<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended:
June 30, 2000 Commission File Number: 0-19871
-------
STEMCELLS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3078125
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No)
525 DEL REY AVENUE SUITE C
SUNNYVALE, CA 94085
-------------------
(Address of principal executive offices including zip code)
(408) 731-8670
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
At June 30, 2000, there were 19,612,677 shares of Common Stock, $.01 par value,
issued and outstanding.
Page 1 of 14
<PAGE>
STEMCELLS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (unaudited) June 30, 2000 and 3
December 31, 1999
Condensed Consolidated Statements of Operations (unaudited) Three and 4
six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows (unaudited) Six months 5
ended June 30, 2000 and1999
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 9
of Operations
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
Page 2 of 14
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, 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 held for sale 3,203,491 3,203,491
Property, plant and equipment, net 1,524,650 1,747,885
Intangible assets, net 936,745 1,108,768
Other assets 750,000 750,000
------------- -------------
Total assets $ 32,088,460 $ 15,780,999
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 144,269 $ 631,315
Accrued expenses 615,092 2,605,068
Current maturities of capitalized lease obligations 326,250 324,167
------------- -------------
Total current liabilities 1,085,611 3,560,550
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 $ 32,088,460 $ 15,780,999
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3 of 14
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited) Three Months Six Months
Ended June 30 Ended June 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue from collaborative arrangements $ -- $ 2,520,672 $ -- $ 5,021,707
Operating expenses:
Research and development 1,115,207 3,280,826 2,021,839 6,847,383
General and administrative 770,019 1,172,856 1,427,733 2,168,315
Encapsulated cell therapy wind
down and corporate relocation 54,260 -- 288,646 --
----------- ------------ ------------ ------------
1,939,486 4,453,682 3,738,218 9,015,698
----------- ------------ ------------ ------------
Loss from operations (1,939,486) (1,933,010) (3,738,218) (3,993,991)
Other income (expense):
Investment income 64,900 184,220 138,232 406,331
Interest expense (73,708) (91,229) (142,566) (185,054)
Gain on sale of Modex shares 1,427,686 -- 1,427,686 --
Loss on disposal of fixed assets (11,098) (11,098)
----------- ------------ ------------ ------------
1,407,780 92,991 1,412,254 221,277
----------- ------------ ------------ ------------
Net Loss $ ( 531,706) $ (1,840,019) $( 2,325,964) $( 3,772,714)
=========== ============ ============ ============
Loss per share:
Net loss $ (531,706) $ (1,840,019) $( 2,325,964) $( 3,772,714)
Deemed dividend (note 6) (265,000) -- (265,000)
Net loss attributable to common share $ (796,706) $ (1,840,019) $( 2,590,964) $( 3,772,714)
=========== ============ ============ ============
Basic and Diluted Net Loss per share $ (0.04) $ (0.10) $ (0.13) $ (0.20)
=========== ============ ============ ============
Shares used in computing Basic and Diluted
Net Loss per share 19,356,928 18,514,236 19,419,236 18,483,437
=========== ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 14
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) Six Months Ended
June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,325,964) $(3,772,714)
Gain on sale of Modex shares (1,427,686) --
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 (1,890,508) (2,075,873)
----------- -----------
Net cash used in operating activities (5,149,024) (4,495,642)
----------- -----------
Cash flows from investing activities:
Proceeds from marketable securities -- 6,891,026
Purchases of marketable securities -- (4,397,676)
Proceeds from sale of encapsulated cell technology 2,800,000 --
Proceeds from sale of Modex shares 1,427,686 --
Purchase/Sale of property, plant and equipment, net 8,005 (131,113)
Acquisition of other assets (20,380) (274,510)
----------- -----------
Net cash provided by investing activities 4,215,311 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.
Page 5 of 14
<PAGE>
PART I - ITEM 1 - FINANCIAL STATEMENTS
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 in the
Company's Annual Report to Stockholders and the Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Net loss-per-share is computed using the weighted-average number of shares
of common stock outstanding. The value associated with the beneficial
conversion feature of certain preferred stock has been treated as a deemed
dividend in the computation of earnings per share (see note 4). 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 5).
NOTE 4. BENEFICIAL CONVERSION VALUE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
As previously reported, the Company sold 1,500 shares of its 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 face value of the shares are
convertible at the option of the holders into common stock at $3.77 per
share. The Company has valued the beneficial conversion feature reflecting
the April 13, 2000 commitment date and the most beneficial per share
discount available to the preferred shareholders. Such value was $265,000
and is treated as a deemed dividend as of the commitment date.
NOTE 5. INVESTMENTS
At June 30, 2000, the Company owned 126,193 shares of Modex Therapeutics
Ltd. ("Modex"). This Swiss biotechnology company made an initial public
offering of shares on the Swiss Exchange on June 23, 2000. Accordingly,
with an established market value, the investment was marked to market
and recorded as available-for-sale at estimated fair market value based
on the June 30, 2000 closing price of $152.31, which was converted from
the market price of 247.50 Swiss francs per share at that date. The
unrealized gain was reported in other comprehensive income. The market
price of Modex stock on October 31, 2000 was 329.50 Swiss francs, which
converts to $183.28 and results in an estimated fair value of $23,128,598
for our holdings at that date. Estimated fair value at June 30, 2000
is as follows:
-----------------------------------------------------------------
COST GROSS UNREALIZED GAIN FAIR VALUE
-----------------------------------------------------------------
$0 $19,220,165 $19,220,165
-----------------------------------------------------------------
Page 6 of 14
<PAGE>
NOTE 6. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY
As previously reported, in 1999 the Company restructured its operations
to abandon all further encapsulated cell technology research and
concentrate its resources on the research and development of its
proprietary platform of stem cell technologies. The Company relocated
its remaining research and development activities and its corporate
headquarters to California, and has been seeking to dispose of its
former science and administrative and pilot manufacturing facilities in
Rhode Island. At the end of 1999 the balance in the reserve created for
wind-down expenses was $1,634,522. For the first half of 2000 the
roll-forward of this balance is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Description Reserve as at Cash Payments Reserve as at
12/31/99 6/30/00
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Facilities,
Maintenance and other
Expenses 462,522 462,522 0
--------------------------------------------------------------------------------
RIPSAT Settlement 1,172,000 1,172,000 0
--------------------------------------------------------------------------------
Totals $1,634,522 $1,634,522 0
--------------------------------------------------------------------------------
</TABLE>
During the first six months of 2000 the Company incurred $288,646 of costs
in excess of the amounts reserved as of December 31, 1999 for the carrying
costs of the Rhode Island facilities. During the third quarter the Company
incurred an additional $480,087 in carrying costs, including lease
payments, property taxes and utilities, for the Rhode Island facilities,
as it was unable to dispose of them by June 30, 2000, as expected. These
amounts were previously included in general and administrative expense,
and have been reclassified to be separately disclosed as encapsulated cell
therapy wind down and corporate relocation expense. The Company
anticipates that it will incur a similar amount in the fourth quarter of
2000 and in every quarter thereafter until it disposes of these
facilities. The Company does not currently have a projected date for such
disposal and there can be no assurance that it will be able to dispose of
these facilities in a reasonable time, if at all. Some additional items
that were more properly included in research and development were also
reclassified out of general and administrative expense, and facilities
costs were more accurately spread between research and development and
general and administrative expense.
The fixed assets revenue was applied against property held for sale at
December 31, 1999 and June 30, 2000 for financial statement prescription
purposes.
NOTE 7. STOCK OPTIONS
As previously reported, in conjunction with the StemCells
California merger, the Company adopted the 1997 CytoTherapeutics, Inc.
StemCells California Research Stock Option Plan whereby an additional
2,000,000 shares of Common Stock have been reserved. During 1997, the
Company awarded options under this plan to purchase 1.6 million shares of
the Company's common stock to the Chief Executive Officer and scientific
founders of StemCells California, Inc. at an exercise price of $5.25 per
share. Under the original grants, approximately 100,000 of these options
were exercisable immediately on the date of the grant, 1,031,000 of these
options would vest and become exercisable only upon achievement of
specified milestones and the remaining 469,000 options would vest over
eight years. The Company agreed on October 27, 2000 with Irving
Weissman, M.D. and Fred H. Gage, Ph.D., two of the grant recipients, to
amend their options. In exchange for the revision of the options,
Dr. Weissman and Dr. Gage agreed to rescind their Conduct of Research
Agreement with the Company, in all respects, including their right under
the Agreement to reacquire certain technology under certain circumstances.
Instead of vesting based on performance milestones, Dr. Weissman's and
Dr. Gage's options will vest over eight years from the date of the
original grant, on the same schedule as the option granted to the third
founder, Dr. David Anderson. 168,750 shares vested upon the revision and
the remaining 300,000 shares will vest at 50,000 shares on each
September 25 until September 25, 2005, when the final 100,000 shares will
vest. The exercise price for the revised options remains $5.25 per share.
We expect to incur a charge in the fourth quarter of 2000 of approximately
$1,600,000 relating to the vested portion of the options. The deferred
compensation expense associated with the unvested portion of the grants
was determined to be approximately $2.8 million. The Company plans to
revalue the options using the Black-Scholes method on a quarterly basis
and recognize additional compensation expense accordingly.
NOTE 8. 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. As set forth in
an adjustable warrant issued to the Fund on the closing date, the Fund
may be entitled to receive additional shares of common stock on eight
dates beginning six months from the closing and every three months
thereafter. The adjustable warrant may be exercised at any time prior
to the thirtieth day after the last of such dates. The number of
additional shares the Fund may be entitled to on each date will be based
on the number of shares of common stock the Fund continues to hold on
each date and the market price of the Company's common stock over a
period prior to each date. The exercise price per share under the
adjustable warrant is $.01. Such warrants provide the Fund with the
opportunity to acquire additional common shares at a nominal value if the
value of the common stock that the Fund holds decreases. The Company will
have the right, under certain circumstances, to cap the number of
additional shares by purchasing part of the entitlement from the Fund at
a purchase price based on the market price of such shares. The Fund also
received a five year warrant to purchase up to 101,587 shares of common
stock at $4.725 per share. This warrant is callable at any time by
StemCells at $7.875 per underlying share. The calculated value of this
callable warrant using the Black-Scholes method is $376,888, which the
Company accounts for as stock issuance cost which was treated as a credit
to paid in capital stockholders' equity. The Company accounts for
the sale of the stock and warrants or the exercise of warrants by adding
that portion of the proceeds equal to the par value of the new shares to
common stock and the balance, including the value of the warrants, to
paid in capital. In addition, any repurchase of the shares by the Company
would also be accounted for through paid in capital.
Page 7 of 14
<PAGE>
In the Purchase Agreement governing the August 3, 2000 sale to the
Fund, the Company granted the Fund an option to purchase up to an
additional $3 million of its common stock and a callable warrant and an
adjustable warrant. The Fund can exercise this option in whole or in
part at any time prior to August 3, 2001. The price per share of common
stock to be issued upon exercise of the option will be based on the
average market price of the common stock for a five-day period prior to
the date on which the option is exercised. On August 23, 2000, the Fund
exercised $1,000,000 of its option to purchase additional common stock.
The Fund paid $750,000 of the purchase price in connection with
the closing on August 30, 2000. The Fund will pay the remaining $250,000
upon effectiveness of a registration statement covering the shares owned
by the Fund. The Fund purchased the Company's common stock at $5.53 per
share, which amount was based upon the average market price of the
common stock for the five day period prior to August 23, 2000. An
adjustable warrant similar to the one issued on August 3, 2000 was issued
to the Fund on August 30, 2000, but was canceled on November 1, 2000 by
Agreement of the Company and the Fund. The Fund also received a five
year warrant to purchase up to 19,900 shares of common stock at $6.03
per share. This warrant is callable by the Company at any time at $10.05
per underlying share. The calculated value of this callable warrant
using the Black-Scholes method is $139,897, which the Company accounts
for as a credit to paid in capital
The adjustable warrant contains provisions regarding the adjustment
or replacement of the warrants in the event of stock splits, mergers,
tender offers and other similar events. The adjustable warrant also
limits the number of shares that can be beneficially owned by the Fund
to 9.99% of the total number of outstanding shares of Common Stock.
Page 8 of 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company for the six months ended June 30, 2000 and 1999 should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and the related footnotes thereto.
This report 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 "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Cautionary Factors Related to Forward Looking Information" sections included
in our annual report on Form 10-K for the year ended December 31, 1999, as
amended, and elsewhere in this report 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 or referred
to herein. 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.
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research
and development of human therapeutic products. As a result of a restructuring
in the second half of 1999, our sole focus is now on our stem cell
technology. At the beginning of last year, by contrast, our corporate
headquarters, most of our employees, and the main focus of our operations
were primarily devoted to a different technology--encapsulated cell therapy,
or ECT. Since that time, we terminated a clinical trial of the ECT then in
progress, we wound down our other operations relating to the ECT, we
terminated the employment of those who worked on the ECT, we sold the ECT and
we relocated from Rhode Island to Sunnyvale, California. Comparisons with
last year's results are correspondingly less meaningful than they may be
under other circumstances.
We were known as CytoTherapeutics, Inc., until May 23, 2000, when we
changed our name to StemCells, Inc.
We have not derived any revenues from the sale of any products, and we do
not expect to receive revenues from product sales for at least several years. We
have not commercialized any product and in order to do so we must, among other
things, substantially increase our research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses since inception and expect
to incur substantial operating losses in the future. As a result, we are
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance our
operations. There are no such
Page 9 of 14
<PAGE>
collaborative research arrangements at this time and there can be no assurance
that such financing or partnering revenues will be available when needed or on
terms acceptable to us.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, and the initiation or
termination of research collaborations, in addition to the winding-down of
terminated research and development programs referred to above.
RESULTS OF OPERATIONS
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 ECT. We
have not yet entered into revenue-producing collaborations with respect to
our platform of stem cell technologies. During the second quarter 2000 we
realized a $1,427,686 gain in connection with our investment in Modex
Therapeutics Ltd., 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 market value of $19,220,165, based on the per share
price of approximately $152.00, which we converted from a market price of
247.50 Swiss francs on that date. The market price of Modex stock on October
31, 2000 was 329.50 Swiss francs, which converts to $183.28 using exchange
rates on that date and represents an estimated fair value of $23,128,598 for
our holdings.
Research and development expenses totaled $2,021,839 for the six
months ended June 30, 2000, compared with $6,847,383 for the same period in
1999. The decrease of $4,825,544, or 70%, from 1999 to 2000 was primarily
attributable to the wind-down of research activities relating to the ECT.
General and administrative expenses were $1,427,733 for the six months
ended June 30, 2000, compared with $2,168,315 for the same period in 1999.
The decrease of $740,582, or 34%, from 1999 to 2000 was primarily
attributable to lower payroll costs resulting from the restructuring of
administrative operations and to the establishment of a smaller corporate
office in California. Some additional items that were more properly included
in research and development were also reclassified out of general and
administrative expense, and facilities costs were more accurately spread
between research and development and general and administrative expense.
Wind-down expenses related to our ECT research, our Rhode Island
operations and the transfer of our headquarters to Sunnyvale, California for
the six months ended June 30, 2000 and 1999 were $288,646 and $0
respectively. In 1999 we had created a reserve of $1,634,522 for wind-down
expenses related to the first half of 2000, of which approximately $463,000
related to the carrying costs through an expected June 30, 2000 disposition
of the Rhode Island facilities. During the first six months of 2000 we
incurred costs in excess of the amounts reserved as of December 31, 1999 for
the carrying costs, including lease payments, property taxes and utilities,
of the Rhode Island facilities. These amounts were previously included in
general and administrative expense, and have been reclassified to be
separately disclosed as encapsulated cell therapy wind down and corporate
relocation expense because they are directly related to wind down and
relocation. We anticipate that we will continue to incur additional carrying
costs for the Rhode Island facilities because we were unable to dispose of
them by June 30, 2000, and will incur approximately $500,000 in carrying costs
for them in the third quarter of 2000 and in every quarter thereafter until we
dispose of these facilities. We do not currently have a projected date for
such disposal and there can be no assurance that we will be able to dispose of
these facilities in a reasonable time, if at all.
Interest income for the 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 the 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. We were one
of the founders of Modex, a Swiss biotherapeutics company established in 1996
to pursue encapsulated cell technologies related to our former programs.
After Modex' initial public offering on the Swiss Neue Market on June 23,
2000 and our sale of 23,807 shares, we own 126,193 shares of Modex common
stock. The IPO price was 168.00 Swiss francs, and the share price on June 30,
2000 was 247.50 Swiss francs. The market price of Modex stock on October 31,
2000 was 329.50 Swiss francs. The shares are subject to a lockup for 6 months
from the date of the IPO.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
For the three months ended June 30, 2000 and 1999, revenues from collaborative
agreements totaled $0 and $2,520,672, respectively. The decrease in revenues
resulted from the June 1999 termination of a Development, Marketing and License
Agreement related to our former programs. 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 our investment in Modex Therapeutics, Ltd., or 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 per share price of approximately $152, which we
converted from a market price of 247.50 Swiss Francs on that date.
Research and development expenses totaled $1,115,207 for the three months ended
June 30, 2000, compared with $3,280,826 for the same period in 1999. The
decrease of $2,165,619, or 66%, from 1999 to 2000, was primarily attributable to
the wind-down of research activities relating to the ECT.
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<PAGE>
General and administrative expenses were $770,019 for the three months
ended June 30, 2000, compared with $1,172,856 for the same period in 1999.
The decrease of $402,837, or 34%, from 1999 to 2000 was primarily
attributable to lower payroll costs resulting from the restructuring of
administrative operations and to the establishment of a smaller corporate
office in California. Some additional items that were more properly included
in research and development were also reclassified out of general and
administrative expense, and facilities costs were more accurately spread
between research and development and general and administrative expense.
Wind-down expenses related to our ECT research, our Rhode Island
operations and the transfer of our headquarters to Sunnyvale, California for
the three months ended June 30, 2000 and 1999 were $54,260 and $0
respectively. In 1999 we had created a reserve of $1,634,522 for wind-down
expenses related to the first half of 2000, of which approximately $463,000
related to the carrying costs, including lease payments, property tax and
utilities, through an expected June 30, 2000 disposition of the Rhode Island
facilities. During the first six months of 2000 we incurred costs in excess
of the amounts reserved as of December 31, 1999. We anticipate that we will
continue to incur additional carrying costs for the Rhode Island facilities
because we were unable to dispose of them by June 30, 2000, and will incur
approximately $500,000 in carrying costs for them in the third quarter of 2000
and in every quarter thereafter until we dispose of these facilities. We do
not currently have a projected date for such disposal and there can be no
assurance that we will be able to dispose of these facilities in a reasonable
time, it at all.
Interest income for the three months ended June 30, 2000 and 1999 was $64,900
and $184,220, respectively. The decrease in interest income in 2000 was
attributable to the lower average investment balances during such period.
Interest expense was $73,708 for the three months ended June 30, 2000,
compared with $91,229 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 three months ended June 30, 2000 was $531,706, or ($0.03) per
share, as compared to net loss of $1,840,019, or ($0.10) per share, for the
comparable period in 1999. The decrease in net loss of $1,308,313 from the same
period in 1999 primarily reflects a gain of $1,427,686 in connection with our
stock in Modex, as the reductions in expenses were offset by the decrease in
revenues from collaboration agreements. We were one of the founders of Modex, a
Swiss biotherapeutics company established in 1996 to pursue encapsulated cell
technologies related to our former programs. After Modex' initial public
offering on the Swiss Neue Market on June 23, 2000 and our sale of 23,807
shares, we own 126,193 shares of Modex common stock. The IPO price was
168.00 Swiss Francs, and the share price on June 30, 2000 was 247.50 Swiss
Francs. The shares are subject to a lockup for 6 months from the date of the
IPO.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of
common and preferred stock, the issuance of long-term debt and capitalized
lease obligations, revenues from collaborative agreements, research grants
and interest income.
We had unrestricted cash and cash equivalents totaling $5,535,264 at June
30, 2000. Cash equivalents are invested in money market funds.
We also hold 126,193 shares of Modex stock, which is publicly traded on the
Swiss Neue Market exchange. While our Modex stock had an estimated fair
market value of $27,204,333 on September 30, 2000 (and $23,128,598 on
October 31, 2000), the fair market value of our Modex stock has varied
significantly since the Modex public offering and may continue to vary
significantly based on increases and decreases in the reported per share
price, in Swiss francs, of the Modex stock and on foreign currency exchange
rates. We are prohibited under a lock-up agreement entered into at the time
of Modex's public offering from selling any of our Modex shares until
December 23, 2000. In addition, there is a limited trading market for
Modex stock, and if we were to attempt to sell any significant portion of our
Modex holdings, we would likely be able to do so only at a significant
discount to the then market price, if at all.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former ECT. These relationships are now terminated, and we have not yet
established corporate partnerships with respect to our stem cell technology.
In March 1995, we signed a collaborative research and development
agreement with AstraZeneca plc 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
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 a potential ECT product, an 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 16--"Research Agreements" accompanying the Financial
Statements set forth in our annual report on Form 10-K for the year ended
December 31, 1999, as amended.
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<PAGE>
In the third quarter of 1999, we announced restructuring plans for the
wind-down of operations relating to our ECT and to focus our resources on
the research and development of our platform of proprietary stem cell
technologies. We terminated approximately 68 full time employees and, in
October 1999, relocated our corporate headquarters to Sunnyvale, California.
We recorded $6,047,806 of wind-down expenses including employee separation
and relocation costs during 1999.
On December 30, 1999, we sold our ECT and assigned our intellectual
property assets in it to Neurotech S.A. for a payment of $3,000,000,
royalties on future product sales, and a portion of certain Neurotech
revenues from third parties. In addition, we retained certain non-exclusive
rights to use ECT in combination with our proprietary stem cell technologies
and in the field of vaccines for prevention and treatment of infectious
diseases. We received $2,800,000 of the initial payment on January 3, 2000
with a remaining balance of $200,000 placed in escrow, to be released to us
upon demonstration satisfactory to Neurotech that certain intellectual
property is not subject to other claims.
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, as a result of our decision to close our Rhode Island
facilities, the Rhode Island Partnership for Science and Technology, or
RIPSAT, alleged that we were in default under a June, 1989 Funding Agreement,
and demanded payment of approximately $2.6 million. While we believe we were
not in default under the Funding Agreement, we deemed it best to resolve the
dispute without litigation and, on March 3, 2000, entered into a settlement
agreement with RIPSAT, the Rhode Island Industrial Recreational Building
Authority, or IRBA, and the Rhode Island Industrial Facilities Corporation,
or RIIFC. We agreed to pay RIPSAT $1,172,000 in full satisfaction of all our
obligations to them under the Funding Agreement. At the same time, IRBA
agreed to return to us the full amount of our debt service reserve,
comprising approximately $610,000 of principal and interest, relating to the
bonds we had with IRBA and RIIFC. The $610,000 debt service reserve was
transferred directly to RIPSAT, leaving the remainder of approximately
$562,000 to be paid by us. We made this payment in March of 2000.
Our liquidity and capital resources could have also been affected by a
claim by Genentech, Inc., arising out of their collaborative development and
licensing agreement with us relating to the development of products for the
treatment of Parkinson's disease; however, the claim was resolved with no
effect on our resources. On May 21, 1998, Genentech exercised its right to
terminate the Parkinson's collaboration and demanded that we redeem, for
approximately $3,100,000, certain shares of our redeemable Common Stock held
by Genentech. Genentech's claim was based on provisions in the agreement
requiring us to redeem, at the price of $10.01 per share, the shares
representing the difference between the funds invested by Genentech to
acquire such stock and the amount expended by us on the terminated program
less an additional $1,000,000. In March 2000, we entered into a Settlement
Agreement with Genentech under which Genentech released us from any
obligation to redeem any shares of our Common Stock held by Genentech,
without cost to us. Accordingly, the $5.2 million of redeemable common stock
shown as a liability in our December 31, 1999 balance sheet was transferred
to equity in March 2000 without any impact on our liquidity and capital
resources. We and Genentech also agreed that all collaborations between us
were terminated, and that neither of us had any rights to the intellectual
property of the other.
In May 1996, we secured an equipment loan facility with a bank in the
amount of $2,000,000. On August 5, 1999 we made a payment of approximately
$752,000 of principal and interest to the lender to retire this loan 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 outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $950,000 per year associated with our former research
laboratory and corporate headquarters building and debt service payments and
operating costs of approximately $1,000,000 per year with respect to our
pilot manufacturing and cell processing facility. We are actively seeking to
sublease, assign or sell our interests in these facilities. Failure to do so
within a reasonable period of time will have a material adverse effect on our
liquidity and capital resources.
On April 13, 2000, we sold 1,500 shares of our 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common
stock to two members of our Board of Directors for $1,500,000, on terms more
favorable to us than we were able to obtain from outside investors. The face
value of the shares of preferred stock is convertible at the option of the
holders into common stock at $3.77 per share. The holders of the preferred
stock have liquidation rights equal to their
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<PAGE>
original investments plus accrued but unpaid dividends. The investors would
be entitled to make additional investments in our securities on the same
terms as those on which we complete offerings of our securities with third
parties within 6 months, if any such offerings are completed. They have
waived that right with respect to the common stock transactions described
below. If offerings totaling at least $6 million are not completed during the
6 months, the investors have the right to acquire up to a total of 1,126
additional shares of convertible preferred stock, the face value of which is
convertible at the option of the holders into common stock at $6.33 per
share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if
any are acquired. The warrants expire on April 13, 2005.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund
with more than a billion dollars in assets under management. We received $3
million of the purchase price at the closing and 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, pursuant to an adjustable warrant issued to
the Fund in connection with the sale of common stock, to receive additional
shares of common stock on eight dates beginning six months from the closing
and every three months thereafter. The number of additional shares the Fund
may be entitled to on each date will be based on the number of shares of
common stock the Fund continues to hold on each date and the market price of
our common stock over a period prior to each date. We will have the right,
under certain circumstances, to cap the number of additional shares by
purchasing part of the entitlement from the Fund. The Fund also received a
warrant to purchase up to 101,587 shares of common stock at $4.725 per share.
This warrant is callable by us at $7.875 per underlying share.
In addition, the Fund has the option for twelve months to purchase up to
$3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per
share. The Fund paid $750,000 of the purchase price in connection with the
closing on August 30, 2000. The Fund will pay the remaining $250,000 upon
effectiveness of a registration statement covering the shares owned by the
Fund. At the closing on August 30, 2000, we issued to the Fund an adjustable
warrant similar to the one issued on August 3, 2000. This adjustable warrant
was canceled by agreement between us and the Fund on November 1, 2000. The
Fund also received a warrant to purchase up to 19,900 shares of common stock
at $6.03 per share. This warrant is callable by us at $10.05 per underlying
share.
We have limited liquidity and capital resources and must obtain
significant additional capital resources in the future in order to sustain
our product development efforts. 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 our anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities,
establishment of production capabilities and for general and administrative
expenses. Our ability to obtain additional capital will be substantially
dependent on our ability to obtain partnering support for our stem cell
technology and, in the near term, on our ability to realize proceeds from the
sale, assignment or sublease of our facilities in Rhode Island. Failure to do
so will have a material effect on our liquidity and capital resources. Until
our operations generate significant revenues from product sales, we must rely
on cash reserves and proceeds from equity and debt offerings, proceeds from
the transfer or sale of our intellectual property rights, equipment,
facilities or investments, government grants and funding from collaborative
arrangements, if obtainable, to fund our operations.
We intend to pursue opportunities to obtain additional financing in the
future through equity and debt financings, grants and collaborative research
arrangements. The source, timing and availability of any future financing
will depend principally upon market conditions, interest rates and, more
specifically, on our progress in our exploratory, preclinical and future
clinical development programs. Lack of necessary funds may require us to
delay, reduce or eliminate some or all of our research and product
development programs or to license our potential products or technologies to
third parties. Funding may not be available when needed, at all, or on terms
acceptable to us.
While our cash requirements may vary, as noted above, we currently
expect that our existing capital resources, including income earned on
invested capital, will be sufficient to fund our operations 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 our research and product development programs
and/or our capital expenditures or to license our potential products or
technologies to third parties.
PART II - ITEM 1
LEGAL PROCEEDINGS
None.
PART II - ITEM 2
(c) On April 13, 2000, we sold 1,500 shares of our 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of our
common stock to two members of our Board of
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<PAGE>
Directors for $1,500,000, on terms more favorable than we were 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
face value of the shares of preferred stock is convertible at the option of
the holders into common stock at $3.77 per share. The holders of the
preferred stock have liquidation rights equal to their original investments
plus accrued but unpaid dividends. The investors would be entitled to make
additional investments in 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. They have waived that right with
respect to the common stock transactions described in Note 8, 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, the face value of which is
convertible at the option of the holders into common stock at $6.33 per
share. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002 in the case of the original stock and two
years after the first acquisition of any of the additional 1,126 shares, if
any are acquired. The warrants, which are exercisable at $6.58 per share,
expire on April 13, 2005.
PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The Annual Meeting of Stockholders was held in Menlo Park, California on
May 23, 2000.
(b) Not applicable
(c) The following is a brief description of each matter voted upon at the
meeting and a breakdown of the votes cast for, against or withheld, as well
as the number of abstentions voted for each proposal.
1. Proposal to elect Donald Kennedy, Ph.D. as a Director of the Company -
15,622,499 votes in favor, 85,855 votes against, no abstentions.
2. Amendment to the Company's Restated Certificate of Incorporation to Change
its Corporate Name From CytoTherapeutics, Inc. to StemCells, Inc. - 15,561,786
votes in favor, 119,993 votes against, 26,575 abstentions.
3. Ratification of Selection of Ernst & Young LLP as the Company's Independent
Public Accountants - 5,634,955 votes in favor, 52,904 votes against, 20,495
abstentions.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 - Form of Certificate of Designations of 6% Cumulative Convertible
Preferred Stock of the Registrant
Exhibit 3.2 - Restated Certificate of Incorporation of the Registrant, as
amended on May 24, 2000
Exhibit 10.1 - Form of Securities Purchase Agreement dated as of April 13, 2000
Exhibit 10.2 - Form of Registration Rights Agreement dated as of April 13, 2000
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the period April 1
to June 30, 2000.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEMCELLS, INC.
---------------------------------------
(Name of Registrant)
December 5, 2000 /s/ George Koshy
---------------------------
Controller and Acting Chief
Financial Officer (authorized officer
and principal financial officer and
principal accounting officer)
