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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19871
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STEMCELLS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3078125
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3155 PORTER DRIVE, PALO ALTO, CA 94304
(Address of principal offices) (zip code)
Registrant's telephone number, including area code: (650) 475 3100
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
Title of class
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of Common Stock held by non-affiliates at February
25, 2002: $66,606,700. Inclusion of shares held beneficially by any person
should not be construed to indicate that such person possesses the power, direct
or indirect, to direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common control with
the Registrant. Common stock outstanding at February 25, 2002: 24,220,618 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
registrant's 2002 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A are incorporated by reference in Part III of this
report.
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FORWARD LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED UNDER THE FEDERAL
SECURITIES LAWS. ACTUAL RESULTS COULD VARY MATERIALLY. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO VARY MATERIALLY ARE DESCRIBED HEREIN AND IN OTHER DOCUMENTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD PAY PARTICULAR
ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS EXHIBIT 99 TO THIS REPORT, ENTITLED "CAUTIONARY FACTORS
RELEVANT TO FORWARD-LOOKING INFORMATION." READERS SHOULD ALSO CAREFULLY REVIEW
ANY RISK FACTORS DESCRIBED IN OTHER DOCUMENTS WE FILE FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION.
This amendment on Form 10-K/A amends the Annual Report of the Company on
Form 10-K previously filed for the year ended December 31, 2001. This Annual
Report on Form 10-K/A is filed in connection with the Company's restatement
of its consolidated statements of operations for the year ended December 31,
2001 and its unaudited consolidated statements of operations for the quarters
ended March 31, 2001 and June 30, 2001. The restatement is being made in
order to record additional deemed dividends for the beneficial conversion
feature of the Comapny's 6% Cumulative Convertible Preferred Stock. The
additional deemed dividends arise as a result of the change to the effective
conversion price resulting from the issuance in 2001 of adjustable warrants
in connection with the common stock financing transaction with Millennium
Partners, LP (See note 11 to the financial statements). Accordingly, in its
restated financial statements, the Company has recorded additional deemed
dividends of $331,000 for the quarter ended March 31, 2001, $471,000 for the
quarter ended June 30, 2001 and $802,000 for the year ended December 31, 2001
(see note 15 to the financial statements).
2
ITEM 1. BUSINESS
OVERVIEW
We are engaged in research aimed at the development of therapies that would
use stem and progenitor cells derived from fetal or adult sources to treat, and
possibly cure, human diseases and injuries such as Parkinson's disease,
hepatitis, diabetes, and spinal cord injuries. The body uses certain key cells
known as stem cells to produce all the functional mature cell types found in
normal organs of healthy individuals. Progenitor cells are cells that have
already developed from the stem cells, but can still produce one or more types
of mature cells within an organ. We are not developing embryonic stem cells for
therapeutic use.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate, based
on information available to us from the Alzheimer's Association, the National
Institutes of Health, the Centers for Disease Control and Prevention, and the
Parkinson's Action Network, that these conditions affect more than 20 million
people in the United States and account for more than $190 billion annually in
health care costs.
We believe that our stem cell technologies, if successfully developed, may
provide the basis for effective therapies for these and other conditions. Our
aim is to return patients to productive lives and significantly reduce the
substantial health care costs often associated with these diseases and
disorders. We have made significant progress toward developing stem cell
therapies for the nervous system by identifying and characterizing the human
central nervous system stem cell. We have also made significant advances in our
search for the stem cells of the liver and the pancreas by identifying markers,
some of which are novel, on the surface of cells so they can be isolated and
tested to determine whether they are stem cells. We have established an
intellectual property position in all three areas of our stem cell research--the
nervous system, the liver and the pancreas--by patenting our discoveries and
entering into exclusive in-licensing arrangements. We believe that, if
successfully developed, our platform of stem cell technologies may create the
basis for therapies that would address a number of conditions with significant
unmet medical needs. We intend to concentrate our in-house efforts on our neural
and liver programs and, for the present, to pursue work on the pancreas
primarily through external collaborators.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many degenerative diseases of the nervous system, such as
Parkinson's disease and Alzheimer's disease. Recent advances in medical science
have identified cell loss or impaired cellular function as leading causes of
degenerative diseases. Biotechnology advances have led to the identification of
some of the specific substances or proteins that are deficient. While
administering these substances or proteins as medication does overcome some of
the limitations of traditional pharmaceuticals such as lack of specificity,
there is no existing technology that can deliver them to the precise sites of
action and in the appropriate physiological regulation and quantities or for the
duration required to cure the degenerative condition. Cells, however, can do
this naturally. As a result, investigators have considered supplementing the
failing cells that are no longer producing the needed substances or proteins by
implanting stem or progenitor cells. Where there has been irreversible tissue
damage or organ failure,
3
transplantation of these stem or progenitor cells offers the possibility of
generating new and healthy mature cells, thus potentially restoring the organ
function and the patient's health.
THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
We believe that, if successfully developed, stem cell-based therapy--the use
of stem or progenitor cells to treat diseases--has the potential to provide a
broad therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves or from donors. Cells obtained from the same person who will
receive them may be abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these
rare cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can
be used for transplantation into individuals whose own cells are not
suitable because of disease or other reasons.
We have discovered markers on the cell surface that identify the human CNS
stem cells. This allows us to purify them and eliminate other unwanted cell
types. We have also developed a process, based on a proprietary IN VITRO culture
system in chemically defined media, and demonstrated that this process
reproducibly grows normal human central nervous system, or CNS, stem and
progenitor cells. We believe this is the first reproducible process for growing
normal human CNS stem cells. Together, these discoveries enable us to select
normal human CNS stem cells and to expand them in culture to produce a large
number of pure stem cells. This process facilitates the banking of large
quantities of individual vials of these cells which could then be used for
distribution to transplant centers worldwide for administration to patients.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells.
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. In our research, we have shown that stem cells of
the central nervous system transplanted into hosts are accepted, migrate, and
successfully specialize to produce mature neurons and glial cells.
More generally, because the stem cell is the pivotal cell that produces all
the functional mature cell types in an organ, we believe these cells, if
successfully identified and developed for transplantation, may serve as
platforms for five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- gene discovery and use, and
- diagnostics.
4
We intend to aggressively pursue a series of non-exclusive agreements
whereby third parties would have access to our cells for use in diagnostics,
gene discovery and use, drug discovery and screening, and correction of genetic
disorders, while in connection with tissue repair and replacement, we intend to
enter into exclusive agreements with larger entities for the development of the
technology and use of the cells in transplantation on a disease-specific basis.
OUR PLATFORM OF STEM CELL TECHNOLOGIES
Stem cells have two defining characteristics:
- some of the cells developed from stem cells produce all the kinds of
mature cells making up the particular organ; and
- they self renew--that is, other cells developed from stem cells are
themselves new stem cells, thus permitting the process to continue again
and again.
Stem cells are known to or thought to exist for many systems of the human
body, including the blood and immune system, the central and peripheral nervous
systems (including the brain), and the liver, pancreas endocrine, and the skin
systems. These cells are responsible for organ regeneration during normal cell
replacement and, to a more or less limited extent, after injury. We believe that
further research and development will allow stem cells to be cultivated and
administered in ways that enhance their natural function, so as to form the
basis of therapies that will replace specific subsets of cells that have been
damaged or lost through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture any of the finite number of different
types of human stem cells will be able to obtain patent protection for the
methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human central
nervous system stem and progenitor cells in our proprietary chemically defined
medium, and our published studies show that these cultured and expanded cells
give rise to all three major cell types of the central nervous system. Also, a
separate study sponsored by us using these cultured stem and progenitor cells
showed that the cells are accepted, migrate, and successfully specialize to
produce neurons and glial cells.
We have published the results of a study that showed that human central
nervous system stem cells can be successfully isolated by markers present on the
surface of freshly obtained brain cells. We believe this is the first
reproducible process for isolating highly purified populations of
well-characterized normal human central nervous system stem cells, and have
applied for a composition of matter patent. Because the cells are highly
purified and have not been genetically modified, they may be especially suitable
for transplantation and may provide a safer and more effective alternative than
therapies that are based on cells derived from cancer cells, or from cells
modified by a cancer gene to make them grow, or from an unpurified mixture of
many different cell types or cells derived from animals. We have also filed an
improved process patent for the growth and expansion of these purified normal
human central nervous system cells.
More recently, we announced the results of a new study in which we used
novel human specific monoclonal antibodies to demonstrate the extent of
engraftment, migration and site-specific formation of the human neural stem
cells into mature neurons. These neuronal cells integrate in a 3-dimensional
array within the normal architecture of the mouse brain. Astrocytes and
oligodendrocytes, the other two principle types of central nervous system cells,
are also generated from the human neural stem cells.
5
Neurological disorders such as Parkinson's disease, Alzheimer's disease, the
side effects of stroke, and the mental retardation that accompanies genetic
disorders such as Gaucher's Disease, Tay-Sachs Disease, and Batten's Disease
affect a significant portion of the U.S. population and there currently are no
effective long-term therapies for them. We believe that therapies based on our
process for identifying, isolating and culturing neural stem and progenitor
cells may be useful in treating such diseases. We are continuing our research
into, and have initiated the development of, human central nervous system stem
and progenitor cell-based therapies for some diseases of this kind.
We continue to advance our research programs to discover the liver stem cell
and, through our outside collaborators, the islet stem cell in the human
pancreas. Liver stem cells may be useful in the treatment of diseases such as
hepatitis, liver failure, blood-clotting disorder, cirrhosis of the liver and
liver cancer. Islet cells are the pancreas cells that produce insulin, so
pancreatic stem cells may be useful in the treatment of Type 1 diabetes and
those cases of Type 2 diabetes where insulin secretion is defective.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To our knowledge, no one has developed an FDA-approved method for replacing
lost or damaged tissues from the human nervous system. Replacement of tissues in
other areas of the human body is mainly limited to those few sites, such as bone
marrow or peripheral blood cell transplants, where transplantation of the
patient's own cells is now feasible. In a few additional areas, including the
liver, transplantation of donor organs is now used, but is limited by the
scarcity of organs available through donation. We believe that our stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and specialize
into the multiple kinds of cells that are commonly lost in various diseases,
transplanted stem cells may be able to migrate limited distances to the proper
location within the body, to expand and specialize and to replace damaged or
defective cells, facilitating the return to proper function. We believe that
such replacement of damaged or defective cells by functional cells is unlikely
to be achieved with any other treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for, and
current status of, our primary research and product development programs and
projects. The table is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
report. We continually evaluate our research and product development efforts and
reallocate
6
resources among existing programs or to new programs in light of experimental
results, commercial potential, availability of third party funding, likelihood
of near-term efficacy, collaboration success or significant technology
enhancement, as well as other factors. Our research and product development
programs are at relatively early stages of development and will require
substantial resources to commercialize.
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
------------------------------------------ ---------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central nervous - Demonstrated IN VITRO the ability to initiate and
system tissue (including spinal cord, expand stem cell-containing human neural cultures
stroke-damaged tissue, and tissue affected and specialization into three types of central
by certain genetic disorders) nervous system cells
- Demonstrated the ability to isolate
neurosphere-initiating stem cells from human brain
- Demonstrated in rodent studies that transplanted
human brain-derived stem cells are accepted and
properly specialized into the three major cell
types of the central nervous system
- Commenced preclinical testing of human neural stem
cells in well-characterized small animal models of
human diseases
LIVER STEM CELL RESEARCH
Repair or replace liver tissue damaged or - Demonstrated the production of hepatocytes from
destroyed by cirrhosis and certain purified mouse hematopoietic stem cells
metabolic genetic diseases
- Identified IN VITRO culture assay for growth of
human liver progenitor cells that express markers
for both bile duct cells and hepatocytes
- Showed that the IN VITRO culture of human liver
progenitor cells can also grow human hepatitis
virus
- Demonstrated the engraftment and survival of human
liver cells in an IN VIVO mouse model
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas islet - Identified markers on the surface of a rare
tissue population of human pancreatic cells
- Commenced testing enriched population of those
cells in IN VITRO and IN VIVO small animal model
- Established consortium of external collaborators
------------------------
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
7
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of central nervous system, stem and progenitor cell technology, animal models
for the identification and/or testing of stem and progenitor cells and our own
research and development efforts to date. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We have assembled an experienced team of scientists
and scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes Irving L. Weissman, M.D., of Stanford University, Fred H. Gage, Ph.D.,
of The Salk Institute, David Anderson, Ph.D., of the California Institute of
Technology and Ben Barres, Ph.D., of Stanford University, as well as other
occasional consultants including William C. Mobley, M.D., Ph.D. and Seung Kim,
M.D., Ph.D., both of Stanford University.
BRAIN STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with central nervous system stem and progenitor cell
cultures in collaboration with NeuroSpheres, Ltd., in 1992. We believe that
NeuroSpheres was the first to invent these cultures. We are the exclusive,
worldwide licensee from NeuroSpheres to such inventions and associated patents
and patent applications for all uses, including transplantation in the human
body, as embodied in these patents. See "License Agreements and Sponsored
Research Agreements--NeuroSpheres, Ltd."
In 1997, our scientists invented a reproducible method for growing human CNS
stem and progenitor cells in cultures. In preclinical IN VITRO and early IN VIVO
studies, we demonstrated that these cells specialize into all three of the cell
types of the central nervous system. Because of these results, we believe that
these cells may form the basis for replacement of cells lost in certain
degenerative diseases. We are continuing research into, and have initiated the
development of, our human CNS stem and progenitor cell cultures. We have
initiated the cultures and demonstrated that these cultures can be expanded for
a number of generations IN VITRO in chemically defined media. In collaboration
with us, Dr. Anders Bjorklund of Lund University, Sweden, showed that cells from
these cultures can be successfully transplanted and accepted into the brains of
rodents where they subsequently migrated and specialized into the appropriate
cell types for the site of the brain into which they were placed.
Since then, we have expanded our preclinical efforts in this area by
initiating programs aimed at the discovery and use of specific monoclonal
antibodies to facilitate identification and isolation of CNS and other stem and
progenitor cells or their specialized progeny. Our researchers have devised
methods to advance the IN VITRO culture and passage of human CNS stem cells that
resulted in a 100-fold increase in CNS stem and progenitor cell production after
6 passages. A U.S. patent on those methods issued in May, 2001 (patent No.
6238922, "Use of collagenase in the preparation of neural stem cell cultures").
We are expanding our preclinical efforts toward the goal of selecting the proper
indications to pursue.
In December 1998, the US Patent and Trademark Office granted patent No.
5,851,832, covering our methods for the human CNS cell cultures containing
central nervous system stem cells, for compositions of human CNS cells expanded
by these methods, and for use of these cultures in human transplantation. These
human CNS stem and progenitor cells expanded in culture may be useful for
repairing or replacing damaged central nervous system tissue, including the
brain and the spinal cord. US Patent No. 5,968,829, entitled "Human CNS Neural
Stem Cells," which covers our composition of matter for human CNS stem cells,
was granted in 1999, and US Patent No. 6,103,530, covering our media for
culturing human CNS stem cells, was granted in 2000.
8
We have a US patent application pending that covers our proprietary process
for the direct isolation of normal human CNS stem cells based on the markers
found to be present on the surface of freshly obtained brain cells. Since the
filing of this patent application, our researchers have completed a study
designed to identify, isolate and culture human CNS stem cells utilizing this
proprietary process. Using our proprietary markers on the surface of the cell,
our researchers have succeeded in identifying, isolating and purifying human CNS
stem cells from brain tissue, and were able to expand the number of these cells
in culture.
We believe that this was the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human CNS
stem cells. Because the cells are normal human CNS stem cells and have not been
genetically modified, they may be especially suitable for transplantation and
may provide a safer and more effective alternative to therapies that are based
on cells derived from cancer cells or from an unpurified mix of many different
cell types, or from animal derived cells. Even more importantly, in our view,
our researchers have been able to take these purified and expanded stem cells
and transplant them into the normal brains of immunodeficient mouse hosts, where
they take hold and grow into neurons and glial cells.
During the course of this long-term study, the transplanted human CNS stem
cells survived for as long as one year and migrated to specific functional
domains of the host brain, with no sign of tumor formation or adverse effects on
the animal recipients; moreover, the cells were still dividing. These findings
show that when CNS stem cells isolated and cultured with our proprietary
processes are transplanted, they adopt the characteristics of the host brain and
act like normal stem cells. In other words, the study suggests the possibility
of a continual replenishment of normal human brain cells.
In 2001, we assembled and evaluated our long-term transplantation data,
defined in-house disease targets for further evaluation for proof of principle,
and established external collaborations with a number of academic laboratories
to pursue other well-characterized disease models in small animals.
As noted above, human CNS stem and progenitor cells harvested and purified
and expanded using our proprietary processes may be useful for creating
therapies for the treatment of degenerative brain diseases such as Parkinson's
and Alzheimer's diseases. These conditions affect about 5 million people in the
United States and there are no effective long-term therapies currently
available. We believe the ability to purify human brain stem cells directly from
fresh tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types, that can be expanded in culture
without fear of also expanding some unwanted cell types;
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development and function of the
brain is absent. Brain-derived stem cells might produce enough enzyme
after transplantation to degrade the toxic product build-up, or, if not
enough enzyme is made naturally, the cells might be genetically modified
to produce those proteins. The native or modified brain stem cells could
be transplanted into patients with these genetic diseases;
- the efficient acceptance of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
nerve cells.
9
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained rights to a
novel mouse model of liver failure for evaluating cell transplantation developed
by Dr. Grompe, and a worldwide exclusive license to U.S. Patent No. 6,132,708,
claiming a method of regenerating a functional liver by transplantation of
pancreas cells in mammals, including humans.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for many of which there are currently no effective, long-term treatments.
Our researchers continue to advance methods for establishing enriched cell
populations suitable for transplantation in preclinical animal models. We are
focused on discovering and utilizing proprietary methods to identify and isolate
liver stem and progenitor cells and to evaluate these cells in culture and in
preclinical animal models.
Our researchers have devised a culture assay that we will use in our efforts
to identify liver stem and progenitor cells. In addition to supporting the
growth of an early human liver bipotent progenitor cell, it is also possible to
infect this culture with human hepatitis virus, providing a valuable system for
study of the virus. This technology could also provide a unique IN VITRO model
for the testing of drugs that act on, or are metabolized by, human liver cells.
There have been reports in the scientific community that bone marrow
transplant patients show evidence of donor derived liver cells (hepatocytes).
Our scientists (in conjunction with Markus Grompe, OHSU) showed that bone marrow
derived hepatocytes are functional and can rescue mice in liver failure.
Moreover, the only cells within the mouse bone marrow that are able to produce
hepatocytes are highly purified hematopoietic stem cells--that is, stem cells of
the blood and immune system, often referred to as HSCs. We believe that these
studies in stem cell plasticity are the most rigorous studies performed to date
and show the possibility of transitioning from one cell type to another.
In parallel with the studies performed using mouse HSCs, our scientist have
performed IN VITRO studies on human liver cells. To date, they have identified
proprietary monoclonal antibodies that enrich for distinct subsets of fetal
and/or pediatric liver cells. These cells are currently being tested in our IN
VITRO and IN VIVO culture assays. Further analysis and enrichments are in
progress.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our pancreas discovery research program is directed to the identification,
isolation and culturing of the pancreas stem and progenitor cells. We obtained
an exclusive, worldwide license from The Scripps Research Institute (Scripps),
to novel technology developed by Dr. Nora Sarvetnick, Ph.D., which may
facilitate the identification and isolation of those cells by using a mouse
model that continuously regenerates the pancreas. US patent number 6,242,666 was
issued on the animal model on June 5, 2001. We believe that stem cells produce
the regeneration, in which case this animal model may be useful for identifying
specific markers on the cell surface unique to the pancreas stem cells. We
believe this may lead to the development of cell-based treatments for Type 1
diabetes and that portion of Type 2 diabetes characterized by defective
secretion of insulin. We also obtained licenses from Scripps to novel markers on
the cell surface identified by Dr. Sarvetnick and her research team as being
unique to the pancreas islet stem cell, for which we have now filed a US patent
application. We have no current plans for further research collaborations with
Scripps or Dr. Sarvetnick.
In 2001, we established a consortium of academic investigators to work in
collaboration with us on the human pancreatic stem and progenitor cells. This
consortium includes Drs. Raphael Scharfmann and Bruno Peault of INSERM, in
Paris, France, and Dr. Seung Kim of Stanford University. Through this consortium
we have access to unique animal models for transplantation of candidate stem/
10
progenitor cells. We have identified key monoclonal antibodies that identify a
rare subset of pancreatic cells that may be candidate stem cells. For the
present, we will be pursuing the program primarily through the external members
of the consortium.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, our company, which was then known as CytoTherapeutics,
engaged in research and development in encapsulated cell therapy technology, or
ECT. In July 1999, we began the restructuring of our research operations to
abandon all further ECT research and to concentrate our resources on the
research and development of our proprietary platform of stem cell technology. We
sold our intellectual property assets related to the ECT, retaining certain
non-exclusive rights to use the ECT in combination with our proprietary stem
cell technology and in the field of vaccines for prevention and treatment of
infectious diseases, and a portion of certain revenues the buyer, Neurotech
S.A., might receive in the future. (Subsequently, we sold the retained rights to
such revenues to Modex Therapeutics, S.A.; see Note 5 to the Financial
Statements below.) We relocated to California, and have subleased the two
buildings that constituted our pilot manufacturing and cell processing facility
in Rhode Island and approximately one-third of our former corporate headquarters
building. We are actively seeking to sublease, assign or sell our remaining
interests in the Rhode Island real estate.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells California, Inc., a
California corporation, in exchange for 1,320,691 shares of our common stock and
options and warrants for the purchase of 259,296 common shares. Simultaneously
with the acquisition, its President, Richard M. Rose, M.D., became our
President, Chief Executive Officer and a director, and Irving L. Weissman, M.D.,
a founder of StemCells California, became a member of our board of directors.
CORPORATE COLLABORATIONS
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics SA (Modex), a Swiss biotherapeutics company, to pursue
extensions of our former technology of ECT for certain applications outside the
central nervous system. Modex, headquartered in Lausanne, Switzerland, was
formed to integrate technologies developed by us and by several other
institutions to develop products to treat diseases such as diabetes, obesity and
anemia. After our disposition of the encapsulated cell technology in December
1999, we no longer had common research or development interests with Modex, but
we held approximate 17% of its stock. Modex completed an initial public offering
on June 23, 2000, in the course of which we realized a gain of approximately
$1.4 million from the sale of certain shares. By the end of May 2001 we had sold
all our shares in Modex for a realized gain of approximately $7.8 million.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
11
Our research agreement with Scripps expired at the end of 2000, and we do
not intend to renew it at this time. It is our intention to pursue research on
human stem and progenitor cells of the pancreas primarily through the consortium
we have established with other academic researchers. Our license agreements with
Scripps are not affected by the expiration of the research agreement. They will
terminate upon expiration, revocation or invalidation of the patents licensed to
us, unless governmental regulations require a shorter term. These license
agreements also will terminate earlier if we breach our obligations under the
agreement and do not cure the breach, or if we declare bankruptcy, and we can
terminate the license agreements at any time upon notice. Upon the initiation of
the Phase II trial for our first product using Scripps licensed technology, we
must pay Scripps $50,000 and upon completion of that Phase II trial we must pay
Scripps an additional $125,000. Upon approval of the first product for sale in
the market, we must pay Scripps $250,000. Our license agreements with the
California Institute of Technology (Cal Tech) will expire upon expiration,
revocation, invalidation or abandonment of the patents licensed to us. We can
terminate any of these license agreements by giving 30 days' notice to Cal Tech.
Either party can terminate these license agreements upon a material breach by
the other party. Pursuant to the terms of our license agreement with Cal Tech
and our acquisition of our wholly owned subsidiary, StemCells California, we
issued 14,513 shares of our common stock to Cal Tech. We issued an additional
12,800 shares of common stock to Cal Tech with a market value of approximately
$40,000 in May 2000, upon execution of an amendment adding four families of
patent applications to the license agreement. We must pay an additional $10,000
upon the issuance of the patent licensed to us under the relevant agreement. We
also will pay $5,000 on the anniversary of the issuance of the patent licensed
to us under the relevant agreement. These amounts are creditable against
royalties we must pay under the license agreements. The maximum royalties that
we will have to pay to the California Institute of Technology will be $2 million
per year, with an overall maximum of $15 million. Once we pay the $15 million
maximum royalty, the licenses will become fully paid and irrevocable.
We and our wholly-owned subsidiary, StemCells California have entered into
sponsored research and license agreements with the Oregon Health Sciences
University (OHSU) beginning in March 1997. Pursuant to the terms of the license
agreement and our acquisition of StemCells California, we issued 4,838 shares of
our common stock and an option to purchase up to 62,888 additional shares to
OHSU with an exercise price of $.01 per share. The option has vested as to 9,675
shares by passage of time and the others will vest, if at all, on the
achievement of specified milestones.
LICENSE AGREEMENTS
We have entered into a number of license agreements with commercial and
non-profit institutions, as well as a number of research-plus-license agreements
with academic organizations. The research agreements provide that we will fund
certain research costs, and in return, will have a license or an option for a
license to the resulting inventions. Under the license agreements, we will
typically be subject to obligations of due diligence and the requirement to pay
royalties on products that use patented technology licensed under such
agreements.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene. Each agreement with Signal will terminate at
the expiration of all patents licensed under it, but the licensing party can
terminate earlier if the other party breaches its obligations under the
agreement or declares bankruptcy. Also, the party receiving the license can
terminate the agreement at any time upon notice to the other party. Under these
agreements, we must reimburse Signal for
12
payments it must make to the University of California based on products we
develop and for 50% of certain other payments Signal must make.
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in a License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation, subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired. We have developed additional intellectual
property relating to the subject matter of the license. We entered into an
additional license agreement with NeuroSpheres as of October 30, 2000, under
which we obtained an exclusive license in the field of non-transplant uses, such
as drug discovery and drug testing. Together, our rights under the licenses are
exclusive for all uses of the technology. We made up-front payments to
NeuroSpheres of 65,000 shares of our common stock in October 2000 and $50,000 in
January 2001, and we will make additional cash payments when milestones are
achieved in the non-transplant field, or in any products employing NeuroSpheres
patents for generating cells of the blood and immune system from neural stem
cells. In addition, in October 2000 we reimbursed Neurospheres for patent costs
amounting to $341,000. Milestone payments would total $500,000 for each product
that is approved for market. Our agreements with NeuroSpheres will terminate at
the expiration of all patents licensed to us, but can terminate earlier if we
breach our obligations under the agreement and do not cure the breach, or if we
declare bankruptcy. We would have a security interest in the licensed technology
in the event that NeuroSpheres declares bankruptcy.
MANUFACTURING
Because of the early stage of our stem and progenitor cell programs, we have
made no decisions about the means by which potential future cell products will
be manufactured, nor resolved the many issues that will affect our choices. We
believe that our new facility in Palo Alto, however, has the capacity to be used
for manufacture of cells under FDA-determined clinical Good Manufacturing
Practices conditions in quantities sufficient for clinical trials, and we have
developed a robust and replicable process for producing and processing the
cells.
MARKETING
Because of the early stage of our stem and progenitor cell programs, we have
not yet addressed questions of channels of distribution and commercialization of
potential future products.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be critical to
our future business. We vigorously seek out intellectual property that we
believe might be useful in connection with our products, and have an aggressive
program of protecting our intellectual property. We believe that our know-how
will also provide a significant competitive advantage, and we intend to continue
to develop and protect our proprietary know-how. We may also from time to time
seek to acquire licenses to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of patents and
patent applications related to various stem and progenitor cells and methods of
deriving and using them. These patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, our U.S. patent
portfolio in the stem cell therapy area includes thirty issued U.S. patents,
five of which issued in 2001. An additional twenty-five patent applications are
pending, two of which have been allowed.
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We own, or have filed, the following United States Patents and patent
applications: U.S. Patent Number 5,968,829 (Human CNS neural stem cells); U.S.
Patent Number 6,103,530 (Human CNS neural stem cells--culture media);
Application Number WO 99/11758 (Cultures of human CNS neural stem cells); U.S.
Patent Number 6,238,922 (Use of collagenase in the preparation of neural stem
cell cultures); U.S. Patent Application Number WO 00/50572 (Use of collagenase
in the preparation of neural stem cell cultures); Application Number WO 00/47762
(Enriched neural stem cell populations and methods of identifying, isolating,
and enriching neural stem cells); Application Number WO 00/52143 (Isolation and
enrichment of neural stem cells from uncultured tissue based on cell-surface
marker expression); and Application Number WO 01/28574 (Method for inducing IN
VIVO proliferation and migration of transplanted progenitor cells in the brain).
We have licensed the following United States Patents or pending patent
applications from NeuroSpheres Holdings Ltd.: U.S. Patent Number 5,851,832 (IN
VITRO proliferation); U.S. Patent Number 5,750,376 (IN VITRO genetic
modification); U.S. Patent Number 5,981,165 (IN VITRO production of dopaminergic
cells from mammalian central nervous system multipotent stem cell compositions);
U.S. Patent Number 6,093,531 (Generation of hematopoietic cells from multipotent
neural stem cells); U.S. Patent Number 5,980,885 (Methods for inducing IN VIVO
proliferation of precursor cells); U.S. Patent Number 6,071,889 (Methods for IN
VIVO transfer of a nucleic acid sequence to proliferating neural cells); U.S.
Patent Number 6,294,346 (Methods for screening biological agents); U.S. Patent
Number 6,165,783 (Methods of inducing differentiation of multipotent neural stem
cells); Application Number WO 93/01275 (Mammalian central nervous system
multipotent stem cell compositions); Application Number WO 94/09119
(Remyelination using mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/10292 (Biological factors useful in
differentiating mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/16718 (Genetically engineered mammalian
central nervous system multipotent stem cell compositions); Application Number
WO 96/15224 (Differentiation of mammalian central nervous system multipotent
stem cell compositions); Application Number WO 99/2196 (Erythropoietin-mediated
neurogenesis); Application Number WO 99/16863 (Generation of hematopoietic
cells); Application Number WO 98/22127 (Pretreatment with growth factors to
protect against CNS damage); Application Number WO 97/3560 (IN SITU manipulation
of cells of the hippocampus); Application Number WO 96/09543 (IN VITRO models of
CNS functions and dysfunctions); Application Number WO 95/13364 (IN SITU
modification and manipulation of stem cells of the CNS); Application Number WO
96/15226 (IN VITRO production of dopaminergic cells from mammalian central
nervous system multipotent stem cell composition); and Application Number WO
96/15266 (Regulation of neural stem cell proliferation).
We have licensed the following United States Patents or pending patent
applications from the University of California, San Diego: U.S. Patent Number
5,776,948 (Method of production of neuroblasts); U.S. Patent Number 6,265,175
(Method of production of neuroblasts); U.S. Patent Number 6,013,521 (Method of
production of neuroblasts); U.S. Patent Number 6,020,197 (Method of production
of neuroblasts); U.S. Patent Number 6,045,807 (Method of production of
neuroblasts); and Application Number WO 94/16059 (Method of production of
neuroblasts).
We have licensed the following United States Patents or pending patent
applications from the California Institute of Technology: U.S. Patent Number
5,629,159 (Immortalization and disimmortalization of cells); Application Number
WO 96/40877 (Immortalization and disimmortalization of cells); U.S. Patent
Number 6,270,990 (Neuron restrictive silencer factor proteins); U.S. Patent
Number 5,935,811 (Neuron restrictive silencer factor proteins); Application
Number WO 96/27665 (Neuron restrictive silencer factor proteins); U.S. Patent
Number 5,589,376 (Mammalian neural crest stem cells); U.S. Patent Number
5,824,489 (Methods for isolating mammalian multipotent neural crest stem cells);
Application Number WO 94/02593 (Mammalian neural crest stem cells); U.S. Patent
Number 5,654,183 (Genetically engineered mammalian neural crest stem cells);
U.S. Patent Number 5,928,947 (Mammalian multipotent neural crest stem cells);
U.S. Patent Number 5,693,482 (IN
14
VITRO neural crest stem cell assay); U.S. Patent Number 6,001,654 (Methods for
differentiating neural stem cells to neurons or smooth muscle cells (TGFb));
Application Number WO 98/48001 (Methods for differentiating neural stem cells to
neurons or smooth muscle cells (TGFb)); U.S. Patent Number 5,672,499 (Methods
for immortalizing multipotent neural crest stem cells); U.S. Patent Number
5,849,553 (Immortalizing and disimmortalizing multipotent neural crest stem
cells); and U.S. Patent Number 6,033,906 (Differentiating mammalian neural stem
cells to glial cells using neuregulins).
We have licensed the following United States Patents or pending patent
applications from the following other institutions: Number 6,242,666 (An animal
model for identifying a common stem/ progenitor to liver cells and pancreatic
cells) and Application Number WO 00/36091 (An animal model for identifying a
common stem/progenitor to liver cells and pancreatic cells), licensed from The
Scripps Research Institute; Application Number WO98/50526 (Generation,
characterization, and isolation of neuroepithelial stem cells and lineage
restricted intermediate precursor), licensed from the University of Utah; and
Number 6,132,708 (Liver regeneration using pancreas cells), licensed from Oregon
Health Sciences University.
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University, to certain patents and
know-how regarding present and certain future developments in CNS, liver and
pancreas stem cells.
The patent positions of pharmaceutical and biotechnology companies,
including ours, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently, we do
not know whether any of our pending applications will result in the issuance of
patents, or if any existing or future patents will provide significant
protection or commercial advantage or will be circumvented by others. Since
patent applications are secret until the applications are published (usually
eighteen months after filing), and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make the inventions covered by each of our
pending patent applications or that we were the first to file patent
applications for such inventions. There can be no assurance that patents will
issue from our pending or future patent applications or, if issued, that such
patents will be of commercial benefit to us, afford us adequate protection from
competing products, or not be challenged or declared invalid.
In the event that a third party has also filed a patent application relating
to inventions claimed in our patent applications, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
uncertainties and cost for us, even if the eventual outcome is favorable to us.
There can be no assurance that our patents, if issued, would be held valid by a
court of competent jurisdiction.
15
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of genetically modified cells to treat disease, disorder or
injury. We are aware of two patents issued to a competitor claiming certain
methods for treating defective, diseased or damaged cells in the mammalian CNS
by grafting genetically modified donor cells from the same mammalian species.
If third party patents or patent applications contain claims infringed by
our technology and such claims or claims in issued patents are ultimately
determined to be valid, there can be no assurance that we would be able to
obtain licenses to these patents at a reasonable cost, if at all, or be able to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, we may not be able to develop certain products
commercially. There can be no assurance that we will not be obliged to defend
ourselves in court against allegations of infringement of third party patents.
Patent litigation is very expensive and could consume substantial resources and
create significant uncertainties. An adverse outcome in such a suit could
subject us to significant liabilities to third parties, require disputed rights
to be licensed from third parties, or require us to cease using such technology.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University to certain patents,
applications and know-how regarding neural, liver and pancreatic stem cells. Our
licenses may be canceled or converted to non-exclusive licenses if we fail to
use the relevant technology or if we breach our agreements. Loss of such
licenses could expose us to the risks of third party patents and/or technology.
There can be no assurance that any of these licenses will provide effective
protection against our competitors.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative and liver diseases, diabetes
and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products, when
and if successfully developed, will compete with these products principally on
the basis of improved and extended efficacy and safety and their overall
economic benefit to the health care system. The market for therapeutic products
that address degenerative diseases is large, and competition is intense. We
expect competition to increase. We believe that our most significant competitors
will be fully integrated pharmaceutical companies and more established
biotechnology companies. Smaller companies may also be significant competitors,
particularly through collaborative arrangements with large pharmaceutical or
biotechnology companies. Many of these competitors have significant products
approved or in development that could be competitive with our potential
products.
16
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect that all of these products will compete with our potential stem and
progenitor cell products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed patent
applications relating to the use of genetically modified cells to treat disease,
disorder or injury. We may be required to seek licenses from these competitors
in order to commercialize certain of our proposed products, and such licenses
may not be granted.
If we develop products that receive regulatory approval, they would then
have to compete for market acceptance and market share. For certain of our
potential products, an important success factor will be the timing of market
introduction of competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a number
of years and involves significant uncertainty combined with the expenditure of
substantial resources. In addition, the federal, state, and other jurisdictions
have restrictions on the use of fetal tissue.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
--------------------------------------------- ---------------------------------------------
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
in specific disease models to assess the
potential safety and efficacy of the product
and our formulation as well as the quality
and consistency of the manufacturing process.
17
STEPS CONSIDERATIONS
--------------------------------------------- ---------------------------------------------
2.Submission to the FDA of an application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence its receipt by the FDA, as long as there are
no questions, requests for delay or
objections from the FDA.
3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, or cGMP, determined by the FDA.
Each protocol is submitted to the FDA as part
of the IND. The protocol for each clinical
study must be approved by an independent
Institutional Review Board, or IRB, at the
institution at which the study is conducted
and the informed consent of all participants
must be obtained. The IRB will consider,
among other things, the existing information
on the product, ethical factors, the safety
of human subjects, the potential benefits of
the therapy and the possible liability of the
institution.
Clinical development is traditionally
conducted in three sequential phases, which
may overlap:
- In Phase I, products are typically
introduced into healthy human subjects
or into selected patient populations
to test for adverse reactions, dosage
tolerance, absorption and
distribution, metabolism, excretion
and clinical pharmacology.
- Phase II involves studies in a limited
patient population to (i) determine
the efficacy of the product for
specific targeted indications and
populations, (ii) determine optimal
dosage and dosage tolerance and (iii)
identify possible adverse effects and
safety risks. When a dose is chosen
and a candidate product is found to be
effective and to have an acceptable
safety profile in Phase II
evaluations, Phase III trials can be
initiated.
- Phase III trials are undertaken to
demonstrate clinical efficacy and to
test
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STEPS CONSIDERATIONS
--------------------------------------------- ---------------------------------------------
further for safety within an expanded
patient population, generally at multiple
study sites.
The FDA can review the clinical trial plans
and results and may suggest changes or may
require discontinuance of the trials at any
time if significant safety issues arise.
4. Submission to the FDA of marketing The results of the preclinical studies and
authorization applications clinical studies are submitted to the FDA in
the form of marketing approval authorization
applications.
5. FDA approval of the application(s) prior The testing and approval process will require
to any commercial sale or shipment of the substantial time, effort and expense. The
drug. Biologic product manufacturing time for approval is affected by a number of
establishments located in certain states also factors, including relative risks and
may be subject to separate regulatory and benefits demonstrated in clinical trials, the
licensing requirement availability of alternative treatments and
the severity of the disease. Additional
animal studies or clinical trials may be
requested during the FDA review period, which
might add to that time.
After FDA approval for the product, the manufacturing and the initial
indications, further clinical trials may be required to gain approval for the
use of the product for additional indications. The FDA may also require unusual
or restrictive post-marketing testing and surveillance to monitor for adverse
effects, which could involve significant expense, or may elect to grant only
conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's current good manufacturing practice (cGMP) requirement. Even after
product licensure approval, the manufacturer must comply with cGMP on a
continuing basis, and what constitutes cGMP may change as the state of the art
of manufacturing changes. Domestic manufacturing facilities are subject to
regular FDA inspections for cGMP compliance, which are normally held at least
every two years. Foreign manufacturing facilities are subject to periodic FDA
inspections or inspections by the foreign regulatory authorities with reciprocal
inspection agreements with the FDA. Domestic manufacturing facilities may also
be subject to inspection by foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. We
may apply for orphan drug status for certain of our therapies. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity in the United States for
that product for the orphan indication. While the marketing exclusivity of an
orphan drug would prevent other sponsors from obtaining approval of the same
compound for the same indication, it would not prevent other types of products
from being approved for the same use including, in some cases, slight variations
on the originally designated orphan product.
19
PROPOSED FDA REGULATIONS
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which relates to the use of human cells. As
part of this approach, the FDA has published final rules for registration of
establishments that engage in the recovery, screening, testing, processing,
storage or distribution of human cells, tissues, and cellular and tissue-based
products, and for the listing of such products. These products specifically
include hematopoietic stem cells (stem cells that are progenitors of blood
cells); however, the FDA makes no explicit statement regarding the inclusion of
other types of stem cells. In addition, the FDA has published proposed rules for
making suitability determinations for donors of cells and tissue and for current
good tissue practice for manufacturers using them. We cannot now determine the
full effects of this regulatory initiative, including precisely how it may
affect the clarity of regulatory obligations and the extent of regulatory
burdens associated with pluripotent stem cell research (for stem cells that give
rise to various tissue types, including blood), and the manufacture and
marketing of stem cell products.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations that govern the
import of drug products from the United States or other manufacturing sites and
foreign regulatory requirements governing human clinical trials and marketing
approval for our products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursements vary widely from country
to country. In particular, the European Union, or EU, is revising its regulatory
approach to high tech products, and representatives from the United States,
Japan and the EU are in the process of harmonizing and making more uniform the
regulations for the registration of pharmaceutical products in these three
markets.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
EMPLOYEES
As of December 31, 2001, we had thirty-three full-time employees, of whom
nine have Ph.D. degrees. Twenty-two full-time employees work in research and
development and laboratory support services. A number of our employees have held
positions with other biotechnology or pharmaceutical
20
companies or have worked in university research programs. No employees are
covered by collective bargaining agreements.
SCIENTIFIC ADVISORY BOARD
Members of our Scientific Advisory Board provide us with strategic guidance
in regard to our research and product development programs, as well as
assistance in recruiting employees and collaborators. Each Scientific Advisory
Board member has entered into a consulting agreement with us. These consulting
agreements specify the compensation to be paid to the consultant and require
that all information about our products and technology be kept confidential. All
of the Scientific Advisory Board members are employed by employers other than us
and may have commitments to or consulting or advising agreements with other
entities that limit their availability to us. The Scientific Advisory Board
members have generally agreed, however, for so long as they serve as consultants
to us, not to provide any services to any other entities that would conflict
with the services the member provides to us. We are entitled to terminate the
arrangement if we determine that there is such a conflict. Members of the
Scientific Advisory Board offer consultation on specific issues encountered by
us as well as general advice on the directions of appropriate scientific inquiry
for us. In addition, Scientific Advisory Board members assist us in assessing
the appropriateness of moving our projects to more advanced stages. The
following persons are members of our Scientific Advisory Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University, Stanford California. Dr. Weissman was a
cofounder of SyStemix, Inc., and Chairman of its Scientific Advisory
Board. He has served on the Scientific Advisory Boards of Amgen Inc., DNAX
and T-Cell Sciences, Inc. Dr. Weissman is Chairman of the Scientific
Advisory Board of StemCells.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
- Ben A. Barres, Ph.D., is Associate Professor of Neurobiology and of
Developmental Biology, Stanford University, Stanford California.
ITEM 2. PROPERTIES
We entered into a 5-year lease, as of February 1, 2001, for a 40,000 square
foot facility, located in the Stanford Research Park in Palo Alto, California.
This facility includes space for animals as well as laboratories, offices, and a
Good Manufacturing Practices suite, signifying that the facility can be used to
manufacture materials for clinical trials. The new facility will better enable
us to achieve our goal of utilizing genetically unmodified human stem cells for
the treatment of disorders of the nervous system, liver, and pancreas. We have
space-sharing agreements for part of the animal facility not needed for our own
use with Stanford University and with Celtrans, Inc.
We continue to lease the following facilities in Lincoln, Rhode Island
obtained in connection with our former encapsulated cell technology: our former
research laboratory and corporate headquarters building which contains 65,000
square feet of wet labs, specialty research areas and administrative offices
held on a lease agreement that goes through June 2013, as well as a 21,000
square-foot pilot manufacturing facility and a 3,000 square-foot cell processing
facility financed by bonds issued by the Rhode Island Industrial Facilities
Corporation. In 2001 we subleased the 3,000 square foot facility and effective
in 2002 we have subleased the 21,000 square-foot facility. We have also
subleased
21
approximately one-third of the 65,000 square foot facility. We are actively
seeking to sublease, assign or sell our remaining interests in these properties.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The common stock of StemCells is traded on the National Market System of
NASDAQ under the Symbol STEM (Previously traded under the Symbol CTII until May
2000). The quarterly ranges of high and low bid prices for the last two fiscal
years as reported by NASDAQ are shown below:
2001 HIGH LOW
---- -------- --------
First Quarter............................................... $3.56 $1.75
Second Quarter.............................................. $5.41 $1.56
Third Quarter............................................... $7.00 $1.94
Fourth Quarter.............................................. $4.15 $2.07
2000 HIGH LOW
---- -------- --------
First Quarter............................................... $20.00 $1.38
Second Quarter.............................................. $ 8.06 $2.00
Third Quarter............................................... $11.67 $3.53
Fourth Quarter.............................................. $ 6.75 $2.25
No cash dividends have been declared on the Company common stock since the
Company's inception.
As of February 25th, 2001, there were approximately 362 holders of record of
the common stock.
On December 4, 2001, we issued 5,000 shares of 3% Cumulative Convertible
Preferred Stock to Riverview Group, L.L.C., a wholly owned subsidiary of
Millennium Partners, L.P. This preferred stock is convertible into shares of our
common stock at a conversion price of $2.00 per share of common stock; there is
a mandatory redemption provision under which any preferred stock outstanding on
December 4, 2003, shall be redeemed on that date. The conversion price may be
below the trading market price of the stock at the time of conversion. Also on
December 4, 2001, in connection with the preferred stock agreement, we issued to
Riverview Group a warrant to purchase 350,877 shares of our common stock at a
price of $3.42 per share. The warrant expires on December 4, 2005. Riverview
Group paid $5,000,000 for the preferred stock and warrant. We also issued to
Cantor Fitzgerald & Co., our financial advisor in connection with the
transaction, a warrant for 146,199 shares exercisable at $3.42 per share. These
transactions were exempt from registration under the Securities Act of 1933
pursuant to Regulation D thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical information has been derived from the
audited financial statements of the Company. The financial information as of
December 2001 and 2000 and for each of
23
the three years in the period ended December 31, 2001 are derived from audited
financial statements included elsewhere in this Form 10-K/A.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations
Revenue from collaborative and licensing
agreements(1).............................. $ -- $ 74 $ 5,022 $ 8,803 $10,617
Revenue from grants.......................... 505 -- -- -- --
Revenue from assignment of rights to
technology................................. 300 -- -- -- --
------- ------- ------- ------- -------
Total revenue.................................. 805 74 5,022 8,803 10,617
Research and development expenses.............. 8,603 5,979 9,984 17,659 18,604
Acquired research and development.............. -- -- -- -- 8,344
Encapsulated Cell Technology wind-down and
corporate relocation(2)...................... -- 3,327 6,048 -- --
Net loss before cumulative effect of change in
accounting principle......................... (3,447) (11,125) (15,709) (12,628) (18,114)
Basic and diluted net loss per share available
to common shareholders before cumulative
effect of an accounting change............... $ (0.22) $ (0.57) $ (0.84) $ (0.69) $ (1.08)
Cumulative effect of a change in accounting
principle.................................... -- $ (0.01) -- -- --
------- ------- ------- ------- -------
Net loss per share applicable to common
shareholders (4)............................. $ (0.22) $ (0.58) $ (0.84) $ (0.69) $ (1.08)
Shares used in computing basic and diluted net
loss per share............................... 22,242 20,068 18,708 18,291 16,704
DECEMBER 31
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
Consolidated Balance Sheet
Cash and cash equivalents.................... $13,697 $ 6,069 $ 4,760 $17,386 $29,050
Restricted investments....................... -- 16,356 -- -- --
Total assets................................. 20,803 29,795 15,781 32,866 44,301
Long-term debt, including capital leases..... 2,316 2,605 2,937 3,762 4,108
Redeemable common stock...................... -- -- 5,249 5,249 5,583
Redeemable preferred stock(3)................ 2,663 1,283 5,249 5,249 5,583
Stockholders' equity......................... 13,208 21,699 3,506 17,897 28,900
------------------------
(1) See footnote 3 in the consolidated financial statements
(2) See footnote 2 in the consolidated financial statements
(3) See footnote 11 in the consolidated financial statements
(4) 2001 amounts have been restated for additional deemed dividends to preferred
shareholders, see Notes 1 and 11 in the accompanying consolidated financial
statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the accompanying financial
statements and the related footnotes thereto.
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
that involve substantial risks and
24
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 protect 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, such as failure to obtain a corporate partner
or partners to support the development of our stem cell programs, our ability to
sell, assign or sublease our interest in our facilities related to our
encapsulated cell technology program, risks of delays in, or adverse results
from, our research, development and clinical testing programs, obsolescence of
our technology, lack of available funding, competition from third parties,
intellectual property rights of third parties, failure of our collaborators to
perform, regulatory constraints, litigation and other risks to which we are
subject. See "Cautionary Factors Relevant to Forward-Looking-Information" filed
herewith as Exhibit 99 and incorporated herein by reference.
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology.
We have not derived any revenues from the sale of any products, and we do
not expect to receive revenues from product sales for at least several years. We
have not commercialized any product and in order to do so we must, among other
things, substantially increase our research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses since inception and expect
to incur substantial operating losses in the future. As a result, we are
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance our
operations. There are no such collaborative research arrangements at this time
and there can be no assurance that such financing or partnering revenues will be
available when needed or on terms acceptable to us.
In 2001, we entered into two significant financing agreements: In May, we
entered into an equity line enabling us to draw up to $30,000,000 subject to
various restrictions, and we did draw down $4,000,000 in July; and in December,
we issued 3% convertible preferred stock for $5,000,000 gross. In addition,
under the terms of the financing agreement we entered into in 2000 with
Millennium Partners, LP, Millennium exercised its final option to purchase
$2,000,000 of our common stock; that agreement has now terminated. (See
"Liquidity and Capital Resources" below for further detail on each of these
transactions.)
In addition, we received two grants from the National Institutes of Health,
one for work on hepatitis to be carried out jointly by us and Stanford
University, and one focusing on the effort to identify liver stem and progenitor
cells for the treatment of liver diseases. Although the grants are relatively
small ($300,000 a year for two years and $225,000 a year for four years,
respectively, and dependent on availability of funds and satisfactory progress),
we are very pleased by this recognition of our work by the agency.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material recurring and nonrecurring events, including without
limitation the receipt and payment of recurring and nonrecurring licensing
payments, the initiation or termination of research collaborations, the on-going
expenses to lease and maintain our facilities in Rhode Island and the increasing
costs associated with our move to a larger facility in California. To expand and
provide high quality systems and support to our Research and
25
Development programs, we will need to hire more personnel, which will lead to
higher operating expenses.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States, that requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could differ from these
estimates.
STOCK-BASED COMPENSATION
The Company's employee stock option plan is accounted for under Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company grants qualified stock options for a fixed number of
shares to employees with an exercise price equal to the fair market value of the
shares at the date of grant. In accordance with APB 25, the Company recognizes
no compensation expense for qualified stock option grants. The Company also
issues non-qualified stock options for a fixed number of shares to employees
with an exercise price less than the fair market value of the shares at the date
of grant. When such options vest, the Company recognizes the difference between
the exercise price and fair market value as compensation expense in accordance
with APB 25.
For certain stock options granted to non-employees, the Company accounts for
these grants in accordance with FAS No. 123--accounting for stock-based
compensation and EITF 96-18--accounting for equity instruments that are issued
to other than employees for acquiring, or in conjunction with selling, goods or
services, and accordingly, recognizes as expense the estimated fair value of
such options as calculated using the Black-Scholes valuation model, and is
remeasured during the service period. Fair value is determined using
methodologies allowable by FAS No. 123. The cost is amortized over the vesting
period of each option or the recipient's contractual arrangement, if shorter.
LONG-LIVED ASSETS
The Company routinely evaluates the carrying value of its long-lived assets.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets are less than
the carrying amount of those assets. If an impairment exists, the charge to
operations is measured as the excess of the carrying amount over the fair value
of the assets.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
Research and Development costs include costs of personnel, external services,
supplies, facilities and miscellaneous other costs.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Revenues totaled $805,000, $74,000 and $5,022,000 for the years ending
December 31, 2001, 2000 and 1999, respectively. Revenues for 2001 are from
grants received from the National Institute of Health's Small Business
Innovation Research (SBIR) office for research relating to our Neural & Liver
stem cell programs ($505,000) and from the assignment to Modex Therapeutics,
Ltd., of our retained
26
rights to a portion of certain possible future revenues arising out of our sale
of our former Encapsulated Cell Technology (ECT) to Neurotech, S.A.($300,000).
Revenues for 2000 were from Neurotech, SA. in return for that sale of our ECT
intellectual property assets described above under "Research and Development
Programs" above. Revenues for 1999 were from collaborative agreements, earned
primarily from a Development, Marketing and License Agreement with AstraZeneca
Group plc, which was signed in March 1995 and which related to the ECT. The
decrease in revenues from 1999 to 2000 resulted primarily from the June 1999
termination of the agreement with AstraZeneca. The increase from 2000 to 2001
was primarily due to the receipt of money from grants. There were no receipts
from grants in 2000.
Research and development expenses totaled $8,603,000 in 2001, as compared to
$5,979,000 in 2000 and $9,984,000 in 1999. The increase of $2,624,000, or 44%,
from 2000 to 2001 was primarily attributable to the costs related to leasing a
larger facility and an increase in personnel to facilitate the expansion of our
research and initiate development. Our program in neural stem and progenitor
cells has entered the preclinical stage, as we focus increasingly on testing
human neural stem cells in small animal models of human diseases, both in-house
and through external academic collaborators. In our liver stem cell program, we
are intensifying our efforts to identify liver stem and progenitor cells. In
part, we will do this by following up studies we have done showing that purified
blood stem cells can give rise to liver tissue, to seek a possible transitional
cell transitional between the blood stem cells and the mature liver cells. Our
pancreas program is concentrated on the use of animal models, available through
a consortium of academic collaborators, to attempt to identify and test
candidate stem cells for use in the treatment of diseases such as certain types
of diabetes, and is being carried on for the present primarily through those
collaborators. The decrease of $4,005,000 or 40%, from 1999 to 2000, was
primarily attributable to the wind-down of research activities relating to our
ECT, precipitated by termination of the agreement with AstraZeneca.
General and administrative expenses were $3,788,000 in 2001, compared with
$3,361,000 in 2000 and $4,927,000 in 1999. The increase of $427,000 or 13%, from
2000 to 2001 was primarily attributable to the related costs of an increase in
personnel, which included the hiring of senior management personnel as part of
the reorganization and consolidation of our operations in California, and the
costs related to leasing a larger facility. The decrease of $1,566,000 or 32%
from 1999 to 2000 was due to the wind-down of our ECT and relocation of our
headquarters in October1999 from Rhode Island to California.
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to California totaled $0, $3,327,000 and
$6,048,000 for 2001, 2000 and 1999, respectively. 1999 expenses included
accruals of approximately $1.6 million for employee severance costs, $1.9
million in losses and reserves for the write-down of related patents and fixed
assets, $1.2 million for our costs of settlement of a 1989 funding agreement
with the Rhode Island Industrial Recreational Building Authority, $700,000 of
estimated additional carrying costs through June 30, 2000, and other related
expenses totaling $760,000.
During 2000, we incurred approximately $290,000 of costs in excess of the
amounts accrued as of December 31, 1999 for the carrying costs, including lease
payments, property taxes and utilities, through the expected June 30, 2000
disposition of the Rhode Island facilities. During the third and fourth quarters
of 2000 we incurred additional $1.3 million in carrying costs for the Rhode
Island facilities, as we were unable to dispose of them as expected. We created
a reserve of $1,780,000 related to the carrying costs for the Rhode Island
facilities through 2001. In the year 2001 we utilized all of the reserve. We
have subleased substantial portions of the facilities and are actively seeking
to sublease, assign or sell our remaining interests in the properties. However,
there can be no assurance that we will be able to dispose of these facilities in
a reasonable time, if at all. As we cannot predict the exact disposal date of
these properties, we will record all future expenses as they incur as normal
operating expenses.
27
Interest income for the years ended December 31, 2001, 2000 and 1999 totaled
$201,000, $304,000 and $564,000, respectively. The average cash and cash
equivalents were $9,034,000, $5,668,000 and $10,663,000 in 2001, 2000 and 1999,
respectively. The decrease in interest income from 2000 to 2001 was attributable
to the lower interest rate on overnight and money market funds. The decrease in
interest income from 1999 to 2000 to 2001 was attributable to lower average
balances.
In 2001, interest expense was $246,000, compared to $273,000 in 2000 and
$335,000 in 1999. Interest expense for year 2001 was charged against the
wind-down reserve, as the expense was part of the bond payments related to the
Rhode Island facilities. The decrease from 1999 to 2000 to 2001 was attributable
to lower outstanding debt and capital lease balances.
Gain on sale of short-term investments relates to the sale of Modex shares.
On January 9, 2001, we sold 22,616 Modex shares for a net price of 182.00 Swiss
francs per share, which converted to $112.76 per share, for total proceeds and a
realized gain of $2,550,230. On April 30, 2001, we sold our remaining shares in
Modex for a net price of 87.30 Swiss Francs per share, which converted to
approximately $50.51 for total proceeds and a realized gain of $5,232,000, net
of commissions and fees. We no longer hold any shares of Modex.
The net loss in 2001, 2000 and 1999 was $3,446,000, $11,125,000, and
$15,709,000, respectively. The loss per share applicable to common shareholders
was $0.22, $.57 and $.84 in 2001, 2000 and 1999, respectively. The decrease from
2000 to 2001 is primarily attributable to a realized gain of $7,782,000 from our
sale of Modex shares in 2001, offset by an increase in operating expenses
attributable to an increase in personnel and our move to a larger facility. The
decrease from 1999 to 2000 was primarily attributable to the wind-down of our
encapsulated cell technology research and our Rhode Island operations and offset
by the elimination of revenue from the Astra Agreement.
DEEMED DIVIDENDS RELATED TO CONVERTIBLE PREFERRED STOCK.
In 2001, we recorded a deemed dividend of $743,667 related to the 3%
Cumulative Convertible Preferred Stock (see note 11 to the financial statements)
which includes the accretion of common stock warrants, the accretion of the
beneficial conversion feature and the accretion of related issuance costs. The
aggregate accretion value associated with the warrants, beneficial conversion
feature and issuance costs were included in the calculation of net loss
applicable to common stockholders.
In 2000 we recorded an initial deemed dividend aggregating $481,000 related
to the 6% Cumulative Convertible Preferred Stock (see note 11 to the financial
statements). The dividend reflects the value of warrants issued and the
beneficial conversion feature. In November 2000, the FASB issued Emerging Issues
Task Force Issue No. 00-27, "Application of EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, to Certain Convertible Instruments" ("EITF
00-27"). Prior to the adoption of EITF 00-27, we recognized $216,000 of deemed
dividends on preferred stock. Upon adoption of the new accounting principle, we
have presented an additional deemed dividend of $265,000 as a cumulative effect
of a change in accounting principle as allowed for in EITF 00-27.
This Form 10-K/A reflects additional deemed dividends of $802,000 for the
beneficial conversion feature of the 6% Cumulative Convertible Preferred
Stock which resulted from the subsequent change to the effective conversion
price of those shares due to the issuance in 2001 of adjustable warrants in
connection with the common stock financing transaction with Millennium
Partners, LP. The 2001 consolidated financial statements have been restated
to reflect the additional deemed dividends (see Notes 1 and 11 to the
financial statements).
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants and
interest income.
We had cash and cash equivalents totaling $13,697,000 at December 31, 2001.
Cash equivalents are invested in US Treasuries with maturities of less than 90
days. We used $10.5 million, $6.3 million, and $11.9 million of cash, in 2001,
2000 and 1999 respectively, in our operating activities. The increase in cash
used in 2001 is the result of increased research and development spending in
2001 over 2000.
28
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former ECT. These relationships are now terminated, and we have not yet
established corporate partnerships with respect to our stem cell technology. Our
liquidity and capital resources have, in the past, also been affected by our
holdings of Modex, all of which holdings have now been sold, resulting in
proceeds to us of $7,782,000 in 2001.
On April 13, 2000, we sold 1,500 shares of our 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common stock
to two members of our Board of Directors for $1,500,000, on terms more favorable
to us than we were able to obtain from outside investors. The face value of the
shares of preferred stock is convertible at the option of the holders into
common stock at an initial conversion price of $3.77 per share. The conversion
price is subject to adjustment upon certain equity transactions, as defined in
the applicable agreement. The holders of the preferred stock have liquidation
rights equal to their original investments plus accrued but unpaid dividends.
Any unconverted preferred stock will be converted, at the applicable conversion
price, on April 13, 2002. The warrants expire on April 13, 2005. The preferred
stock is redeemable in the event of liquidation or change of control of the
Company. A purchaser could acquire a majority of the voting power of the
outstanding stock, without Company approval, thereby triggering a redemption.
Accordingly, the Company has reclassified the 6% cumulative convertible
preferred stock out of permanent equity for all periods presented, in accordance
with the transition guidance of EITF D-98.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP at $4.33 per share. In the purchase
agreement, we granted Millennium an option to purchase up to an additional $3
million of our common stock. Millennium exercised its option to purchase $1
million of our common stock on Aug 23, 2000 at $5.53 per share. On June 8, 2001,
Millennium exercised its remaining option to purchase $2 million of our common
stock at $4.3692 per share. As a result of the financing agreement, Millennium
received five year warrants to purchase 101,587 shares of common stock at $4.725
per share, 19,900 shares of common stock at $6.03 per share, and 50,352 shares
at $4.7664 per share. We may call the warrants at any time at $7.875, $10.05 and
$7.944 per underlying share respectively. In addition to the afore-mentioned
warrants, Millennium was issued adjustable warrants in connection with the
original $4 million purchase, each of which entitled Millennium to receive
additional shares on eight dates beginning six months from the respective
closing dates and every three months thereafter. The exercisable price per share
under the adjustable warrant was $0.01. Millennium exercised the first of the
adjustable warrants to purchase 463,369, 622,469, and 25,804 shares on March 30,
2001, July 26, 2001 and August 15, 2001 respectively at $0.01 per share. On
December 4, 2001, we entered into an agreement with Millennium under which we
issued 176,101 shares of our common stock as a final cashless exercise of all
outstanding adjustable warrants that Millennium was entitled to or would be
entitled to. Immediately following delivery of these shares, any further right
to acquire common stock under these adjustable warrants were cancelled by the
agreement.
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 of our common stock, subject to restrictions and other obligations.
We, at our sole discretion, may draw down on this facility, sometimes termed an
equity line, from time to time, and Sativum is obligated to purchase shares of
our common stock at a 6% discount to a volume weighted average market price over
the 20 trading days following the draw-down notice. We are limited with respect
to how often we can exercise a draw down and the amount of each draw down. We
delivered a draw down notice to Sativum Investments Limited, dated as of July
11, 2001, exercising our right to draw down up to $5,000,000 at a market-based
share price not less than $5.00 per share beginning July 12, 2001. Sativum
purchased a total of 707,947 shares of our common stock at an average purchase
price of $5.65 per share, net of Sativum's discount of six percent. Because the
market based price of our common stock was less than $5.00 for 4 trading days
during the draw down period, pursuant to the terms of our with Sativum
agreement, our $5,000,000 request was reduced to $4,000,000. Our placement
agents, Pacific Crest Securities, Inc. and Granite
29
Financial Group, Inc., received $80,000 and $40,000, respectively, as placement
fees in connection with this draw down, resulting in net proceeds to us of
$3,603,407, after paying escrow fees and other associated costs. In connection
with our execution of the common stock purchase agreement with Sativum, we
issued three three-year warrants to purchase an aggregate of 350,000 shares of
our common stock at $2.38 per share to Sativum (250,000 shares), Pacific Crest
Securities Inc. (75,000 shares) and Granite Financial Group, Inc. (25,000
shares). Our placement agents have exercised their warrants in full, and we have
received payment of $238,050 for the shares issued to them.
On December 4, 2001, we issued 5,000 shares of 3% Cumulative Convertible
Preferred Stock to Riverview Group, L.L.C., a wholly owned subsidiary of
Millennium Partners. We received total proceeds of $4,727,515 net of the fee to
Cantor Fitzgerald and other associated costs. This preferred stock is
convertible into shares of our common stock at a current conversion price of
$2.00 per share of common stock. There is a mandatory redemption provision in
the preferred stock under which any preferred stock remaining on December 4,
2003, is redeemed on that date. The conversion price may be below the trading
market price of the stock at the time of conversion. In connection with the
preferred stock agreement, we issued to Riverview Group a warrant to purchase
350,877 shares of our common stock at a price of $3.42 per share. The warrant
expires on December 4, 2005. We paid Cantor Fitzgerald & Co., our financial
advisor in connection with the transaction, a fee of $200,000 and issued them a
warrant for 146,199 shares exercisable at $3.42 per share.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,000,000 for 2002, net of subtenant income. We have
subleased a portion of these facilities and are actively seeking to sublease,
assign or sell our remaining interests in these facilities. Failure to do so
within a reasonable period of time will have a material adverse effect on our
liquidity and capital resources. Our total operating lease payments for the
years 2002 to 2013 amounts to $25,141,000, and our total capital lease payments
for the years 2002 to 2014 amounts to $4,107,000.
We have limited liquidity and capital resources and must obtain significant
additional capital resources in the future 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 and for general
and administrative expenses. Our ability to obtain additional capital will be
substantially dependent on our ability to obtain partnering support for our stem
cell technology and, in the near term, on our ability to realize proceeds from
the sale, assignment or sublease of our facilities in Rhode Island. Failure to
do so will have a material effect on our liquidity and capital resources. Until
our operations generate significant revenues from product sales, we must rely on
cash reserves and proceeds from equity and debt offerings, proceeds from the
transfer or sale of our intellectual property rights, equipment, facilities or
investments, and government grants and funding from collaborative arrangements,
if obtainable, to fund our operations.
We intend to pursue opportunities to obtain additional financing in the
future through equity and debt financings, grants and collaborative research
arrangements. The source, timing and availability of any future financing will
depend principally upon market conditions, interest rates and, more
specifically, on our progress in our exploratory, preclinical and future
clinical development programs. Funding may not be available when needed--at all,
or on terms acceptable to us. While our cash requirements may vary, we currently
expect that our existing capital resources will be sufficient to fund our
operations through December of 2002. Lack of necessary funds may require us to
delay, scale back or eliminate some or all of our research and product
development programs and/or our capital expenditures or to license our potential
products or technologies to third parties.
With the exception of operating leases for facilities, we have not entered
into any off balance sheet financial arrangements and have not established any
special purpose entities. We have not guaranteed
30
any debts or commitments of other entities or entered into any options on
non-financial assets. During 2001, we were party to a space-sharing agreement
entered into between us and Celtrans, LLC. Dr. Irving Weissman, a member of our
Board of Directors and Chairman of our Scientific Advisory Board, was interim
Chief Executive Officer and is a member of the Board of Managers of Celtrans, a
privately-owned biotechnology company that is also a tenant in the building in
which the Company is located. Under the agreement, which was effective as of
September 1, 2001, Celtrans or, with our approval, a subtenant of Celtrans, may
use certain animal space in our facility, which we do not currently require for
our own use. Celtrans pays the Company $16,122 per month under the space-
sharing agreement, at the same rate per square foot as we receive from Stanford
University, with which we also have an agreement for sharing the animal
facility. In addition, Dr. Weissman remains a consultant to us under an
agreement entered in 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141). This Statement addresses
financial accounting and reporting for business combinations. Statement 141
supersedes APB Opinion No. 16, Business Combinations, and amends or supersedes a
number of interpretations of that Opinion. Statement 141 requires that (1) all
business combinations be accounted for by a single method--the purchase method,
(2) all intangible assets acquired in a business combination are to be
recognized as assets apart from goodwill if they meet one of two criteria--the
contractual-legal criterion or the separability criterion and (3) in addition to
the disclosure requirements in Opinion 16, disclosure of the primary reasons for
a business combination and the allocation of the purchase price paid to the
assets acquired and liabilities assumed by major balance sheet caption. When the
amounts of goodwill and intangible assets acquired are significant in relation
to the purchase price paid, disclosure of other information about those assets
is required, such as the amount of goodwill by reportable segment and the amount
of the purchase price assigned to each major intangible asset class. The
provisions of Statement 141 apply to all business combinations initiated after
June 30, 2001. Statement 141 also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001,
or later. The Company will adopt the provisions of Statement 141 for any
business combinations that may be initiated.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" ("Statement 142"). Under Statement
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their estimated useful lives.
StemCells has not recorded any goodwill or indefinite lived intangible assets
prior to December 31, 2001. The adoption of this statement as of January 1, 2002
will not have a material impact on the Company's financial position, results of
operations or cash flow.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
disposal of a segment of a business." Statement 144 is effective for fiscal
years beginning after December 15, 2001. The Company will adopt Statement 144 as
of January 1, 2002 and it does not expect that the adoption of the Statement
will have a significant impact on the Company's financial position and results
of operations.
31
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have sold all our shares of Modex Therapeutics, Ltd., referred to in our
Form 10-K for the year ended December 31, 2000. We have no other financial
instruments with significant market risk. Cash equivalents consist of U.S.
Treasury instruments with maturities of less than 90 days.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STEMCELLS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors.......... 34
Consolidated Balance Sheets................................. 35
Consolidated Statements of Operations....................... 36
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity...................................... 37
Consolidated Statements of Cash Flows....................... 40
Notes to Consolidated Financial Statements.................. 41
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc.
We have audited the accompanying consolidated balance sheets of StemCells,
Inc. as of December 31, 2001 and 2000, and the related consolidated statements
of operations, changes in redeemable preferred stock and stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of StemCells, Inc.
at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1, the financial statements for the year ended December 31,
2001 have been restated.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 12, 2002, except for Note 1 - Restatement of Financial Statements, as
to which the date is July 29, 2002
34
STEMCELLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,697,195 $ 6,068,947
Short-term restricted investments......................... -- 16,356,334
Accrued interest receivable............................... 4,638 16,725
Other receivable.......................................... 49,590 --
Other current assets...................................... 361,636 524,509
------------- -------------
Total current assets........................................ 14,113,059 22,966,515
Property held for sale...................................... 3,203,491 3,203,491
Property, plant and equipment, net.......................... 1,219,319 1,451,061
Other assets, net........................................... 2,267,207 2,173,912
------------- -------------
Total assets................................................ $ 20,803,076 $ 29,794,979
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 578,270 $ 526,191
Accrued expenses.......................................... 499,165 837,358
Accrued wind-down costs................................... -- 1,780,579
Current maturities of capital lease obligations........... 289,167 332,083
------------- -------------
Total current liabilities................................... 1,366,602 3,476,211
Capital lease obligations, less current maturities.......... 2,315,833 2,605,000
Deposits.................................................... 129,897 26,000
Deferred rent............................................... 1,120,005 705,746
------------- -------------
Total liabilities........................................... 4,932,337 6,812,957
Redeemable Convertible Preferred Stock, $0.01 par value;
1,000,000 shares authorized issuable in series:
3% Cumulative Convertible Preferred Stock, 5,000 shares
issued and 4,000 shares outstanding at December 31,
2001, none at December 31, 2000 (aggregate liquidation
preference of $5,000,000 at December 31,2001)........... 1,379,682 --
6% Cumulative Convertible Preferred Stock, 2,626
designated as 6%, 1,500 shares issued and outstanding at
December 31, 2001 and 2000 (aggregate liquidation
preference of $1,500,000 at December 31, 2001).......... 1,283,250 1,283,250
Stockholders' equity:
Common stock, $.01 par value; 45,000,000 shares authorized;
24,220,021 and 20,956,887 shares issued and outstanding at
December 31, 2001 and 2000, respectively.................. 242,200 209,569
Additional paid-in capital................................ 149,180,388 138,366,817
Accumulated deficit....................................... (133,944,684) (130,498,187)
Accumulated other comprehensive income.................... -- 16,356,334
Deferred compensation..................................... (2,270,097) (2,735,761)
------------- -------------
Total stockholders' equity.................................. 13,207,807 21,698,772
------------- -------------
Total liabilities, redeemable convertible preferred stock,
and stockholders' equity.................................. $ 20,803,076 $ 29,794,979
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
(RESTATED)
------------ ------------ ------------
Revenue from collaborative and licensing
agreements........................................ $ -- $ 74,300 $ 5,021,707
Revenue from grants................................. 505,231
Revenue from assignment of rights to technology..... 300,000
------------ ------------ ------------
Total revenues...................................... 805,231 74,300 5,021,707
Operating expenses:
Research and development.......................... 8,603,444 5,979,007 9,984,027
General and administrative........................ 3,787,759 3,361,231 4,927,303
Encapsulated Cell Therapy wind-down and corporate
relocation...................................... -- 3,327,360 6,047,806
------------ ------------ ------------
12,391,203 12,667,598 20,959,136
------------ ------------ ------------
Loss from operations................................ (11,585,972) (12,593,298) (15,937,429)
Other income (expense):
Interest income................................... 200,766 303,746 564,006
Interest expense.................................. -- (272,513) (335,203)
Gain on sale of short-term investment............. 7,782,398 1,427,686 --
Loss on disposal of property, plant and
equipment....................................... (30,477) -- --
Other income...................................... 186,788 8,902 --
------------ ------------ ------------
8,139,475 1,467,821 228,803
------------ ------------ ------------
Net loss before deemed dividends and accounting
change............................................ (3,446,497) (11,125,477) (15,708,626)
Deemed dividend to preferred shareholders........... (1,545,917) (265,000) --
Net loss applicable to common shareholders before
cumulative effect of change in accounting
principle......................................... (4,992,414) (11,390,477) (15,708,626)
Cumulative effect of a change in accounting
principle......................................... -- $ (216,000) --
------------ ------------ ------------
Net loss applicable to common share holders......... $ (4,992,414) $(11,606,477) $(15,708,626)
============ ============ ============
Basic and diluted net loss per share applicable to
common shareholders before cumulative effect...... $ (0.22) $ (0.57) $ (0.84)
Cumulative effect of a change in accounting
principle......................................... -- $ (0.01) --
Basic and diluted net loss per share applicable to
common shareholders............................... $ (0.22) $ (0.58) $ (0.84)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 22,241,564 20,067,760 18,708,838
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
STEM CELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
------------------------ --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------- ---------- ---------- -------- ------------ -------------
Balances, December 31, 1998.................. 524,337 $5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084)
Issuance of common stock..................... -- -- 196,213 1,962 318,221
Issuance of common stock under the stock
purchase plan.............................. -- -- 57,398 574 41,619 --
Common stock issued pursuant to employee
benefit plan............................... -- -- 90,798 908 102,502 --
Exercise of stock options.................... -- -- 490,833 4,908 513,534 --
Deferred compensation-amortization and
cancellations.............................. -- -- -- -- 80,276 --
Change in unrealized losses on marketable
securities................................. -- -- -- -- -- --
Net loss..................................... -- -- -- -- -- (15,708,626)
Comprehensive loss...........................
----------- ---------- ---------- -------- ------------ -------------
Balances, December 31, 1999.................. 524,337 $5,248,610 18,635,565 $186,355 $123,917,758 $(119,372,710)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE DEFERRED STOCKHOLDERS'
INCOME (LOSS) COMPENSATION EQUITY
-------------- ------------- -------------
Balances, December 31, 1998.................. $(5,198) $(1,472,919) $17,897,408
Issuance of common stock..................... 320,183
Issuance of common stock under the stock
purchase plan.............................. -- -- 42,193
Common stock issued pursuant to employee
benefit plan............................... -- -- 103,410
Exercise of stock options.................... -- -- 518,442
Deferred compensation-amortization and
cancellations.............................. -- 247,919 328,195
Change in unrealized losses on marketable
securities................................. 5,198 -- 5,198
Net loss..................................... -- -- (15,708,626)
-----------
Comprehensive loss........................... (15,703,428)
------- ----------- -----------
Balances, December 31, 1999.................. $ -- $(1,225,000) $ 3,506,403
37
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (CONTINUED)
REDEEMABLE REDEEMABLE
COMMON STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- --------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- -------- ---------- ---------- -------- ------------
Balances, December 31,1999........ 524,337 $ 5,248,610 -- -- 18,635,565 $186,355 $123,917,758
Issuance of common stock to
Millennium Partners LP, net of
issuance costs of $598,563...... -- -- -- -- 1,104,435 11,044 4,390,393
Issuance of common stock related
to license agreements........... -- -- -- -- 77,800 778 364,222
Common stock issued pursuant to
employee benefit plan........... -- -- -- -- 6,672 68 27,112
Exercise of employee stock
options......................... -- -- -- -- 608,078 6,081 651,828
Redeemable common stock
conversion...................... (524,337) (5,248,610) -- -- 524,337 5,243 5,243,367
Issuance of 6% convertible
preferred stock................. -- -- 1,500 1,283,250 -- -- 216,750
Deferred compensation............. -- -- -- -- -- -- 3,555,387
Amortization of deferred
compensation.................... -- -- -- -- -- --
Unrealized gain on short-term
restricted investments.......... -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- --
Comprehensive income..............
--------- ----------- ----- ---------- ---------- -------- ------------
Balances, December 31, 2000....... -- -- 1,500 $1,283,250 20,956,887 $209,569 $138,366,817
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE DEFERRED STOCKHOLDERS'
DEFICIT INCOME (LOSS) COMPENSATION EQUITY
------------- -------------- ------------- -------------
Balances, December 31, 1999....... $(119,372,710) $ -- $(1,225,000) $ 3,506,403
Issuance of common stock to
Millennium Partners LP, net of
issuance costs of $598,563...... -- -- -- 4,401,437
Issuance of common stock related
to license agreements........... -- -- -- 365,000
Common stock issued pursuant to
employee benefit plan........... -- -- -- 27,180
Exercise of employee stock
options......................... -- -- -- 657,909
Redeemable common stock
conversion...................... -- -- -- 5,248,610
Issuance of 6% convertible
preferred stock................. -- -- -- 216,750
Deferred compensation............. -- -- (3,555,387) --
Amortization of deferred
compensation.................... -- -- 2,044,626 2,044,626
Unrealized gain on short-term
restricted investments.......... -- 16,356,334 -- 16,356,334
Net loss.......................... (11,125,477) -- -- (11,125,477)
------------
Comprehensive income.............. 5,230,857
------------- ----------- ----------- ------------
Balances, December 31, 2000....... $(130,498,187) $16,356,334 $(2,735,761) $ 21,698,772
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (CONTINUED)
REDEEMABLE REDEEMABLE
COMMON STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- -------- ---------- ---------- -------- ------------ -------------
Balances at, December 31,
2000....................... -- -- 1,500 $1,283,250 20,956,887 $209,569 $138,366,817 $(130,498,187)
Issuance of common stock
related to equity financing
net of issuance cost
$396,593................... -- -- -- -- 707,947 7,079 3,596,328 --
Exercise of warrants......... -- -- -- -- 1,856,333 18,563 2,230,603 --
Issuance of redeemable 3%
convertible preferred
stock, net of issuance cost
$272,485................... -- -- 5000 1,542,515 -- -- 3,185,000 --
Conversion of redeemable
convertible preferred
shares to common stock..... -- -- (1,000) (906,500) 500,125 5,001 901,499 --
Accretion of redeemable
preferred stock............ -- -- -- 743,667 -- -- (743,667) --
Common stock issued pursuant
to employee benefit plan... -- -- -- -- 28,221 283 71,882 --
Exercise of employee and
consultant stock options... -- -- -- -- 170,508 1,705 242,833 --
Compensation expense from
grant of options........... -- -- -- -- 552,349 --
Deferred compensation........ -- -- -- -- -- -- 776,744 --
Amortization of deferred
compensation............... -- -- -- -- -- -- --
Realized gain on short-term
investments................ -- -- -- -- -- -- -- --
Unrealized loss on short-term
investments................ -- -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- -- (3,446,497)
Comprehensive loss........... -- -- -- -- -- -- -- --
--- --- ------ ---------- ---------- -------- ------------ -------------
Balances, December 31,
2001....................... -- -- 5,500 $2,662,932 24,220,021 $242,200 $149,180,388 $(133,944,684)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE DEFERRED STOCKHOLDERS'
INCOME (LOSS) COMPENSATION EQUITY
------------- ------------ -------------
Balances at, December 31,
2000....................... $16,356,334 $(2,735,761) $21,698,772
Issuance of common stock
related to equity financing
net of issuance cost
$396,593................... -- -- 3,603,407
Exercise of warrants......... -- -- 2,249,166
Issuance of redeemable 3%
convertible preferred
stock, net of issuance cost
$272,485................... -- -- 3,185,000
Conversion of redeemable
convertible preferred
shares to common stock..... -- -- 906,500
Accretion of redeemable
preferred stock............ -- -- (743,667)
Common stock issued pursuant
to employee benefit plan... -- -- 72,165
Exercise of employee and
consultant stock options... -- -- 244,538
Compensation expense from
grant of options........... -- -- 552,349
Deferred compensation........ -- (776,744) --
Amortization of deferred
compensation............... -- 1,242,408 1,242,408
Realized gain on short-term
investments................ (7,782,398) -- (7,782,398)
Unrealized loss on short-term
investments................ (8,573,936) -- (8,573,936)
Net loss..................... -- -- (3,446,497)
-----------
Comprehensive loss........... -- -- (12,020,433)
----------- ----------- -----------
Balances, December 31,
2001....................... $ -- $(2,270,097) $13,207,807
39
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (3,446,497) $ (11,125,477) $ (15,708,626)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................. 648,273 738,593 1,717,975
Amortization of deferred compensation......... 1,242,408 2,044,627 328,195
Compensation expense related to the grant of
stock options............................... 563,872 -- --
Fair market adjustment for property held for
sale........................................ -- -- 300,000
Other non-cash charges........................ -- -- 320,183
Gain on sale of short-term investments........ (7,782,398) (1,427,686) --
Gain on sale of rights to technology.......... (300,000) -- --
Loss on disposal of fixed assets.............. 30,477 -- 1,117,286
Loss on sale of intangibles................... -- -- 440,486
Changes in operating assets and liabilities:
Accrued interest receivable................. 12,087 25,488 164,397
Other receivable............................ (49,590) 3,000,000 --
Other current assets........................ 162,873 315,213 283,000
Other assets, net........................... (196,432) -- --
Accounts payable and accrued expenses....... (1,919,195) (92,255) 1,344,142
Accrued rent................................ 414,259 203,393 279,680
Deposits.................................... 103,896 -- --
Deferred revenue............................ -- -- (2,500,000)
------------- ------------- -------------
Net cash used in operating activities............. (10,515,967) (6,318,104) (11,913,282)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments...... 7,782,398 1,427,686 --
Purchases of marketable securities................ -- -- (4,397,676)
Proceeds from sales of marketable securities...... -- -- 13,923,813
Purchases of property, plant and equipment........ (334,321) (151,212) (192,747)
Proceeds on sale of fixed assets.................. 40,795 -- 746,448
Acquisition of other assets....................... (50,344) (886,751) (558,311)
Proceeds from sale of rights to technology, net... 300,000 -- --
Disposal of other assets.......................... -- -- 440,486
------------- ------------- -------------
Net cash provided by investing activities......... 7,738,528 389,723 9,962,013
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net....... 5,852,573 4,401,437 145,603
Proceeds from the exercise of stock options....... 157,682 685,089 518,442
Common stock issued for agreements................ -- 365,000 --
Proceeds from issuance of preferred stock, net.... 4,727,515 1,500,000 --
Change in debt service fund....................... -- 609,905 --
Repayments of debt and lease obligations.......... (332,083) (324,167) (1,817,500)
------------- ------------- -------------
Net cash provided by (used in) financing
activities...................................... 10,405,687 7,237,264 (1,153,455)
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents..................................... 7,628,248 1,308,883 (3,104,724)
Cash and cash equivalents at beginning of year.... 6,068,947 4,760,064 7,864,788
------------- ------------- -------------
Cash and cash equivalents at end of the year...... $ 13,697,195 $ 6,068,947 $ 4,760,064
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid................................... $ 246,328 $ 272,513 $ 335,203
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
40
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
StemCells, Inc. (the "Company") is a biopharmaceutical company that operates
in one segment, engaged in the development of novel stem cell therapies designed
to treat human diseases and disorders. Since inception, the Company has incurred
annual losses and negative cash flows from operations and has an accumulated
deficit of approximately $133.9 million at December 31, 2001. The Company has
not derived revenues from the sale of products, and does not expect to receive
revenues from product sales for at least several years.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant inter-company
balances and transactions have been eliminated on consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States, that requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be only those investments that are
highly liquid, readily convertible to cash and which mature within three months
from the date of purchase.
AVAILABLE-FOR-SALE SECURITIES
The Company determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company classifies such holdings as available-for-sale securities, which are
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. At December 31, 2000, the Company owned
126,193 shares of Modex. The Company sold all of its shares of Modex in 2001 for
a realized gain of $7.8 million. The Company no longer holds any shares of
Modex.
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. The only component of other comprehensive income is unrealized gains and
losses on our available-for-sale securities. Comprehensive income has been
disclosed in the statement of changes in redeemable preferred stock and
stockholders' equity.
PROPERTY, PLANT AND EQUIPMENT
As a result of the Company's decision to wind down the encapsulated cell
technology and relocate its corporate headquarters to California, certain
property considered by management to no longer be
41
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
necessary has been made available for sale or lease. The aggregate carrying
value of such property has been reviewed by management, subject to appraisal
and adjusted downward to estimated market value.
Property, plant and equipment, including that held under capital lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, or the lease term if shorter,
as follows:
Building and improvements................................... 3 - 15 years
Machinery and equipment..................................... 3 - 10 years
Furniture and fixtures...................................... 3 - 10 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or lease terms.
PATENT AND LICENSE COSTS
Prior to fiscal year 2001, the Company capitalizes certain patent costs
related to patent applications. Accumulated costs are amortized over the
estimated economic life of the patents, not to exceed 17 years, using the
straight-line method, commencing at the time the patent is issued. Costs related
to patent applications are charged to expense at the time such patents are
deemed to have no continuing value. Effective in 2001 the Company expenses all
patent costs as incurred. At December 31, 2001 and 2000, total costs capitalized
were $980,000 and $638,000 and the related accumulated amortization was $125,000
and $9,000, respectively. The increase in year 2001 was a result of a
reclassification from licenses to patents. Patent expense totaled $647,000,
$305,000, and $539,000 in 2001, 2000 and 1999, respectively. License costs are
capitalized and amortized over the period of the license agreement.
STOCK BASED COMPENSATION
The Company's employee stock option plan is accounted for under Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company grants qualified stock options for a fixed number of
shares to employees with an exercise price equal to the fair market value of the
shares at the date of grant. In accordance with APB 25, the Company recognizes
no compensation expense for qualified stock option grants. The Company also
issues non-qualified stock options for a fixed number of shares to employees
with an exercise price less than the fair market value of the shares at the date
of grant. When such options vest, the Company recognizes the difference between
the exercise price and fair market value as compensation expense in accordance
with APB 25.
The company accounts for stock options granted to non-employees in
accordance with FAS No. 123--ACCOUNTING FOR STOCK-BASED COMPENSATION AND EITF
96-18--ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES
FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES, and
accordingly, recognizes as expense the estimated fair value of such options as
calculated using the Black-Scholes valuation model. The fair value is remeasured
during the service period. and is amortized over the vesting period of each
option or the recipient's contractual arrangement, if shorter.
42
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG LIVED ASSETS
The Company routinely evaluates the carrying value of its long-lived assets.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets are less than
the carrying amount of those assets. If an impairment exists, the charge to
operations is measured as the excess of the carrying amount over the fair value
of the assets.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carry forwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE RECOGNITION
Revenues from collaborative agreements and grants are recognized as earned
upon either the incurring of reimbursable expenses directly related to the
particular research plan or the completion of certain development milestones as
defined within the terms of the collaborative agreement. Payments received in
advance of research performed are designated as deferred revenue. The Company
recognizes non-refundable upfront license fees and certain other related fees on
a straight-line basis over the development period. Fees associated with
substantive at risk, performance based milestones are recognized as revenue upon
their completion, as defined in the respective agreements. Incidental assignment
of technology rights are recognized as revenue at time of receipt.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141). This Statement addresses
financial accounting and reporting for business combinations. Statement 141
supersedes APB Opinion No. 16, Business Combinations, and amends or supersedes a
number of interpretations of that Opinion. Statement 141 requires that (1) all
business combinations be accounted for by a single method--the purchase method,
(2) all intangible assets acquired in a business combination are to be
recognized as assets apart from goodwill if they meet one of two criteria--the
contractual-legal criterion or the separability criterion and (3) in addition to
the disclosure requirements in Opinion 16, disclosure of the primary reasons for
a business combination and the allocation of the purchase price paid to the
assets acquired and liabilities assumed by major balance sheet caption. When the
amounts of goodwill and intangible assets acquired are significant in relation
to the purchase price paid, disclosure of other information about those assets
is required, such as the amount of goodwill by reportable segment and the amount
of the purchase price assigned to each major intangible asset class. The
provisions of Statement 141 apply to all business combinations initiated after
June 30, 2001. Statement 141 also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001,
or later. The Company will adopt the provisions of Statement 141 for any
business combinations that may be initiated.
43
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" ("Statement 142"). Under Statement
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their estimated useful lives.
The Company has not recorded any goodwill or indefinite lived intangible assets
prior to December 31, 2001. The adoption of this statement as of January 1, 2002
will not have a material impact on the Company's financial position, results of
operations or cash flow.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
disposal of a segment of a business." Statement 144 is effective for fiscal
years beginning after December 15, 2001. The Company will adopt Statement 144 as
of January 1, 2002 and it does not expect that the adoption of the Statement
will have a significant impact on the Company's financial position and results
of operations.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
Research and Development costs include costs of personnel, external services,
supplies, facilities and miscellaneous other costs.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
The Company has excluded outstanding stock options and warrants from the
calculation of diluted loss per common share because all such securities are
anti-dilutive for all applicable periods presented.
RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its consolidated statements of operations for the
year ended December 31, 2001 and its unaudited consolidated statements of
operations for the quarters ended March 31, 2001 and June 30, 2001. The
restatement is being made in order to record additional deemed dividends for
the beneficial conversion feature of the 6% Cumulative Convertible Preferred
Stock which should have been recorded in connection with the subsequent
change to the effective conversion price resulting from the issuance in 2001
of adjustable warrants in connection with the common stock financing
transaction with Millennium Partners, LP (See note 11). Accordingly, in its
restated financial statements, the Company has recorded additional deemed
dividends of $331,000 for the quarter ended March 31, 2001, $471,000 for the
quarter ended June 30, 2001 and $802,000 for the year ended December 31, 2001
(see note 15).
2. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999 AstraZeneca terminated the collaboration, as allowed under the
terms of the original collaborative agreement signed in 1995.
As a result of termination, management determined in July 1999 to
restructure its research operations to abandon all further encapsulated cell
technology research and concentrate its resources on the research and
development of its proprietary platform of stem cell technologies.
The Company wound down its research and manufacturing operations in Lincoln,
Rhode Island, and relocated its remaining research and development activities,
and its corporate headquarters, to the
44
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
2. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
facilities of its wholly owned subsidiary, StemCells California, Inc., in
California, in October 1999. The Company terminated legal, professional and
consulting contractual arrangements in support of ECT research. The Company had
used these legal, professional and consulting contractual arrangements to meet
regulatory requirements in support of its research work, to support contractual
arrangements with clinical sites, to provide assistance at clinical sites in
administrating therapy and documenting activities, and to assist in compliance
with FDA and other regulations regarding its clinical trials. ECT related patent
law work was also terminated. The Company also engaged professional consultants
in connection with the determination to exit its ECT activities and restructure
its operations, which concluded with the exit from ECT activities and relocation
of its corporate headquarters to California. The Company reduced its workforce
by approximately 58 employees who had been focused on ECT programs and 10
administrative employees. As a result, the Company sold excess furniture and
equipment in December 1999 and is seeking to sublease the science and
administrative facility and to sell the pilot manufacturing facility.
Wind-down expenses totaled $0, $3,327,360 and $6,047,806, for the year ended
December 31, 2001, 2000 and 1999, respectively. These expenses relate to the
wind-down of our encapsulated cell technology research and other Rhode Island
operations and the transfer of the corporate headquarters to California.
At December 31, 1999, the Company's $1.6 million wind-down reserve included
approximately $1.2 million for the RIPSAT settlement and approximately $0.4
million for Rhode Island facility for the estimated lease payments and operating
costs of the Rhode Island facilities through an expected disposal date of June
30, 2000. In 2000 the Company settled with RIPSAT, paid $1.2 million and paid
0.4 million related to Rhode Island facilities. The Company did not sublet the
Rhode Island facilities in 2000 and therefore made a change in estimate to
accrue additional expenses of $3.3 million to cover operating lease payments,
utilities, taxes, insurance, maintenance, interest and other non-employee
expenses through 2001. In the year 2001 the Company paid $1.7 million of
expenses which were recorded against the reserve. There is no reserve remaining
at December 31, 2001. Even though it is the intent of the Company to dispose of
these facilities at the earliest possible time, it cannot determine with
certainty a fixed date by which such disposal will occur. In light of this
uncertainty, for the year 2002 and beyond, the Company will record further costs
as operating expenses as incurred.
45
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
2. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of wind-down expenses, including the amounts and periods of
recognition, are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------- ------------
Employee severance costs............................ -- $1,554,000
Impairment losses(1):
Fixed assets...................................... -- 800,000
ECT patents....................................... -- 260,000
---------- ----------
-- 1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters............................ $3,327,000 702,000
Pilot manufacturing plant......................... -- 562,000
---------- ----------
3,327,000 1,264,000
Employee outplacement............................... -- 200,000
RIPSAT settlement(3)................................ -- 1,172,000
Loss on sale of assets(4):
Fixed assets...................................... -- 318,000
ECT patents....................................... -- 180,000
---------- ----------
-- 498,000
Write-down of pilot plant(5)........................ -- 300,000
---------- ----------
$3,327,000 $6,048,000
========== ==========
------------------------
(1) Management's estimate of the fixed asset impairment was derived from
communications with an outside auction house. The patent impairment loss was
based on preliminary negotiations with parties interested in acquiring the
patents.
(2) Facilities carrying costs include operating lease payments, utilities,
property taxes, insurance, maintenance, interest and other non-employee
related expenses necessary to maintaining these facilities through December
31, 2001
(3) The Company originally received funding from the Rhode Island Partnership
for Science and Technology (RIPSAT) for purposes of conducting ECT
activities conditioned upon maintaining the operation within the state.
RIPSAT claimed that the Company's decision to exit ECT activities and close
the Rhode Island operation was in violation of the funding arrangement and
that the Company was obligated to return a portion of the funding proceeds.
Although the Company disputed these claims, during the fourth quarter of
1999, management determined it was in the best interest of the Company to
settle the issue.
(4) The Company held an auction to sell all ECT fixed assets. Proceeds from that
sale resulted in a loss, which was related to machinery and equipment
($292,000), and furniture and fixtures ($26,000).
46
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
2. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
(5) The write-down of the pilot plant was based on an independent property
appraisal.
Property held for sale at December 31, 2001 and 2000, consisted of $3.2
million relating to the Company's pilot plant facility located in Lincoln, Rhode
Island. The Company suspended depreciation of these assets in 1999. The balance
reflected a $300,000 impairment loss included as part of the additional
wind-down expenses.
3. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells California, Inc. was completed. As part of the acquisition of
StemCells, Richard M. Rose, M.D., became President, Chief Executive Officer and
director of the Company and Dr. Irving Weissman became a director of the
Company. Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events. To
attract and retain Drs. Rose, Weissman, Gage and Anderson, and to expedite the
progress of the Company's stem cell program, the Company awarded these
individuals options to acquire a total of approximately 1.6 million shares of
the Company's common stock, at an exercise price of $5.25 per share, the quoted
market price at the grant date. The Company also designated a pool of 400,000
options to be granted to persons in a position to make a significant
contribution to the success of the stem cell program. Under the original grants,
approximately 100,000 of these options were exercisable immediately on the date
of grant, 1,031,000 of these options would vest and become exercisable only upon
the achievement of specified milestones related to the Company's stem cell
development program and the remaining 468,750 options would vest over eight
years. In connection with the 468,750 options issued to a non-employee, Dr.
Anderson, the Company recorded deferred compensation of $1,750,000, the fair
value of such options at the date of grant, which will be amortized over an
eight-year period. The deferred compensation expense associated with the
unvested portion of the grants as of December 31, 2001 was $968,000. The fair
value was determined using the Black-Scholes method.
Effective October 31, 2000, the Company agreed with Drs. Weissman and Gage
to revise their 468,750 milestone-vesting stock options to time-based vesting,
on the same schedule as Dr. Anderson's option. Under each of the revised
options, 168,750 shares vested immediately, and the remaining 300,000 shares
will vest at 50,000 per year on September 25, until September 25, 2005, when the
final 100,000 shares will vest. The exercise price remains $5.25 per share. The
Company recorded $1,647,000 and $692,000 for the year 2000 and 2001
respectively, as compensation expense for the fair market value of the vested
portion of such options in an amount determined using the Black-Scholes method.
The deferred compensation expense associated with the unvested portion of the
grants was determined to be approximately $1,104,000 at December 31, 2001. As
part of the revision of the options, Drs. Weissman and Gage relinquished all
rights under an agreement. These individuals had the right to license the
non-brain stem cell technology in exchange for a payment to the Company equal to
all prior funding for such research plus royalty payments. The Company plans to
revalue the options using the Black-Scholes method on a quarterly basis and
recognize additional compensation expense accordingly.
47
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
4. INVESTMENTS
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutics, Ltd., (Modex) as an independent company.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounted for this
investment under the cost method from that date. On June 23, 2000, Modex
completed an initial public offering of its common stock. At December 31, 2000,
the Company owned 126,193 shares of Modex. On January 9, 2001, the Company sold
22,616 Modex shares for a net price of 182.00 Swiss francs per share, which
converts to $112.76 per share, for total proceeds of $2,550,230. On May 01,
2001, the Company sold its remaining shares in Modex for a net price of 87.30
Swiss Francs per share, which converts to approximately $50.51 per share, for
total proceeds of approximately $5,232,168, net of commissions and fees. The
Company no longer holds any shares of Modex.
5. ASSIGNMENT OF RIGHTS
On April 30, 2001, in consideration for $300,000 received from Modex and the
assistance of Modex in executing the sale of StemCells' holding of Modex shares,
StemCells agreed to assign to Modex the rights concerning future payments under
the Asset Purchase and License Agreement between the Company and Neurotech SA,
by which Neurotech SA purchased the Company's former encapsulated cell therapy
technology.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
Building and improvements.......................... $ 715,397 $ 703,095
Machinery and equipment............................ 1,884,581 1,766,448
Furniture and fixtures............................. 273,999 188,736
----------- -----------
2,873,977 2,658,279
Less accumulated depreciation and amortization..... (1,654,658) (1,207,218)
----------- -----------
$ 1,219,319 $ 1,451,061
=========== ===========
Depreciation expense was $495,000, $451,000, and $1,436,000 for the years
ending December 31, 2001, 2000 and 1999, respectively.
Certain property, plant and equipment in Rhode Island were acquired under
capital lease obligations. These assets totaled $5,827,000 at December 31, 2001
and 2000, respectively, with related accumulated amortization of $2,747,000 at
December 31, 2001 and 2000, respectively. As a result of the Company's decision
to wind down its operations in Rhode Island and relocate to California, this
property has been classified as held for sale.
48
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
7. OTHER ASSETS, NET
Other assets are as follows:
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Patents, net......................................... $ 854,974 $ 629,203
License agreements, net.............................. 380,092 669,000
Security deposit--building lease..................... 752,500 750,000
Deposit--other....................................... 4,641 16,321
Deferred financing costs, net........................ -- 109,388
Restricted Cash--(Letter of Credit).................. 275,000 --
---------- ----------
$2,267,207 $2,173,912
========== ==========
At December 31, 2001 and 2000, accumulated amortization was $1,293,000 and
$1,140,000, respectively, for patents and license agreements.
8. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-------------------
2001 2000
-------- --------
External services....................................... $ 88,649 $219,051
Employee compensation................................... 173,645 109,007
Other................................................... 236,871 509,300
-------- --------
$499,165 $837,358
======== ========
9. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of the related assets.
49
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
9. LEASES (CONTINUED)
The Company entered into a fifteen-year lease for a laboratory facility in
connection with a sale and leaseback arrangement in 1997. The lease has a rent
escalation clause and accordingly, the Company is recognizing rent expense on a
straight-line basis. At December 31, 2001, the Company had $918,528 in deferred
rent expense for this facility.
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto, CA. The
new facility includes space for animals, laboratories, offices, and a GMP (Good
Manufacturing Practices) suite. GMP facilities can be used to manufacture
materials for clinical trials. The rent will average approximately $3.15 million
per year over the term of the lease. In addition the Company has issued a letter
of credit amounting to $275,000 to serve as a deposit for the duration of the
lease. The lease has a rent escalation clause and accordingly, the Company is
recognizing rent expense on a straight-line basis. At December 31, 2001 the
Company had $201,477 in deferred rent expense for this facility. The lease on
the Company's former Sunnyvale headquarters was terminated on August 31, 2001.
As of December 31, 2001, future minimum lease payments and sublease income
under operating and capital leases and principal payments on equipment loans are
as follows:
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
---------- ----------- ----------
2002.................................... $ 519,719 $ 2,308,838 $1,265,692
2003.................................... 436,909 4,568,274 2,000,746
2004.................................... 425,713 4,677,197 2,016,578
2005.................................... 412,587 4,789,388 2,072,545
2006.................................... 401,289 1,268,120 675,653
Thereafter.............................. 1,910,288 7,529,296 --
---------- ----------- ----------
Total minimum lease payments............ 4,106,505 $25,141,113 $8,031,214
Less amounts representing interest...... 1,501,505 -- --
---------- ----------- ----------
Present value of minimum lease
payments.............................. 2,605,000 -- --
Less current maturities................. 289,167 -- --
---------- ----------- ----------
Capitalized lease obligations, less
current maturities.................... $2,315,833 -- --
========== =========== ==========
Rent expense for the years ended December 31, 2001, 2000 and 1999, was
$2,629,000, $1,111,000 and $947,000 respectively.
10. GRANTS
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the National Institutes of Health's Small Business Innovation
Research (SBIR) office. The grant, which will support joint work with virologist
Dr. Jeffrey Glenn at Stanford University, is aimed at characterizing the human
cells that can be infected by human hepatitis viruses and to develop a small
animal model using the cells that are most infectable by these viruses to
develop screening assays and identify novel drug for the disease. The Company
received $300,000, of which $150,367 represents the Company's
50
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
10. GRANTS (CONTINUED)
share of the joint effort through June 30, 2001 and has been recognized as
revenue. The remainder, $149,633, was paid to Stanford University as its share
of the joint effort. In addition the Company received and recognized as revenue
$298,614 for research from a prior SBIR grant relating to the neural program.
On September 30 2001, the Company was awarded a four-year, $225,000 per year
grant from the National Institute of Diabetes & Digestive & Kidney Disorders of
the National Institutes of Health for the Company's liver stem cell program
which focuses on identifying liver stem and progenitor cells for the treatment
of liver diseases. The grant is subject to the availability of funds and
satisfactory progress of the project. As of December 31, 2001 the Company has
recognized $56,250 related to this award.
11. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP at $4.33 per share. In the purchase
agreement, the Company granted Millennium an option to purchase up to an
additional $3 million of its common stock. Millennium exercised its option to
purchase $1 million of the Company's common stock on August 23, 2000 at $5.53
per share. On June 8, 2001, Millennium exercised its remaining option to
purchase $2 million of the Company's common stock at $4.3692 per share. As a
result of the financing agreement, Millennium received five year warrants to
purchase 101,587 shares of common stock at $4.725 per share, 19,900 shares of
common stock at $6.03 per share, and 50,352 shares at $4.7664 per share. The
warrants are callable by StemCells any time at $7.875, $10.05 and $7.944 per
underlying share respectively. The calculated value of these callable warrants
using the Black-Scholes method is $701,073, which is accounted for as stock
issuance cost.
In addition to the above, Millennium was issued adjustable warrants in
connection with the original $4 million purchase, each of which entitled
Millennium to receive additional shares on eight dates beginning six months from
the respective closing dates and every three months thereafter. The adjustable
warrants could be exercised at any time prior to the thirtieth day after the
last of such dates. The number of additional shares Millennium was entitled to
on each date was based on the number of shares of common stock Millennium
continued to hold on each date and the market price of the Company's common
stock over a period prior to each date. The exercise price per share under the
adjustable warrant was $0.01. Millennium exercised the first of the adjustable
warrants to purchase 463,369, 622,469, and 25,804 shares on March 30, 2001, July
26, 2001 and August 15, 2001 respectively at $0.01 per share. The Company has
accounted for the sale of the stock and warrants by adding that portion of the
proceeds equal to the par value of the new shares to common stock and the
balance including the value of the warrants to additional paid in capital. On
December 4, 2001, the Company entered into an agreement with Millennium under
which it issued 176,101 shares of the Company's common stock as a final cashless
exercise of all outstanding adjustable warrants that Millennium was entitled to
or would be entitled to. Immediately following delivery of these shares, any
further right to acquire common stock under these adjustable warrants was
cancelled by the agreement.
51
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
11. STOCKHOLDERS' EQUITY (CONTINUED)
EQUITY LINE
On May 10, 2001, the Company entered into a common stock purchase agreement
with Sativum Investments Limited for the potential future issuance and sale of
up to $30,000,000 of the Company's common stock, subject to restrictions and
other obligations. The Company, at its sole discretion, may draw down on this
facility, from time to time, and Sativum is obligated to purchase shares of the
Company's common stock at a 6% discount to a volume weighted average market
price over the 20 trading days following the draw-down notice. The Company's
volume weighted average market price is calculated by adding the total dollars
traded in every transaction in a given trading day and dividing that number by
the total number of shares traded during that trading day. The Company is
limited with respect to how often it can exercise a draw down and the amount of
each draw down.
In connection with the Company's execution of the common stock purchase
agreement with Sativum, the Company issued three three-year warrants to purchase
an aggregate of 350,000 shares of the Company's common stock at $2.38 per share
to Sativum (250,000 shares), Pacific Crest Securities Inc. (75,000 shares) and
Granite Financial Group, Inc. (25,000 shares). The Company has valued the
warrants using the Black-Scholes method and recorded the fair value in
stockholders' equity. These amounts are $522,500, $167,750 and $55,250
respectively. The exercise price and number of shares are subject to adjustment
for subdivisions, combinations, stock dividends and reorganizations.
The Company cannot sell more than 3,922,606 shares pursuant to the common
stock purchase agreement without stockholder approval. The Company delivered a
draw down notice to Sativum Investments Limited, dated as of July 11, 2001,
exercising the Company's right to draw down up to $5,000,000 at a market-based
share price not less than $5.00 per share beginning July 12, 2001. Sativum
purchased a total of 707,947 shares of the Company's common stock at an average
purchase price of $5.65 per share, net of Sativum's discount of six percent.
Because the market based price of the Company's common stock was less than $5.00
for four trading days during the draw down period, the $5,000,000 request was
reduced to $4,000,000. The Company's placement agents, Pacific Crest Securities,
Inc. and Granite Financial Group, Inc. received $80,000 and $40,000,
respectively, as placement fees in connection with this draw down, resulting in
net proceeds to the Company of $3,603,407, after paying escrow fees and other
associated costs. The Company's placement agents have exercised their warrants
in full, and the Company has received payment of $238,050 for the shares issued
to them.
3% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On December 4, 2001, the Company issued 5,000 shares of 3% cumulative
convertible preferred stock to Riverview Group, L.L.C., (Riverview Group), a
wholly owned subsidiary of Millennium Partners, L.P. plus a 5-year warrant to
purchase 350,877 shares of common stock at $3.42 per share. The Company received
net proceeds of $4,727,515. This preferred stock is convertible into shares of
the Company's common stock at a conversion price of $2.00 per share at the
option of Riverview Group. The preferred stock contains a mandatory redemption
feature where the Company will redeem unconverted preferred stock on
December 4, 2003. The conversion price is subject to adjustment for stock
splits, dividends, distributions, reclassifications and similar events. The
conversion price may be below the trading market price at the time of the
conversion. The final closing on the NASDAQ National Market of the Company's
common stock on December 4, 2001 was $2.90 per share. The
52
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
11. STOCKHOLDERS' EQUITY (CONTINUED)
company has valued the warrants and the beneficial conversion feature reflecting
the Dec 4, 2001 commitment date and the most beneficial per share discount
available to the preferred shareholders. As the preferred shares contain a
stated redemption, such value of $3,185,000, including issuance costs of
$272,485, is recorded as a discount to the preferred shares. The preferred
shares will be accreted to its mandatory redemption amount and the accretion
will result in a deemed dividend. The deemed dividend has been reflected as an
adjustment to net loss applicable to common stockholders. The Company filed a
registration statement on Form S-3 covering the shares of common stock
underlying the 3% Cumulative Convertible Preferred Stock, and the SEC declared
it effective on January 10, 2002. On December 7, 2001, Riverview Group converted
1,000 shares of its 3% cumulative convertible preferred stock for 500,125 shares
of the Company's common stock. The holders of the preferred stock have
liquidation rights equal to their original investment plus accrued but unpaid
dividends.
6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000 the Company issued 1,500 shares of 6% cumulative
convertible preferred stock plus a warrant for 75,000 shares of our common stock
to two members of its Board of Directors for $1,500,000 on terms more favorable
to the Company than it was then able to obtain from outside investors. The
shares are initially convertible at the option of the holders into common stock
at $3.77 per share (based on the face value of the preferred shares), and will
be converted automatically on April 13, 2002 if they have not been converted
before then. The conversion price is subject to adjustment upon certain equity
transactions, as defined by the applicable agreement and may be below the
trading market price of the stock at the time of conversion. The Company has
valued the beneficial conversion feature reflecting the April 13, 2000
commitment date and the most beneficial per share discount available to the
preferred shareholders. Such value was $481,000 and is treated as a deemed
dividend as of the commitment date. The holders of the preferred stock have
liquidation rights equal to their original investment plus accrued but unpaid
dividends.
During the first and second quarters of 2001, the conversion price was
reduced as a result of the issuance of adjustable warrants to Millennium LP, as
described above. The Company has revalued the beneficial conversion feature
reflecting the reduced conversion prices and the most beneficial per share
discount available to the preferred shareholders and has recorded additional
deemed dividends aggregating $802,000 as of the applicable reset dates.
In July 2001, the SEC staff made a staff announcement, "Classification and
Measurement of Redeemable Securities", (EITF D-98) which clarifies Rule5-02.28
of Regulation S-X, which was previously adopted in accounting series Release No.
268, "Presentation in Financial Statements of Redeemable Preferred Stock". This
announcement addresses financial statement classification and measurement of
securities subject to mandatory redemption requirements or whose redemption is
outside of the control of the issuer. Rule 5-02.28 requires preferred securities
that are redeemable for cash or other assets to be classified outside of
permanent equity if they are redeemable (1) at a fixed or determinable price on
a fixed or determinable date (2) at the option of the holder, or (3) upon the
occurrence of an event that is not solely within the control of the issuer.
The 6% cumulative convertible preferred stock issued in April 2000 was
classified with stockholders' equity since issuance. The agreement provides that
a mandatory redemption is triggered if a change in control occurs. A purchaser
could acquire a majority of the voting power of the outstanding stock, without
Company approval, thereby triggering a redemption. Accordingly the Company has
reclassified the 6% cumulative convertible preferred stock outside of permanent
equity for all periods presented, in accordance with the transition guidance of
EITF D-98. Since a majority of the outstanding stock of the Company is the
control of outside investors, a hostile takeover or other sale could occur
outside the control of the Company and thereby trigger a change in control and
ultimately a redemption. There is no accretion of the fair value of the
preferred shares to its
53
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
11. STOCKHOLDERS' EQUITY (CONTINUED)
redemption amount because the redemption is uncertain. The redemption only takes
place when the Company's outside investors vote for a takeover or a sale and
there is no current indication that this event will occur.
STOCK ISSUED FOR TECHNOLOGY LICENSES
Under a 1997 License Agreement with NeuroSpheres, Ltd., the Company obtained
an exclusive patent license in the field of transplantation. The Company entered
into an additional license agreement with NeuroSpheres as of October 31, 2000,
under which the Company obtained an exclusive license in the field of
non-transplant uses, such as drug discovery and drug testing, so that together
the licenses are exclusive for all uses of the technology. The Company made
up-front payments to NeuroSpheres of 65,000 shares of its common stock and
$50,000, and will make additional cash payments when milestones are achieved in
the non-transplant field, or in any products employing NeuroSpheres patents for
generating cells of the blood and immune system from neural stem cells.
The Company also entered into license agreements with the California
Institute of Technology and issued 27,313 shares of common stock upon execution
of the license agreement and its amendment. The Company must pay an additional
$10,000 upon the issuance of each of the four patents licensed under the amended
agreement. Upon entering a license agreement with the Oregon Health Sciences
University ("OHSU") in March 1997, the Company issued it 4,838 shares of common
stock and an option to purchase up to 62,888 additional shares to OHSU with an
exercise price of $.01 per share, 9,675 of which have vested by passage of time
and the others of which will vest, if at all, on the achievement of specified
milestones.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors. In
the case of incentive stock options, such price will not be less than the fair
market value on the date of grant. Options generally vest ratably over four
years and are exercisable for ten years from the date of grant or within three
months of termination. At December 31, 2001, the Company had reserved 6,615,261
shares of common stock for the exercise of stock options.
54
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents the combined activity of the Company's stock
option plans for the years ended December 31:
2001 2000 1999
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding at January 1....... 2,716,966 $4.32 939,335 $ 2.65 1,654,126 $3.62
Granted........................ 1,212,082 2.61 2,485,090 4.08 536,078 1.08
Exercised...................... (170,105) 0.93 (540,927) 1.015 (604,362) 1.5
Canceled....................... (106,383) 2.26 (166,532) 4.77 (646,507) 5.31
--------- ----- --------- ------ --------- -----
Outstanding at December 31..... 3,652,560 3.98 2,716,966 $ 4.32 939,335 $2.65
========= ========= =========
Options exercisable at
December 31.................. 1,287,918 $3.74 731,523 $ 4.01 594,216 $3.44
========= ========= =========
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
Less than $5.00................. 1,884,560 8.71 $ 2.53 832,046 $ 2.32
$5.01 - $10.00.................. 1,687,000 5.88 5.25 374,872 5.28
Greater than $10.00............. 81,000 0.94 11.03 81,000 11.03
--------- ---------
3,652,560 1,287,918
========= =========
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 2001, 2000, and 1999, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 2001, 2000,
and 1999, consistent with the provisions of FAS 123:
2001 2000 1999
------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ------------ ------------ ------------ ------------
Net loss............. $(3,446,497) $(5,201,774) $(11,125,477) $(12,160,752) $(15,708,626) $(15,764,569)
Net loss per share... $ (.22) $ (.30) $ (.58) $ (.62) $ (.84) $ (.84)
55
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
11. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value per share of options granted during 2001,
2000 and 1999 was $2.61, $4.13 and $.82, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Expected life (years)............ 5 5 5 N/A N/A .5
Interest rate.................... 4.39% 6.5% 5.5% N/A N/A 5.0%
Volatility....................... 154.2% 167.8% 96.7% N/A N/A% 96.7%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future. On August 04, 1999
the board suspended the 1992 Employee Stock Purchase Plan.
The effects on pro forma net loss and net loss per share of expensing the
estimated fair value of stock options and shares issued pursuant to the stock
purchase plan are not necessarily representative of the effects on reporting the
results of operations for future years. As required by FAS 123, the Company has
used the Black-Scholes model for option valuation, which method may not
accurately value the options described.
COMMON STOCK RESERVED
The Company has the following shares of common stock reserved for the
exercise of options, warrants and other contingent issuances of common stock.
Shares reserved for exercise of stock options............... 6,615,261
Shares reserved for the employee benefit plan............... 23,031
Shares reserved for the equity line and related warrants.... 5,250,000
Shares Reserved for 6% convertible preferred stock and
related warrants.......................................... 945,486
Shares Reserved for 3% convertible preferred stock and
related warrants.......................................... 2,845,339
----------
Total....................................................... 15,679,117
12. RESEARCH AGREEMENTS
The Company has entered various research agreements and collaborations with
academic institutions. Under such arrangements, the Company is typically granted
rights to the related intellectual property or an option to obtain such rights
on terms to be agreed, in exchange for research funding and specified royalties
on any resulting product revenue.
In November 1997, the Company signed a Research Funding and Option Agreement
with The Scripps Research Institute ("Scripps") relating to certain stem cell
research. Under the terms of the Agreement, StemCells agreed to fund research in
the total amount of approximately $931,000 at Scripps over a period of three
years. StemCells paid Scripps approximately $309,000 in 1999, $225,000
56
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
12. RESEARCH AGREEMENTS (CONTINUED)
in 2000, and $0 in 2001. In addition, the Company agreed to issue to Scripps
4,837 shares of the Company's common stock and a stock option to purchase 9,674
shares of the Company's Common Stock with an exercise price of $.01 per share
upon the achievement of specified milestones. Under the Agreement, StemCells has
an option for an exclusive license to the inventions resulting from the
sponsored research, subject to the payment of royalties and certain other
amounts, and is obligated to make payments totaling $425,000 for achievement of
certain milestones. The Company also entered a Sponsored Research Agreement and
a License Agreement with Oregon Health Sciences University ("OHSU") in March
1997, relating to other certain research concerning liver repopulating cells.
Under subsequent Sponsored Research Agreements with OHSU, StemCells paid OHSU
approximately $80,500 in 2000 and $105,000 in 2001. In addition, the Company
issued 4,838 shares of common stock and an option to purchase up to 62,888
additional shares to OHSU with an exercise price of $.01 per share, 9,675 of
which have vested by passage of time and the others of which will vest, if at
all, on the achievement of specified milestones.
In 2001, the Company entered into a collaboration with Stanford University
to pursue certain additional research funded by the National Institutes of
Health under an SBIR grant discussed above. Pursuant to its agreement, the
Company paid Stanford approximately $150,000 in 2001.
13. INCOME TAXES
Deferred income taxes reflect net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
Deferred tax assets:
Capitalized research and development costs................ $ 3,770,000 $ 6,000,000
Net operating losses...................................... 43,700,000 44,000,000
Research and development credits.......................... 4,460,000 4,260,000
Other..................................................... 80,000 893,000
------------ ------------
Deferred tax liabilities:
Unrealized gain on investments............................ -- (6,543,000)
Valuation allowance......................................... (52,010,000) (48,610,000)
============ ============
Net deferred tax assets..................................... $ -- $ --
============ ============
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $3,400,000, $1,084,000 and $6,272,000 during 2001, 2000
and 1999, respectively.
As of December 31, 2001 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $110,000,000 which expire in the
years 2004 through 2021, and federal research and development tax credits of
approximately $4,100,000 which expire in the year 2004 through 2021.
57
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
13. INCOME TAXES (CONTINUED)
Utilization of the Company's net operating loss may be subject to
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
14. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company matches 50% of employee
contributions, up to a maximum of 6% of the employee's compensation, with the
Company's common stock. The related expense was $63,000, $33,000, and $103,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
(RESTATED) (RESTATED)
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001:
Total revenue............................................ $ 100 $ 300 $ 276 $ 129
Operating expenses....................................... 2,641 3,959 2,119 3,672
Net income (loss)........................................ 269 1,595 (1,787) (3,524)
Basic and diluted net income(loss) per share applicable
to common Shareholders, as reported.................... $ 0.01 $ 0.07 $ (0.08) $ (0.19)
Basic and diluted net income (loss) per share applicable
to common Shareholders, restated (1)................... * $ 0.05 $ (0.08) $ (0.19)
2000:
Net revenue.............................................. $ -- $ -- $ -- $ 74
Operating expenses....................................... 1,799 1,939 2,553 6,378
Net loss................................................. (1,794) (532) (2,539) (6,260)
Basic and diluted net loss per share applicable to common
shareholders........................................... $(0.09) $(0.04) $( 0.13) $ (0.30)
Cumulative effect of a change in accounting principle.... -- -- -- $ (0.01)
* Less than $(0.01) per share
(1) The unaudited quarterly financial information for the first and second
quarters of 2001 have been restated to reflect additional deemed dividends to
preferred shareholders of $331,000 for the quarter ended March 31, 2001 and
$471,000 for the quarter ended June 30, 2001.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND
CONTROL
The information required by this Item is incorporated by reference from our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 2,
2002.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 2,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 2,
2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 2,
2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K/A.
(1) Financial Statements:
The financial statements filed as part of this Report are listed and indexed
under Item 8 above.
(2) Financial Statement Schedules:
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(3) Exhibits.
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
59
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
4.10XXX Registration Rights Agreement dated as of May 10, 2001
between the Registrant and Sativum Investments Limited.
4.11XXX Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Sativum Investments Limited.
4.12XXX Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Pacific Crest Securities, Inc.
4.13XXX Warrant dated May 10, 2001 to Purchase Common Stock
issued to Granite Financial Group, Inc.
4.14XXX Callable Warrant, dated June 21, 2001, issued to
Millennium Partners, L.P.
4.15XXX Common Stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P.
4.16{**} Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and other Special
Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of 3% Cumulative
Convertible Preferred Stock for StemCells, Inc.
4.17{**} Warrant to Purchase Common Stock--Riverview Group, LLC
4.18XXXX Warrant to Purchase Common Stock--Cantor Fitzgerald & Co.
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
60
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as
of March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in
April 1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and
Dr. Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38{*} Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40$** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41$** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42$** License Agreement dated as of October 27, 1998 between
The Scripps Research Institute and the Registrant.
10.43$** License Agreement dated as of October 27, 1998 between
The Scripps Research Institute and the Registrant.
61
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
10.44$** License Agreement dated as of November 20, 1998 between
The Scripps Research Institute and the Registrant.
10.45$$** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July
31, 2000 between the Registrant and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
the Registrant and Millennium Partners, L.P.
10.50XXX Common Stock Purchase Agreement, dated as of May 10,
2001, between the Registrant and Sativum Investments
Limited.
10.51XXX Escrow Agreement, dated as of May 10, 2001, among the
Registrant, Sativum Investments Limited and Epstein,
Becker & Green, P.C.
10.52XX License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn
10.54XX Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant.
10.55XXX Registration Rights Agreement, dated as of June 21,
2001, by and between the Registrant and Millennium
Partners, L.P.
10.56XXX Subscription Agreement, dated as of June 21, 2001, by
and between the Registrant and Millennium Partners, L.P.
10.57$$$ 2001 Equity Incentive Plan
10.58{**} Subscription Agreement, dated as of December 4, 2001 between
the Registrant and Riverview Group, L.L.C.
10.59{**} Registration Rights Agreement, dated as of December 4,
2001 between the Registrant and Riverview Group, L.L.C.
10.60{**} Agreement dated as of December 4, 2001 between the
Registrant and Millennium Partners, L.P.
10.61{**} Agreement dated as of December 4, 2001 among the Registrant,
Millennium Partners, L.P. and Riverview Group, L.L.C.
21X Subsidiaries of the Registrant.
62
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1XX Side Letter, dated March 17, 2001, between the Company
and Oleh S. Hnatiuk regarding NeuroSpheres License
Agreement, dated October 30, 2000.
------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement
on Form S-1, File No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
63
{*} Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
{**} Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on December 7, 2001.
$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1998 and filed on March 31, 1999.
$$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K on
January 14, 2000.
$$$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's definitive proxy statement filed
May 1, 2001.
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
XX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 and filed on April 2, 2001.
XXX Previously filed with the Commission as an Exhibit to, and incorporate
herein by reference to, the Registrant's Registration Statement filed on
Form S-1 as amended to Form S-3, File No. 333-61726.
XXXX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement filed on
Form S-3, File No. 333-75806.
(b) CURRENT REPORTS ON FORM 8-K.
A current report on Form 8-K was filed by the Registrant on December 7,
2001. In that report, under Item 5, the Registrant reported: (a) the
cancellation of all adjustable warrants previously issued to Millennium
Partners, L.P. in connection with an exercise of the warrants by Millennium, and
(b) the issuance of preferred stock and a warrant to purchase common stock to a
wholly owned subsidiary of Millennium.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STEMCELLS, INC.
By: /s/ MARTIN MCGLYNN
-----------------------------------------
Martin McGlynn
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: August 2, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
President and Chief
/s/ MARTIN MCGLYNN Executive Officer and
------------------------------------------- Director (principal August 2, 2002
Martin McGlynn executive officer)
Controller and Acting Chief
/s/ GEORGE KOSHY Financial Officer
------------------------------------------- (principal financial August 2, 2002
George Koshy officer and principal
accounting officer)
/s/ JEAN-JACQUES BIENAIME
------------------------------------------- Director August 2, 2002
Jean-Jacques Bienaime
------------------------------------------- Director August 2, 2002
Ricardo B. Levy, Ph.D.
/s/ ROGER PERLMUTTER, M.D.
------------------------------------------- Director August 2, 2002
Roger Perlmutter, M.D.
------------------------------------------- Director, Chairman of the August 2, 2002
John J. Schwartz, Ph.D. Board
/s/ IRVING L. WEISSMAN, M.D.
------------------------------------------- Director August 2, 2002
Irving L. Weissman, M.D.
65
Certification
To the extent required by the Sarbanes-Oxley Act of 2002, each of the
undersigned hereby certifies, to their knowledge, that (i) this report fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and (ii) the information contained in this report fairly presents, in
all material respects, the financial condition and results of operations of the
registrant.
/s/ Martin McGlynn
-------------------------
Martin McGlynn
President and Chief Executive Officer
/s/ George Koshy
-------------------------
George Koshy
Controller and Acting Chief Financial Officer
August 2, 2002
EXHIBIT INDEX
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo
4.4X Warrant to Purchase Common Stock--Robert Farrell
4.5X Warrant to Purchase Common Stock--Joseph Donahue
4.6X Warrant to Purchase Common Stock--Hunter Singer
4.7X Warrant to Purchase Common Stock--May Davis
4.8X Common Stock Purchase Warrant
4.9X Callable Warrant
4.10XXX Registration Rights Agreement dated as of May 10, 2001
between the Registrant and Sativum Investments Limited.
4.11XXX Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Sativum Investments Limited.
4.12XXX Warrant, dated May 10, 2001, to Purchase Common Stock
issued to Pacific Crest Securities, Inc.
4.13XXX Warrant dated May 10, 2001 to Purchase Common Stock
issued to Granite Financial Group, Inc.
4.14XXX Callable Warrant, dated June 21, 2001, issued to
Millennium Partners, L.P.
4.15XXX Common Stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P.
4.16{**} Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and other Special
Rights of Preferred Stock and Qualifications,
Limitations and Restrictions Thereof of 3% Cumulative
Convertible Preferred Stock for StemCells, Inc.
4.17{**} Warrant to Purchase Common Stock--Riverview Group, LLC
4.18XXXX Warrant to Purchase Common Stock--Cantor Fitzgerald & Co.
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.17**++++ Development, Marketing and License Agreement, dated as
of March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in
April 1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and
CytoTherapeutics, Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and
Dr. Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan")
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38{*} Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40$** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
10.41$** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.43$** License Agreement dated as of October 27, 1998 between
The Scripps Research Institute and the Registrant.
10.45$$** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July
31, 2000 between the Registrant and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
the Registrant and Millennium Partners, L.P.
10.50XXX Common Stock Purchase Agreement, dated as of May 10,
2001, between the Registrant and Sativum Investments
Limited.
10.51XXX Escrow Agreement, dated as of May 10, 2001, among the
Registrant, Sativum Investments Limited and Epstein,
Becker & Green, P.C.
10.52XX License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn
10.54XX Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant.
10.55XXX Registration Rights Agreement, dated as of June 21,
2001, by and between the Registrant and Millennium
Partners, L.P.
10.56XXX Subscription Agreement, dated as of June 21, 2001, by
and between the Registrant and Millennium Partners, L.P.
10.57$$$ 2001 Equity Incentive Plan
10.58{**} Subscription Agreement, dated as of December 4, 2001 between
the Registrant and Riverview Group, L.L.C.
10.59{**} Registration Rights Agreement, dated as of December 4,
2001 between the Registrant and Riverview Group, L.L.C.
10.60{**} Agreement dated as of December 4, 2001 between the
Registrant and Millennium Partners, L.P.
10.61{**} Agreement dated as of December 4, 2001 among the Registrant,
Millennium Partners, L.P. and Riverview Group, L.L.C.
21X Subsidiaries of the Registrant.
EXHIBIT NO. TITLE OR DESCRIPTION
--------------------- ------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1XX Side Letter, dated March 17, 2001, between the Company
and Oleh S. Hnatiuk regarding NeuroSpheres License
Agreement, dated October 30, 2000.
------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement
on Form S-1, File No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
{*} Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
{**} Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on December 7, 2001.
$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1998 and filed on March 31, 1999.
$$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K on
January 14, 2000.
$$$ Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's definitive proxy statement filed
May 1, 2001.
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
XX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 and filed on April 2, 2001.
XXX Previously filed with the Commission as an Exhibit to, and incorporate
herein by reference to, the Registrant's Registration Statement filed on
Form S-1 as amended to Form S-3, File No. 333-61726.
XXXX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement filed on
Form S-3, File No. 333-75806.