
Less actual expenses recorded against estimated
reserve during the period |
|
|
(331,000 |
) |
|
|
(288,000 |
) |
|
|
(619,000 |
) |
|
|
(1,420,000 |
) |
Additional expense recorded to revise estimated
reserve at period-end |
|
|
160,000 |
|
|
|
167,000 |
|
|
|
327,000 |
|
|
|
783,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised reserve at period-end |
|
|
4,704,000 |
|
|
|
4,583,000 |
|
|
|
4,583,000 |
|
|
|
4,875,000 |
|
Add deferred rent at period-end |
|
|
1,218,000 |
|
|
|
1,166,000 |
|
|
|
1,166,000 |
|
|
|
1,268,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end
(current and non current) |
|
$ |
5,922,000 |
|
|
$ |
5,749,000 |
|
|
$ |
5,749,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down expenses, current |
|
$ |
1,383,000 |
|
|
$ |
1,379,000 |
|
|
$ |
1,379,000 |
|
|
$ |
1,374,000 |
|
Accrued wind-down expenses, non-current |
|
|
4,539,000 |
|
|
|
4,370,000 |
|
|
|
4,370,000 |
|
|
|
4,769,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses |
|
$ |
5,922,000 |
|
|
$ |
5,749,000 |
|
|
$ |
5,749,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Note 6. 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 $1,080,000 at June 30, 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 escalating rent payments, which we recognize on a straight-line
basis. Deferred rent expense for this facility was approximately $1,166,000 at June 30, 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
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
terms of the agreement we are 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 $589,717 as of
June 30, 2008 and $728,000 as of December 31, 2007, and is reflected as deferred rent on our
condensed consolidated balance sheet. At June 30, 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.
14
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstems activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the 505 and 418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. Preliminary
motions in both these cases are pending.
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 and for a myelin disorder in
the brain in 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
15
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 are dependent upon external financing
from equity and debt offerings, federal and state grants, 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
In April 2008, the U.S. Patent and Trademark Office (PTO) issued U.S. Patent No. 7,361,505,
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 us.
In June 2008, the PTO issued Patent No. 7,381,561 with claims covering the use of additional
monoclonal antibodies for the prospective isolation of rare cells from human neural tissue, such as
the Companys HuCNS-SC® product candidate (purified human neural stem cells). The 561 patent is
owned by the Company.
On June 25, 2008 we filed with the U.S. Securities and Exchange Commission (SEC) a universal
shelf registration statement, declared effective July 18, 2008, which permits us to issue up to
$100 million worth of registered debt and equity securities. Under this shelf, we have the
flexibility to issue registered securities, from time to time, in one or more separate offerings or
other
transactions with the size, price and terms to be determined at the time of issuance. In July
2008, we deregistered the remaining
16
unissued shares available under the shelf registration
statement we had filed in October 2005. See Liquidity and Capital Resources-Net Cash (Used in)
Provided by Financing Activities below for further discussion.
On July 22, 2008, at our Annual Meeting of Stockholders, our stockholders approved an increase
to our authorized capital by an additional 125,000,000 shares of common stock, increasing the
number of authorized shares of capital stock from 126,000,000 total shares to 251,000,000 total
shares. We subsequently amended our restated certificate of incorporation to designate an
additional 125,000,000 shares of common stock, bringing the total number of authorized shares of
common stock to 250,000,000. These securities may be used to raise additional capital to fund the
companys working capital and other corporate needs, for future acquisitions of assets, programs or
businesses, and for other corporate purposes.
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
Effective 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
January 1, 2006 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 1, 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. As of June 30, 2008, total compensation cost
related to unvested stock-based awards not yet recognized was approximately $7,255,000, which is
expected to be recognized as expense over a weighted-average period of 2.4 years. See also Note 4,
Stock-Based Compensation, in the notes to condensed consolidated financial statements of Part I,
Item 1 of this Form 10-Q for further information.
Wind-down expenses
In connection with exiting 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
17
sublease, assign, sell, or otherwise divest ourselves of our
interest in the facility at the earliest possible time, but we cannot determine with certainty a
fixed date by which such events will occur, if at all.
In determining the facility exit cost reserve amount, we are required to consider our lease
payments through to the end of the lease term and estimate other relevant factors such as facility
operating expenses, real estate market conditions in Rhode Island for similar facilities, occupancy
rates, and sublease rental rates projected over the course of the leasehold. We re-evaluate the
estimate each quarter, taking account of changes, if any, in each underlying 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 June 30, 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 June 30, 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 June 30, 2008, then the
reserve would have increased or decreased by approximately $195,000. Similarly, a 5% increase or
decrease in the operating expenses for the facility from 2009 on would have increased or decreased
the reserve by approximately $100,000, and a 5% increase or decrease in the assumed average rental
charge per square foot would have increased or decreased the reserve by approximately $65,000.
Management does not wait for specific events to change its estimate, but instead uses its best
efforts to anticipate them on a quarterly basis. See Note 5 Wind-down expenses, in the notes to
condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for further
information.
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,
developments in on-going patent protection and litigation, as well as the on-going expenses to
lease and maintain our Rhode Island facilities, and the increasing costs associated with operating
our California facility.
Revenue
Revenue for the second quarter and six months ended 2008, as compared with the same periods in
2007, is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, |
|
|
|
|
|
|
|
|
|
|
Six months ended, |
|
|
|
|
|
|
June 30 |
|
|
Change in 2008 versus 2007 |
|
|
June 30 |
|
|
Change in 2008 versus 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreements |
|
$ |
29,832 |
|
|
$ |
7,840 |
|
|
$ |
21,992 |
|
|
|
281 |
% |
|
$ |
47,182 |
|
|
$ |
13,786 |
|
|
$ |
33,396 |
|
|
|
242 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in licensing revenue in the second quarter and six months ended 2008 from the
comparable periods in 2007 were primarily attributable to increased licensing fees from existing
licensing agreements.
Operating Expenses
18
Operating expenses for the second quarter and six months ended 2008, as compared with the same
periods in 2007, are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, |
|
|
Change in 2008 versus |
|
|
Six months ended, |
|
|
Change in 2008 versus |
|
|
|
June 30 |
|
|
2007 |
|
|
June 30 |
|
|
2007 |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development |
|
$ |
4,415,615 |
|
|
$ |
4,498,204 |
|
|
$ |
( 82,589 |
) |
|
|
( 2 |
)% |
|
$ |
8,915,366 |
|
|
$ |
8,517,342 |
|
|
$ |
398,024 |
|
|
|
5 |
% |
General & administrative |
|
|
2,345,846 |
|
|
|
1,408,657 |
|
|
|
937,189 |
|
|
|
67 |
% |
|
|
4,600,049 |
|
|
|
3,673,205 |
|
|
|
926,844 |
|
|
|
25 |
% |
Wind-down expenses |
|
|
167,250 |
|
|
|
134,045 |
|
|
|
33,205 |
|
|
|
25 |
% |
|
|
327,500 |
|
|
|
355,810 |
|
|
|
(28,310 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
6,928,711 |
|
|
$ |
6,040,906 |
|
|
$ |
887,805 |
|
|
|
15 |
% |
|
$ |
13,842,915 |
|
|
$ |
12,546,357 |
|
|
$ |
1,296,558 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the six months ended 2008) were approximately $84 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 expenses totaled approximately $4,416,000 in the second quarter of 2008 compared with
$4,498,000 in the second quarter of 2007, and $8,915,000 for the six months ended 2008 compared
with $8,517,000 for the six months ended 2007.
Second quarter 2008 versus second quarter 2007. R&D expenses decreased by approximately
$83,000, or 2%, in the second quarter of 2008 from the second quarter of 2007. The decrease was
primarily attributable to a decrease in external services of approximately $528,000, which was due
mainly to a decrease in expenses related to our Phase I clinical trial; including costs related to
manufacturing and testing of our cells and the enrollment and dosing of patients. The decrease of
these expenses were mostly offset by (i) an increase in other operating expenses of approximately
$291,000, primarily attributable to supplies, and (ii) an increase of in personnel costs of
approximately $154,000 to support expanded operations in cell processing and our product
development programs. At June 30, 2008, we had 45 full-time employees working in research and
development and laboratory support services as compared to 42 at June 30, 2007.
Six months ended June 30, 2008 versus six months ended June 30, 2007. R&D expenses increased
by approximately $398,000, or 5%, for the six months ended 2008 from the six months ended 2007. The
increase was primarily attributable to (i) an increase in personnel costs of approximately $617,000
to support expanded operations in cell processing and our product development programs, and (ii) an
increase in other operating expenses of approximately $409,000, primarily attributable to supplies.
These increased expenses were partially offset by a decrease in external services of approximately
$628,000, which was due mainly to a decrease in expenses related to our Phase I clinical trial;
including costs related to manufacturing and testing of our cells and the enrollment and
19
dosing of patients. At June 30, 2008, we had 45 full-time employees working in research and
development and laboratory support services as compared to 42 at June 30, 2007.
General and Administrative Expenses
General and Administrative (G&A) expenses totaled approximately $2,346,000 in the second
quarter of 2008 compared with $1,409,000 in the second quarter of 2007, and $4,600,000 for the six
month ended 2008 compared with $3,673,000 for the six months ended 2007.
Second quarter 2008 versus second quarter 2007. G&A expenses increased by approximately
$937,000, or 67%, in the second quarter of 2008 from the second quarter of 2007. The increase was
primarily attributable to (i) an increase in external services of approximately $551,000, primarily
due to an increase in external consultants and legal fees, (ii) an increase in personnel costs of
approximately $64,000, primarily due to an increase in headcount, and (iii) an increase in other
operating expenses of approximately $31,000. In addition, operating expenses for our vacant pilot
manufacturing facility in Rhode Island increased approximately $291,000 in the second quarter of
2008 to the comparable period in 2007, primarily attributable to the loss of tenant income to
offset operating expense.
Six months ended June 30, 2008 versus six months ended June 30, 2007. G&A expenses increased
by approximately $927,000, or 25%, for the six months ended 2008 from the six months ended 2007.
The increase was primarily attributable to (i) an increase in external services of approximately
$391,000, primarily due to an increase in external consultants and
legal fees, and (ii) an increase in
personnel costs of approximately $97,000, primarily due to an increase in headcount. In addition,
operating expenses for our vacant pilot manufacturing facility in Rhode Island increased
approximately $457,000 for the six months ended 2008 to the comparable period in 2007, primarily
attributable to the loss of tenant income to offset operating expense. These increased expenses
were partially offset by a decrease in other operating expenses of approximately $18,000.
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. Payments net of subtenant
income of approximately $288,000 for the second quarter and $619,000 for the six months ended 2008
were recorded against this reserve. At June 30, 2008, we re-evaluated the estimate and adjusted the
reserve to approximately $5,749,000 by recording in aggregate, additional wind-down expenses of
approximately $167,000 in the second quarter of 2008, for a total of approximately $327,000 for the
six months ended 2008. Payments recorded against the reserve were approximately $342,000 in the
second quarter and $723,000 for the six months ended 2007 and additional expenses recorded to
adjust the reserve were approximately $134,000 in the second quarter and $356,000 for the six
months ended 2007. 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 5 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 $183,000 in the second quarter of 2008 compared with
$609,000 of 2007, and $535,000 for the six months ended 2008 compared with $2,489,000 for the six
months ended 2007.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended, |
|
|
Change in 2008 versus |
|
|
Six months ended, |
|
|
Change in 2008 versus |
|
|
|
June 30 |
|
|
2007 |
|
|
June 30 |
|
|
2007 |
|
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
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 |
|
|
216,109 |
|
|
|
655,531 |
|
|
|
(439,422 |
) |
|
|
(67 |
)% |
|
|
599,774 |
|
|
|
1,309,137 |
|
|
|
(709,363 |
) |
|
|
(54 |
)% |
Interest expense |
|
|
(28,970 |
) |
|
|
(34,055 |
) |
|
|
5,085 |
|
|
|
(15 |
)% |
|
|
(57,161 |
) |
|
|
(67,372 |
) |
|
|
10,211 |
|
|
|
(15 |
)% |
Other expense, net |
|
|
(3,736 |
) |
|
|
(12,400 |
) |
|
|
8,664 |
|
|
|
(70 |
)% |
|
|
(7,345 |
) |
|
|
(21,024 |
) |
|
|
13,679 |
|
|
|
(65 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
183,403 |
|
|
$ |
609,076 |
|
|
$ |
(425,673 |
) |
|
|
(70 |
)% |
|
$ |
535,268 |
|
|
$ |
2,488,829 |
|
|
$ |
1,953,561 |
|
|
|
(78 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 for the
six months ended 2007, which was the fair value of the ReNeuron shares we received under such
agreement, net of legal 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 for the six months
ended 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 decreased 67%, or approximately $439,000, to approximately $216,000 in the
second quarter and 54%, or approximately $709,000, to approximately $600,000 for the six months
ended 2008 from the comparable periods in 2007. The decreases were 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 decreased 15%, or approximately $5,000, to approximately $29,000 in the
second quarter and 15%, or approximately $10,000, to approximately $57,000 for the six months ended
2008 from the comparable periods in 2007. The decreases were primarily attributable to lower
outstanding debt and capital lease balances. See Note 6 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
21
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 |
|
|
June 30, |
|
December 31, |
|
Versus 2007 |
|
|
2008 |
|
2007 |
|
$ |
|
% |
Cash, cash
equivalents and marketable debt securities |
|
$ |
26,203,417 |
|
|
$ |
37,645,085 |
|
|
$ |
(11,441,668 |
) |
|
|
(30 |
)% |
Total
cash, cash equivalents and marketable debt securities were approximately $26,203,000 at June 30, 2008,
compared with approximately $37,645,000 at December 31, 2007.
The decrease in our cash, cash equivalents and marketable debt securities of approximately 30%, or $11,442,000, from December 31, 2007 to June 30, 2008
was primarily attributable to cash used in operating activities.
In summary, our cash flows were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Six months ended |
|
2008 |
|
|
June 30, |
|
Versus 2007 |
|
|
2008 |
|
2007 |
|
$ |
|
% |
Net cash used in operating activities |
|
$ |
(12,226,271 |
) |
|
$ |
(10,105,693 |
) |
|
$ |
(2,120,578 |
) |
|
|
(21 |
)% |
Net cash provided by investing activities |
|
$ |
21,010,191 |
|
|
$ |
2,719,762 |
|
|
$ |
18,290,429 |
|
|
|
673 |
% |
Net cash provided by financing activities |
|
$ |
49,634 |
|
|
$ |
4,772,504 |
|
|
$ |
(4,722,870 |
) |
|
|
(99 |
)% |
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 $12,226,000 in cash for the six months ended
2008, compared with $10,106,000 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 continued 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 Provided by Investing Activities
The increase from 2007 to 2008 of approximately $18,290,000 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 six months ended 2008. Also, in
April 2008, Progenitor Cell Therapy, LLC prepaid a $1.0 million loan that we had advanced to them
in connection with discussions about the possible acquisition of PCT.
In February 2007, we sold 5,275,000 ordinary shares of ReNeuron for net proceeds of
approximately $3,075,000.
Net Cash Provided by Financing Activities
The decrease from 2007 to 2008 of approximately $4,723,000 for net cash provided by financing
activities was primarily attributable to the following financing transaction for the six months
ended 2007: (i) the sale of approximately 1,217,000 shares of our common stock at an average price
of $3.13 per share for net proceeds of
approximately $3,614,000, sold under a sales agreement with Cantor Fitzgerald & Co. (Cantor),
and (ii) on April 26, 2007, a warrant issued as part of a June 16, 2004 financing arrangement, was
22
exercised to purchase an aggregate of 575,658 shares of our common stock at $1.90 per share
for net proceeds of approximately $1,094,000.
On June 25, 2008 we filed with the U.S. Securities and Exchange Commission (SEC) a universal
shelf registration statement, declared effective July 18, 2008, which permits us to issue up to
$100 million worth of registered debt and equity securities. Under this effective shelf
registration, we have the flexibility to issue registered securities, from time to time, in one or
more separate offerings or other transactions with the size, price and terms to be determined at
the time of issuance. Registered securities issued using this shelf may be used for to raise
additional capital to fund our working capital and other corporate needs, for future acquisitions
of assets, programs or businesses, and for other corporate purposes. In July 2008, we deregistered
the remaining unissued shares available under the shelf registration statement we had filed in
October 2005. The 2005 shelf permitted the issuance of up to $100 million of registered shares of
common stock, and as of June 30, 2008, approximately $59 million worth of common stock remained
available under this shelf.
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. |
|
|
|
|
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. 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 (discussed
above), of which approximately 8.2 million shares remain available at June 30, 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.
23
Commitments
See Note 6, 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 June 30, 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 $189,000 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 $968,000 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 $586,000 in operating lease payments and estimated
operating expenses of approximately $275,000, before receipt of sub-tenant income, for the
remainder of 2008. We expect to receive, in aggregate, approximately $139,000 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 $722,000 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 six months ended 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 January 1, 2008. See Note 3 Fair Value Measurement,
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.
24
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at June 30, 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.
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstems activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition
25
of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the 505 and 418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. Preliminary
motions in both these cases are pending.
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.
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
On July 22, 2008, we held our Annual Meeting of Stockholders. Ricardo Levy, Ph.D. and Irving
Weissman, M.D. were re-elected to the Board as Class II directors, with
terms expiring in 2011. The
remaining members of the Board, whose terms continued after the Annual Meeting, are Mr. Eric
Bjerkholt, Martin McGlynn, Roger Perlmutter, M.D., Ph.D., and John
Schwartz, Ph.D. The shareholders also ratified the selection of Grant Thornton LLP as StemCells
independent public accountants for the fiscal year ending December 31, 2008 and approved an
amendment to the Companys restated certificate of incorporation to increase the number of
authorized shares of common stock by 125,000,000 shares.
The number of proxies finally tabulated represented 67,687,234 of the 80,810,302 eligible shares,
or 83.76 percent of eligible shares. The votes on each of the proposals were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority |
|
|
|
|
|
|
For |
|
Withheld |
|
Against |
|
Abstain |
Election of Ricardo
B. Levy, Ph.D., as
director |
|
|
63,033,187 |
|
|
|
4,654,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Election of Irving
Weissman, M.D., as
director |
|
|
62,899,368 |
|
|
|
4,787,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of
Grant Thornton LLP
as independent
accountants for
2008 |
|
|
65,628,976 |
|
|
|
|
|
|
|
1,153,324 |
|
|
|
904,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase authorized
capital by
125,000,000 shares
of common stock |
|
|
54,848,440 |
|
|
|
|
|
|
|
12,088,669 |
|
|
|
750,125 |
|
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
26
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) |
|
|
|
|
|
|
|
August 4, 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
29
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: August 1, 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: |
(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: August 1, 2008
/s/ Rodney K. B. Young
Rodney K. B. Young
Chief Financial Officer
exv32w1
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the StemCells, Inc. (the Company) quarterly report on Form 10-Q for the period
ending June 30, 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:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date: August 1, 2008
/s/ Martin McGlynn
Martin McGlynn
President and Chief Executive Officer
exv32w2
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the StemCells, Inc. (the Company) quarterly report on Form 10-Q for the period
ending June 30, 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:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to StemCells,
Inc. and will be retained by StemCells, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Date: August 1, 2008
/s/ Rodney K. B. Young
Rodney K. B. Young
Chief Financial Officer