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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
3155 PORTER DRIVE
PALO ALTO, CALIFORNIA 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 / / No /X/
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 March 20,
2001: $42,643,084. 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 March 20, 2001: 20,994,035 shares.
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FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding, among
other things, the expected results of our operations, the progress of our
product development and clinical programs and of our collaborations, the need
for, and timing of, additional capital and capital expenditures, strategic
partner collaboration prospects, costs of manufacture of products, the
protection of and the need for additional intellectual property rights,
regulatory matters, 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 risks of lack of available funding, failure to develop strategic
partnerships, delays in research, adverse results from our research or
development programs, obsolescence of our technology, competition from third
parties, termination of our collaborations, intellectual property rights of
third parties, unavailability of needed raw materials, our failure, or our
collaborators' failure, to perform, litigation, regulatory restrictions, 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.
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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.
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 Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
Our proposed therapies are based on the transplanting of healthy human stem
and progenitor cells to repair or replace central nervous system, pancreas or
liver tissue that has been damaged or lost as a result of disease or injury,
potentially returning patients to productive lives and significantly reducing
health care costs. We believe that we have achieved significant progress in
research regarding stem cells of the central nervous system through the advances
we have made in the isolation, purification and transplantation of central
nervous system stem and progenitor cells. We have also made advances in our
research programs to discover the stem cells of the pancreas and of the liver.
We have established an intellectual property position in all three areas of our
stem cell research--the central nervous system, the pancreas and the liver--by
patenting our discoveries and entering into exclusive 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 were formerly known as CytoTherapeutics, Inc. Until mid-1990 we had
programs in a different technology, encapsulated cell therapy, as well as stem
cell programs. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
Effective May 2000 we changed our name to StemCells, Inc.
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, Alzheimer's disease and amyotrophic lateral sclerosis.
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
quantities or for the duration required to
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cure the degenerative condition. Cells, however, do this naturally. As a result,
investigators have considered replacing failing cells that are no longer
producing the needed substances or proteins by implanting stem or progenitor
cells capable of regenerating the cell that the degenerative condition has
damaged or destroyed. Where there has been irreversible tissue damage or organ
failure, transplantation of stem cells offers the possibility of generating new
and healthy tissue, 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 developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that 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. More
recently, 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. 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.
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
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- diagnostics.
We will be pursuing key alliances in these areas.
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 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.
More recently, we announced the results of a new 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.
Neurological disorders such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke, 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 these diseases.
We continue to advance our research programs to discover the islet stem cell
in the human pancreas and the liver stem cell. Islet cells are the cells that
produce insulin, so islet stem cells may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin secretion is
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defective. Liver stem cells may be useful in the treatment of diseases such as
hepatitis, cirrhosis of the liver and liver cancer.
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of 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 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
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. Our research and product
development programs are at relatively early stages of development and will
require substantial resources to commercialize.
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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
system tissue (including spinal cord, initiate and expand stem cell-containing
degenerated retinas and tissue affected by human neural cultures and specialization
certain genetic disorders) into three types of central nervous system
cells
- Demonstrated the ability of 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
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas islet - Identified markers on the surface of cells
tissue to identify, isolate and culture islet stem
cells of the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver tissue - Demonstrated the production of hepatocytes
including tissue resulting from certain from purified mouse hematopoietic stem
metabolic genetic diseases cells
- Identified IN VITRO culture assay for
growth of human bipotent liver progenitor
cells that can produce both bile duct and
hepatocytes
- Showed that the in vitro culture of human
bipotent liver cells can also grow human
hepatitis virus
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(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.
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, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
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.
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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 has shown 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.
In 1998, we 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. Also in 1998, our researchers 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 has since been allowed. We are
expanding our preclinical efforts toward the goal of selecting the proper
indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
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.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS stem cells, and also allowed a separate patent
application for our media for culturing human CNS stem cells.
Also in 1999, we announced the filing of a US patent application covering
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. In November 1999, we announced the study's
first results: Our researchers, by using our proprietary markers on the surface
of the cell, had 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 is 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.
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were 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.
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During the course of the 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.
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,
Huntington's and Alzheimer's disease. These conditions affect more than
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 cell cultures might be genetically
modified to produce those proteins. The 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.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreas stem and progenitor cells has, to the present, been
conducted by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in
collaboration with some of our senior researchers. It is our intention to bring
the research on stem and progenitor cells of the pancreas in house We expect
that Dr. Sarvetnick will continue to consult with us.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes, which is often called "juvenile
diabetes" and most commonly diagnosed in childhood; and 30,000 new patients are
diagnosed with the disease every year. It is a costly, serious, lifelong
condition, requiring constant attention and insulin injections every day for
survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreas stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. 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.
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In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute 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. In collaboration with Dr. Sarvetnick, we continue to
advance the discovery program directed at the identification, isolation and
culturing of pancreas stem and progenitor cells utilizing this technology.
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 a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments. In 1998,
our researchers continued to advance methods for establishing enriched cell
populations suitable for transplantation in preclinical animal models. We are
focused on discovering and utilizing our proprietary methods to identify,
isolate and culture liver stem and progenitor cells and to evaluate these cells
in preclinical animal models.
In 1999, our researchers 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.
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.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, 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.
Consequently, in July 1999, we announced plans for 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 reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
Sunnyvale, California. We are actively seeking to sublease, assign or sell our
interest in our former corporate headquarters building and our pilot
manufacturing and cell processing facility in Rhode Island.
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In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. We retained 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.
In a related development, by mutual consent we and the Advanced Technology
Program of the National Institute of Standards and Technology terminated two
grants previously awarded to us for our encapsulated cell therapy and stem
cell-related research. The encapsulated cell therapy grant was obviated by the
sale of the technology to Neurotech. The funding agency has invited us to
resubmit a proposal consistent with the new directions we are taking in our
research and development of our platform of stem cell technologies.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now 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 the California corporation, became a member of
our board of directors. We, as the sole stockholder of our subsidiary, voted on
February 23, 2000, to amend its Certificate of Incorporation to change its name
to StemCells California, Inc.
CORPORATE COLLABORATIONS
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics SA, 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. After Modex's IPO, we owned
126,193 shares, or approximately 9%, of Modex's equity, subject to a lockup
until December 23, 2000. The closing market price of Modex stock on the Swiss
Neue Market exchange on January 2, 2001 was 210.00 Swiss francs, or
approximately $130.39, per share. On January 9, 2001, we 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 approximately $2,550,000. In connection
with this sale, we agreed not to resell any more of our remaining 103,577 Modex
shares until April 12, 2001. The market value of our Modex holdings at March 27,
2001 was $8,732,797 based on the closing market price of Modex stock on the
Swiss Neue Market exchange at that date of 145.00 Swiss francs per share, or
approximately $84.31, per share.
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
11
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.
Our research agreement with Scripps expired on November 14, 2000. It is our
intention to bring the research on stem and progenitor cells of the pancreas in
house. Dr. Nora Sarvetnick, who led the research at Scripps, will continue to
consult with us. 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 without curing our obligations under the agreement 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 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 the California Institute of Technology. Either party can terminate these
license agreements upon a material breach by the other party. We issued 12,800
shares of common stock amounting to $10,000 to the California Institute of
Technology upon execution of the license agreements, and 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.
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 payments it must make to the University
of California based on products we develop and for 50% of certain other payments
Signal must make.
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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, so that together 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 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 without curing
our obligations under the agreement or if we declare bankruptcy. We would have a
security interest in the licensed technology in the event that NeuroSpheres
declares bankruptcy.
MANUFACTURING
The keys to successful commercialization of brain stem and progenitor cells
are efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier. The carrier may also be used to
improve the stability and acceptance of the stem cells or their progeny. Because
of the early stage of our stem and progenitor cell programs, all of the issues
that will affect manufacture of stem and progenitor cell products are not yet
clear.
MARKETING
We expect to market and sell our products primarily through co-marketing,
licensing or other arrangements with third parties. There are a number of
substantial companies with existing distribution channels and large marketing
resources who are well equipped to market and sell our products. It is our
intent to have the marketing of our products undertaken by such partners,
although we may seek to retain limited marketing rights in specific narrow
markets where the product may be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be of major
importance to our future business. We have an aggressive program of vigorously
seeking and protecting our intellectual property which we believe might be
useful in connection with our products. 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
13
therapy area includes twenty-two issued U.S. patents, seven of which issued in
2000. An additional twenty-seven patent applications are pending, five of which
have been allowed.
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); and
Application Number WO 00/36091 (An animal model for identifying a common stem/
progenitor to liver cells and pancreatic cells); Application Number WO98/50526
(Generation, characterization, and isolation of neuroepithelial stem cells and
lineage restricted intermediate precursor); Application Number WO 00/50572 (Use
of collagenase in the preparation of neural stem cell cultures); and Application
Number WO 00/47762 (Enriched neural stem cell populations and methods of
identifying, isolating, and enriching neural stem cells).
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 6,165,783 (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 6,013,521
(Method of production of neuroblasts); U.S. Patent Number 6,020,197 (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 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 VITRO neural crest stem cell assay); U.S.
Patent
14
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 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 and pancreas
stem cells.
The patent positions of pharmaceutical and biotechnology companies,
including those of the Company, 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, the Company does not know whether any of its 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 patents are
issued in the United States or until the applications are published in foreign
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of its pending
patent applications or that it was the first to file patent applications for
such inventions. There can be no assurance that patents will issue from the
Company's pending or future patent applications or, if issued, that such patents
will be of commercial benefit to the Company, afford the Company 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 Company patent applications, the Company 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 the Company, even if the eventual outcome
is favorable to the Company. There can be no assurance that the Company's
patents, if issued, would be held valid by a court of competent jurisdiction.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by the Company's expected products. The Company cannot
predict which, if any, of such applications will issue as patents or the claims
that might be allowed. The Company is aware that a number of companies have
filed applications relating to stem cells. The Company is also aware of a number
of patent applications and patents claiming use
15
of genetically modified cells to treat disease, disorder or injury. The Company
is 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
the Company's technology and such claims or claims in issued patents are
ultimately determined to be valid, there can be no assurance that the Company
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 the Company is
unable to obtain such licenses at a reasonable cost, it may be adversely
affected. There can be no assurance that the Company will not be obliged to
defend itself 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 the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require the
Company to cease using such technology.
The Company has obtained rights from universities and research institutions
to technologies, processes and compounds that it believes may be important to
the development of its products. These agreements typically require the Company
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 neural and
pancreatic stem cells. The Company's licenses may be canceled or converted to
non-exclusive licenses if the Company fails to use the relevant technology or
the Company breaches its agreements. Loss of such licenses could expose the
Company 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
the Company's 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
successfully developed, will compete with these products principally on the
basis of improved and extended efficacy and safety and their overall economic
benefit to the health care system. The market for therapeutic products that
address degenerative diseases is large, and competition is intense. We expect
competition to increase. We believe that our most significant competitors will
be fully integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also be significant competitors, particularly
through collaborative arrangements with large pharmaceutical or biotechnology
companies. Many of these competitors have significant products approved or in
development that could be competitive with our potential products.
Competition for 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.
16
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.
Once our products are developed and receive regulatory approval, they must
then 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 Preclinical tests include laboratory evaluation of
tests 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.
2. Submission to the FDA of an The results of the preclinical tests are submitted
application for an Investigational New to the FDA as part of an IND, and the IND becomes
Drug Exemption, or IND, which must become effective 30 days following its receipt by the
effective before U.S. human clinical FDA, as long as there are no questions, requests
trials may commence for delay or objections from the FDA.
17
STEPS CONSIDERATIONS
----------------------------------------- --------------------------------------------------
Clinical trials involve the evaluation of the
product in healthy volunteers or, as may be the
case with our potential products, in a small
3. Adequate and well-controlled human number of patients under the supervision of a
clinical trials to establish the safety qualified physician. Clinical trials are conducted
and efficacy of the product 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 begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical
efficacy and to test further for safety
within an expanded patient population,
generally at multiple study sites.
The FDA continually reviews the clinical trial
plans and results and may suggest changes or may
require discontinuance of the trials at any time
if significant safety issues arise.
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STEPS CONSIDERATIONS
----------------------------------------- --------------------------------------------------
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) The testing and approval process will require
prior to any commercial sale or shipment substantial time, effort and expense. The time for
of the drug. Biologic product approval is affected by a number of factors,
manufacturing establishments located in including relative risks and benefits demonstrated
certain states also may be subject to in clinical trials, the availability of
separate regulatory and licensing alternative treatments and the severity of the
requirement 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 initial indications and requisite approval of the
manufacturing facility, 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 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.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which
19
contain such research. Certain of our collaborators have stock options or other
equity interests in us that could subject such collaborators and us to the
proposed 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. We
cannot now determine the effects of that approach or what regulatory actions
might be taken from it. Restrictions exist on the testing or use of cells,
whether human or non-human.
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 which 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, 2000, we had twenty-six full-time employees, of whom six
have Ph.D. degrees, as well as two half-time employees. The equivalent of
fifteen 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 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.
20
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.
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. 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.
ITEM 2. PROPERTIES
Our current research laboratories and administrative offices are located in
a leased 7,950 square-foot multipurpose building housing wet labs, specialty
research areas and administrative offices located in Sunnyvale, California. The
facilities are leased pursuant to lease agreements expiring August 31, 2001.
These facilities were sufficient to accommodate our needs through the end of
2000, but our expanding endeavors require more space for both research and
development in the future.
We have therefore entered 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, which includes vivarium space as well as laboratories, offices, and
a GMP (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 expect to vacate our current premises and be moved into the new facility by
May, 2001.
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 fifteen-year lease agreement, 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
February, 2001, we subleased the 3,000 square foot facility and 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.
21
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 sales prices for the last two
fiscal years are shown below:
2000 HIGH LOW
---- ------------- ------------
First Quarter............................................... $20 $1 3/8
Second Quarter.............................................. $ 7 5/8 $2
Third Quarter............................................... $11 41/61 $ 11/16
Fourth Quarter.............................................. $ 6 1/8 $2 1/4
1999 HIGH LOW
---- ------------- ------------
First Quarter............................................... $ 1 25/32 $1 5/32
Second Quarter.............................................. $ 1 3/8 $ 17/32
Third Quarter............................................... $ 2 3/8 $ 11/16
Fourth Quarter.............................................. $ 1 5/8 $1
No cash dividends have been declared on the Company common stock since the
Company's inception.
As of March 20th, 2001, there were approximately 278 holders of record of
the common stock.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data
Revenue from collaborative & licensing
agreements(1)............................ $ 74 $ 5,022 $ 8,803 $ 10,617 $ 7,104
Research and development expenses.......... 5,979 9,984 17,659 18,604 17,130
Acquired research and development.......... -- -- -- 8,344 --
ECT wind-down and corporate relocation
expenses................................. 3,327 6,048 -- -- --
Net loss................................... $(11,125) $(15,709) $(12,628) $(18,114) $(13,759)
======== ======== ======== ======== ========
Basic and diluted net loss per share
available to common shareholders before
cumulative effect of an accounting
change................................... $ (0.57) $ (0.84) $ (0.69) $ (1.08) $ (0.89)
Cumulative effect of a change in accounting
principle(2)............................. $ (0.01) -- -- -- --
-------- -------- -------- -------- --------
Net loss per share applicable to common
shareholders............................. $ (0.58) $ (0.84) $ (0.69) $ (1.08) $ (0.89)
======== ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share....................... 20,067 18,706 18,291 16,704 15,430
------------------------
(1) See footnote 3 in the consolidated financial statements
22
(2) See footnote 2 in the consolidated financial statements
23
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance Sheet Data
Cash, cash equivalents and marketable
securities................................... $ 6,069 $ 4,760 $17,386 $29,050 $42,607
Restricted investments......................... 16,356 -- -- -- --
Total assets................................... 29,795 15,781 32,866 44,301 58,397
Long-term debt, including capitalized leases... 2,605 2,937 3,762 4,108 8,223
Redeemable common stock........................ -- 5,249 5,249 5,583 8,159
Stockholders' equity........................... 22,982 3,506 17,897 28,900 34,747
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.
The statements contained in this report, other than statements of historical
fact, constitute forward-looking statements. 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 and product
development programs, the need for, and timing of, additional capital and
capital expenditures, partnering prospects, 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 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. At the
beginning of last year, by contrast, our corporate headquarters, most of our
employees, and the main focus of our operations were primarily devoted to a
different technology--encapsulated cell therapy, or ECT. Since that time, we
terminated a clinical trial of the ECT then in progress, we wound down our other
operations relating to the ECT, we terminated the employment of those who worked
on the ECT, we sold the ECT and we relocated from Rhode Island to Sunnyvale,
California. Comparisons with last year's results are correspondingly less
meaningful than they may be under other circumstances.
We were known as CytoTherapeutics, Inc., until May 23, 2000, when we changed
our name to StemCells, Inc.
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.
24
There are no such collaborative research arrangements at this time and there can
be no assurance that such financing or partnering revenues will be available
when needed or on terms acceptable to us.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, and the initiation or
termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Revenues totaled $74,000, $5,022,000 and $8,803,000 for the years ending
December 31, 2000, 1999 and 1998, respectively. Revenues for 2000 are from
Neurotech, S.A. in return for the assignment of our intellectual property assets
relating to Encapsulated Cell Technology. Revenues for 1999 and 1998 were from
collaborative agreements, earned primarily from a Development, Marketing and
License Agreement with AstraZeneca Group plc, which was signed in March 1995
(the "Astra Agreement"). The decrease in revenues from 1998 to 1999 to 2000
resulted primarily from the June 1999 termination of the Astra Agreement.
Research and development expenses totaled $5,979,000 in 2000, as compared to
$9,984,000 in 1999 and $17,659,000 in 1998. The decrease of $4,005,000, or 40%,
from 1999 to 2000 and the decrease of $7,675,000 or 43%, from 1998 to 1999, was
primarily attributable to the wind-down of research activities relating to our
encapsulated cell technology, precipitated by termination of the Astra
Agreement.
General and administrative expenses were $3,361,000 in 2000, compared with
$4,927,000 in 1999 and $4,603,000 in 1998. The decrease of $1,566,000 or 32%,
from 1999 to 2000 was primarily attributable to the relocation of our
headquarters to a smaller facility as well as a reduction of personnel. Due to
the wind-down of our encapsulated cell technology and relocation of our
headquarters in October, the 1999 expenses are less than they would have been
had these events not occurred.
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to Sunnyvale, California totaled $3,327,000
and $6,048,000 for 2000 and 1999, respectively. No such expenses were incurred
in 1998. 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 RIPSAT, $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 have
created a reserve of $1,780,000 related to the carrying costs for the Rhode
Island facilities through 2001. On February 2001, we subleased 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.
Interest income for the years ended December 31, 2000, 1999 and 1998 totaled
$303,000, $564,000 and $1,254,000, respectively. The average cash and investment
balances were $5,668,000, $10,663,000
25
and $21,795,000 in 2000, 1999 and 1998, respectively. The decrease in interest
income from 1998 to 1999 to 2000 was attributable to lower average balances.
In 2000, interest expense was $273,000, compared to $335,000 in 1999 and
$472,000 in 1998. The decrease from 1998 to 1999 to 2000 was attributable to
lower outstanding debt and capital lease balances.
During the second quarter 2000 we realized a $1,427,000 gain in connection
with the sale of a portion of our investment in Modex. Modex Therapeutics Ltd
("Modex"), a Swiss biotechnology company that completed an initial public
offering on June 23, 2000, and is publicly traded on the Swiss Neue Market
exchange.
The net loss in 2000, 1999 and 1998 was $11,125,000, $15,709,000, and
$12,628,000, respectively. The loss per share was $0.58, $.84 and $.69 in 2000,
1999 and 1998, respectively. The decrease from 1999 to 2000 is 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. The increase from 1998 to 1999 is primarily attributable to the
elimination of revenue from the Astra Agreement, which was terminated in
June 1999, as well as expenses related to the wind-down of our encapsulated cell
technology research and our other Rhode Island operations, the transfer of our
corporate headquarters to Sunnyvale, California and an accrual for the our
estimate of the costs of settlement of a funding agreement with RIPSAT.
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 $6,069,000 at December 31, 2000.
Cash equivalents are invested in money market funds. We also hold shares of
Modex Therapeutics Ltd ("Modex"), a Swiss biotechnology company that completed
an initial public offering on June 23, 2000, and is publicly traded on the Swiss
Neue Market exchange. During the second quarter 2000 we realized a $1,427,000
gain in connection with the sale of a portion of our investment in Modex. Our
Modex stock has a fair market value of $16,356,000 on December 31, 2000. The
fair market value of our Modex stock has varied significantly since the Modex
public offering and may continue to vary significantly based on increases and
decreases in the reported per share price, in Swiss francs, of the Modex stock
and on foreign currency exchange rates. We had been prohibited under a lock-up
agreement entered into at the time of Modex's secondary offering from selling
any of our Modex holdings until December 23, 2000. On January 9, 2001, we 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 $2,550,000. In connection
with this sale, we agreed not to resell any more of our remaining 103,577 Modex
shares until April 12, 2001. There is a limited trading market for Modex stock,
and if we were to attempt to sell any significant portion of our remaining Modex
holdings, we would likely be able to do so only at a significant discount to the
then market price, if at all. If we sell some but not all of our Modex shares,
it is likely that we would have to agree, in connection with the sale, to
refrain from selling additional shares for several months. Our Modex stock has a
fair value of $8,732,797 on March 27, 2001.
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.
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to our ECT and to focus our resources on the
research and development of our platform of proprietary stem cell technologies.
We terminated approximately 68 full time employees and, in October 1999,
relocated our corporate headquarters to Sunnyvale, California.
26
As part of our restructuring of operations and relocation of corporate
headquarters to Sunnyvale, California, we identified a significant amount of
excess fixed assets. In December of 1999, we completed the disposition of those
excess fixed assets, from which we received more than $746,000. The proceeds
were used to fund our continuing operations
On December 30, 1999 we sold our ECT and assigned our intellectual property
assets in it to Neurotech S.A. for a payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties.
In addition, we retained certain non-exclusive rights to use ECT in combination
with our proprietary stem cell technologies and in the field of vaccines for
prevention and treatment of infectious diseases. We received $2,800,000 of the
initial payment on January 3, 2000 with a remaining balance of $200,000 placed
in escrow, to be released to us upon demonstration satisfactory to Neurotech
that certain intellectual property is not subject to other claims. We received
the remaining balance of $200,000 on December 04, 2000.
In July 1999, as a result of our decision to close our Rhode Island
facilities, the Rhode Island Partnership for Science and Technology, or RIPSAT,
alleged that we were in default under a June, 1989 Funding Agreement, and
demanded payment of approximately $2.6 million. While we believe we were not in
default under the Funding Agreement, we deemed it best to resolve the dispute
without litigation and, on March 3, 2000, entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority, or
IRBA, and the Rhode Island Industrial Facilities Corporation, or RIIFC. We
agreed to pay RIPSAT $1,172,000 in full satisfaction of all of our obligations
to them under the Funding Agreement. At the same time, IRBA agreed to return to
us the full amount of our debt service reserve, comprising approximately
$610,000 of principal and interest, relating to the bonds we had with IRBA and
RIIFC. The $610,000 debt service reserve was transferred directly to RIPSAT,
leaving the remainder of approximately $562,000 to be paid by us. We made this
payment in March of 2000.
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of the their collaborative development and
licensing agreement with us relating to the development of products for the
treatment of Parkinson's disease; however, the claim was resolved with no effect
on our resources. On May 21, 1998, Genentech exercised its right to terminate
the Parkinson's collaboration and demanded that we redeem, for approximately
$3,100,000, certain shares of our redeemable Common Stock held by Genentech.
Genentech's claim was based on provisions in the agreement requiring us to
redeem, at the price of $10.01 per share, the shares representing the difference
between the funds invested by Genentech to acquire such stock and the amount
expended by us on the terminated program less an additional $1,000,000. In
March 2000, we entered into a Settlement Agreement with Genentech under which
Genentech released us from any obligation to redeem any shares of our Common
Stock held by Genentech, without cost to us. Accordingly, the $5.2 million of
redeemable common stock shown as a liability in our December 31, 1999 balance
sheet was transferred to equity in March, 2000 without any impact on our
liquidity and capital resources. We and Genentech also agreed that all
collaborations between us were terminated, and that neither of us had any rights
to the intellectual property of the other.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,200,000 per year associated with our former research
laboratory and corporate headquarters building, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to our pilot
manufacturing and cell processing facility. 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.
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
27
face value of the shares of preferred stock is convertible at the option of the
holders into common stock at $3.77 per share. The holders of the preferred stock
have liquidation rights equal to their original investments plus accrued but
unpaid dividends. The investors would be entitled to make additional investments
in our securities on the same terms as those on which we complete offerings of
our securities with third parties within 6 months, if any such offerings are
completed. They have waived that right with respect to the common stock
transactions described below. If offerings totaling at least $6 million are not
completed during the 6 months, the investors have the right to acquire up to a
total of 1,126 additional shares of convertible preferred stock, the face value
of which is convertible at the option of the holders into common stock at $6.33
per share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if any
are acquired. The warrants expire on April 13, 2005.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund with
more than a billion dollars in assets under management. We received $3 million
of the purchase price at the closing and received the remaining $1 million upon
effectiveness of a registration statement covering the shares purchased by the
Fund. The Fund purchased our common stock at $4.33 per share. The Fund may be
entitled, pursuant to an adjustable warrant issued in connection with the sale
of common stock to the Fund, to receive additional shares of common stock on
eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of our common stock over a period prior
to each date. We will have the right, under certain circumstances, to cap the
number of additional shares by purchasing part of the entitlement from the Fund.
The Fund also received a warrant to purchase up to 101,587 shares of common
stock at $4.725 per share. This warrant is callable by us at $7.875 per
underlying share.
In addition, the Fund has the option for twelve months to purchase up to
$3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per share.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and paid the remaining $250,000 upon effectiveness of a
registration statement covering the shares owned by the Fund. At the closing on
August 30, 2000, we issued to the Fund an adjustable warrant similar to the one
issued on August 3, 2000. This adjustable warrant was canceled by agreement
between us and the Fund on November 1, 2000. The Fund also received a warrant to
purchase up to 19,900 shares of common stock at $6.03 per share. This warrant is
callable by us at $10.05 per underlying share.
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, 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
28
specifically, on our progress in our exploratory, preclinical and future
clinical development programs. Lack of necessary funds may require us to delay,
reduce or eliminate some or all of our research and product development programs
or to license our potential products or technologies to third parties. Funding
may not be available when needed--at all, or on terms acceptable to us. While
our cash requirements may vary, as noted above, we currently expect that our
existing capital resources, including income earned on invested capital, will be
sufficient to fund our operations through December of 2001. Our cash
requirements may vary, however, depending on numerous factors. 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.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." We are required to adopt SFAS 133 effective January 1,
2001. Because we do not hold any derivative instruments and do not engage in
hedging activities, management does not believe the adoption of SFAS 133 will
have an impact on our financial position or results of operations.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On December 31, 2000, we have an investment in common stock of Modex
Therapeutics Ltd. (Modex), a Swiss Biotherapeutics company. Our value in this
investment is subject to both equity price risk and foreign currency exchange
risk. Modex shares were offered in an initial public offering ("IPO") on the
Swiss Neue Market on June 23, 2000 at a price of 168.00 Swiss francs. From the
date of the IPO to March 9, 2001, the Modex closing share price has fluctuated
from a high of 390.00 Swiss francs on October 6, 2000 to a low of 121.00 Swiss
francs on March 01, 2001. On January 9, 2001, we 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. In connection with this sale, we agreed not to
resell any more of our Modex shares until April 12, 2001. On March 27, 2001 the
market price of Modex stock was 145.00 Swiss francs which converts to $84.31
using exchange rates on that date, which represents an estimated fair market
value of $8,732,797. If we were to seek to liquidate all or part of our
remaining 103,577 Modex shares, our proceeds would depend on the share price and
foreign currency exchange rates at the time of conversion. Additionally, if we
sell a sizable portion of our holdings, we may have to sell these shares at a
discount to market price.
The company's sole market risk sensitive instrument is:
MARKET VALUE AT EXPECTED FUTURE
NO. OF SHARES DESCRIPTION ASSOCIATED RISKS DECEMBER 31, 2000 CASH FLOWS
--------------------- ------------------ -------------------- ------------------ ---------------
126,193 Modex Therapeutics Equity/Foreign $16,356,334 (1)
Currency Translation
------------------------
(1) Although we have not formally adopted a liquidation plan for this
investment, liquidation may be necessary to meet operating cash flow
requirements. Under the agreement with Modex, we had been restricted from
selling our holding through December 23, 2000 and, as noted above, we sold
22,616 shares on January 9, 2001 and agreed not to sell any more shares
until April 12, 2001. If we sell some but not all of our remaining 103,577
shares, we likely would have to agree, in connection with the sale, to
refrain from selling additional shares for several months.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STEMCELLS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Ernst & Young LLP, Independent Auditors........... 30
Consolidated Balance Sheets................................. 31
Consolidated Statements of Operations....................... 32
Consolidated Statements of Stockholders' Equity............. 33
Consolidated Statements of Cash Flows....................... 36
Notes to Consolidated Financial Statements.................. 37
30
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. (formerly CytoTherapeutics, Inc.) as of December 31, 2000 and
1999, and the related consolidated statements of operations, changes in
redeemable common stock and stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for the beneficial conversion of preferred
shares.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 23, 2001
31
STEMCELLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,068,947 $ 4,760,064
Short-term restricted investments......................... 16,356,334 --
Accrued interest receivable............................... 16,725 42,212
Technology sale receivable................................ -- 3,000,000
Debt service fund......................................... -- 609,905
Other current assets...................................... 524,509 558,674
------------- -------------
Total current assets........................................ 22,966,515 8,970,855
Property held for sale...................................... 3,203,491 3,203,491
Property, plant and equipment, net.......................... 1,451,061 1,747,885
Other assets, net........................................... 2,173,912 1,858,768
------------- -------------
Total assets................................................ $ 29,794,979 $ 15,780,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 526,191 $ 631,315
Accrued expenses.......................................... 837,358 970,546
Accrued wind-down costs................................... 1,780,579 1,634,522
Current maturities of capital lease obligations........... 332,083 324,167
------------- -------------
Total current liabilities................................... 3,476,211 3,560,550
Capital lease obligations, less current maturities.......... 2,605,000 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 705,746 502,353
Commitments
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999, none at
December 31, 2000......................................... -- 5,248,610
Stockholders' equity:
Convertible Preferred Stock, $.01 par value; 1,000,000
shares authorized, 2,626 designated as 6% Cumulative
Convertible Preferred Stock 1,500 shares issued and
outstanding at December 31, 2000, none at December 31,
1999.................................................... 1,500,000 --
Common stock, $.01 par value; 45,000,000 shares
authorized; 20,956,887 and 18,635,565 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 209,569 186,355
Additional paid-in capital................................ 138,150,067 123,917,758
Accumulated deficit....................................... (130,498,187) (119,372,710)
Accumulated other comprehensive income.................... 16,356,334 --
Deferred compensation..................................... (2,735,761) (1,225,000)
------------- -------------
Total stockholders' equity.................................. 22,982,022 3,506,403
------------- -------------
Total liabilities and stockholders' equity.................. $ 29,794,979 $ 15,780,999
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue from collaborative and licensing
agreements........................................ $ 74,300 $ 5,021,707 $ 8,803,163
Operating expenses:
Research and development.......................... 5,979,007 9,984,027 17,658,530
General and administrative........................ 3,361,231 4,927,303 4,602,758
Encapsulated Cell Therapy wind-down and corporate
relocation...................................... 3,327,360 6,047,806 --
------------ ------------ ------------
12,667,598 20,959,136 22,261,288
------------ ------------ ------------
Loss from operations................................ (12,593,298) (15,937,429) (13,458,125)
Other income (expense):
Interest income................................... 303,746 564,006 1,253,781
Interest expense.................................. (272,513) (335,203) (472,400)
Gain on sale of Investment........................ 1,427,686 -- --
Other income...................................... 8,902 -- 48,914
------------ ------------ ------------
1,467,821 228,803 830,295
------------ ------------ ------------
Net loss............................................ $(11,125,477) $(15,708,626) $(12,627,830)
Deemed dividend to preferred shareholders........... (265,000) -- --
------------ ------------ ------------
Net loss applicable to common shareholders before a
cumulative effect of a change in accounting
principle......................................... $(11,390,477) $(15,708,626) $(12,627,830)
Cumulative effect of a change in accounting
principle due to deemed dividend.................. $ (216,000) $ -- $ --
------------ ------------ ------------
Net loss applicable to common shareholders.......... $(11,606,477) $(15,708,626) $ 12,627,830)
============ ============ ============
Basic and diluted net loss per share applicable to
common shareholders before cumulative effect...... $ (.57) $ (.84) $ (.69)
Cumulative effect of a change in accounting
principle......................................... $ (.01) -- --
------------ ------------ ------------
Basic and diluted net loss per share applicable to
common shareholders............................... $ (.58) $ (.84) $ (.69)
Shares used in computing basic and diluted net loss
per share......................................... 20,067,760 18,705,838 18,290,548
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- -------------
Balances, December 31, 1997........ 557,754 $5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254) $(8,877)
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 436 83,622
Common stock issued pursuant to
employee benefit plan............ -- -- 84,812 848 143,025 -- --
Issuance of common
stock--StemCells................. -- -- 101,320 1,013 505,587 -- --
Redeemable common stock lapses..... (33,417) (334,500) 33,417 334 334,166 -- --
Exercise of stock options.......... -- -- 11,012 110 1,254 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 321,108 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 3,679
Net loss........................... -- -- -- -- -- (12,627,830) --
Comprehensive loss.................
------- ---------- ---------- -------- ------------ ------------- -------
Balances, December 31, 1998........ 524,337 5,248,610 17,800,323 178,003 122,861,606 (103,664,084) (5,198)
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1997........ $(1,702,820) $ 28,900,155
Issuance of common stock under the
stock purchase plan.............. 84,058
Common stock issued pursuant to
employee benefit plan............ -- 143,873
Issuance of common
stock--StemCells................. -- 506,600
Redeemable common stock lapses..... -- 334,500
Exercise of stock options.......... -- 1,364
Deferred compensation--amortization
and cancellations................ 229,901 551,009
Change in unrealized losses on
marketable securities............ -- 3,679
Net loss........................... -- (12,627,830)
------------
Comprehensive loss................. (12,624,151)
----------- ------------
Balances, December 31, 1998........ (1,472,919) 17,897,408
34
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- -------------
Balances, December 31, 1998........ 524,337 $5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084) $(5,198)
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............ -- -- -- -- -- -- 5,198
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) --
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1998........ $(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
Net loss........................... -- (15,708,626)
Comprehensive loss................. (15,703,428)
----------- ------------
Balances, December 31, 1999........ (1,225,000) 3,506,403
35
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
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 preferred stock........ -- -- 1,500 $1,500,000 -- -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- -- -- $ 3,555,387
Unrealized gain on short-term
restricted investments........... -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
Comprehensive Income.............
-------- ----------- ----- ---------- ---------- -------- ------------
Balances, December 31, 2000........ -- -- 1,500 $1,500,000 20,956,887 $209,569 $138,150,067
======== =========== ===== ========== ========== ======== ============
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 preferred stock........ -- -- -- $ 1,500,000
Deferred compensation--amortization
and cancellations................ -- -- $(1,510,760) $ 2,044,627
Unrealized gain on short-term
restricted investments........... -- $16,356,334 -- $ 16,356,334
Net loss........................... $ (11,125,477) -- -- $(11,125,477)
------------
Comprehensive Income............. $ 5,230,858
------------- ----------- ----------- ------------
Balances, December 31, 2000........ $(130,498,187) $16,356,334 $(2,735,761) $ 22,982,022
============= =========== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(11,125,477) $(15,708,626) $(12,627,830)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 738,593 1,717,975 2,244,146
Acquired research and development....................... -- -- 551,009
Amortization of deferred compensation................... 2,044,627 328,195 --
Fair market adjustment for property held for sale....... 300,000
Other non-cash charges.................................. 320,183 410,173
Gain on investment...................................... (1,427,686) -- --
Loss on sale of property, plant and equipment........... -- 1,117,286 --
Loss on sale of intangibles............................. -- 440,486 --
Changes in operating assets and liabilities:
Accrued interest receivable........................... 25,488 164,397 346,577
Technology receivable................................. 3,000,000 -- --
Other current assets.................................. 315,213 283,000 (265,665)
Accounts payable and accrued expenses................. (92,255) 1,344,142 (2,378,613)
Deferred rent......................................... 203,393 279,680 --
Deferred revenue...................................... -- (2,500,000) 2,483,856
------------ ------------ ------------
Net cash used in operating activities....................... (6,318,104) (11,913,282) (9,236,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Investments........................... 1,427,686 -- --
Purchases of marketable securities.......................... (4,397,676) (18,982,387)
Proceeds from sales of marketable securities................ 13,923,813 22,573,625
Purchases of property, plant and equipment.................. (151,212) (192,747) (2,153,525)
Proceeds on sale of fixed assets............................ -- 746,448 --
Acquisition of other assets................................. (886,751) (558,311) (400,219)
Disposal of other assets.................................... -- 440,486 --
------------ ------------ ------------
Net cash provided by investing activities................... 389,723 9,962,013 1,037,494
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 4,401,437 145,603 227,931
Proceeds from the exercise of stock options................. 685,089 518,442 1,364
Common stock issued for agreements.......................... 365,000 -- --
Proceeds from issuance of preferred stock................... 1,500,000 -- --
Proceeds from debt financings............................... -- -- 1,259,300
Change in debt service fund................................. 609,905 -- --
Repayments of debt and lease obligations.................... (324,167) (1,817,500) (1,366,655)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 7,237,264 (1,153,455) 121,940
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 1,308,883 (3,104,724) (8,076,913)
Cash and cash equivalents at beginning of year.............. 4,760,064 7,864,788 15,941,701
------------ ------------ ------------
Cash and cash equivalents at end of the year................ $ 6,068,947 $ 4,760,064 $ 7,864,788
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 272,513 $ 335,203 $ 444,047
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. 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. On May 23, 2000, the Company's name was
changed to Stem Cells, Inc. from CytoTherapeutics, Inc. by vote of the
shareholders at the Annual Meeting.
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $6.1 million and a restricted short-term equity investment of
approximately $16.4 million in Modex Therapeutics, a Swiss Biotherapeutics
company. Since inception, the Company has incurred annual losses and negative
cash flows from operations and has an accumulated deficit of approximately
$130.5 million at December 31, 2000. The Company has not derived any revenues
from the sale of any products, and does not expect to receive revenues from
product sales for at least several years. As a result, the Company is dependent
upon external financing from equity and debt offerings and revenues from
collaborative research arrangements with corporate sponsors to finance its
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 the Company.
As noted above, the Company has a restricted investment in Modex
Therapeutics, a Swiss Biotherapeutics company with a fair market value of
approximately $16.4 million at December 31, 2000. On January 9, 2001, the
Company sold 22,616 shares of Modex common stock for total proceeds of
approximately $2.5 million. The Company is restricted from selling any of the
remaining 103,577 shares until April 12, 2001. The value of the Company's
holdings is subject to market risk and foreign currency fluctuation and could
decrease significantly. The Company is currently in discussions with Modex to
sell the remaining shares during 2001. If the Company decided to sell the Modex
shares, due to relatively small trading volume in Modex shares and the
relatively large size of the Company holdings, or other factors, the Company may
not be able to sell its Modex shares at their market value or at all, and the
Company may have to sell these shares at a significant discount to the market
price.
If the Company is unable to obtain the necessary proceeds from the sale of
Modex shares, significant reductions in spending and the delay or cancellation
of planned activities may be necessary. In such event, the Company intends to
implement expense reduction plans in a timely manner to enable the Company to
meet its operating cash requirements through December 31, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the 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 and accompanying notes. Actual results
could differ from those estimates.
38
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
preservation while obtaining a reasonable rate of return.
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.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). The only component of other comprehensive income
(loss) is unrealized gains and losses on our available-for-sale securities.
Comprehensive income (loss) has been disclosed in the statement of changes in
redeemable common stock and stockholders' Equity.
PROPERTY, PLANT AND EQUIPMENT
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, California,
certain property considered by management to no longer be 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
PATENT AND LICENSE COSTS
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. At
December 31, 2000 and 1999, total costs capitalized were $638,000 and $718,000
and the related accumulated amortization were $9,000 and $9,000, respectively.
Patent expense totaled $305,000, $539,000, and $3,000 in 2000, 1999 and 1998,
respectively.
In December 1999 the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, which was paid in 2000,
royalties on future product sales, and a portion of certain Neurotech revenues
from third parties in return for the assignment to Neurotech
39
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of intellectual property assets relating to ECT. In addition, the Company
retained certain non-exclusive rights to use ECT in combination with its
proprietary stem cell technology and in the field of vaccines for prevention and
treatment of infectious diseases. The patent portfolio that was sold had a net
book value of $3,180,000. In year 2000 the Company received $74,300 representing
a portion of revenues received by Neurotech from third parties.
STOCK BASED COMPENSATION
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. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted to non-employees, the
Company accounts for these grants in accordance with FAS No. 123--ACCOUNTING FOR
STOCK-BASED COMPENSATION AND EITF96-18--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 consulting expenses
the estimated fair value of such options as calculated using the Black-Scholes
valuation model, and is remeasured during the vesting 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.
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 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. StemCells 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 milestones are recognized as revenue upon their
completion, as defined in the respective agreements.
40
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." The Company is required to adopt SFAS 133 effective
January 1, 2001. Because the Company does we does not hold any derivative
instruments and does not engage in hedging activities, management does not
believe the adoption of SFAS 133 will have an impact on our financial position
or results of operations.
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") which is
effective retroactively to September 1999 for all such instruments. EITF 00-27
clarifies the accounting for instruments with beneficial conversion features or
contingently adjustable conversion ratios. According to the new accounting
principle, the beneficial conversion features should be calculated by first
allocating the proceeds received from the financing among the convertible
instrument and the detachable warrants and then, measuring the beneficial
conversion feature between the stated conversion price of the convertible
instrument and the effective conversion price based on the allocated proceeds.
Previously, the beneficial conversion feature calculation was based on the
difference between the stated conversion price of the convertible instrument and
the fair value of the Company's stock price on the closing date of the
financing. As a result of the new accounting principle, the Company modified the
calculation of the beneficial conversion features associated with its 6%
cumulative convertible preferred stock.
The Company has presented the effect of adopting the new accounting
principle as a cumulative effect of a change in accounting principle as allowed
for in EITF 00-27. Accordingly, the Company has recognized an additional
$216,000 of deemed dividend on preferred stock.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
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,
less shares subject to repurchase. The Company has excluded outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are anti-dilutive for
all applicable periods presented.
3. 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
41
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
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 facilities of its wholly owned
subsidiary, StemCells California, Inc., in Sunnyvale, 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 $3,327,360 and $6,047,806, for the year ended
December 31, 2000 and 1999, respectively. No such expenses were incurred in
1998. 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 Sunnyvale, California. Expenses for the year 2000, includes an
accrual for the estimated lease and facility costs related to the facilities in
Rhode Island through 2001. Expenses for the year 1999 also includes an accrual
for the estimate of the costs of settlement of a 1989 funding agreement with the
Rhode Island Partnership for Science and Technology ("RIPSAT").
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. At December 31, 2000 the remaining wind-down reserve
totaled $1.7 million.
42
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. 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, 1999 DECEMBER 31, 2000
----------------- -----------------
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.................... 702,000 $3,327,000
PILOT MANUFACTURING PLANT................. 562,000
----------
1,264,000 3,327,000
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
----------
$6,048,000 $3,327,000
========== ==========
------------------------
(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 the
expected date of disposition (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).
(5) The write-down of the pilot plant was based on an independent property
appraisal.
43
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
Property held for sale at December 31, 2000 and 1999, 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 the $300,000 write-down included as part of the additional
wind-down expenses recognized in accordance with Financial Accounting Standards
Board Statement 121, which requires that long-lived assets be reviewed for
impairment whenever events or circumstances indicate that the carrying value of
the asset may not be recoverable. There were no such assets at December 31,
1998.
4. 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 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 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 $1,338,000. 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. We plan to revalue
the options using the Black-Scholes method on a quarterly basis and recognize
additional compensation expense accordingly.
44
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
5. 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.
At December 31, 2000 the Company owned 126,193 shares of Modex. Modex
completed an initial public offering of shares on the Swiss Exchange on
June 23, 2000. Accordingly, with an established market value, the investment is
recorded as available-for-sale at a fair market value of $16,356,334 as at
December 31, 2000. The unrealized gain was reported as other comprehensive
income in the statement of stockholders' equity.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Building and improvements............................ $ 703,095 $ 665,890
Machinery and equipment.............................. 1,766,448 1,691,136
Furniture and fixtures............................... 188,736 219,260
---------- ----------
2,658,279 2,576,286
Less accumulated depreciation and amortization....... (1,207,218) (828,401)
---------- ----------
$1,451,061 $1,747,885
========== ==========
Depreciation expense was $451,000, $1,436,000, and $1,720,000 for the years
ending December 31, 2000, 1999 and 1998, respectively.
As part of restructuring our operations, sale of our encapsulated cell
technology ("ECT"), and relocation of our corporate headquarters to Sunnyvale,
California, we identified fixed assets associated with the ECT or otherwise no
longer needed. In December of 1999, we disposed of these excess fixed assets,
realizing proceeds of approximately $746,000. These assets had a net book value
of approximately $1,063,000 after a write-down of 800,000, which was based on an
estimate of expected sale proceeds.
Certain property, plant and equipment have been acquired under capital lease
obligations. These assets totaled $5,827,000 at December 31, 2000 and 1999,
respectively, with related accumulated amortization of $2,747,000 at
December 31, 2000 and 1999, respectively. As a result of the Company's
45
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
decision to exit ECT and relocate to Sunnyvale, California, this property has
been classified as held for sale.
7. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Patents, net......................................... $ 629,203 $ 708,823
License agreements, net.............................. 669,000 282,750
Security deposit--building lease..................... 750,000 750,000
Deposit--other....................................... 16,321 --
Deferred financing costs, net........................ 109,388 117,195
---------- ----------
$2,173,912 $1,858,768
========== ==========
At December 31, 2000 and 1999, accumulated amortization was $1,140,000 and
$857,000, respectively, for patents and license agreements.
8. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
External services....................................... $219,051 $ 97,439
Employee compensation................................... 109,007 306,342
Collaborative research.................................. -- 222,140
Other................................................... 509,300 344,625
-------- --------
$837,358 $970,546
======== ========
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. In addition, the Company was required to maintain a
debt service reserve until December 1999. On March 3, 2000 the Company entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). The Company agreed to pay RIPSAT $1,172,000 in
full satisfaction of all obligations of the Company to RIPSAT under the
46
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
9. LEASES (CONTINUED)
Funding Agreement dated as of June 22, 1989. On execution and delivery of this
Agreement, IRBA agreed to return to the Company the full amount of the Company's
debt serve reserve ("Reserve Funds") of approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. In order to
avoid the loss of interest on the Reserve Funds due to early termination of
certain investments, the parties agreed that the Company would render a net
payment to RIPSAT in the amount of approximately $562,000.
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, 2000, the Company has $705,746 in deferred
rent expense.
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 vivarium space, 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.
As of December 31, 2000, future minimum lease payments under operating and
capital leases and principal payments on equipment loans are as follows:
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
---------- ----------- ----------
2001.................................... $ 589,217 $ 3,584,061 $ 295,854
2002.................................... 519,719 2,392,988 400,658
2003.................................... 436,909 4,568,274 395,676
2004.................................... 425,713 4,677,197 416,507
2005.................................... 412,587 4,789,388 437,338
Thereafter.............................. 2,311,577 8,797,417 130,761
---------- ----------- ----------
Total minimum lease payments............ 4,695,722 $28,809,325 $2,076,794
========== ===========
Less amounts representing interest...... 1,758,639
Present value of minimum lease
payments.............................. 2,937,083
Less current maturities................. 332,083
----------
Capitalized lease obligations, less
current maturities.................... $2,605,000
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998, was
$1,111,000, $947,000 and $1,052,000, respectively.
10. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). StemCells received
$3 million of the purchase price at the
47
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
closing and received the remaining $1 million upon effectiveness of a
registration statement covering the shares owned by the Fund. The Fund purchased
the Company's common stock and warrants at $4.33 per share. As set forth in an
adjustable warrant issued to the Fund on the closing date, the Fund may be
entitled to receive additional shares of common stock on eight dates beginning
six months from the closing and every three months thereafter. The adjustable
warrant may be exercised at any time prior to the thirtieth day after the last
of such dates. The number of additional shares the Fund may be entitled to on
each date will be based on the number of shares of common stock the Fund
continues 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 is $0.01. Such warrants provide the Fund with the opportunity
to acquire additional common shares at a nominal value if the value of the
common stock that the Fund holds decreases. The Company will have the right,
under certain circumstances, to cap the number of additional shares by
purchasing part of the entitlement from the Fund at a purchase price based on
the market price of such shares. No portion of the sale proceeds was assigned to
the adjustable warrants, as the ultimate number of shares issuable upon exercise
of the warrants was not determinable and the net impact on the Company's equity
from any such allocation of proceeds would have been zero. The Fund also
received a five-year warrant to purchase up to 101,587 shares of common stock at
$4.725 per share. This warrant is callable at any time by StemCells at
$7.875 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $376,888, which was treated as a credit to paid in
capital in stockholders' equity. The Company accounts for the sale of the stock
and warrants or the exercise of 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 paid in capital. In addition, any
repurchase of the shares or warrants by the Company would also be accounted for
through paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the Fund, the
Company granted the Fund an option to purchase up to an additional $3 million of
its common stock and a callable warrant and an adjustable warrant. The Fund can
exercise this option in whole or in part at any time prior to August 3, 2001.
The price per share of common stock to be issued upon exercise of the option
will be based on the average market price of the common stock for a five-day
period prior to the date on which the option is exercised. On August 23, 2000,
the Fund exercised $1,000,000 of its option to purchase additional common stock.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and the Fund paid the remaining $250,000 upon effectiveness of
a registration statement covering the shares owned by the Fund. The Fund
purchased the Company's common stock at $5.53 per share, which amount was based
upon the average market price of the common stock for the five-day period prior
to August 23, 2000. An adjustable warrant similar to the one issued on
August 3, 2000 was issued to the Fund on August 30, 2000, but was cancelled on
November 1, 2000 by agreement of the Company and the Fund. The Fund also
received a five -year warrant to purchase up to 19,900 shares of common stock at
$6.03 per share. This warrant is callable by the Company at any time at
$10.05 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $139,897, which the Company accounted for as a
credit to paid in capital.
The adjustable warrant contains provisions regarding the adjustment or
replacement of the warrants in the event of stock splits, mergers, tender offers
and other similar events. The adjustable
48
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
warrant also limits the number of shares that can be beneficially owned by the
Fund to 9.99% of the total number of outstanding shares of Common Stock.
REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such studies by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company reclassified the amount currently recorded as Redeemable Common
Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
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 12,800 shares of common stock upon execution
of the license agreements. The Company must pay an additional $10,000 upon the
issuance of the patent licensed under the relevant agreement
COMMON STOCK ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
49
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
SALE OF 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 convertible at the option of the holders into common stock at $3.77
per share (based on the face value of the preferred shares). The conversion
price 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.
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, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. 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, 2000,
the Company had reserved 3,828,371 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
2000 1999 1998
-------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- ---------- --------------
Outstanding at January 1....... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
Granted........................ 2,485,090 4.08 536,078 1.08 1,174,118 1.70
Exercised...................... (540,927) 1.015 (604,362) 1.50 (11,012) .12
Canceled....................... (166,532) 4.77 (646,507) 5.31 (1,955,553) 7.08
--------- ------ --------- ----- ---------- -----
Outstanding at December 31..... 2,716,966 4.32 939,335 $2.65 1,654,126 $3.62
========= ====== ========= ===== ========== =====
Options exercisable at
December 31.................. 731,523 $4.01 594,216 $3.44 1,108,936 $4.33
========= ====== ========= ===== ========== =====
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 96,750 of these options
vest and become exercisable only upon achievement of specified milestones, and
the remaining 78,210 options vest over three years from the date of grant.
Additionally, the Company adopted the 1997 StemCells, Inc. StemCells California
Research Stock Option Plan (the StemCells California Research Plan) whereby an
additional 2,000,000 shares of Common Stock have
50
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
been reserved. During 1997, the Company awarded options under the StemCells
Research Plan to purchase 1.6 million shares of the Company's common stock to
the Chief Executive Officer and scientific founders of StemCells at an exercise
price of $5.25 per share; approximately 100,000 of these options were
exercisable immediately, 1,031,000 of these options vest and become exercisable
only upon achievement of specified milestones and the remaining 469,000 options
vest over eight years. For the year 2000 the options have been incorporated into
the number of options granted so as to be reflected in the total of options
outstanding as of December 31, 2000
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, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
Less than $5.00........................... 944,216 8.68 $ 2.063 370,023 $ 1.53
$5.01 - $10.00............................ 1,691,750 6.87 5.26 280,500 5.27
Greater than $10.00....................... 81,000 1.30 11.03 81,000 11.03
--------- -------
2,716,966 731,523
========= =======
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 2000, 1999, and 1998, 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 2000, 1999,
and 1998, consistent with the provisions of FAS 123:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(11,125,477) $(12,160,752) $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389)
Net loss per share... $ (.58) $ (.62) $ (.84) $ (.84) $ (.69) $ (.82)
The weighted average fair value per share of options granted during 2000,
1999 and 1998 was $4.13, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock
51
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
purchase plan at the date of grant were estimated using the Black-Scholes model
with the following weighted average assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ---------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Expected life (years)................ 5 5 5 N/A .5 .5
Interest rate........................ 6.5% 5.5% 5.2% N/A 5.0% 4.6%
Volatility........................... 167.8 96.7% 63.5% N/A 96.7% 63.5%
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.
STOCK WARRANTS
The Company issued warrants to purchase 8,952 shares of common stock in
conjunction with the StemCells California merger, warrants to purchase 31,545
shares in conjunction with various equipment leasing agreements, and warrants to
purchase 434,500 shares in connection with a public offering of common stock in
April 1995. All of these expired at various dates in 2000.
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............... 3,828,371
Shares reserved for warrants................................ 2,292,625
StemCell option conversions................................. 250,344
---------
Total....................................................... 6,371,340
=========
11. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
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 $307,000 in 1998, $309,000 in 1999, and $225,739 in 2000.
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
52
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
11. RESEARCH AGREEMENTS (CONTINUED)
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.
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
continue the trials of the bovine cell-containing implant therapy and executed
its right to terminate the agreement. The Company has no additional funding
obligations with AstraZeneca.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, 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. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's encapsulated cell technology
program and its new focus on the stem cell field, its principal academic
collaborations are now with Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $314,000, $868,000, and $1,259,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The Company has
no other significant collaborative research funding obligations.
53
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
12. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 2000, the Company
had tax net operating loss carry forwards of $110,000,000 and research and
development tax credit carry forwards of $4,100,000, which expire in the years
2004 through 2020. Utilization of the Company's net operating loss may be
subject to substantial annual limitation due to the 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.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Deferred tax assets:
Capitalized research and development costs..... $ 6,000,000 $ 4,331,000
Net operating losses........................... 44,000,000 38,478,000
Research and development credits............... 4,260,000 4,035,000
Other.......................................... 1,020,000 928,000
------------ ------------
55,280,000 47,772,000
Deferred tax liabilities:
Unrealized gain on investment.................. (6,543,000) --
Patents........................................ (127,000) (246,000)
Valuation allowance............................ (48,610,000) (47,526,000)
------------ ------------
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 $6,272,000 during 1999, and $5,459,000 during 1998.
13. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $33,000, $103,000, and $146,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
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,
California. The new facility includes animal space, 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. The Company continues to
lease the facilities in Lincoln, Rhode Island
54
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
obtained in connection with its former encapsulated cell technology, but has now
succeeded in subleasing parts of those facilities: the 3,000 square-foot cell
processing facility and approximately one-third of its former scientific and
administrative facility ("SAF"). The Company continues to seek to sublet the
remainder of the approximately 65,000 square foot SAF and the 21,000 square-foot
pilot manufacturing facility, or to assign or sell its interests in these
properties. There can be no assurance however, that we will be able to dispose
of these properties in a reasonable time, if at all.
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH'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.
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 $2,550,000. In connection with this sale, the Company agreed not to
resell any more of its Modex shares until April 12, 2001. On March 07, 2001 the
market price of Modex stock was 145.00 Swiss francs which converts to $84.31
using exchange rates on that date, which represents an estimated fair market
value of $8,732,797 for the remaining shares. If the Company were to seek to
liquidate all or part of the remaining 103,577 Modex shares, the proceeds would
depend on the share price and foreign currency exchange rates at the time of
conversion.
55
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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
before cumulative effect............. $ (0.09) $ (0.04) $ (0.13) $ (0.30)
Cumulative effect of a change in
accounting principle(1).............. -- -- -- $ (0.01)
Net loss per share applicable to common
shareholders......................... $ (0.09) $ (0.04) $ (0.13) $ (0.31)
1999:
Net revenue............................ $ 2,501 $ 2,521 $ -- $ --
Operating expenses..................... 4,562 4,454 6,690 5,253
Net Loss............................... (1,932) (1,840) (6,711) (5,226)
Basic and diluted net loss per share... $ (0.10) $ (0.10) $ (0.36) $ (0.27)
------------------------
(1) See note 2 to the Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND
CONTROL
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
NAME AGE POSITION
---- -------- ------------------------------------------
John J. Schwartz, Ph.D.................... 67 Director, Chairman of the Board
Martin M. McGlynn......................... 54 Director, President and Chief Executive
Officer
Mark J. Levin............................. 50 Director
Roger M. Perlmutter M.D., Ph.D............ 48 Director
Irving L. Weissman, M.D................... 61 Director
Ann Tsukamoto, Ph.D....................... 48 Vice President, Scientific Operations
Ronnda Bartel, Ph.D....................... 42 Vice President, Scientific Development
------------------------
- John J. Schwartz, Ph.D., was elected to the board of directors in
December 1998 and was elected Chairman of the board at the same time. He was
formerly Senior Vice President and General Counsel of SyStemix, Inc. from 1993
to 1995, and then President and Chief Executive Officer of SyStemix, Inc. from
1995 to 1997. Dr. Schwartz is currently President of Quantum Strategies
Management Company, a registered investment advisor located in Atherton,
California. Prior to his positions at SyStemix, he served as Assistant
Professor and a Vice President and General Counsel at Stanford University in
California. Dr. Schwartz graduated from Harvard Law School in 1958 and
received his Ph.D. in physics from the University of Rochester in 1966.
- Martin M. McGlynn joined the company on January 15, 2001 when he was appointed
President and Chief Executive Officer of the company and of its wholly-owned
subsidiary, StemCells California, Inc. From 1994 until he joined the company,
Mr. McGlynn was President and Chief Executive Officer of Pharmadigm, Inc., a
privately held company in Salt Lake City, Utah, engaged in research and
development in the fields of inflammation and genetic immunization.
Mr. McGlynn received a bachelor of commerce degree from University College,
Dublin, Ireland in 1968, a diploma in industrial engineering from the Irish
Institute of Industrial Engineering in 1970, and a diploma in production
planning from the University of Birmingham, England in 1971.
- Mark J. Levin is a founder of the company and has served as a director since
the company's inception. From inception until January 1990 and from May 1990
until February 1991, Mr. Levin served as the company's President and acting
Chief Executive Officer. From November 1991 until March 1992, he served as
Chief Executive Officer of Tularik, Inc., a biotechnology company. From
August 1991 until August 1993, Mr. Levin was Chief Executive Officer and a
director of Focal, Inc., a biomedical company. Mr. Levin is currently the
Chairman of the Board and Chief Executive Officer of Millennium
Pharmaceuticals, Inc., a biotechnology company. Mr. Levin is also currently on
the Board of Directors of Tularik, Inc.
- Roger M. Perlmutter, M.D., Ph.D., was elected to the board of directors in
December 2000. Dr. Perlmutter is Executive Vice President, Research and
Development, of Amgen, Inc., a position he has held since January 2001. Prior
to joining Amgen, Dr. Perlmutter was Executive Vice President, Worldwide Basic
Research and Preclinical Development, Merck Research Laboratories, a division
of Merck & Co., Inc., a position he held since August 1999. He joined Merck in
February 1997 as Senior Vice President, Merck Research Laboratories, from
February 1997 to December 1998 and as Executive Vice President from
February 1999 to July 1999. Prior to joining Merck, Dr. Perlmutter was a
professor in the Departments of Immunology, Biochemistry and
57
Medicine at the University of Washington from January 1991 to January 1997 and
served as chairman of the Department of Immunology at the University of
Washington from May 1989 to January 1997. He also was an Investigator at the
Howard Hughes Medical Institute from July 1984 to February 1997. Dr Perlmutter
has been a member of the board of directors of The Irvington Institute for
Immunological Research since 1997 and of the Institute for Systems Biology
since 1999. He also serves as President of the Merck Genome Research
Institute, a position he has held since March 2000.
- Irving L. Weissman, M.D., Director, is the Karel and Avice Beekhuis Professor
of Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Stanford has employed Dr. Weissman since
July 1967, and he has been a Faculty member since January 1969. He has been a
full professor of pathology since September 1987, and also of developmental
biology since July 1989. Since October 1990, Dr. Weissman has also served as a
professor of biology (by courtesy). He has been Chairman of the Stanford
University Immunology Program since 1986. 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 a member of the National Academy of Sciences
and also serves as Chairman of our Scientific Advisory Board. He also serves
as Chief Executive Officer and a member of the Board of Managers of Celtrans,
LLC.
Ann Tsukamoto, Ph.D., joined the Company in November 1997 as Senior
Director, Scientific Operations, and was appointed Vice President, Scientific
Operations in June 1998. From 1989 until she joined StemCells, Dr. Tsukamoto was
employed at SyStemix, Inc., where she served in various research capacities
before transitioning to the position of Director of Clinical Science. At
SyStemix, Inc., Dr. Tsukamoto assisted in the launch of its clinical research
program for the hematopoietic stem cell. She received her Ph.D. degree from the
University of California, Los Angeles and did postdoctoral research with
Dr. Harold Varmus at the University of California, San Francisco. Dr. Tsukamoto
is an inventor on six issued U.S. Patents related to the human hematopoietic
stem cell. As of March 5, 2001, Dr. Tsukamoto became a member of the Board of
Directors for the Society of Regenerative Medicine and Stem Cell Biology.
Ronnda Bartel, Ph.D., joined the Company in July 1998, as Senior Director,
Cell Development, and was appointed Vice President, Scientific Development of
StemCells in April 2000. From 1995 until her employment with the Company,
Dr. Bartel was Senior Principal Scientist at Advanced Tissue Sciences Inc.,
responsible for research, development, and manufacturing of tissue engineered
human cell based products. Dr. Bartel was awarded her Ph.D. degree in
biochemistry from the University of Kansas, Lawrence and did postdoctoral work
with Dr. John Voorhees at the University of Michigan, Ann Arbor.
Our Restated Certificate of Incorporation and Amended and Restated By-laws
provide for the classification of the board of directors into three classes, as
nearly equal in number as possible, with the term of office of one class
expiring each year. There are no family relationships between any of our
directors or executive officers. Our executive officers are elected by, and
serve at the discretion of, the board of directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officer during the fiscal years ended December 31, 2000, 1999, and
1998 and the two other most highly compensated executive officers who served in
such capacities during the fiscal year ended December 31, 2000 but who were not
serving in such capacities as of the end of such fiscal year. There were no
other persons serving as executive officers at the end of such fiscal year.
58
SUMMARY COMPENSATION TABLE
AWARDS
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------ ----------------------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) COMPENSATION
--------------------------- -------- ----------- --------- ---------------- ---------- ----------- -------------
George W. Dunbar, Jr. ......... 2000 186,538 50,000 -- -- 36,031 --
Acting President and Chief 1999 48,000
Executive Office(1)
Richard M. Rose M.D............ 2000 309,632 -- -- -- -- --
Chief Executive Officer(2) 1999 279,974 -- -- -- -- 4,667(3)
1998 286,553 -- -- -- 150,000(4) 11,330(5)
Ann Tsukomoto, Ph.D. .......... 2000 159,054 -- -- -- -- 4,783(6)
VP, Scientific Operations
Ronnda Bartel, Ph.D............ 2000 129,668 -- -- -- -- 3,245(7)
VP, Scientific Development
------------------------------
(1) Mr. Dunbar became Acting President and Chief Executive Officer effective as
of February 1, 2000, and resigned from that position effective as of
January 15, 2001.
(2) Dr. Rose became Chief Executive Officer on September 26, 1997. Dr. Rose
resigned as a director and officer of the company and its wholly owned
subsidiary effective as of January 31, 2000.
(3) Represents the personal portion of the use of a company vehicle, as well as
$5,000 of fair market value of our matching contributions of common stock to
Dr. Rose's account in the company's 401(k) Plan.
(4) Represents the regrant of an option in the original amount of 200,000 shares
which was reduced to 150,000 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on
July 10,1998.
(5) Represents $4,666.56 of fair market value of the company matching
contributions of common stock to Dr. Rose's account in our 401(k)Plan.
(6) Represents $4,783 of fair market value of the company matching contributions
of common stock to Dr. Ann Tsukomoto
(7) Represents $3,245 of fair market value of the company matching contributions
of common stock to Dr. Ronnda Bartel
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 09, 2001 by (i) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock, (ii) each director and nominee for director,
(iii) each executive officer named in the Summary Compensation Table and
(iv) all executive officers and directors of the Company as a group. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
59
community property laws where applicable, and that there are no other
affiliations among the stockholders listed in the table.
PERCENTAGE
SHARES OF CLASS
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED* BENEFICIALLY OWNED*
--------------------------- ------------------- -------------------
Donald Kennedy, Ph.D....................................... 10,309(2) **
Mark J. Levin.............................................. 347,775(3) 1.5%
Martin M. McGlynn.......................................... --
Roger Perlmutter, M.D., Ph.D............................... -- **
John J. Schwartz, Ph.D..................................... 115,588(4) **
Irving Weissman, M.D....................................... 291,308(5) 1.3%
George W. Dunbar, Jr....................................... 50,049(6) **
Ann Tsukamoto, Ph.D........................................ 84,521(7) **
Ronnda Bartel, Ph.D........................................ 22,742(8) **
All directors and executive officers as a group (9
persons)................................................. 815,029 3.6%
Millennium Partners, LP.................................... 2,152,393(9) 9.5%
------------------------
* All numbers are based on information obtained by questionnaire or filings on
Forms 13D or 13G received by the Company.
** Less than one percent.
(1) The address of all such persons, except Millenium Partners, LP, is c/o the
Company, 3155 Porter Drive, Palo Alto, California 94304. The address of
Millenium Partners, LP is 551 Fifth Avenue, New York, New York 10176.
(2) Includes 10,309 shares issuable upon exercise of stock options exercisable
within 60 days.
(3) Includes 37,400 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 198,871 shares issuable upon conversion of 6%
cumulative convertible preferred shares at the currently applicable
conversion price. Does not include a warrant to purchase 37,500 shares
exercisable at a price above the current market price. Includes 111,504
shares held outright.
(4) Includes 115,588 shares issuable upon exercise of stock options exercisable
within 60 days.
(5) Includes 34,486 shares issuable upon exercise of stock options exercisable
within 60 days and 7,160 shares issuable upon exercise of warrants
exercisable within 60 days. Includes 198,871 shares issuable upon conversion
of 6% cumulative convertible preferred shares at the currently applicable
conversion price. Does not include a warrant to purchase 37,500 shares
exercisable at a price above the current market price. Includes a total of
50,791 shares owned by trusts for the benefit of Dr. Weissman's children as
to which he disclaims beneficial ownership.
(6) Includes 26,031 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 24,018 shares held outright. Mr. Dunbar was
appointed Acting President and Chief Executive Officer of the Company's
wholly owned subsidiary, StemCells California, Inc., effective as of
November 8, 1999, and was appointed Acting President and Chief Executive
Officer of the Company effective as of February 1, 2000.
(7) Includes 84,521 shares issuable upon exercise of stock options exercisable
within 60 days.
(8) Includes 22,742 shares issuable upon exercise of stock options exercisable
within 60 days.
(9) Includes 1,054,835 shares held outright. Includes 101,587 shares currently
issuable upon the exercise of warrants issued on August 3, 2000. Includes
19,900 shares currently issuable upon the exercise of warrants issued on
August 30, 2000. Includes 461,894 if shares currently issuable upon exercise
of an option issued on August 3, 2000 to purchase up to $2 million of our
Common Stock based upon the market price of the Common Stock at the time of
the exercise. Includes 50,808 shares issuable upon the exercise of warrants
issuable upon exercise of the afore mentioned option. Includes 463,369
shares issuable upon exercise of an adjustable warrant.
60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Schwartz, a member and Chairman of the Board of Directors, was retained
in July 1998 to serve as a consultant to us rendering strategic business advice
and consulting services, including assistance in the negotiation and
consummation of strategic collaboration transactions specified by us. Under
terms of an agreement dated December 19, 1998, and amended as of July 1, 1999
(the "Letter Agreement") Dr. Schwartz agreed to serve as a Director and Chairman
of the Board of Directors of the Company for a term expiring at the 2001 Annual
Meeting of Stockholders. The Letter Agreement incorporates certain payments
provided for under a consulting services agreement dated July 27, 1998, and
amended as of December 19, 1998 (the "Consulting Services Agreement"). As a
result, Dr. Schwartz is entitled to a retainer of $192,000 per year plus $1,500
for each Board meeting or Committee meeting (if held at a date and time separate
from the Board meeting) physically attended and $500 for each Board meeting or
Committee meeting (if held at a date and time separate from the Board meeting)
held by conference call, payable quarterly in arrears. Dr. Schwartz is obligated
to spend no less than thirty business days per calendar quarter devoted to the
performance of his duties under the Letter Agreement. In the event Dr. Schwartz
devotes more than thirty business days in any calendar quarter to the
performance of his duties, Dr. Schwartz is entitled to receive additional
compensation at the rate of $1,500 per day. Under the Letter Agreement,
Dr. Schwartz was granted a stock option covering 40,000 shares of Common Stock
that vests in equal portions on the last day of each of the 29 months of the
term of the Letter Agreement. By virtue of provisions incorporated from the
Consulting Services Agreement, Dr. Schwartz also holds an option to purchase
76,000 shares of the Company's Common Stock at $1.281 per share, the fair market
value of the Company's Common Stock at the time the option was granted, vesting
at a rate of 3,167 shares per month for the ensuing 23 months after the date of
the grant, with a final vesting of 3,159 shares in the 24th month, plus another
option to purchase 48,000 shares of Common Stock at the then current fair market
value of the Company's Common Stock on July 27, 1999, vesting at a rate of 2,000
shares per month. In the event Dr. Schwartz ceases to be Chairman of the Board
of Directors, either as a result of an affirmative vote of the Board of
Directors for reasons other than cause or due to his disability or his
resignation from such position, but remains a Director, his cash compensation
and remaining unvested portion of the 40,000-share time-based stock option will
be reduced to the then current rate for a Director of the Company, plus $5,000
per month pursuant to the Consulting Services Agreement. In the event
Dr. Schwartz ceases to be Chairman of the Board of Directors, either as a result
of an affirmative vote of the Board of Directors for reasons other than cause or
due to his disability or his resignation from such position, and then he resigns
as a Director or is removed as a Director pursuant to the Company's By-laws, the
Company shall have no further obligation to pay cash compensation to
Dr. Schwartz under the Letter Agreement but he would receive $5,000 per month
pursuant to the Consulting Services Agreement. Dr. Schwartz shall have one year
from such date to exercise the vested portion of the 40,000-share time-based
option and any unvested portion of that option shall lapse. In the event
Dr. Schwartz is removed from his positions as Director and Chairman of the Board
of Directors for cause, as defined in the Letter Agreement, the Company shall
have no further obligation to pay cash compensation to Dr. Schwartz under the
Letter Agreement, any unvested portion of the 40,000-share time-based option
shall lapse and the exercise of any vested portion shall be governed by the
terms of the Company's 1992 Equity Incentive Plan. The termination of the Letter
Agreement for any reason shall have no effect on the Consulting Services
Agreement, which had an initial term through July 27, 2000 and was renewed on a
month-to-month basis, and Dr. Schwartz shall serve as a consultant to the
Company rendering strategic business advice and counseling services, including
assistance in the negotiation and consummation of strategic collaboration
transactions specified by the Company as provided therein. At a meeting of the
Board on February 23, 2000, in order to conserve cash and demonstrate his
continuing confidence in the Company's future, the Board of Directors, upon the
suggestion of Dr. Schwartz, approved a resolution revising the compensation
arrangement between Dr. Schwartz and the Company, for the period commencing
January 1, 2000. Under this resolution, Dr. Schwartz waives any and all cash
payments which may accrue to him for his retainer, monthly and
61
meeting fees, and agrees to take, in lieu of such cash payments, compensation in
the form of options to purchase shares of the Company's common stock at
below-market prices ($0.25 per share). To effectuate the intention of
Dr. Schwartz and other members of the Board to change the form but not the
amount of compensation, Dr. Schwartz will be granted options covering a number
of shares of the Company's common stock such that the difference between the
aggregate exercise price of such options and the aggregate market value of the
shares underlying such options (using the closing price of the Company's common
stock for the date of the subject Board or Committee meeting (if such Committee
meeting is not held contemporaneously with a Board meeting) or, with respect to
the quarterly or monthly retainer payments of $33,000 and $5,000 respectively,
the closing price for the last business day of the quarter or month) is equal to
the compensation he is entitled to receive. All options so issued to
Dr. Schwartz vest immediately. The Consulting Services Agreement expired under
its terms on July 27, 2000 and the board of directors renewed it on a
month-to-month basis on September 19, 2000.
Dr. Weissman, a member of the Board of Directors, was retained in
September 1997 to serve as a consultant to us. Pursuant to his Consulting
Agreement, Dr. Weissman has agreed to provide consulting services to us and
serve on our Scientific Advisory Board. We agreed to pay Dr. Weissman $50,000
per year for his services and granted him an option to purchase 500,000 shares
of Common Stock for $5.25 per share, of which 31,250 shares vested at the date
of grant. Originally, the remainder of the option would have vested upon the
occurrence of certain milestones related to the Company's stem cell research
program and in the event of certain changes of control. We agreed to amend the
option on October 27, 2000 so that the shares would become exercisable over
eight years from the original grant date (so the option is currently exercisable
for 200,000 shares) or in the event of certain changes of control. We have
recorded a compensation expense of $823,759 during the fourth quarter of 2000 as
a result of this change in the vested portion of the option. The deferred
compensation expense associated with the unvested portion of the grants was
recorded as $669,116. We plan to revalue the options using the Black-Scholes
method on a quarterly basis and recognize additional compensation expense
accordingly. The Company also agreed to nominate Dr. Weissman for a position on
the Board of Directors. The Consulting Agreement contains confidentiality,
noncompetition, and assignment of invention provisions and is for a term of
fifteen years, subject to earlier termination by us for cause or frustration of
purpose and earlier termination by Dr. Weissman for good reason. Dr. Weissman
initially received no compensation as a member of the Board of Directors or for
attending meetings of the Board or its committees or meetings of our Scientific
Advisory Board, but was reimbursed for reasonable expenses he incurred in
attending such meetings. In December 2000, we agreed with Dr. Weissman that we
would pay him the same compensation paid to other members of the Board.
Martin McGlynn joined the company as President and Chief Executive Officer
on January 15, 2001. Under the terms of an agreement between Mr. McGlynn and us,
Mr. McGlynn is entitled to an annual base salary of $275,000 per year,
reviewable annually by the Board of Directors, and a bonus, in the Board's sole
discretion, of up to 25% of his base salary. Mr. McGlynn was granted an option
to purchase 400,000 shares of Common Stock with an exercise price equal to the
fair market value of the Common Stock on the date of his employment. One-fourth
of these options will vest on the first anniversary of his employment and the
remaining three-fourths will vest in equal monthly installments during his
second through fourth years of employment. The Board may, in its sole
discretion, grant Mr. McGlynn a bonus option to purchase up to an additional
25,000 shares. The vesting under the option is subject to acceleration in the
event of certain changes of control. We also agreed to pay Mr. McGlynn a $50,000
relocation bonus and reimburse him for relocation expenses. Our agreement with
Mr. McGlynn provides that if his employment is terminated by the Company without
cause or by Mr. McGlynn for good reason, he will be entitled to severance
payments equal to one year's base salary and he will receive healthcare benefits
under our plans for one year after termination. If Mr. McGlynn's employment is
terminated as a result of his disability, he will receive up to six months' base
salary. If we terminate Mr. McGlynn's employment for cause or if he resigns, he
will not be entitled to any severance or other benefits.
62
George W. Dunbar, Jr., Acting President and Chief Executive Officer from
February 1, 2000 to January 15, 2001, was a founding member of iCEO, LLC
("iCEO") in September 1999. Mr. Dunbar joined the company as Acting President of
StemCells California, Inc., our wholly owned subsidiary, and he held this
position until January 15, 2001. Under the terms of two agreements dated as of
November 17, 1999 and effective as of November 8, 1999, the first between us and
iCEO and the second between us and Mr. Dunbar, Mr. Dunbar agreed to serve as
Acting President of StemCells California, Inc., our wholly owned subsidiary.
Pursuant to the terms of his agreement with us, Mr. Dunbar was entitled to an
annual salary of $175,000 and was granted a stock option to purchase 48,000
shares of our common stock that vested at the rate of 4,000 shares per month
commencing on December 6, 1999 and continuing until fully vested so long as he
served as Acting President. The vesting under the option was subject to
acceleration in the event of certain changes of control. Additionally, the
agreement provided that the Board would consider once per quarter the grant of
an option for an additional 3,000 shares if it is determined that the services
rendered by Mr. Dunbar during the preceding quarter exceeded expectations. The
agreement with Mr. Dunbar had no provisions for any severance payments or other
benefits upon Mr. Dunbar's resignation or termination. Pursuant to the terms of
the agreement between iCEO and us, iCEO was entitled to receive annual
compensation of $75,000 for so long as Mr. Dunbar continued to serve in his role
as Acting President of StemCells California, Inc. or in any other interim role
with the Company. In addition, iCEO was granted a stock option to purchase
48,000 shares of our common stock that vested at the rate of 4,000 shares per
month commencing on December 6, 1999 and continuing until fully vested so long
as Mr. Dunbar served as Acting President of StemCells California, Inc. or in any
other interim role with the company. Additionally, the iCEO agreement provided
that the Board would consider once per quarter the grant of an option to iCEO
for an additional 3,000 shares if it is determined that the services rendered by
Mr. Dunbar during the preceding quarter exceeded expectations. As a member of
iCEO, Mr. Dunbar was entitled to receive, once annually, a distribution of his
assigned allocable percentage of net taxable income and net long-term gain with
respect to the pooled income and gain from shares of stock or exercised options
received by iCEO from its clients, including that received from us. When
Mr. Dunbar was appointed Acting President and Chief Executive Officer effective
as of February 1, 2000, there was no adjustment to his or iCEO's compensation or
stock options. In the event that during the period of his service as Acting
President and Chief Executive Officer or within 120 days from the termination of
such services, Mr. Dunbar were to become a permanent employee in any capacity,
we would be obligated under the iCEO agreement to pay iCEO a fee equal to
one-third of the then targeted first year's compensation for Mr. Dunbar. Our
agreements with Mr. Dunbar and iCEO expired in November 2000 and at that time we
paid Mr. Dunbar a bonus of $50,000 and granted him an immediately exercisable
option to purchase 12,031 shares of common stock. We continued to employ
Mr. Dunbar in the same capacity until January 15, 2001 at an annual salary of
$250,000, and also granted him an option to purchase 8,000 shares of common
stock for each additional month, or pro rata portion of a month, of his
employment.
In April 2000, we sold 750 shares of our 6% cumulative convertible preferred
stock plus a warrant to purchase 37,500 shares of our common stock to each of
Dr. Weissman and Mr. Levin for $750,000, for a total of $1,500,000, on terms
more favorable to us than we were able to obtain from outside investors. The
face value of the shares is convertible at the option of the holder into common
stock at $3.77 per share. The holders of the preferred stock have liquidation
rights equal to their original investments plus accrued but unpaid dividends.
The investors would be entitled to make additional investments in our securities
on the same terms as those on which we complete offerings of our securities with
third parties within 6 months, if any such offerings are completed. If offerings
totaling at least $6 million are not completed during the 6 months, the
investors have the right to acquire up to a total of 1,126 additional shares of
convertible preferred stock the face value of which is convertible at the option
of the holder into common stock at $6.33 per share. Any unconverted preferred
stock will be converted into common stock on April 13, 2002 in the case of the
original stock issued and two years after the first acquisition of any of the
additional 1,126 shares, if any are acquired. The warrants expire on April 13,
2005.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS FORM 10-K.
(1) 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.
(2) 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
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
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.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
64
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
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.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the
Registrant.
65
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
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 StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
10.50 License Agreement dated as of October 30, 2000 between
StemCells, Inc. and NeuroSpheres Ltd.
10.51 Letter Agreement dated January 2, 2001 between StemCells,
Inc. and Martin McGlynn.
10.52 Lease dated February 1, 2001 between the Board of Trustees
of Stanford University and StemCells, Inc.
21X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Cautionary Factors Relevant to Forward-Looking Information.
99.2 Side Letter dated March 17, 2001 between StemCells, Inc. 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.
66
!! 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.
Section 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.
SectionSection 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
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.
(B) CURRENT REPORTS ON FORM 8-K.
None
67
SIGNATURES
STEMCELLS, INC.
By: /s/ MARTIN MCGLYNN
-----------------------------------------
Martin McGlynn
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 31, 2001
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.
SIGNATURES CAPACITY DATE
---------- -------- ----
President and Chief Executive
/s/ MARTIN MCGLYNN Officer and Director
------------------------------------------- (principal executive March 31, 2001
Martin McGlynn officer)
Controller and Acting Chief
/s/ GEORGE KOSHY Financial officer (prinipal
------------------------------------------- financial officer and March 31, 2001
George Koshy principal accounting
officer)
/s/ MARK J. LEVIN
------------------------------------------- Director March 31, 2001
Mark J. Levin
/s/ ROGER PERLMUTTER, M.D.
------------------------------------------- Director March 31, 2001
Roger Perlmutter, M.D.
/s/ JOHN J. SCHWARTZ, PH.D.
------------------------------------------- Director, Chairman of the March 31, 2001
John J. Schwartz, Ph.D. Board
/s/ IRVING L. WEISSMAN, M.D.
------------------------------------------- Director March 31, 2001
Irving L. Weissman, M.D.
68