<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2836 94-3078125
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
</TABLE>
------------------------
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
IRIS BREST, ESQ.
STEMCELLS, INC.
525 DEL REY AVENUE, SUITE C
SUNNYVALE, CA 94085
(408)731-8670
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
GEOFFREY B. DAVIS, ESQ.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
(617) 951-7050 (fax)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share....... 3,205,486 Shares $8.22 $26,349,094 $6,956.16
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. The maximum price
per share information is based on the average of the high and low sale
prices on the Nasdaq National Market on September 7, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION--SEPTEMBER 8, 2000
PROSPECTUS
, 2000
STEMCELLS, INC.
SHARES OF COMMON STOCK
---------------
This prospectus relates to the resale of 3,205,486 shares of our common
stock acquired by the selling stockholders listed on page 39 of this prospectus
or in an accompanying supplement to this prospectus.
The selling stockholders identified in this prospectus, or their pledgees,
donees, transferees or other successors-in-interest, may offer the shares from
time to time through public or private transactions at prevailing market prices,
at prices related to prevailing market prices or at privately negotiated prices.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
We will not receive any proceeds from the sale of the shares.
---------------------
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 4
Forward-Looking Statements............. 10
Industry and Market Data............... 10
Use of Proceeds........................ 10
Dividend Policy........................ 10
Capitalization......................... 11
Dilution............................... 12
Selected Consolidated Financial Data... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Business............................... 20
Management............................. 36
Executive Compensation................. 37
Selling Stockholders................... 39
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Security Ownership of Certain
Beneficial Owners and Management..... 39
Relationships and Transactions with
Related Parties...................... 42
Description of Capital Stock........... 44
Plan of Distribution................... 48
Legal Matters.......................... 49
Experts................................ 49
Where You Can Find More Information.... 49
Index to Financial Statements.......... F-1
Condensed Consolidated Balance
Sheets............................... F-22
Condensed Consolidated Statements of
Operations........................... F-23
Condensed Consolidated Statements of
Cash Flows........................... F-24
Notes to Condensed Consolidated
Financial Statements................. F-25
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
STEMCELLS, INC.
We are a leader in the development of therapies that use stem cells to treat
degenerative human diseases and disorders. Stem cells are the key cells in the
body that produce all the functional mature cell types found in normal, healthy
individuals. Our research and development efforts focus on the identification,
isolation and expansion of stem cells as the underlying technology for
developing potential cell transplant therapies. These stem cell based therapies
could be used to repopulate or repair tissues, such as the brain, pancreas or
liver, that have been damaged or lost as a result of disease or injury.
Many diseases result from organ failure in situations where whole organs
cannot be transplanted to cure the disease (e.g., Alzheimer's, Parkinson's and
other degenerative diseases of the nervous system) or where there are
constraints due to a short supply of organs for transplant (e.g., liver failure
from hepatitis or other causes and pancreatic failure from diabetes). These
conditions, many of which cannot be treated effectively, affect more than
18 million people in the United States and account for more than $160 billion
annually in health care costs according to associations for the various diseases
and government sources.
We believe our stem cell technologies can provide the basis for effective
therapies for these and other conditions. Our aim is to replace lost or damaged
cells or regenerate organs, returning patients to productive lives and
significantly reducing health care costs. Our current leadership position is a
result of fundamental advances we have made in stem cell therapy for the nervous
system through our research and development program for the isolation,
purification and transplantation of neural stem cells. We also have made
significant advances in our search for the stem cells of the pancreas and of the
liver.
We have established a broad intellectual property position with respect to
stem cell therapies in all three areas by patenting our discoveries and entering
into exclusive licensing arrangements. Our portfolio of issued patents includes
a method of culturing normal human neural stem cells in our proprietary medium,
and our published studies show that our cultured and expanded cells give rise to
all three major cell types of the central nervous system (i.e., neurons,
astrocytes and oligodendrocytes). In addition, the Company recently announced
the results of a new study that showed that human brain stem cells can be
successfully isolated with the use of 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 neural
stem cells, and we have applied for a composition of matter patent. We also have
filed an improved process patent for the growth and expansion of these purified
normal human neural cells.
Historical Note: StemCells was formerly known as CytoTherapeutics and was
incorporated in Delaware in 1988. We currently have one subsidiary, StemCells
California, Inc., a California corporation we acquired in September 1997. Until
mid-1999, we had programs in encapsulated cell therapy as well as stem cell
programs. In 1999, we embarked on a major restructuring of our research and
development operations and sold the encapsulated cell therapy technology. We now
focus exclusively on the discovery, development and commercialization of our
proprietary platform stem cell technologies.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 6,847 1,660
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(3,773) $(2,326)
======= ======== ======== ======== ======== ======= =======
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.20) $ (0.12)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,483 19,419
</TABLE>
The following table provides a summary of our consolidated balance sheets.
The pro-forma column is based on our historical unaudited financial statements
and also reflects our August 3, 2000 sale of 923,521 shares of common stock to
Millennium Partners, L.P for $4,000,000 and the sale as of August 30, 2000 of
180,914 shares of common stock to Millennium Partners, L.P., for $1,000,000, net
of a stock subscription receivable of $1,250,000.
<TABLE>
<CAPTION>
AS OF DECEMBER 31 AS OF JUNE 30
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -------- ---------
ACTUAL PRO-FORMA
-------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and marketable securities.... $44,192 $42,607 $29,050 $17,386 $4,760 $5,535 $9,285
Restricted investments.............................. 19,220 19,220
Total assets........................................ 56,808 58,397 44,301 32,866 16,081 32,388 36,138
Long-term debt, including capitalized leases........ 5,441 8,223 4,108 3,762 2,937 2,775 2,775
Redeemable common stock............................. 8,159 5,583 5,249 5,249
Stockholders' equity................................ 45,391 34,747 28,900 17,897 3,506 27,606 31,356
</TABLE>
The results shown at, and for the six months ended, June 30, 2000 reflect a
restructuring of the Company to focus solely on our stem cell technology which
was implemented by terminating all activities related to its former encapsulated
cell technology and relocating all activities to Sunnyvale, California. For more
information on this restructuring see "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this prospectus.
During the second quarter 2000 the Company realized a $1,427,686 gain and
recognized an increase in value related to its remaining holdings of $19,220,165
in connection with its investment in Modex Therapeutics Ltd. ("Modex"), a Swiss
biotechnology company that completed an initial public offering on June 23,
2000. For more information on Modex see "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this prospectus.
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision regarding StemCells, Inc. (the "Company" or "we" or "us").
Furthermore, the risks described are not the only ones facing the Company.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. Consequentially, the
trading price of our common stock could decline, resulting in the loss of all or
part of your investment.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cells technology is at the early pre-clinical stage for the neural
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product utilizing stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly differentiate and integrate into existing tissue in the desired
manner, or (iv) achieve benefits therapeutically equal to or better than the
standard of treatment at the time of testing. In addition, any such product may
cause undesirable side effects. Results obtained in early pre-clinical research
may not be indicative of the results that will be obtained in later stages of
preclinical or clinical research. If any products we develop do not receive
regulatory approval, or if we are unable to maintain regulatory compliance, we
will be limited in our ability to commercialize them, and our business and
results of operations would be harmed. Furthermore, since stem cells represent a
novel form of therapy, the marketplace may not accept any products we may
develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses.
Even though we owned 126,193 shares of Modex Therapeutics Ltd., stock with
an estimated fair market value of $19,220,165 based on the share price of
$247.50 Swiss francs on June 30, 2000, we are restricted from selling them until
January 2001, and the value of our holdings is subject to change. The
performance of Modex stock since Modex's initial public offering does not
predict its future value.
We intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
Our ability to complete any such arrangements successfully will depend upon
market conditions and, more specifically, on continued progress in our research
and development efforts. We may fail to obtain the necessary capital resources
from any such sources when needed or on terms acceptable to us. Lack of
necessary funds may require us to delay, reduce or eliminate some or all of our
research and development program or to license our technology or any potential
products resulting therefrom to third parties rather than commercializing it
ourselves.
4
<PAGE>
WE MAY NEED BUT FAIL TO OBTAIN A PARTNER OR PARTNERS TO SUPPORT OUR STEM
CELL DEVELOPMENT EFFORTS.
Equity and other funds alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may be dependent on our ability to
reach partnering arrangements that will provide support for our stem cell
discovery and development efforts. While we have engaged, and expect to continue
to engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all.
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE THAT WE
WILL DEVELOP PRODUCTS, OBTAIN PRODUCT REVENUES OR BECOME PROFITABLE.
We have incurred substantial operating losses and expect to continue to
incur substantial operating losses in the future in order to conduct our
research and development activities, and if those are successful, to fund
clinical trials and other expenses. We have not earned any revenue from sales of
any product. Substantially all of our past revenues have been derived from, and
any future revenues we may obtain for the foreseeable future are expected to be
derived from, cooperative agreements, research grants, investments and interest
on invested capital. We have no cooperative agreements and only one research
grant currently in place for our stem cell technology, and we may not obtain any
such agreements or additional grants in the future, or receive any revenues from
them.
WE HAVE SUBSTANTIAL PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED
OR LEASED BY US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR
STEM CELL RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where our administrative
offices were also located. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$950,000 per year for our former Science and Administrative Facility ("SAF") and
debt service payments and operating costs of approximately $1,000,000 per year
for our former encapsulated cell therapy pilot manufacturing facility. We are
currently seeking to sublease the SAF and to sell the pilot manufacturing
facility, but may not be able to do so. These continuing costs significantly
reduce our cash resources and adversely affect our ability to fund further
development of our stem cell technology.
WE DO NOT ANTICIPATE RECEIVING FUTURE REVENUES FROM THE SALE OF OUR
ENCAPSULATED CELL TECHNOLOGY.
In December 1999, we sold our encapsulated cell therapy technology to
Neurotech S.A. While under the terms of the sale, we may receive royalty and
other payments from Neurotech under certain circumstances, we do not anticipate
receiving any material payments from Neurotech in the near future, if at all.
FOUNDERS OF STEMCELLS CALIFORNIA, INC. HAVE THE RIGHT TO CONTROL OUR STEM
CELL RESEARCH AND TO REACQUIRE OUR STEM CELL TECHNOLOGY UNDER CERTAIN
CIRCUMSTANCES.
The agreement by which StemCells, Inc. acquired StemCells California in
September 1997, provides for our stem cell research to be conducted in
accordance with the provisions of an agreement between StemCells, Inc. and Drs.
Irving Weissman and Fred Gage, founders of StemCells California, pursuant to a
research plan. As long as the goals of the research plan are accomplished, the
stem cell research will continue to be conducted under an extension of such
research plan approved by a Research Committee. Increases in stem cell research
funding of not more than 25% a year approved by the Committee must be funded by
StemCells, Inc. as long as the goals of the research plan are being met, but
StemCells, Inc. has the option of ceasing or reducing neural stem cell research
even if all research plan goals are being met. Under those circumstances all
unvested but still-achievable performance-based options granted to Drs. Weissman
and Gage in connection with the acquisition of StemCells California would vest.
However, if we do cease or reduce non-neural stem cell research
5
<PAGE>
although all research plan goals are being met, Drs. Weissman and Gage would
have the right to continue development of the non-neural stem cell research by
licensing the technology related to such research in exchange for a payment to
StemCells, Inc. equal to all prior funding for such research plus royalty
payments, which might not reflect fair market value for such technology at such
time.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION WILL BE HARMED.
Patent protection for products such as those we propose to develop is highly
uncertain and involves complex and continually evolving factual and legal
questions. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently, we do
not know whether any of our pending applications will result in the issuance of
patents, or if any existing or future patents a) will provide significant
protection or commercial advantage or b) 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, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Our patents may not issue from our
pending or future patent applications or, if issued, may not be of commercial
benefit to us, afford us adequate protection from competing products or may be
challenged or declared invalid. In the event that a third party has also filed a
patent application relating to inventions claimed in our patent applications, we
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention. This
could result in substantial uncertainties and cost for us, even if the eventual
outcome is favorable to us, and it might not be. Even if our patent issues, a
court of competent jurisdiction could hold the patent to be issued.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking; failure to do so could
prevent us from commercializing all of our research and development related to
such stem cell and have a material adverse effect on the Company.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of genetically modified cells to treat disease, disorder or
injury. We are aware of two patents issued to a competitor claiming certain
methods for enriching central nervous system (CNS) stem cells through gene
modification of in vitro cultured cells. These genetically modified cells can
then be used to treat defective, diseased or damaged CNS tissue.
If third party patents or patent applications contain claims infringed by
our technology and such claims or claims in issued patents are ultimately
determined to be valid, we may be unable to obtain licenses to these patents at
a reasonable cost, if at all, and may also be unable to develop or obtain
alternative technology. If we are unable to obtain such licenses at a reasonable
cost, our business could be significantly harmed. We could be obligated to
defend ourselves in court against allegations of
6
<PAGE>
infringement of third party patents. Patent litigation is very expensive and
could consume substantial resources and create significant uncertainties. An
adverse outcome in such a suit could subject us to significant liabilities to
third parties, require disputed rights to be licensed from third parties, or
require us to cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own, gain access
to our trade secrets or disclose such technology, or that we will be able to
meaningfully protect our trade secrets and unpatented know-how and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
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. Our licenses may be canceled or converted to
non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of such licenses could expose us to the risks of
third party patents and/or technology. There can be no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH SUBSTANTIAL COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER
US.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense and is expected to increase. Our most
significant competitors are expected to be fully integrated pharmaceutical
companies and more established biotechnology companies with significantly
greater capital resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing. Many of
these potential competitors have significant products approved or in development
that could be competitive with our potential products, and also operate large,
well-funded research and development programs.
Our competitors may succeed in developing technologies and products that
a) are more effective than those being developed by us, or that b) would render
our technology obsolete or non-competitive.
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 will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain. We or our collaborators may fail
to obtain the necessary approvals to commence or continue clinical testing or to
manufacture or market our potential products in reasonable time frames, if at
all. In addition, the United States Congress and other legislative bodies may
enact regulatory reforms or restrictions on the development of new therapies
that could adversely affect the regulatory environment in which we operate or
the development of any products we may develop.
7
<PAGE>
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. Legislation has been introduced in the U.S. Congress in the
past, and is likely to be introduced again in the future, that would restrict
the extent and duration of the market exclusivity of an orphan drug. If enacted,
such legislation could prevent us from obtaining some or all of the benefits
offered under the existing statute even if we were to apply for and be granted
orphan drug status with respect to a potential product.
ACQUISITION OF CELLS AND OTHER MATERIALS CRITICAL TO OUR BUSINESS MAY BE
DIFFICULT.
Our research and development is based on the use of human stem and
progenitor cells that are currently obtained from fetal tissue. The federal and
state governments and other jurisdictions impose restrictions on the use of
fetal tissue. These restrictions change from time to time and there can be no
assurance that they will not become more onerous. Additionally, there can be no
assurance that we will successfully identify or develop reliable and ethical
sources of the cells required for our potential products and obtain such cells
in quantity or quality sufficient to satisfy the commercial requirements of our
potential products.
WE ARE SIGNIFICANTLY DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants. We currently have
outside consultants and interim personnel in key management and scientific
positions who are not permanent employees. Loss of services of any of these
individuals could have a material adverse effect on our operations. In addition,
our operations are dependent upon our ability to attract and retain additional
qualified scientific and management personnel. We may not be able to attract and
retain personnel we need on acceptable terms given the competition for
experienced personnel among pharmaceutical, biotechnology and health care
companies, universities and research institutions.
WE MAY BE SIGNIFICANTLY DEPENDENT ON THIRD PARTIES.
In order to successfully develop and commercialize our technology, we may
need to enter into a wide variety of arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. We may not
be able to establish and maintain such arrangements on terms acceptable to us,
or to successfully perform our obligations under such arrangements. Furthermore,
these arrangements may require us to grant certain rights to third parties,
including exclusive marketing rights to one or more products, or may have other
terms that are burdensome to us, and may involve the acquisition of our
securities. If any of our collaborators terminates its relationship with us or
fails to perform its obligations in a timely manner, the development or
commercialization of our technology and any product candidates we may develop
may be adversely affected.
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGE OR WITH THE
ADVANCES OF OUR COMPETITORS.
Competitors of the Company are numerous and include major pharmaceutical and
chemical companies, biotechnology companies, universities and other research
institutions. In addition, we have competitors with substantially greater
capital resources, experience in obtaining regulatory approvals and, in the case
of commercial entities, experience in manufacturing and marketing pharmaceutical
products. There can be no assurance that our competitors will not succeed in
developing technologies and products that are more effective than those we are
developing or that would render our technology and products obsolete or
non-competitive.
8
<PAGE>
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that reimbursement will be
provided by such payors at all or without substantial delay, or, if such
reimbursement is provided, that the approved reimbursement amounts will provide
sufficient funds to enable us to sell products we may develop on a profitable
basis. Changes in reimbursement policy could also adversely affect the
willingness of pharmaceutical companies to collaborate with the Company on the
development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals will be adopted or what actions Federal, state or private payers for
healthcare goods and services may take in response to healthcare reform
proposals or legislation. We cannot predict the effect government control and
other healthcare reforms may have on our .
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with winddown of our encapsulated
cell therapy programs, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and should not be relied
upon as an indication of future performance.
OUR STOCK PRICE MAY BE VOLATILE.
The market price for our Common Stock has been volatile and could decline
below the offering price for the shares. We believe that the market price for
our common stock could fluctuate substantially due to some or all of the risk
factors enumerated above.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have especially affected the market price of
the stock of many high technology and health care-related companies. Such
fluctuations have often been unrelated to the operating performance of these
companies. Nonetheless, these broad market fluctuations may negatively affect
the market price of our Common Stock.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our Common Stock on the open market, or the
availability of such shares for sale, could adversely affect the price of our
Common Stock. In particular, as of August 15, 2000, stock options to purchase
approximately 2,556,486 shares of Common Stock were outstanding, at an average
exercise price of approximately $4.209 per share (subject to adjustment in
certain circumstances); of this total, options covering approximately 608,976
shares are currently exercisable at an average exercise price of approximately
$4.693 per share.
9
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "possibly," "expect,"
"anticipate," "project," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition, or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there will be events in the future that
we have not been able to accurately predict or control and that may cause our
actual results to differ materially from those discussed. For example,
contaminations at our facilities, changes in the pharmaceutical or biotechnology
industries, competition and changes in government regulations or general
economic or market conditions could all have significant effects on our results.
These factors should be considered carefully and readers should not place undue
reliance on our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections and elsewhere in this prospectus
could harm our business, operating results and financial condition. All forward
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements and risk
factors contained throughout this prospectus. We are under no duty to update any
of the forward-looking statements after the date of this prospectus or to
conform these statements to actual results.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding disease occurrences, costs of treatment, biotechnology, and the market
sectors in which we may compete in the future. We obtained this information and
statistics from various third party sources, discussions with our consultants
and/or our own internal estimates. We believe that these sources and estimates
are reliable, but we have not independently verified them.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not, therefore, anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent on
then existing conditions, including our financial stability, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant.
10
<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization as of June 30,
2000 on a historical basis and as adjusted to reflect the $4,000,000 aggregate
proceeds from our August 3, 2000 sale of 923,521 shares of common stock and
$1,000,000 aggregate proceeds from our sale as of August 30, 2000 of 180,914
shares to Millennium Partners, L.P., net of a stock subscription receivable of
$1,250,000. This table excludes
- 2,852,973 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of August 15, 2000, 2,556,486 shares of common stock upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.209 per share.
b) 101,587 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P in conjunction with the aforementioned
August 3, 2000 financing at an exercise price of $4.725 per share.
c) 19,900 shares of common stock upon the exercise of a warrant held by
Millennium Partners, L.P. in conjunction with the aforementioned
August 30, 2000 financing at an exercise price of $6.03 per share.
d) 100,000 shares of common stock upon the exercise of warrants granted to
May Davis Group, Inc. and four of its affiliates in connection with the
aforementioned financing at an exercise price of $5.0375 per share.
e) 75,000 shares of common stock upon the exercise of warrants at $6.58125
per share held by holders of our 6% cumulative convertible preferred
stock purchased on April 13, 2000 for $1,500,000.
- the right under certain circumstances for holders of our 6% cumulative
convertible preferred stock to acquire up to a total of 1,126 additional
shares of our 6% cumulative convertible preferred stock, which is
convertible at the option of the holders into common stock at $6.33 per
share subject to customary antidilution protection.
- Millennium Partners, L.P. option to purchase up to an additional
$2,000,000 of common stock through August 3, 2001.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Stockholders' equity:
Convertible Preferred Stock, par value $0.01 per share,
1,000,000 shares authorized, 2,626 designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares
issued.................................................. $ 1,500,000 $ 1,500,000
Common stock, par value $0.01 per share, 45,000,000 shares
authorized, 19,612,677 (actual) and 20,717,112 (as
adjusted) shares issued................................. 196,127 207,171
Additional paid-in-capital................................ 129,525,509 134,514,465
Stock subscription receivable............................. (1,250,000)
Accumulated deficit....................................... (121,698,674) (121,698,674)
Accumulated other comprehensive income.................... 19,220,165 19,220,165
Deferred compensation..................................... (1,137,500) (1,137,500)
------------ ------------
Total stockholders' equity.............................. $ 27,605,627 $ 31,355,627
============ ============
</TABLE>
11
<PAGE>
DILUTION
This offering is for sales of stock by existing StemCells, Inc. stockholders
on a continuous or delayed basis in the future. Sales of common stock by
stockholders will not result in any substantial change to the net tangible book
value per share before and after the distribution of shares by the selling
stockholders. There will be no change in net tangible book value per share
attributable to cash payments made by purchasers of the shares being offered.
Prospective investors should be aware, however, that the price of
StemCells, Inc. shares may not bear any rational relationship to net tangible
book value per share.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements and other financial information included elsewhere in this
prospectus.
The consolidated historical financial data presented below as of
December 31, 1995, 1996, 1997, 1998, and 1999 and for the years then ended are
derived from StemCells, Inc. (formerly CytoTherapeutics, Inc.) consolidated
financial statements, which have been audited by Ernst & Young LLP, our
independent auditors. The selected consolidated financial data as of June 30,
1999 and 2000, and for the six months then ended are derived from the unaudited
financial statements of StemCells, Inc. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. The selected consolidated financial data for the six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000 or any other future period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements................ $11,761 $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 5,022 $ --
Research and development expenses.................... 14,730 17,130 18,604 17,659 9,991 6,847 1,660
Acquired research and development.................... 8,344
ECT wind-down expenses............................... 6,048
Net loss............................................. $(8,891) $(13,759) $(18,114) $(12,628) $(15,709) $(3,773) $(2,326)
======= ======== ======== ======== ======== ======= =======
Basic and diluted net loss per share................. $ (0.69) $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.20) $ (0.12)
Shares used in computing basic and diluted net loss
per share.......................................... 12,799 15,430 16,704 18,291 18,706 18,483 19,419
</TABLE>
The following table provides a summary of our consolidated balance sheets.
The pro-forma column is based on our historical unaudited financial statements
and also reflects our August 3, 2000 sale of 923,521 shares of common stock to
Millennium Partners, L.P for $4,000,000 and the August 30, 2000 sale of 180,914
shares of common stock to Millennium Partners L.P. for $1,000,000, net of a
stock subscription receivable of $1,250,000.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- --------- ------------
ACTUAL PRO-FORMA
--------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and
marketable securities........ $44,192 $42,607 $29,050 $17,386 $ 4,760 $ 5,535 $ 9,285
Restricted investments......... 19,220 19,220
Total assets................... 56,808 58,397 44,301 32,866 16,081 32,388 36,138
Long-term debt, including
capitalized leases........... 5,441 8,223 4,108 3,762 2,937 2,775 2,775
Redeemable common stock........ 8,159 5,583 5,249 5,249
Stockholders' equity........... 45,391 34,747 28,900 17,897 3,506 27,606 31,356
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations for the six months ended June 30, 2000 and 1999 and the years ended
December 31, 1999, 1998, and 1997 should be read in conjunction with our
consolidated financial statements and notes to those statements and other
financial information included elsewhere in this prospectus.
RESULTS OF OPERATIONS
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 main focus of our operations were primarily devoted to a
different technology (encapsulated cell technology, 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 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 its
operations. There presently are no such collaborative research arrangements 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.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ended June 30, 2000 and 1999, revenues from collaborative
agreements totaled $0 and $5,021,707, respectively. The decrease in revenues
resulted from the June 1999 termination of a Development, Marketing and License
Agreement related to our former encapsulated cell technology. We have not yet
entered into revenue-producing collaborations with respect to our platform stem
cell technology. During the second quarter 2000 we realized a $1,427,686 gain in
connection with its investment in Modex Therapeutics Ltd. ("Modex"), a Swiss
biotechnology company that completed an initial public offering on June 23,
2000. At June 30, 2000, we owned 126,193 shares with an estimated fair value of
$19,220,165 based on the share price of $247.50 Swiss francs on that date.
Research and development expenses totaled $1,659,932 for the six months
ended June 30, 2000, compared with $6,847,383 for the same period in 1999. The
decrease of $5,187,451, or 76%, from 1999 to 2000 was primarily attributable to
the wind-down of research activities relating to the ECT. General and
administrative expenses were $2,078,286 for the six months ended June 30, 2000,
compared with $2,168,315 for the same period in 1999. The decrease of $90,029,
or 4%, from 1999 to 2000 was
14
<PAGE>
primarily attributable to the establishment of a smaller corporate office in
California. Interest income for the six months ended June 30, 2000 and 1999 was
$138,232 and $406,331, respectively. The decrease in interest income in 2000 was
attributable to the lower average investment balances during such period.
Interest expense was $142,566 for the six months ended June 30, 2000, compared
with $185,054 for the same period in 1999. The decrease in 2000 was attributable
to lower outstanding debt and capital lease balances in 2000 compared to 1999.
Net loss for the six months ended June 30, 2000 was $2,325,964, or ($0.12)
per share, as compared to net loss of $3,772,714, or ($0.20) per share, for the
comparable period in 1999. The decrease in net loss of $1,446,750 from the same
period in 1999 primarily reflects a gain from the sale of certain shares of our
stock in Modex, as the reductions in expenses were offset by the decrease in
revenues from collaboration agreements. The Company (then known as
CytoTherapeutics, Inc.) was one of the founders of Modex, a Swiss
biotherapeutics company established in 1996 to pursue encapsulated cell
technologies related to former programs of the Company. After Modex' initial
public offering on the Swiss Neue Market in late June, we own 126,193 shares of
Modex common stock. The IPO price was 168.00 Swiss Francs, and the share price
on June 30 was 247.50 Swiss Francs. The shares are subject to a lockup for
6 months from the date of the IPO.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues from collaborative agreements totaled $5,022,000, $8,803,000 and
$10,617,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
We earned revenues primarily from a Development, Marketing and License Agreement
with AstraZeneca Group plc, which we signed in March 1995 (the "Astra
Agreement"). The decrease in revenues from 1998 to 1999 resulted primarily from
the June 1999 termination of the Astra Agreement. 1997 revenues included a
$3,000,000 milestone payment from Astra related to the Phase II clinical program
for our pain control implant.
Research and development expenses totaled $9,984,000 in 1999, as compared to
$17,659,000 in 1998 and $18,604,000 in 1997. The decrease of $7,668,000, 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. The decrease of $945,000, or 5%, from 1997
to 1998 was primarily attributable to a reduction in spending on research
agreements and a reduction in research and development personnel.
Acquired research and development consists of a one-time charge of
$8,344,000 related to the acquisition of StemCells California, Inc., in 1997.
Commercialization of this technology will require significant incremental
research and development expenses over a number of years. With the recent
completion of the restructuring of our research operations, we are now focused
solely on the research and development of its platform stem cell technology,
which encompasses the technology acquired upon the acquisition of StemCells
California, Inc. and related technology developed or licensed in by us.
General and administrative expenses were $4,927,303 for the year ended
December 31, 1999, compared with $4,603,000 in 1998 and $6,158,000 in 1997. Due
to the wind-down of the Company's 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. The reduction of $1,555,000, or 25%, from
1997 to 1998 was primarily attributable to a reduction in legal fees, recruiting
and relocation expenses, as well as a reduction in employees.
Wind-down expenses totaled $6,047,806 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate 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 our estimate of the costs of settlement of a 1989
funding agreement with the Rhode Island Partnership for Science and Technology
("RIPSAT").
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<PAGE>
Interest income for the years ended December 31, 1999, 1998 and 1997 totaled
$564,000, $1,254,000 and $1,931,000, respectively. The average cash and
investment balances were $10,663,000, $21,795,000 and $33,343,000 in 1999, 1998
and 1997, respectively. The decrease in interest income from 1997 to 1998 to
1999 was attributable to lower average balances.
In 1999, interest expense was $335,000, compared with $472,000 in 1998 and
$438,000 in 1997. The decrease from 1998 to 1999 was attributable to lower
outstanding debt and capital lease balances. The increase from 1997 to 1998 was
primarily attributable to capitalization of $210,000 of interest on the new
facility in 1997.
In October 1997, we recognized a gain in the amount of $3,387,000 related to
the sale of 50 percent of our interest in Modex Therapeutiques.
The net loss in 1999, 1998 and 1997 was $15,709,000, $12,628,000, and
$18,114,000, respectively. The loss per share was $0.84, $.69 and $1.08 in 1999,
1998 and 1997, respectively. 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 our estimate of the costs of settlement of a funding agreement with RIPSAT.
The decrease from 1997 to 1998 was attributable to a one-time charge of
$8,344,000 for acquired research and development related to the purchase of
StemCells California, Inc. offset by a $3,387,000 gain on a partial sale of our
interest in Modex in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its 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 unrestricted cash and cash equivalents totaling $5,535,264 at
June 30, 2000. Cash equivalents are invested in money market funds.
Our 126,193 shares of Modex stock are subject to a lock-up agreement for six
months in connection with Modex' initial public offering. The actual sale price
for the shares may vary significantly from the initial public offering price of
168.00 Swiss francs and the share price at June 30, 2000 of 247.50 Swiss francs.
Our liquidity and capital resources were, in the past, significantly
affected by its 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 its stem cell technology.
In March 1995, we 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, we were 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, we 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 us 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, we were entitled to a royalty on the
worldwide net sales of such products in return for the marketing
16
<PAGE>
license granted to AstraZeneca and our 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 us of the
results of AstraZeneca's analysis of the double-blind, placebo-controlled trial
of our 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 further develop the bovine cell-containing implant therapy and
exercised its right to terminate the agreement. (SEE ALSO NOTE 17--"RESEARCH
AGREEMENTS" TO THE ACCOMPANYING FINANCIAL STATEMENTS)
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to its encapsulated cell technology and to
focus its resources on the research and development of its proprietary stem cell
technology platform. We terminated approximately 68 full time employees and, in
October 1999, relocated its corporate headquarters to Sunnyvale, California. We
recorded approximately $5.7 million of wind-down expenses including employee
separation and relocation costs during 1999.
On December 30, 1999 we sold our encapsulated cell technology ("ECT") 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 return for the
assignment to Neurotech of intellectual property assets relating to ECT. In
addition, we 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. 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 received by us upon demonstration satisfactory to Neurotech
that certain intellectual property is not subject to other claims.
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 are
being used to fund our continuing operations.
In July 1999, the Rhode Island Partnership for Science and Technology
("RIPSAT") alleged that we were in default under a June, 1989 Funding Agreement
(the "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 ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). We agreed to pay RIPSAT $1,172,000 in full
satisfaction of all of our obligations to RIPSAT under the Funding Agreement. At
the same time, IRBA agreed to return to us the full amount of our debt service
reserve ("Reserve Funds"), comprising approximately $610,000 of principal and
interest, relating to the bonds we have with IRBA and RIIFC. The Reserve Funds
were transferred directly to RIPSAT, so the net cash paid by us was
approximately $562,000. 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 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 and Genentech entered into a Settlement Agreement under which
Genentech released the Company from any obligation to
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<PAGE>
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,
and use of our liquidity and capital resources was not necessary. 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.
In May 1996, we secured an equipment loan facility with a bank (the
"Lender") in the amount of $2,000,000 (the "Credit Facility"). On August 5, 1999
we made a payment of approximately $752,000 of principal and interest to the
Lender to retire the Credit Facility rather than seek a waiver by the Lender of
our violation of a loan covenant requiring us to maintain unrestricted liquidity
in an amount equal to or in excess of $10 million.
We continue to have substantial outstanding obligations in regard to its
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $950,000 per year associated with its former research
laboratory and corporate headquarters building, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to the its
pilot manufacturing and cell processing facility. We are actively seeking to
sublease, assign or sell its 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 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 it was then able to obtain from outside investors. The shares of
preferred stock are 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 the Company on the
same terms as those on which we complete offerings of its securities with third
parties within 6 months, if any such offerings are completed. They have waived
that right with respect to the common stock transaction 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 which are 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. StemCells received
$3 million of the purchase price at the closing and will receive 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 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 will 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 had the option for twelve months to purchase up to $3 million of
additional common stock. On August 30, 2000 the Fund exercised $1,000,000 of its
option to purchase additional common stock at $5.53 per share. We received
$750,000 of the purchase price at the closing, and will receive the remaining
$250,000 upon effectiveness of a registration statement covering the shares
owned by the Fund. The Fund may be
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entitled 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 will 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 19,900 shares of common stock at $6.03 per share. This
warrant is callable by StemCells 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 its product
development efforts. Substantial additional funds will be required to support
our research and development programs, for acquisition of technologies and
intellectual property rights, for preclinical and clinical testing of its
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 its ability to obtain
partnering support for its stem cell technology and, in the near term, on its
ability to realize proceeds from the sale, assignment or sublease of its
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 its
intellectual property rights, equipment, facilities or investments, government
grants and funding from collaborative arrangements, if obtainable, to fund its
operations.
We intend to pursue opportunities to obtain additional financing in the
future through equity and debt financings, grants and collaborative research
arrangements. The source, timing and availability of any future financing will
depend principally upon market conditions, interest rates and, more
specifically, on our progress in its exploratory, preclinical and future
clinical development programs. Lack of necessary funds may require us to delay,
reduce or eliminate some or all of its research and product development programs
or to license its 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 its operations into the first quarter 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 its research and product development programs and/or its capital
expenditures or to license its potential products or technologies to third
parties.
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BUSINESS
OVERVIEW
We are engaged in the development of therapies that use tissue-derived (that
is, non-embryonic) stem and progenitor cells to treat, and possibly cure, human
diseases and injuries such as Parkinson's disease, hepatitis, diabetes, and
spinal cord injuries. Stem cells are the key cells that the body uses 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 give rise to one or more mature cell types within the
organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the nervous system, result from the destruction of particular types
of mature cells or their failure to function adequately within an organ which,
like the brain, cannot be transplanted to effect a cure. In other diseases
caused by impaired cellular function (e.g., pancreatic failure from diabetes and
liver failure from hepatitis or other causes), the scarcity of organs and other
difficulties constrain treatment or cure by transplant. These conditions, many
of which cannot be treated effectively by other means, affect more than
18 million people in the United States and account for more than $160 billion
annually in health care costs according to associations for the various diseases
and government sources.
Our therapies are based on the transplantation of healthy human stem and
progenitor cells to repair or replace neural, pancreatic 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 a leadership position in the neural stem cell
therapy area through the advances we have made in the isolation, purification
and transplantation of neural 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 a broad intellectual property position with
respect to stem and progenitor cell therapies in all three areas by patenting
our discoveries and entering into exclusive licensing arrangements. Successful
development and commercialization of our platform stem cell technologies may
create the opportunity for therapies that address a number of conditions with
significant unmet medical needs.
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 neurodegenerative diseases, such as Parkinson's disease,
Alzheimer's disease and amyotrophic lateral sclerosis ("ALS").
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 these 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 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
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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
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 (autologous) or from donors (allogeneic). Since autologous
cells are obtained from the same person who will receive them, they 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 allogeneic transplants 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 brain stem and progenitor cells. We believe this is the first reproducible
process for growing normal human neural stem cells. More recently, we have
discovered cell surface markers that identify the human neural stem cells. This
allows us to purify them and eliminate other unwanted cell types. Together,
these discoveries enable us to select normal human neural 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
(xenotransplants).
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. Recent advances in our research have shown that
neural stem cells transplanted into hosts successfully engraft, migrate, and
differentiate to produce mature neurons and glial cells.
Because the stem cell is the pivotal cell that produces all the functional
mature cell types in an organ, we believe this cell serves as a platform for
five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- genomics, and
- diagnostics.
We will be pursuing key alliances in these areas.
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OUR STEM CELL TECHNOLOGY PLATFORM
Stem cells have two defining characteristics:
- they are themselves undifferentiated, but some of their progeny are
differentiated cells that give rise to successively more specialized cell
types until all the kinds of mature cells making up the particular organ
are produced; and
- they "self renew"--that is, some of their progeny 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
hematopoietic, neural (both central and peripheral), hepatic, pancreatic
endocrine, and mesenchymal 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 they can 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 of 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 neural
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 (i.e., neurons, astrocytes,
and oligodendrocytes). Also, a separate study sponsored by us using these
cultured stem and progenitor cells showed that the cells are capable of
transplantation into hosts, with successful engraftment, migration and
differentiation to produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human brain stem cells can be successfully isolated by cell surface markers
present on freshly obtained brain cells. We believe this is the first
reproducible process for isolating highly purified populations of
well-characterized normal human neural 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 (xenogeneic cells). We have also filed an
improved process patent for the growth and expansion of these purified normal
human neural 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. 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 neural stem and progenitor cell-based therapies for these
diseases.
We continue to advance our research programs to discover the human
pancreatic islet stem cell and the liver stem cell. Pancreatic islet stem cells
may be useful in the treatment of Type 1 diabetes and those cases of Type 2
diabetes where insulin secretion is defective. Liver stem cells may be useful in
the treatment of diseases such as hepatitis, cirrhosis of the liver and liver
cancer.
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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 areas (such
as bone marrow or peripheral blood cell transplants) where autologous
transplantation is now feasible. In a few additional areas, including the liver,
allogeneic transplantation 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
differentiate into the multiple kinds of cells that are commonly lost in various
diseases, including neurodegenerative diseases, transplanted stem cells may be
able to migrate limited distances to the proper location within the body, to
expand and differentiate 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 and 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
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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.
<TABLE>
<CAPTION>
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
-----------------------------------------------------------------------
PROGRAM DESCRIPTION STAGE/STATUS(1)
------------------- -----------------------------------------------------------------------
<S> <C> <C>
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged CNS - In vitro ability to initiate and expand stem cell-containing
tissue (including degenerated human neural cultures and differentiation into three types
retinas and tissue affected by of CNS cells
certain genetic disorders)
- Direct isolation of neurosphere-initiating stem cells from
brain
- In vivo demonstration of proper differentiation and
engraftment of cultured human neural cell containing CNS
stem cells in rodent CNS
PANCREATIC ISLET STEM CELL RESEARCH
Repair or replace damaged - Identified cell surface markers used to identify, isolate
pancreatic islet tissue and culture pancreatic islet stem cells
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver - Defined the generation of hepatocytes from purified mouse
tissue (including the results hematopoietic stem cells
of certain metabolic genetic
diseases)
- Identified in vitro culture assay for growth of human
bipotent liver cells
</TABLE>
------------------------
(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 neural, 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.
NEURAL STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with neural stem and progenitor cell cultures in
collaboration with NeuroSpheres, Ltd., in 1992. We believe that NeuroSpheres was
the first to invent these cultures. We are the exclusive, worldwide licensee
from NeuroSpheres to such inventions and associated patents and patent
applications for 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
neural stem and progenitor cells in cultures. In preclinical IN VITRO and early
IN VIVO studies, we demonstrated that these
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cells differentiate into all three of the cell types of the CNS. Based on 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 neural 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 engrafted into the brains of rodents where
they subsequently migrated and differentiated into the appropriate cell lineages
for the site of the brain into which they were transplanted.
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 neural and other stem and progenitor
cells or their differentiated progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human neural stem cells
that resulted in a 100-fold increase in neural stem and progenitor cell
production after 6 passages. 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 neural cell
cultures containing central nervous system stem cells, for compositions of human
neural cells expanded by these methods, and for use of these cultures in, e.g.,
human transplantation. These human neural 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 neural stem cells, and also allowed a separate
patent application for our media for culturing human CNS neural 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 neural stem
cells based on the cell surface markers found to be present on freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human neural stem
cells utilizing this proprietary process. In November 1999, we announced the
study's first results: Our researchers, by using our proprietary cell surface
markers, had succeeded in identifying, isolating and purifying human neural 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 neural
stem cells. Because the cells are normal human neural 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 (xenogenic).
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 normal mouse brain
hosts, where they engraft and grow into neuronal and glial cells.
During the course of the study, the transplanted human neural 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 neural 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 neural cells.
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As noted above, human neural stem and progenitor cells harvested and
purified and expanded using our proprietary processes may be useful for creating
therapies for the treatment of neurodegenerative 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 expanding some unwanted cell type(s);
- 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/function of the brain
is absent; stem cell-derived neural cultures might be genetically modified
to produce those proteins. The modified neural stem cells could be
transplanted into patients with these genetic diseases;
- the efficient engraftment 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
neural cells.
PANCREATIC STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreatic stem and progenitor cell is currently being
conducted by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in
collaboration with some of our senior researchers.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes (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.
Diabetes is widely recognized as one of the leading causes of death and
disability in the United States and is associated with long term complications
that affect almost every major part of the body. Diabetes-related treatment
costs exceed $100 billion 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 pancreatic 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 cell surface markers unique to the
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.
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel cell surface markers identified by Dr. Sarvetnick and her research team as
being unique to the pancreatic islet stem cell for which we have now filed a US
patent application. In collaboration with Dr. Sarvetnick, we continue to advance
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the discovery program directed at the identification, isolation and culturing of
the pancreatic stem and progenitor cell 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, the researchers devised a culture assay for facilitating the
identification of a liver stem and progenitor cell. In addition to supporting
the growth of an early human liver stem and 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 animal 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 TECHNOLOGY 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 Astra
(later 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. 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 stem cell
technology platform. 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 marketing the facility we occupied in
Rhode Island and seeking to sublease, assign or sell our interest in our former
corporate headquarters building and our pilot manufacturing and cell processing
facility there.
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.
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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 stem cell technology.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation. We acquired that 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 INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutiques SA ("Modex"), a Swiss biotherapeutics company, to pursue
extensions of our former technology of encapsulated-cell therapy 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 non-CNS 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. We now own
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 New
Market Exchange on August 15, 2000, was 298.5 Swiss Francs (or approximately
$174) per share.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
We have entered into a number of license agreements with commercial as well
as 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.
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in 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.
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<PAGE>
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.
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
MANUFACTURING
The keys to successful commercialization of neural stem/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 (which may also be used to affect
the stability and engrafting 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 therapy area includes nineteen issued U.S. patents,
six of which have issued within the last year. An additional ten patent
applications are pending, one of which has been allowed.
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<PAGE>
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 neural and
pancreatic stem cells.
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, pancreatic and liver
diseases, 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 and is expected to increase. Our most
significant competitors are expected to 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.
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
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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 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
<TABLE>
<S> <C>
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
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 application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence our receipt by the FDA, absent questions,
requests for delay or objections from the
FDA.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, 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 safety (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 chose and a candidate product is
found to be effective and to have an
acceptable safety profile in Phase II
evaluations.
- 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.
4. Submission to the FDA of a marketing The results of the preclinical studies and
authorization applications(s) clinical studies are submitted to the FDA in
the form of a marketing approval
authorization application.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
5. FDA approval of the application(s) prior The testing and approval process will require
to any commercial sale or shipment of the substantial time, effort and expense. The
drug. Biologic product manufacturing time for approval is affected by a number of
establishments located in certain states also factors, including relative risks and
may be subject to separate regulatory and benefits demonstrated in clinical trials, the
licensing requirement availability of alternative treatments and
the severity of the disease. Additional
animal studies or clinical trials may be
requested during the FDA review period which
might add to that time.
</TABLE>
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 cGMP. 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 (normally at least every
two years), and 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 our 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 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
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<PAGE>
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 supranational, 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 August 15, 2000, we had twenty full-time employees, of whom five 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. 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
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<PAGE>
provide any services to any other entities which 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, Inc.
- 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.
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MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
John J. Schwartz, Ph.D.................... 66 Director, Chairman of the Board
George W. Dunbar, Jr...................... Acting President and Chief Executive
54 Officer
Donald Kennedy, Ph.D...................... 69 Director
Mark J. Levin............................. 50 Director
Irving L. Weissman, M.D................... 60 Director
</TABLE>
The Company's 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.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and compensation committee.
The board may also establish other committees to assist in the discharge of its
responsibilities.
The audit committee oversees the Company's financial reporting process on
behalf of the Board of Directors, makes recommendations to the Board regarding
the independent auditors to be nominated for election by the stockholders,
reviews the independence of such auditors, approves the scope of their annual
audit activities, reviews their audit results, assures that the Company's
financial reporting is of high quality, and reviews the interim financial
statements with Management and the independent auditors prior to the filing of
the Company's Quarterly Report on Form 10-Q. The audit committee is currently
comprised of Dr. Schwartz and Dr. Kennedy.
The duties of the compensation committee are to make recommendations to the
Board and the Company's management concerning salaries in general, determine
executive compensation, and approve incentive compensation for the Company. The
compensation committee is currently comprised of Mr. Levin and Dr. Schwartz.
36
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer during the three most recent fiscal years ended
December 31, and the two other most highly compensated executive officers who
served in such capacities during the fiscal year ended December 31, 1999 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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
AWARDS
------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($) AWARDS($) OPTIONS (#) COMPENSATION
--------------------------- -------- --------- -------- ---------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard M. Rose M.D...... 1999 279,974 0 0 0 0 4667(2)
Chief Executive 1998 286,553 0 0 0 150,000(3) 11,330(4)
Officer(1) 1997 68,750 0 0 0 300,000(5) 76,268(6)
Phillip K. Yachmetz...... 1999 406,731(8) 0 0 0 12,000 71,355(9)
Senior Vice President 1998 155,780 10,000 0 0 75,000 86,695(10)
And General Counsel
Acting Chief Financial
Officer and Treasurer(7)
Moses Goddard, M.D....... 1999 195,176(2) 0 0 0 18,000 7,921(3)
Vice President, Chief 1998 188,957 0 0 0 67,875(4) 0
Technical Officer Cell
Encapsulation (1)
</TABLE>
------------------------
(1) 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.
(2) Represents the personal portion of the use of a Company vehicle, as well
as$5,000 of fair market value of the Company matching contributions of
Common Stock to Dr. Rose's account in the Company's 401(k) Plan.
(3) 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.
(4) Represents $4,666.56 of fair market value of the Company matching
contributions of Common Stock to Dr. Rose's account in the Company's
401(k)Plan.
(5) One option grant for 200,000 shares was reduced to 150,000 shares upon there
pricing of the grant effective as of July 10, 1998 at a price of $1.28 per
share.
(6) Represents advance for relocation expenses of $75,000 and fair market value
of $1,268 of Company matching contributions of Common Stock to Dr. Rose's
account in the Company's 401(k) plan.
(7) Mr. Yachmetz was appointed Acting Chief Financial Officer and Treasurer
effective as of April 2, 1999. The term of Mr. Yachmetz' Employment
Agreement expired on October 31, 1999.
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<PAGE>
(8) Includes $204,807 of compensation and accrued and unused vacation paid upon
the expiration of Mr. Yachmetz' Employment Agreement in accordance with the
terms of such agreement.
(9) Represents $15,304 as the fair market value of 9,601 shares of the Company's
Common Stock earned in 1998 and issued in 1999, $3,990 of fair market value
of Company matching contributions of Common Stock to Mr. Yachmetz' account
in the Company's 401(k) Plan and $52,061 of temporary living and relocation
expenses adjusted for taxes.
(10) Represents $14,724 of temporary living and relocation expenses adjusted for
taxes paid to Mr. Yachmetz and personal use of a Company vehicle. Also
represents $1,827 of fair market value of Company matching contributions of
Common Stock to Mr. Yachmetz' account in the Company's 401(k) Plan.
(11) Dr. Goddard resigned as a director and officer of the Company effective as
of August 30, 1999 and served as a consultant to the Company through
March 28, 2000.
(12) Includes $70,945 of compensation paid to Dr. Goddard in accordance with the
severance agreement entered into with the Company.
(13) Represents the fair market value of 4,687 shares of the Company's Common
Stock granted to Dr. Goddard through the Company's 1992 Equity Incentive
Plan.
(14) Represents the regrant of options in the total original amount of 90,500
shares which was reduced to 67,875 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on July 10,
1998.
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<PAGE>
SELLING STOCKHOLDERS
SALES BY MEMBERS OF THE COMPANY'S BOARD
Dr. Irving Weissman and Mark J. Levin, two members of the Company's Board of
Directors, will be selling shares of common stock in this offering.
Dr. Weissman and Mr. Levin acquired their shares pursuant to a 6% cumulative
convertible preferred stock financing in April, 2000, which is described in the
section titled "Relationships and Transactions with Certain Related Parties."
Both Dr. Weissman and Mr. Levin are party to a registration rights agreement in
which we agreed to register their shares of Common Stock upon their request and
to use our best efforts to keep the registration statement effective for five
(5) years, or until all of their registered shares of StemCells, Inc. Common
Stock are sold, whichever comes first. Registration of these shares does not
necessarily mean that the selling stockholders will sell all or any of the
shares.
The material relationships between Dr. Weissman, Mr. Levin and
StemCells, Inc. are as follows: Mark J. Levin is a Class I Director of the
Company, and from inception until January 1990 and from May 1990 until
February 1991, he served as the Company's President and acting Chief Executive
Officer. Irving L. Weissman, M.D. is a Class II Director of the Company. In
addition, both Dr. Weissman and Mr. Levin may donate or transfer as gifts some
or all of their StemCells, Inc. shares, or may transfer their shares for no
value to other beneficial owners. The selling stockholders will include these
donees or transferees as selling stockholders in a prospectus supplement if the
donees or transferees wish to use this prospectus to re-offer the shares.
SALES BY MILLENNIUM PARTNERS, L.P.
Millennium Partners, L.P. and May Davis Group, Inc. and four of its
affiliates also will be selling shares in this offering. On August 3, 2000, we
issued 923,521 shares of Common Stock to Millennium Partners, L.P., or the Fund.
At the same time we also issued to Millennium Partners a callable warrant to
purchase 101,587 shares of Common Stock and an adjustable warrant for a number
of shares, to be determined on eight dates beginning six months after the
closing and then every three months thereafter. On August 30, 2000 we issued an
additional 180,914 shares to the Fund, together with a callable warrant to
purchase 19,900 shares of Common Stock and an adjustable warrant for a number of
shares, to be determined on eight dates beginning six months after the closing
and then every three months thereafter. In connection with the Millennium
Partners transaction, we issued warrants for a total of 100,000 shares of Common
Stock to May Davis Group, Inc., who acted as placement agent for the
transaction, and four of its affiliates. These warrants expire on August 3,
2005.
We entered into a registration rights agreement with Millennium Partners in
which we agreed to register the shares of Common Stock purchased by Millennium
partners and issuable upon exercise of the warrants issued to Millennium
Partners. We agreed to use commercially reasonable efforts to keep the
registration statement in effect for five years, until all shares covered by the
registration statement are eligible for resale pursuant to Rule 144(k), or until
Millennium Partners and its transferees no longer hold the shares covered by the
registration statement, whichever occurs first. We also agreed to include in
this registration statement the shares issuable upon exercise of the warrants
issued to May Davis and its affiliates.
SECURITY OWNERSHIP OF THE SELLING STOCKHOLDERS, CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows information regarding the beneficial ownership of
our common stock as of August 30, 2000 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock;
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- each selling stockholder;
- each director and named executive officer; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o StemCells, Inc., 525
Del Rey Avenue, Suite C, Sunnyvale, CA 94085.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed to be outstanding shares of common stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of August 15, 2000, assuming that this
offering occurs in that 60-day period, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. The
shares listed below for the selling stockholders represent all of the shares
that each selling stockholder currently beneficially owns, the number of shares
each of them may offer and the number of shares each of them will own after the
offering assuming they sell all of the shares. To our knowledge, except as set
forth in the footnotes below, each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by that stockholder. Beneficial ownership percentage
is based on 20,538,742 shares of our common stock outstanding on August 15, 2000
and as adjusted for unexercised options and warrants as of that date as noted
below and 180,914 shares and 19,900 warrants issued to one of the Selling
Shareholders on August 30, 2000.
The number of shares of our Common Stock that will be issuable upon exercise
of the warrants issued to Millennium Partners is based upon fluctuations in the
market price and the number of shares of our Common Stock that will be issuable
upon conversion of the Preferred Stock held by Messrs. Weissman and Levin is
subject to anti-dilution provisions, so the actual number of shares of our
Common Stock that will be issuable and beneficially owned upon exercise of the
warrants and conversion of the Preferred Stock cannot be determined at this
time. As a result, we have agreed to register a number of shares of Common Stock
that is greater than the number of shares of Common Stock currently beneficially
owned by the selling stockholders.
The selling stockholders may offer all or some of their shares. All numbers
in the following table are based on information obtained by questionnaires
received by the company.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY
SHARES OF COMMON STOCK SHARES OF COMMON OWNED AFTER THIS
BENEFICIALLY OWNED PRIOR TO STOCK OFFERED OFFERING*
THIS OFFERING HEREBY ---------------------
---------------------------- ---------------- NUMBER
NUMBER OF NUMBER OF OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES SHARES PERCENTAGE
------------------------ -------------- ----------- ---------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Donald Kennedy, Ph.D............... 9,234(1) * -- 9,234 *
Mark J. Levin...................... 390,726(2) 1.9 472,743 154,287 0.7
John J. Schwartz, Ph.D............. 139,180(3) 0.7 -- 139,180 0.7
Irving Weissman, M.D............... 600,298(4) 2.9 472,743 363,859 1.8
George W. Dunbar, Jr............... 50,000(5) * -- 50,000 *
All directors and executive
officers as a group (5
persons)......................... 1,189,439(6) 5.6 945,486 716,561 3.4
Millennium Partners, L.P........... 1,225,922(7) 5.9 2,160,000 -- --
May Davis Group.................... 100,000(8) 0.5 100,000 -- --
</TABLE>
------------------------
* Less than 0.1%
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(1) Includes 9,234 shares issuable upon exercise of stock options exercisable
within 60 days.
(2) Includes 27,555 shares issuable upon exercise of stock options exercisable
within 60 days. Includes 198,871 shares issuable upon conversion of
cumulative convertible preferred shares at the currently applicable
conversion price, and a warrant to purchase 37,500 shares.
(3) Includes 139,180 shares issuable upon exercise of stock options exercisable
within 60 days.
(4) Includes 31,250 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. 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. Also includes a warrant to purchase 37,500 shares.
(5) Includes 50,000 shares issuable upon exercise of stock options exercisable
within 60 days. 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.
(6) Includes 339,379 shares exercisable upon exercise of warrants and stock
options exercisable within 60 days.
(7) Includes 180,914 shares issued as of August 30, 2000 and 19,900 shares
issuable upon exercise of warrants issued together with those shares.
Includes 101,587 shares issuable upon exercise of warrants issued August 3,
2000.
(8) Includes shares issuable upon exercise of warrants held by four affiliates
of May Davis Group.
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RELATIONSHIP AND TRANSACTIONS WITH RELATED PARTIES
Dr. Schwartz, a member and Chairman of the Board of Directors, was retained
in July 1998 to serve as a consultant to the Company rendering strategic
business advice and consulting services, including assistance in the negotiation
and consummation of strategic collaboration transactions specified by the
Company. During Dr. Schwartz's service on the Board, his duties and compensation
under the Consulting Services Agreement are included within his duties and
considered part of his compensation for service as Chairman and Board member. To
compensate Dr. Schwartz for his services rendered to the Company during the
period of September 1997 through July 1998, the Consulting Services Agreement
provided for the payment to Dr. Schwartz of $50,000 and the grant of a fully
vested option to purchase 20,000 shares of the Company's Common Stock at $1.281,
the fair market value of the Company's Common Stock at the time of the grant.
Further, in the event that, at a time when he was not Chairman and member of the
Board of Trustees and the Consulting Services Agreement was in effect,
Dr. Schwartz materially participated in the negotiation and consummation of a
strategic collaboration transaction specified by the Company, he would have been
entitled to receive additional compensation equal to three percent of the
transaction consideration (as defined) when it was actually received by the
Company, such additional compensation payable half in cash and half in the form
of an option or warrant to purchase shares of the Company's Common Stock at $.20
per share, the number of shares being calculated based on the fair market value
of the Company's Common Stock ten days prior to the first public announcement of
the consummation of, the execution of a letter of intent for, or the existence
of discussions concerning the collaboration transaction. The Consulting Services
Agreement expired under its terms on July 27, 2000 and has not at this time been
renewed.
Dr. Weissman, a member of the Board of Directors, was retained in
September 1997 to serve as a consultant to the Company. Pursuant to his
Consulting Agreement, Dr. Weissman has agreed to provide consulting services to
the Company and serve on the Company's Scientific Advisory Board. The Company
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 and the remainder of which will vest
upon the occurrence of certain milestones related to the Company's stem cell
research program and in the event of certain changes of control. 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 ten years, subject to
earlier termination by the Company for cause or frustration of purpose and
earlier termination by Dr. Weissman for good reason. Dr. Weissman receives no
compensation as a member of the Board of Directors or for attending meetings of
the Board or its committees or meetings of the Company's Scientific Advisory
Board, but is reimbursed for reasonable expenses he incurs in attending such
meetings.
George W. Dunbar, Jr., Acting President and Chief Executive Officer of the
Company as of February 1, 2000, was a founding member of iCEO, LLC ("iCEO") in
September 1999 and has maintained this position through the present. Mr. Dunbar
joined the Company as Acting President of StemCells California, Inc., the
Company's wholly owned subsidiary, and he still holds this position currently.
Under the terms of two agreements dated as of November 17, 1999 and effective as
of November 8, 1999, the first between the Company and iCEO and the second
between the Company and Mr. Dunbar, Mr. Dunbar agreed to serve as Acting
President of StemCells California, Inc., the Company's wholly owned subsidiary.
Pursuant to the terms of his agreement with the Company, Mr. Dunbar is entitled
to an annual salary of $175,000 and was granted a stock option to purchase
48,000 shares of the Company's common stock that will vest at the rate of 4,000
shares per month commencing on December 6, 1999 and continuing until fully
vested so long as he continues to serve as Acting President. The vesting under
the option will be accelerated in the event of certain changes of control of the
Company. Additionally, the agreement provides that the Board will consider once
per
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<PAGE>
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. Mr. Dunbar is an at-will employee of the Company and as
such may resign or be terminated with or without reason. There are 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 the
Company, iCEO is entitled to receive annual compensation of $75,000 for so long
as Mr. Dunbar continues 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 the Company's
common stock that will vest at the rate of 4,000 shares per month commencing on
December 6, 1999 and continuing until fully vested so long as Mr. Dunbar
continues to serve as Acting President of StemCells California, Inc. or in any
other interim role with the Company. Additionally, the iCEO agreement provides
that the Board will 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 is 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 the Company.
When Mr. Dunbar was appointed Acting President and Chief Executive Officer of
the Company 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 was to become a permanent employee
of the Company in any capacity, the Company is 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.
In April 2000, the Company sold 750 shares of its 6% cumulative convertible
preferred stock plus a warrant to purchase 37,500 shares of the Company's common
stock to each of Dr. Weissman and Mr. Levin for $750,000 (i.e., a total of
$1,500,000), on terms more favorable to the Company than the Company was able to
obtain from outside investors. The shares are convertible at the option of the
holder into common stock at $3.77 per share. The holder 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 the Company on the same terms as those on which the Company completes
offerings of its 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 that are
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.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 45,000,000 shares of common stock, $.01 par value per
share, and 1,000,000 shares of undesignated preferred stock, $.01 par value per
share, to be issued from time to time in one or more series, with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions as our board of directors may determine. As of August 15, 2000, we
had outstanding 20,538,928 shares of common stock and 1,500 shares of 6%
cumulative convertible preferred stock.
As of August 15, 2000, we had 249 stockholders of record with respect to our
Common Stock and outstanding options to purchase 2,556,486 shares of our Common
Stock, of which 608,976 were currently exercisable. The following summary of
provisions of our capital stock describes all material provisions of, but does
not purport to be complete and is subject to, and qualified in its entirety by,
our restated certificate of incorporation and our amended and restated by-laws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our Common Stock are entitled
to any and all dividends as such dividends are declared by the Board of
Directors. This right is not cumulative, and no right shall accrue to holders of
Common Stock by reason of the fact that dividends on said shares were not
declared in any prior period. The shares of Common Stock are not convertible and
the holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon liquidation, dissolution or winding up of our company, the
holders of Common Stock are entitled to an amount equal to $1.00 per share,
subject to the rights of the holders of the Preferred Stock. After payment to
the holders of the Common Stock of the full preferential amounts due to them,
the holders of Common Stock have the right to share equally in the distribution
of the entire remaining assets of the company legally available for
distribution, subject to the rights of the holders of the Preferred Stock. Each
outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders, such voting rights to be counted together
with all other shares of capital stock having voting powers and not as a
separate class, except as otherwise required by law.
Our Common Stock is traded on the Nasdaq National Market under the symbol
"STEM."
PREFERRED STOCK
Our board of directors may from time to time direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Shares of preferred stock of
any one series shall be identical with each other in all respects except as to
the dates from which dividends shall accrue and/or cumulate. In the event of any
liquidation, dissolution or winding up of the company, the holders of
Undesignated Preferred Stock of each series are entitled to receive an amount
fixed by the company's Restated Certificate of Incorporation or by the
resolution(s) of the board of directors providing for the issuance of such
series.
The board of directors designated 2,626 shares, $.01 par value per share, as
6% cumulative convertible preferred stock, 1,500 shares of which are issued and
outstanding. The holders of these preferred shares are entitled to receive
cumulative dividends at a per share rate of 6% of the liquidation preference of
each share, per annum accruing daily and compounding quarterly, with priority
over payment of any dividend on common stock or any other class or series of
equity security
44
<PAGE>
of the company. In the event of any liquidation, dissolution or winding up of
the company, the holders of the 6% cumulative convertible preferred stock are
entitled to receive in preference to holders of any other class or series of
equity securities, an amount equal to $1,000 per share plus (i) dividends added
to the liquidation preference, (ii) all accrued but unpaid dividends and
(iii) all "Monthly Delay Payments" under the Registration Rights Agreement. The
6% cumulative convertible preferred stock was issued pursuant to a Securities
Purchase Agreement. Each holder of the 6% cumulative convertible preferred stock
has at any time the right to convert any or all 6% cumulative convertible
preferred stock held by such holder into fully paid, validly issued and
nonassessable shares of common stock, $.01 par value per share, at which point
the rights of the holders of converted 6% cumulative convertible preferred stock
shall be treated as having become the owners of such common stock. The
affirmative vote of a majority in interest of the outstanding 6% cumulative
convertible preferred stock is required for (i) any amendment, modification or
repeal of the Certificate of Designations, Certificate of Incorporation or
by-laws that may amend or change or adversely affect any of the rights or
preference of the 6% cumulative convertible preferred stock; provided, however,
that the holders of 6% cumulative convertible preferred stock who are affiliates
of the company shall not participate in such votes, and such shares shall be
deemed not to be outstanding for purposes of such votes. We have no current
intention to issue any more of our unissued, authorized shares of undesignated
preferred stock. However, the issuance of any shares of undesignated preferred
stock in the future could adversely affect the rights of the holders of common
stock.
WARRANTS
As of August 31, 2000, we had outstanding warrants to purchase 296,487
shares of common stock at an average exercise price of $5.3876 per share,
subject to customary antidilution adjustment. The warrants were issued at
various times during this year to four different parties as described below.
As of April 13, 2000 (the "Effective Date"), we issued to each of Irving
Weissman and Mark Levin (each an "Investor") a warrant in connection with a
Securities Purchase Agreement dated as of April 13, 2000. Each warrant is to
purchase 37,500 shares of the Company's common stock ("Common Stock"), $0.01 par
value per share, at an exercise price of $6.58125 per share. Each warrant is
exercisable, in whole or in part, at any time on or after the Effective Date and
on or prior to the fifth year anniversary of the Effective Date. The exercise
price is subject to adjustment for subdivisions, combinations, stock dividends,
reorganizations and various other issuances. Under the terms of the warrants,
during any time that the warrant shares are not subject to an effective
registration statement, Investor may elect to receive a reduced number of
warrant shares in lieu of tendering the exercise price in cash. An Investor is
not entitled to any rights as a shareholder until he exercises the warrant. In
the event of a transaction by the Company in which more than 50% of the voting
power of the Company is disposed of, each Investor shall have the right to
purchase, by exercise of the warrant and payment of the exercise price, the kind
and amount of shares and other securities and property which he would have owned
or have been entitled to receive after the occurrence of the transaction had the
warrant been exercised immediately prior thereto, subject to the adjustment of
the exercise price as described in the warrant and above. The Company may, at
any time during the term of the warrant, reduce (but not increase) the exercise
price to any amount for any period of time deemed appropriate by the Board of
Directors of the Company. Under the terms of the warrants, the number of shares
of Common Stock that an Investor may acquire upon exercise cannot exceed a
number that, when added to the total number of shares of Common Stock Investor
is deemed to beneficially own, together with all shares of Common Stock deemed
beneficially owned by the Investor's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the Common Stock.
We issued a warrant to Millennium Partners L.P., or Millennium as of
August 3, 2000, which may entitle them to receive additional shares of common
stock on eight dates beginning six months from
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that date and every three months thereafter On August 30, 2000 we issued a
second warrant to Millennium which may entitle them to receive additional shares
of common stock on eight dates beginning six months from the August 30, 2000
closing and every three months thereafter. The number of additional shares
Millennium will be entitled to receive on each date will be based on the number
of shares of common stock Millennium continues to hold on each date and the
market price of the Company's common stock over a period prior to each date. The
Company will have the right, under certain circumstances, to limit the number of
additional shares by purchasing part of the entitlement from Millennium. Each of
these warrants is exercisable, in whole or in part, at any time on or prior to
30 days after the last date which may entitle them to receive additional shares.
Each warrant is subject to adjustment for subdivisions, combinations, stock
dividends, reorganizations and various other issuances of common stock. During
any period of time that the shares of common stock underlying a warrant are not
subject to an effective registration statement, Millennium may elect to exercise
the warrant by receiving a reduced number of shares in lieu of tendering the
exercise price in cash. In the event of certain mergers, asset sales and tender
or exchange offers, Millennium shall have the right to purchase, by exercise of
the warrants and payment of the exercise price, the kind and amount of shares
and other securities and property it would have owned or have been entitled to
receive after the occurrence of the transaction had the warrant been exercised
immediately before the transaction, subject to the adjustment of the exercise
price as described in the warrant and above, or, if applicable, the right to
receive a substitute warrant after a merger or the right to tender the Warrant
for the consideration that would have been received if the warrant had been
exercised and the shares issued upon exercise had been tendered. Under the terms
of the warrants, the number of shares of common stock that Millennium may
acquire upon exercise cannot exceed a number that, when added to the total
number of shares of common stock Millennium is deemed to beneficially own,
together with all shares of common stock deemed beneficially owned by
Millennium's affiliates (as defined by Rule 144 of the Securities Act of 1933),
would exceed 9.99% of the total issued and outstanding shares of the Common
Stock.
Millennium also received a warrant on August 3, 2000 to purchase up to
101,587 shares of common stock at $4.725 per share, which is callable by
StemCells at $7.875 per underlying share. On August 30, 2000 the Company issued
an additional warrant to purchase up to 19,900 shares of common stock at $6.03
per share which is callable by StemCells at $10.05 per underlying share. These
warrants are referred to herein as the "Callable Warrant". Each Callable Warrant
is exercisable, in whole or in part, at any time on or after the Effective Date
and on or prior to the fifth year anniversary of the Effective Date. The
exercise price and number of shares are subject to adjustment for subdivisions,
combinations, stock dividends, reorganizations and various other issuances.
Under the terms of the Callable Warrants, during any time that the warrant
shares are not subject to an effective registration statement, Millennium may
elect to receive a reduced number of warrant shares in lieu of tendering the
exercise price in cash. Millennium is not entitled to any rights as a
shareholder until it exercises the warrant. In the event of certain mergers,
asset sales and tender or exchange offers, Millennium shall have the right to
purchase, by exercise of the Callable Warrant and payment of the exercise price,
the kind and amount of shares and other securities and property it would have
owned or have been entitled to receive after the occurrence of the transaction
had the warrant been exercised immediately prior thereto, subject to the
adjustment of the exercise price as described in the warrant and above, or, if
applicable, the right to receive a substitute warrant after a merger or the
right to tender the Warrant for the consideration that would have been received
if the warrant had been exercised and the shares issued upon exercise had been
tendered. Under the terms of the Callable Warrants, the number of shares of
Common Stock that Millennium may acquire upon exercise cannot exceed a number
that, when added to the total number of shares of Common Stock Millennium is
deemed to beneficially own, together with all shares of Common Stock deemed
beneficially owned by the Millennium's affiliates (as defined by Rule 144 of the
Securities Act of 1933), would exceed 9.99% of the total issued and outstanding
shares of the Common Stock.
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On August 3, 2000 the Company issued a warrant to the May Davis Group and
four of its affiliates to purchase up to 100,000 shares of common stock at
$5.0375 per share. The warrant is exercisable, in whole or in part, at any time
on or after the Effective Date and on or prior to the fifth year anniversary of
the Effective Date. The exercise price and number of shares are subject to
adjustment for subdivisions, combinations, stock dividends, reorganizations and
various other issuances.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within three
years did own 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is EquiServe Trust
Company, N.A.
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PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale by the
Selling Stockholders of the Common Stock offered hereby.
The shares of the Common Stock offered hereby (the "Shares") may be sold
from time to time by the Selling Stockholders, or by pledgees, donees,
transferees or other successors in interest (i) to or through underwriters or
dealers, (ii) directly to one or more other purchasers, (iii) through agents on
a best-efforts basis, or (iv) through a combination of any such methods of sale.
Such sales may be made on one or more exchanges or in the over-the-counter
market, or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in privately negotiated transactions. The
Shares may be sold by one or more of the following: (a) a block trade in which
the broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) an exchange
distribution in accordance with the rules of such exchange; and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (e) privately negotiated transactions without a broker or dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated prior to the sale. In addition, any securities covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this Prospectus.
In addition, the Selling Stockholders may engage in short sales and other
transactions in the common stock or derivatives thereof, and may pledge, sell,
deliver or otherwise transfer the common stock offered under this prospectus in
connection with such transactions.
If we are notified by a Selling Stockholder that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution, or a
purchase by a broker-dealer as a principal, a supplemental prospectus will be
filed listing:
- the name of each selling stockholder and of the participating
broker-dealer(s);
- the number of shares involved;
- the price at which such shares were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable; and
- other facts material to the transaction.
We have agreed to pay the cost of registering the shares covered by this
prospectus and the costs of preparing this prospectus and the registration
statement under which it is filed. We will provide the estimated total of these
expenses by amendment.
StemCells, Inc. and the Selling Stockholders have agreed to indemnify each
other against certain liabilities, including liabilities arising under the
Securities Act.
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LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
Registration Statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
49
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 (unaudited)............................. F-24
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and June 30, 1999
(unaudited)............................................... F-25
Condensed Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 (unaudited)............... F-26
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-27
</TABLE>
Additional schedules are not provided either because they are inapplicable
or because the required information is included in the accompanying financial
statements.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc., (formerly CytoTherapeutics, Inc.)
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 1999 and
1998, 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, 1999. 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. (formerly CytoTherapeutics, Inc.) at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Providence, Rhode Island
April 14, 2000
F-2
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,760,064 $ 7,864,788
Marketable securities..................................... -- 9,520,939
Accrued interest receivable............................... 42,212 206,609
Technology sale receivable................................ 3,000,000 --
Other current assets...................................... 1,168,579 841,674
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property, plant and equipment, net.......................... 5,251,376 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 16,080,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,905,068 1,020,119
Deferred revenue.......................................... -- 2,500,000
Current maturities of capitalized lease obligations....... 324,167 317,083
Current maturities of long-term debt...................... -- 1,000,000
------------- -------------
Total current liabilities................................... 3,860,550 5,547,824
Capitalized lease obligations, less current maturities...... 2,937,083 3,261,667
Long-term debt, less current maturities..................... 500,000
Deposits.................................................... 26,000 --
Deferred Rent............................................... 502,353 222,673
Commitments and contingencies
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999 and 1998...... 5,248,610 5,248,610
Common stock to be issued................................... -- 187,500
Stockholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and outstanding..... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; 18,635,565 and 17,800,323 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 186,355 178,003
Additional paid-in capital................................ 123,917,758 122,861,606
Accumulated deficit....................................... (119,372,710) (103,664,084)
Unrealized losses on marketable securities................ -- (5,198)
------------- -------------
Accumulated other comprehensive loss...................... (119,372,710) (103,669,282)
------------- -------------
Deferred compensation..................................... (1,225,000) (1,472,919)
------------- -------------
Total stockholders' equity.................................. 3,506,403 17,897,408
------------- -------------
Total liabilities and stockholders' equity.................. $ 16,080,999 $ 32,865,682
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from collaborative agreements............... $ 5,021,707 $ 8,803,163 $ 10,617,443
Operating expenses:
Research and development.......................... 9,984,027 17,658,530 18,603,523
Acquired research and development................. -- -- 8,343,684
General and administrative........................ 4,927,303 4,602,758 6,158,410
Encapsulated Cell Therapy Wind down and Corporate
Relocation...................................... 6,047,806 -- --
------------ ------------ ------------
20,959,136 22,261,288 33,105,617
------------ ------------ ------------
Loss from operations................................ (15,937,429) (13,458,125) (22,488,174)
Other income (expense):
Interest income................................... 564,006 1,253,781 1,931,260
Interest expense.................................. (335,203) (472,400) (437,991)
Gain on partial sale of Modex..................... -- -- 3,386,808
Loss on sale/leaseback............................ -- -- (342,014)
Loss on equity investment......................... -- -- (105,931)
Other income (expense)............................ -- 48,914 (57,538)
------------ ------------ ------------
228,803 830,295 4,374,594
------------ ------------ ------------
Net loss............................................ $(15,708,626) $(12,627,830) $(18,113,580)
============ ============ ============
Basic and diluted net loss per share................ $ (.84) $ (.69) $ (1.08)
============ ============ ============
Shares used in computing basic and diluted net loss
per share......................................... 18,705,838 18,290,548 16,704,144
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
<TABLE>
<CAPTION>
REDEEMABLE
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- ----------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996........ 815,065 $ 8,158,798 15,614,333 $156,144 $107,649,659 $ (72,922,674)
Issuance of common stock........... -- -- 307,548 3,074 1,552,432 --
Issuance of common stock under the
stock purchase plan.............. -- -- 31,822 319 180,103 --
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- 1,750,000 --
Common stock issued pursuant to
employee benefit plan............ -- -- 25,588 256 169,196 --
Issuance of common
stock--StemCells................. -- -- 1,219,381 12,194 7,381,206 --
Redeemable common stock lapses..... (257,311) (2,575,688) 257,311 2,573 2,573,115 --
Exercise of stock options.......... -- -- 75,237 752 244,427 --
Deferred compensation--amortization
and cancellations -- -- (5,000) (50) (27,294) --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- --
Change in cumulative translation
adjustment....................... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (18,113,580)
Comprehensive loss
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1997........ 557,754 $ 5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254)
Issuance of common stock........... -- -- -- -- -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 436 83,622
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- --
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............ -- -- -- -- -- --
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)
Issuance of common stock........... -- -- 196,213 1,962 318,221 --
Issuance of common stock under the
stock purchase plan.............. -- -- 57,398 574 41,619
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- 90,798 908 102,502 --
Issuance of common
stock--StemCells................. -- -- -- -- -- --
Redeemable common stock lapses..... -- -- -- --
Exercise of stock options.......... -- -- 490,833 4,908 513,534 --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 80,276 --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- --
Net loss........................... -- -- -- -- -- (15,708,626)
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ -------------
Balances, December 31, 1999........ 524,337 $ 5,248,610 18,635,565 $186,355 $123,917,758 $(119,372,710)
======== =========== ========== ======== ============ =============
<CAPTION>
OTHER COMPREHENSIVE
INCOME
---------------------------
UNREALIZED
GAINS
(LOSSES) CUMULATIVE TOTAL
ON MARKETABLE TRANSLATION DEFERRED STOCKHOLDERS'
SECURITIES ADJUSTMENTS COMPENSATION EQUITY
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1996........ $ 14,760 $(60,416) $ (90,118) $ 34,747,355
Issuance of common stock........... -- -- -- 1,555,506
Issuance of common stock under the
stock purchase plan.............. -- -- -- 180,422
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- (1,750,000) --
Common stock issued pursuant to
employee benefit plan............ -- -- -- 169,452
Issuance of common
stock--StemCells................. -- -- -- 7,393,400
Redeemable common stock lapses..... -- -- -- 2,575,688
Exercise of stock options.......... -- -- -- 245,179
Deferred compensation--amortization
and cancellations -- -- 137,298 109,954
Change in unrealized losses on
marketable securities............ (23,637) -- -- (23,637)
Change in cumulative translation
adjustment....................... -- 60,416 -- 60,416
Net loss........................... -- -- -- (18,113,580)
Comprehensive loss (18,076,081)
-------- -------- ----------- ------------
Balances, December 31, 1997........ $ (8,877) $ -- $(1,702,820) $ 28,900,155
Issuance of common stock........... -- -- -- --
Issuance of common stock under the
stock purchase plan.............. -- 84,058
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- --
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 -- -- 3,679
Net loss........................... -- -- -- (12,627,830)
Comprehensive loss................. (12,624,151)
-------- -------- ----------- ------------
Balances, December 31, 1998........ $ (5,198) $ -- $(1,472,919) $ 17,897,408
Issuance of common stock........... -- -- -- 320,183
Issuance of common stock under the
stock purchase plan.............. -- 42,193
Deferred compensation recorded in
connection with the granting of
stock options.................... -- -- -- --
Common stock issued pursuant to
employee benefit plan............ -- -- -- 103,410
Issuance of common
stock--StemCells................. -- -- -- --
Redeemable common stock lapses..... --
Exercise of stock options.......... -- -- -- 518,442
Deferred compensation--amortization
and cancellations................ -- -- 247,919 328,195
Change in unrealized losses on
marketable securities............ 5,198 -- -- 5,198
Net loss........................... -- -- -- (15,708,626)
Comprehensive loss................. -- (15,703,428)
-------- -------- ----------- ------------
Balances, December 31, 1999........ $ -- $ -- $(1,225,000) $ 3,506,403
======== ======== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
REDEEMABLE GAINS
COMMON STOCK COMMON STOCK ADDITIONAL (LOSSES)
--------------------- --------------------- PAID-IN ACCUMULATED ON MARKETABLE DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES COMPENSATION
-------- ---------- ---------- -------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock.............. -- -- 196,213 $ 1,962 $ 318,221 -- -- --
Issuance of common
stock under the
stock purchase
plan............... -- -- 57,398 574 41,619 42,193
Deferred compensation
recorded in
connection with the
granting of stock
options............ -- -- -- -- -- -- -- --
Common stock issued
pursuant to
employee benefit
plan............... -- -- 90,798 908 102,502 -- -- --
Issuance of common
stock--StemCells... -- -- -- -- -- -- -- --
Redeemable common
stock lapses....... -- -- -- --
Exercise of stock
options............ -- -- 490,833 4,908 513,534 -- -- --
Deferred
compensation--
amortization and
cancellations...... -- -- -- -- 80,276 -- -- 247,919
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) $ -- $(1,225,000)
======= ========== ========== ======== ============ ============= ====== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common
stock.............. $ 320,183
Issuance of common
stock under the
stock purchase
plan...............
Deferred compensation
recorded in
connection with the
granting of stock
options............ --
Common stock issued
pursuant to
employee benefit
plan............... 103,410
Issuance of common
stock--StemCells... --
Redeemable common
stock lapses.......
Exercise of stock
options............ 518,442
Deferred
compensation--
amortization and
cancellations...... 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........... $ 3,506,403
===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating Activities:
Net loss................................................. $(15,708,626) $(12,627,830) $(18,113,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,717,975 2,244,146 1,968,234
Acquired research and development...................... -- 551,009 8,343,684
Amortization of deferred compensation.................. 328,195 -- 109,954
Other non-cash charges................................. 320,183 410,173 105,931
Gain on investment..................................... -- -- (3,386,808)
Loss on sale of fixed assets........................... 1,117,286 -- 413,856
Loss on sale of intangibles............................ 440,486
Changes in operating assets and liabilities:
Accrued interest receivable.......................... 164,397 346,577 100,004
Other current assets................................. 276,940 (265,665) (232,604)
Accounts payable and accrued expenses................ 1,644,142 (2,378,613) (1,233,501)
Deferred rent........................................ 279,680 -- --
Deferred revenue..................................... (2,500,000) 2,483,856 (1,842,948)
------------ ------------ ------------
Net cash used in operating activities.................... (12,489,342) (9,236,347) (13,767,778)
Cash flows from investing activities:
Proceeds from sale of Modex, net of cash disposed........ -- -- 2,958,199
Purchases of marketable securities....................... (4,397,676) (18,982,387) (14,182,521)
Proceeds from sales of marketable securities............. 13,923,813 22,573,625 23,736,242
Purchases of property, plant and equipment............... (192,747) (2,153,525) (7,710,126)
Proceeds on sale of fixed assets......................... 746,448 -- 8,003,926
Purchase of other investment............................. -- -- (250,000)
Acquisition of other assets.............................. (552,251) (400,219) (1,599,418)
Disposal of other assets................................. 440,485 -- --
Acquisition of StemCells assets.......................... -- -- (640,490)
Advance to Cognetix...................................... -- -- (250,000)
Repayment from Cognetix.................................. -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities................ 9,968,073 1,037,494 10,315,812
Cash flows from financing activities:
Proceeds from issuance of redeemable common stock........ -- -- --
Proceeds from issuance of common stock................... 145,603 227,931 1,905,380
Proceeds from the exercise of stock options and
warrants............................................... 518,442 1,364 245,179
Proceeds from debt financings............................ -- 1,259,300 --
Repayments of debt and lease obligations................. (1,817,500) (1,366,655) (2,496,849)
------------ ------------ ------------
Net cash provided by (used in) financing activities...... (1,153,455) 121,940 (346,290)
Effect of exchange rate changes on cash and cash
equivalents............................................ -- -- (181,627)
------------ ------------ ------------
Decrease in cash and cash equivalents.................... (3,104,724) (8,076,913) (3,979,883)
Cash and cash equivalents, January 1..................... 7,864,788 15,941,701 19,921,584
------------ ------------ ------------
Cash and cash equivalents, December 31................... $ 4,760,064 $ 7,864,788 $ 15,941,701
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid........................................ $ 335,203 $ 444,047 $ 436,461
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
StemCells, Inc. (formerly CytoTherapeutics, Inc.) (the "Company") is a
biopharmaceutical company engaged in the development of novel stem cell
therapies designed to treat human diseases and disorders.
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
generally accepted accounting principles 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.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
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
reservation while obtaining a reasonable rate of return. Marketable securities
consist of investments in agencies of the U.S. government, investment grade
corporate notes and money market funds. The fair values for marketable
securities are based on quoted market prices.
The Company determines the appropriate classification of cash equivalents
and marketable 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including that held under capitalized lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, as follows:
<TABLE>
<S> <C>
Building and improvements................................... 3 -- 15 years
Machinery and equipment..................................... 3 -- 10 years
Furniture and fixtures...................................... 3 -- 10 years
</TABLE>
PATENT 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
F-8
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are written off to expense at the time such patents are deemed to have no
continuing value. At December 31, 1999 and 1998, total costs capitalized were
$718,000 and $4,285,000 and the related accumulated amortization were $9,000 and
$347,000, respectively. Patent expense totaled $539,000, $3,000, and $365,000 in
1999, 1998 and 1997, respectively.
In December 1999, the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties in
return for the assignment to Neurotech 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.
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, the Company recognizes as
compensation expense the excess of the deemed fair value of the common stock
issuable upon exercise of such options over the aggregate exercise price of such
options. The compensation is amortized over the vesting period of each option or
the recipient's term of employment, if shorter.
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 FROM COLLABORATIVE AGREEMENTS
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses or the achievement of certain milestones.
Payments received in advance of research performed are designated as deferred
revenue.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
F-9
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Securities Exchange Commission's recently issued Staff Accounting
Bulletin No. 101 provides guidance on revenue recognition that may impact the
Company's future reporting relative to revenues received from collaborative and
similar agreements.
3. SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's 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. The conversion price may be below
the trading market price of the stock at the time of conversion. The holders of
the preferred stock have liquidation rights equal to their original investment
plus accrued but unpaid dividends. The investors would be entitled to make
additional investments in the Company on the same terms as those on which the
Company completes offerings of its 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 1,126 additional shares of convertible preferred 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 warrant expires on April 13, 2005.
4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Wind-down expenses totaled $6,048,000 for the year ended December 31, 1999;
no such expenses were incurred in 1998 and 1997. These expenses relate to the
wind-down of the Company's encapsulated cell technology research and development
program and the Company's other Rhode Island operations, the transfer of the
Company's corporate headquarters to Sunnyvale, California and an accrual for the
Company's estimate of the costs of settlement of a 1989 funding agreement with
the Rhode Island Partnership for Science and Technology ("RIPSAT") associated
with the Company's pilot manufacturing facility.
5. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the Company and
StemCells California, Inc. was completed in the form of a purchase. Through the
merger, the Company acquired StemCells for a purchase rice totaling
approximately $9,475,000, consisting of 1,320,691 shares of the Company's common
stock and options and warrants for the purchase of 259,296 common shares at
nominal consideration, valued at $7,900,000 in the aggregate, the assumption of
certain liabilities of $934,000 and transaction costs of $641,000. The purchase
price was allocated, through a valuation, to license agreements valued at
$1,131,000 to be amortized over three years and acquired research and
development of $8,344,000, which was expensed. 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.
F-10
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
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; approximately 100,000 of these options
were exercisable immediately, 1,031,000 of these options vest and become
exercisable only upon the achievement of specified milestones related to the
Company's stem cell development program and the remaining 469,000 options vest
over eight years. In connection with the 469,000 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. If the milestones specified relating to the
1,031,000 option grant are achieved, at that time the Company will record
compensation expense for the excess of the quoted market price of the common
stock over the exercise price of $5.25 per share for 562,000 options and the
fair market value for 469,000 of such options determined using the Black-Scholes
method. The Company has 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.
Stem cell research will be conducted pursuant to the provisions of an
agreement between the Company and Drs. Weissman and Gage providing for a
two-year research plan. If the goals of the research plan are accomplished, the
Company has agreed to fund continuing stem cell research. Increases in stem
cells research funding of not more than 25% a year will be funded by the Company
as long as the goals of the research plan are being met. However, the Company
will retain the option of (i) ceasing or reducing neural stem cell research even
if all research plan goals are met, but will be required to accelerate the
vesting of all still-achievable performance based stock options, and
(ii) ceasing or reducing non-neural stem cell research even if all plan goals
are being met by affording the scientific research founders the opportunity to
continue development of the non-neural stem cell research by licensing the
technology related to such research to the founders in exchange for a payment to
the Company equal to all prior Company funding for such research, plus royalty
payments.
6. MODEX
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutiques, S.A., (Modex) as an independent company. In the
transactions, the Company reduced its ownership interest from 50% to
approximately 25% in exchange for $4 million cash and elimination of its prior
contingent obligation to contribute an additional Sfr 2.4 million (approximately
$1.7 million) to Modex in July 1998. In the transactions, all of the put and
call arrangements between the Company and other stockholders of Modex were
eliminated and the Company forgave $463,000 due from Modex to the Company. The
Company recorded a gain on the transactions of $3,387,000.
F-11
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. MODEX (CONTINUED)
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 accounts for this
investment under the cost method.
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.
7. MARKETABLE SECURITIES
During 1999, the Company sold all of its remaining marketable equitable
securities. At December 31, 1999, all of the Company's available funds were held
in cash and cash equivalents. The following is a summary of available-for-sale
securities held at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST LOSSES GAINS FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government securities..................... $ 1,500,994 $1,720 $ (504) $ 1,502,210
U.S. corporate securities...................... 9,225,095 3,244 (9,658) 9,218,681
----------- ------ -------- -----------
Total debt securities.......................... $10,726,089 $4,964 $(10,162) 10,720,891
=========== ====== ========
Debt securities included in cash and cash
equivalents.................................. (1,199,952)
===========
Debt securities included in marketable
securities................................... $ 9,520,939
===========
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- -----------
<S> <C> <C>
Building and improvements........................... $5,666,987 $ 5,665,077
Machinery and equipment............................. 3,144,107 9,887,251
Furniture and fixtures.............................. 219,260 869,831
---------- -----------
9,030,354 16,422,159
Less accumulated depreciation and amortization...... 3,778,978 8,066,150
---------- -----------
$5,251,376 $ 8,356,009
========== ===========
</TABLE>
Depreciation and amortization expense was $1,436,000, $1,720,000, and
$1,778,000 for the years ending December 31, 1999, 1998 and 1997, respectively.
As part of the Company's restructuring of its operations, sale of its
encapsulated cell technology ("ECT"), and relocation of its corporate
headquarters to Sunnyvale, California, the Company identified
F-12
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
fixed assets associated with the ECT or otherwise no longer needed. In December
of 1999, the Company 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 third quarter write-down of $800,000.
Certain property, plant and equipment have been acquired under capitalized
lease obligations. These assets totaled $5,827,000 and $6,587,000, at
December 31, 1999 and 1998, respectively, with related accumulated amortization
of $2,747,000 and $2,860,000 at December 31, 1999 and 1998, respectively.
9. OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Patents, net......................................... $ 708,823 $3,938,755
License agreements, net.............................. 282,750 659,750
Security deposit--building lease..................... 750,000 750,000
Restricted cash...................................... -- 603,467
Deferred financing costs, net........................ 117,195 123,701
---------- ----------
$1,858,768 $6,075,663
========== ==========
</TABLE>
At December 31, 1999 and 1998, accumulated amortization was $857,000 and
$818,000, respectively, for patents and license agreements.
10. ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
External services.................................... $2,031,961 $ 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,905,068 $1,020,119
========== ==========
</TABLE>
11. 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
F-13
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
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 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"),
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.
In 1997, the Company completed construction of a new headquarters and
laboratory facility. In November 1997, the Company entered into sale and
leaseback agreements with a real estate investment trust. Under the terms of
these agreements, the Company sold its new facility for $8,000,000, incurring a
$342,000 loss on the sale. The Company simultaneously entered into a
fifteen-year lease for the facility. The lease agreement calls for minimum rent
of $750,000 for the first five years, $937,500 for years six to ten, $1,171,900
for years eleven to fourteen and $1,465,000 in year fifteen, with a $750,000
security deposit held for the term of the lease. The Company is recognizing rent
expense on a straight line basis. At December 31, 1999, the Company had incurred
$426,790 in deferred rent expense.
Future minimum capitalized lease obligations with non-cancelable terms in
excess of one year at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 606,268
2001........................................................ 589,217
2002........................................................ 519,719
2003........................................................ 436,909
2004........................................................ 425,713
Thereafter.................................................. 2,577,826
----------
Total minimum lease payments................................ 5,302,407
Less amounts representing interest.......................... 2,041,157
----------
Present value of minimum lease payments..................... 3,261,250
Less current maturities..................................... 324,167
----------
Capitalized lease obligations, less current maturities...... $2,937,083
==========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
F-14
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- ----------
<S> <C> <C>
Term note payable, interest at the prime rate plus 1/2%
(8.75% at December 31, 1998), principal payments commence
in August 1998, due ratably through May 2000; secured by
certain equipment (prepaid during 1999)................... $ -- $1,500,000
Current maturities of long-term debt........................ -- 1,000,000
---- ----------
Long-term debt, less current maturities..................... -- $ 500,000
==== ==========
</TABLE>
13. 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 recorded at December 31, 1999 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.
14. COMMON STOCK TO BE 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.
F-15
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY
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, 1999,
the Company had reserved 2,603,736 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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1...... 1,654,126 $3.62 2,446,573 $7.48 2,423,025 $8.34
Granted....................... 536,078 1.08 1,174,118 1.70 679,074 5.33
Exercised..................... (604,362) 1.50 (11,012) .12 (82,737) 2.96
Canceled...................... (646,507) 5.31 (1,955,553) 7.08 (572,789) 9.21
--------- ----- ---------- ----- --------- -----
Outstanding at December 31.... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
========= ===== ========== ===== ========= =====
Options exercisable at
December 31................. 594,216 $3.44 1,108,936 $4.33 1,338,163 $7.79
========= ===== ========== ===== ========= =====
</TABLE>
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; 75,384 of these options
are exercisable at December 31, 1997, 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 CytoTherapeutics, Inc. StemCells California Research
Stock Option Plan (the StemCells California Research Plan) whereby an additional
2,000,000 shares of Common Stock have 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 are 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.
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
F-16
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1999:
<TABLE>
<CAPTION>
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
------------------------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $5.00........................... 755,398 8.50 $ 1.12 411,945 $ 1.02
$5.01-$10.00.............................. 90,687 4.56 6.55 89,021 6.55
Greater than $10.00....................... 93,250 2.54 11.18 93,250 11.18
------- -------
939,335 594,216
======= =======
</TABLE>
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 1999, 1998, and 1997, 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 1999, 1998,
and 1997, consistent with the provisions of FAS 123:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss............. $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389) $(18,113,580) $(19,924,437)
Net loss per share... $(.84) $(.84) $(.69) $(.82) $(1.08) $(1.19)
</TABLE>
The weighted average fair value per share of options granted during 1999,
1998 and 1997 was $.88, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock purchase plan at the date of grant were
estimated using the Black-Scholes model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years)................................. 5 5 5 5 .5 .5
Interest rate......................................... 5.5% 5.2% 6.2% 5.0% 4.64% 5.5%
Volatility............................................ 96.7% 63.5% 59.0% 96.7% 63.5% 59.0%
</TABLE>
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.
The effects on 1999, 1998 and 1997 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 the period
presented includes only four, three or two years, respectively, of option grants
under the
F-17
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
Company's plans. 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
In conjunction with StemCells California merger, the Company exchanged
StemCells California warrants for warrants to purchase 8,952 shares of Company
common stock at $4.71 per share. In conjunction with various equipment leasing
agreements, the Company has outstanding warrants to purchase 31,545 shares of
common stock at prices ranging from $4.00 to $9.00 per share. The warrants
expire through October 2000.
In connection with a public offering of common stock in April 1995, the
Company issued warrants to purchase 434,500 shares of common stock at $8 per
share. The warrants are nontransferable and expire in April 2000, subject to
certain required exercise provisions. In addition to the foregoing rights, the
holder of such warrants has the right, in the event the Company issues
additional shares of common stock or other securities convertible into common
stock, to purchase at the then market price of such common stock, sufficient
additional shares of common stock to maintain the warrant holder's percentage
ownership of the Company's common stock at 15%. This right, subject to certain
conditions and limitations, expires in April 2000.
COMMON STOCK RESERVED
The Company has reserved 6,461,846 shares of common stock for the exercise
of options, warrants and other contingent issuances of common stock.
16. 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 $77,000 in 1997, $307,000 in 1998, and $309,000 in 1999.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share upon the
achievement of specified milestones. Under the Agreement, StemCells has an
option for an exclusive license to the inventions resulting from the sponsored
research, subject to the payment of royalties and certain other amounts, and is
obligated to make payments totaling $425,000 for achievement of certain
milestones.
In April 1997, the Company entered into an agreement with
Neurospheres, Ltd., which superseded all previous licensing agreements and
settled a dispute with Neurospheres. Under the terms of the settlement, the
Company has an exclusive royalty bearing license for growth-factor responsive
stem cells for transplantation. Neurospheres had an option to acquire
co-exclusive rights but did not exercise by the April 1998 deadline. The Company
retains exclusive rights for transplantation. The parties have no further
research obligations to each other.
F-18
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
In February 1997, CytoTherapeutics and Cognetix, Inc. entered into a
Collaboration and Development Agreement related to the Company's former
encapsulated cell technology. As part of the agreement with Cognetix, the
Company purchased $250,000 of Cognetix preferred stock and, subject to certain
milestones, was obligated to purchase as much as $1,500,000 of additional
Cognetix stock over the next year. In July 1997, the Company loaned $250,000 to
Cognetix which was repaid with interest in October 1997. In October 1998, the
Company sold the $250,000 of preferred stock back to Cognetix for $298,914.
Under the terms of one of those agreements, Genentech purchased 829,171
shares of redeemable common stock for $8.3 million to fund development of
products to treat Parkinson's disease. Genentech had the right, at its
discretion, to terminate the Parkinson's program at specified milestones in the
program. The Agreement also provided that if the Parkinson's program were
terminated and the funds of the Company received from the sale of stock to
Genentech pursuant to the Parkinson's agreement exceeded the expenses incurred
by the Company in connection with such studies by more than $1 million,
Genentech had the right to require the Company to repurchase from Genentech
shares of the Company's common stock having a value equal to the over funding,
based upon the share price paid by Genentech. As such, the common stock
purchased by Genentech has been classified as redeemable common stock until the
funds are expended on the program. 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 announced
the settlement of this matter with Genentech. (SEE NOTE 18--"SUBSEQUENT EVENTS"
RELATING TO THE SETTLEMENT OF AND TERMINATION OF THE GENENTECH AGREEMENTS.)
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
F-19
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
worldwide trials for the therapy. AstraZeneca therefore indicated that it did
not intend to further develop the bovine cell-containing implant therapy and
executed its right to terminate the agreement.
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 focusing on the stem cell field, its principal academic
collaborations are now with the Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $868,000, $1,259,000, and $1,326,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
17. 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, 1999, the Company
had tax net operating loss carry forwards of $96,195,000 and research and
development tax credit carry forwards of $4,035,000 which expire at various
times through 2019. Due to the "change in ownership" provisions of the Tax
Reform Act of 1986, the Company's utilization of its net operating loss carry
forwards and tax credits may be subject to annual limitation in future periods.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Capitalized research and development costs................ $ 4,331,000 $ 28,124,000
Net operating losses...................................... 38,478,000 10,786,000
Research and development credits.......................... 4,035,000 3,646,000
Other..................................................... 928,000 235,000
------------ ------------
47,772,000 42,791,000
Deferred tax liabilities:
Patents................................................... (246,000) (1,537,000)
------------ ------------
47,526,000 41,254,000
Valuation allowance....................................... (47,526,000) (41,254,000)
------------ ------------
Net deferred tax assets..................................... $ -- $ --
============ ============
</TABLE>
Since there is uncertainty relating to the ultimate use of the loss carry
forwards and tax credits, a valuation allowance has been recognized at
December 31, 1999 and 1998, to fully offset the Company's deferred tax assets.
The valuation allowance increased $6,272,000 in 1999, due primarily to the
F-20
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. INCOME TAXES (CONTINUED)
increases in net operating loss carry forwards and tax credits offset by
reduction in capitalized research and development costs.
18. 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 $103,000, $146,000, and $169,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
19. CONTINGENCIES
The Company is routinely involved in arbitration, litigation and other
matters as part of the ordinary course of its business. While the resolution of
any matter may have an impact on the Company's financial results for a
particular reporting period, management believes the ultimate disposition of
these matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
20. SUBSEQUENT EVENTS
On April 13, 2000, the Company completed arrangements to sell 1,500 shares
of 6% cumulative convertible preferred stock plus a warrant for 75,000 shares of
the Company's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. (SEE NOTE 3--"SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK.")
F-21
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (NOTE 1)
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,535,264 $ 4,760,064
Technology sale receivable................................ 200,000 3,000,000
Other current assets...................................... 718,145 1,210,791
------------- -------------
Total current assets........................................ 6,453,409 8,970,855
Restricted Investments...................................... 19,220,165 --
Property, plant and equipment, net.......................... 5,028,141 5,251,376
Intangible assets, net...................................... 936,745 1,108,768
Other assets................................................ 750,000 750,000
------------- -------------
Total assets................................................ $ 32,388,460 $ 16,080,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 144,269 $ 631,315
Accrued expenses.......................................... 915,092 2,905,068
Current maturities of capitalized lease obligations....... 326,250 324,167
------------- -------------
Total current liabilities................................... 1,385,611 3,860,550
Capitalized lease obligations, less current maturities...... 2,775,000 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 596,222 502,353
Redeemable stock............................................ -- 5,248,610
Stockholders' equity
Convertible Preferred Stock............................... 1,500,000 --
Common stock.............................................. 196,127 186,355
Additional paid in capital................................ 129,525,509 123,917,758
Accumulated deficit....................................... (121,698,674) (119,372,710)
Accumulated other comprehensive income.................... 19,220,165 --
Deferred compensation..................................... (1,137,500) (1,225,000)
------------- -------------
Total stockholders' equity.................................. 27,605,627 3,506,403
------------- -------------
Total liabilities and stockholders' equity.................. $ 32,388,460 $ 16,080,999
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue from collaborative arrangements..................... $ -- $ 5,021,707
Operating expenses:
Research and development.................................. 1,659,932 6,847,383
General and administrative................................ 2,078,286 2,168,315
----------- -----------
3,738,218 9,015,698
----------- -----------
Loss from operations........................................ (3,738,218) (3,993,991)
Other income (expense):
Investment income......................................... 138,232 406,331
Interest expense.......................................... (142,566) (185,054)
Other Gain................................................ 1,416,588 --
----------- -----------
1,412,254 221,277
----------- -----------
Net Loss.................................................... $(2,325,964) $(3,772,714)
=========== ===========
Basic and Diluted Net Loss per share........................ $ (0.12) $ (0.20)
=========== ===========
Shares used in computing Basic and Diluted Net Loss per
share..................................................... 19,419,236 18,483,437
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income................................................ $(2,325,964) $(3,772,714)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 407,634 1,163,295
Deferred stock compensation............................. 87,500 189,650
Net changes in operating assets and liabilities......... 909,492 (2,075,873)
----------- -----------
Net cash used in operating activities..................... (921,338) (4,495,642)
----------- -----------
Cash flows from investing activities:
Proceeds from marketable securities....................... -- 6,891,026
Purchases of marketable securities........................ -- (4,397,676)
Purchase/Sale of property, plant and equipment............ 8,005 (131,113)
Acquisition of other assets............................... (20,380) (274,510)
----------- -----------
Net cash provided by investing activities................. (12,375) 2,087,727
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 368,913 176,545
Proceeds from issuance of Preferred Stock................. 1,500,000 --
Principal payments under capitalized lease obligations
and mortgage payable.................................. (160,000) (881,250)
----------- -----------
Net cash provided by financing activities................. 1,708,913 (704,705)
----------- -----------
Net increase/(decrease) in cash and cash equivalents........ 775,200 (3,112,620)
Cash and cash equivalents, beginning of period.............. 4,760,064 7,864,788
----------- -----------
Cash and cash equivalents, end of period.................... $ 5,535,264 $ 4,752,168
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-24
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000 AND 1999
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, the Company's name was changed to StemCells, Inc. from
CytoTherapeutics, Inc., by vote of the shareholders at the Annual Meeting. The
accompanying, unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying financial statements include all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required for complete financial statements in accordance with
generally accepted accounting principles.
For the complete financial statements, refer to the audited financial
statements and footnotes thereto as of December 31, 1999 included earlier in
this prospectus.
NOTE 2. EARNINGS PER SHARE
Net loss-per-share is computed using the weighted-average number of shares
of common stock outstanding. Common equivalent shares from stock options and
warrants are excluded, as their effect is antidilutive.
NOTE 3. COMPREHENSIVE INCOME
For the six months ended June 30, 2000 and 1999, total comprehensive
income/(loss) was $16,894,201 and ($3,772,714) respectively. The reported net
loss for the six months ended June 30, 2000 and 1999 was $2,325,964 and
$3,772,714. During the second quarter of 2000, the Company recorded its
ownership of 126,193 shares of Modex Therapeutics Ltd. as available for sale at
an estimated fair value of $19,220,165 (see note 4).
NOTE 4. INVESTMENTS
At June 30, 2000, the Company owned 126,193 shares of Modex
Therapeutics Ltd. ("Modex"), a public Swiss biotechnology company. The
investment is recorded as available-for-sale at estimated fair value with the
unrealized gain reported in other comprehensive income. Estimated fair value at
June 30, 2000 is as follows:
<TABLE>
<CAPTION>
COST GROSS UNREALIZED GAIN FAIR VALUE
--------------------- --------------------- -----------
<S> <C> <C>
$ 0 $19,220,165 $19,220,165
</TABLE>
NOTE 5. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY
In the last two quarters of 1999, the Company wound down operations relating
to its former encapsulated cell technology to focus its resources on the
research and development of its proprietary
F-25
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000 AND 1999
NOTE 5. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY (CONTINUED)
stem cell technology platform. At the end of 1999 balance in the reserve created
for wind-down expenses was $1,934,569. For the first half of 2000 the
roll-forward of this balance is as follows:
<TABLE>
<CAPTION>
RESERVE AS AT RESERVE AS AT
DESCRIPTION 12/31/99 CASH PAYMENTS 6/30/00
----------- ------------- ------------- -------------
<S> <C> <C> <C>
Fixed Assets........................................... $ 300,000 $ 0 $300,000
---------- ---------- --------
Facilities, Maintenance and other Expenses............. 462,569 462,569 0
---------- ---------- --------
RIPSAT Settlement...................................... 1,172,000 1,172,000 0
---------- ---------- --------
Totals................................................. $1,934,569 $1,634,569 $300,000
========== ========== ========
</TABLE>
NOTE 6. SUBSEQUENT EVENTS
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 closing and will receive 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 at $4.33 per
share. The Fund will be entitled 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 will 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 Company 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
StemCells at $7.875 per underlying share.
On August 30, 2000, the Fund exercised $1,000,000 of its option to purchase
additional common stock. We received $750,000 of the purchase price at the
closing, and will receive the remaining $250,000 upon effectiveness of the
registration statement containing this prospectus. The Fund purchased the
Company's common stock at $5.53 per share. 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 number of additional shares the
fund will 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 Company will have
the right, under certain circumstances, to limit the number of additional shares
by purchasing part of the entitlement from the Fund. 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 the Company at $10.05 per underlying share.
F-26
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee, the NASD fee and
the NASDAQ listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $6,956.16
NASD filing fee............................................. *
NASDAQ listing fee.......................................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
---------
Total....................................................... $ *
=========
</TABLE>
------------------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the circumstances indemnification
should apply.
Section Ten of our Restated Certificate of Incorporation provides that we
shall, to the maximum extent legally permitted, indemnify and upon request
advance expenses to each person who is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit proceeding, or
claim (civil, criminal, administrative or investigative) by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Company, or is or was serving, or has agreed to serve, at the request of the
Company, as a director, officer, partner, employee, agent or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprises, provided, however, that the Company is not required to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. The
indemnification provided for in Section Ten is expressly not exclusive of any
other rights to
II-1
<PAGE>
which those seeking indemnification may be entitled under any by-law, agreement
or vote of directors or stockholders or otherwise, and shall inure to the
benefit of the heirs and legal representatives of such persons.
Section 145(g) of the Delaware General Corporation Law provides that the
Company shall have the power to purchase and maintain insurance on behalf of its
officers, directors, employees and agents, against any liability asserted
against and incurred by such persons in any such capacity.
We have obtained insurance covering our directors and officers against
certain liabilities.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Section Nine of the
Company's Restated Certificate of Incorporation eliminates a director's personal
liability for monetary damages for breach of fiduciary duty as a director,
except in circumstances involving a breach of the director's duty of loyalty to
StemCells, Inc. or its shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a) below, Section 4(2) of a
the Securities Act or Regulation D promulgated thereunder relative to sales by
an issuer not involving a public offering; and (ii) in the case of the
transactions (b) below, Section 3(b) of the Securities Act and Rule 701
promulgated thereunder relative to sales pursuant to certain compensatory
benefits plans.
(a) On April 13, 2000, the Registrant sold 1,500 shares of 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of the
Registrant's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. The sale was made in reliance on Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The shares of preferred stock are
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 the Company on the same terms as
those on which the Registrant completes offerings of its securities with third
parties within 6 months, if any such offerings are completed. They have waived
that right with respect to the common stock transaction described in Note 5,
Subsequent Events. 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 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, which are exercisable at $6.58 per share, expire on April 13, 2005.
II-2
<PAGE>
On August 3, 2000, the Registrant completed a $4 million common stock
financing transaction with Millennium Partners, LP, or the Fund. The sale was
made in reliance on Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. The Registrant received $3 million of the purchase
price at the closing and will receive the remaining $1 million upon
effectiveness of a registration statement covering the shares owned by the Fund.
The Fund purchased the Registrant's common stock at $4.33 per share. The Fund
will be entitled 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 will 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 Registrant's common stock over a period prior
to each date. The Registrant 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 the Registrant
at $7.875 per underlying share.
The Fund also had the option for twelve months to purchase up to $3 million
of additional common stock. On August 30, 2000, the Fund exercised $1,000,000 of
that option to purchase Registrant's common stock at $5.53 per share. The
Registrant received $750,000 of the purchase price at the closing and will
receive the remaining $250,000 upon effectiveness of a registration statement
covering the shares owned by the Fund. 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 number of additional shares the
Fund will 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
Registrant's common stock over a period prior to each date. The Registrant will
have the right, under certain circumstances, to limit the number of additional
shares by purchasing part of the entitlement from the Fund. The Fund also
received a warrant to purchase up to 19,900 shares of the Registrant's common
stock at $6.03 per share. This warrant is callable by the Registrant at $10.05
per underlying share.
(b) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
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.
4.3 Warrant to Purchase Common Stock--Mark Angelo
4.4 Warrant to Purchase Common Stock--Robert Farrell
4.5 Warrant to Purchase Common Stock--Joseph Donahue
4.6 Warrant to Purchase Common Stock--Hunter Singer
4.7 Warrant to Purchase Common Stock--May Davis
4.8 Common Stock Purchase Warrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
4.9 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.
10.10##** Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.11++ Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15 First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.16 Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
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.
10.20!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.21!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.23!! Modex Therapeutiques SA stockholders voting agreement dated
as of July 10, 1996 among Modex, the Company, the Societe
Financiere Valoria SA and the other stockholders listed
therein.
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.
10.30** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.31### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick 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.
10.36### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
10.37### Loan Agreement dated as of May 15, 1996 between Fleet
National Bank and the Registrant, together with the related
Promissory Note executed by the Registrant, and an
amendatory agreement dated as of May 15, 1997.
10.38'*> Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.39Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
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.
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.
10.48 Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49 Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31,
1999.
99 Cautionary Factors Relevant to Forward-Looking Information.
</TABLE>
------------------------
++ 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.
II-6
<PAGE>
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
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.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which,
II-7
<PAGE>
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by section 10(a)(3) of the
Securities Act.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on the 8th day of September, 2000.
<TABLE>
<S> <C> <C>
STEMCELLS, INC.
BY: /S/ GEORGE W. DUNBAR, JR.
-----------------------------------------
George W. Dunbar, Jr.
Acting Chief Executive Officer and
Acting Chief Financial Officer
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
immediately below constitutes and appoints George W. Dunbar, Jr. and Iris Brest,
or either of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and any and all
additional registration statements pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by this Registration Statement and its amendments, if any, and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Commission, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his or her substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 8th, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
George W. Dunbar, Jr.,
Acting President, Chief Executive Officer
(Principal Executive Officer) and Chief
Financial Officer (Principal Financial
/s/ GEORGE W. DUNBAR, JR. Officer)
-------------------------------------------
John J. Schwartz, Ph. D.
/s/ JOHN J. SCHWARTZ, PH.D. Director
-------------------------------------------
Donald Kennedy, Ph. D.
/s/ DONALD KENNEDY, PH. D. Director
-------------------------------------------
Mark J. Levin
/s/ MARK J. LEVIN Director
-------------------------------------------
Irving Weissman, M.D.
/s/ IRVING WEISSMAN, M.D. Director
-------------------------------------------
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
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.
4.3 Warrant to Purchase Common Stock--Mark Angelo
4.4 Warrant to Purchase Common Stock--Robert Farrell
4.5 Warrant to Purchase Common Stock--Joseph Donahue
4.6 Warrant to Purchase Common Stock--Hunter Singer
4.7 Warrant to Purchase Common Stock--May Davis
4.8 Common Stock Purchase Warrant
4.9 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.
10.10##** Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.11++ Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15 First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
10.16 Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
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.
10.20!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.21!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.23!! Modex Therapeutiques SA stockholders voting agreement dated
as of July 10, 1996 among Modex, the Company, the Societe
Financiere Valoria SA and the other stockholders listed
therein.
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.
10.30** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.31### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick 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.
10.36### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<C> <S>
10.37### Loan Agreement dated as of May 15, 1996 between Fleet
National Bank and the Registrant, together with the related
Promissory Note executed by the Registrant, and an
amendatory agreement dated as of May 15, 1997.
10.38'*> Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.39Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz 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.
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.
10.48 Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49 Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for fiscal year ended December 31,
1999.
99 Cautionary Factors Relevant to Forward-Looking Information.
</TABLE>
------------------------
++ 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.
<PAGE>
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
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
