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AMENDMENT NO. 1
TO
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 0-19871
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STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
(Exact name of Registrant as specified in its charter)
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DELAWARE 94-3078125
<S> <C>
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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525 DEL REY AVENUE, SUITE C, SUNNYVALE, CA 94086
(Address of principal offices) (zip code)
701 GEORGE WASHINGTON HIGHWAY, LINCOLN, RI 02865
(Former address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 731-8670
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
JUNIOR PREFERRED STOCK PURCHASE RIGHTS
Title of class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of Common Stock held by non-affiliates at March 20,
2000: $140,213,189.22. Inclusion of shares held beneficially by any person
should not be construed to indicate that such person possesses the power, direct
or indirect, to direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common control with
the Registrant. Common stock outstanding at March 20, 2000: 19,506,565 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
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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.
SEE "CAUTIONARY FACTORS RELEVANT TO FORWARD-LOOKING INFORMATION" FILED
HEREWITH AS EXHIBIT 99 AND INCORPORATED HEREIN BY REFERENCE.
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BUSINESS
OVERVIEW
We are engaged in research aimed at the development of therapies that would
use stem and progenitor cells derived from fetal or adult sources to treat, and
possibly cure, human diseases and injuries such as Parkinson's disease,
hepatitis, diabetes, and spinal cord injuries. The body uses certain key cells
known as stem cells to produce all the functional mature cell types found in
normal organs of healthy individuals. Progenitor cells are cells that have
already developed from the stem cells, but can still produce one or more types
of mature cells within an organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate, based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
Our proposed therapies are based on the transplanting of healthy human stem
and progenitor cells to repair or replace central nervous system, pancreas or
liver tissue that has been damaged or lost as a result of disease or injury,
potentially returning patients to productive lives and significantly reducing
health care costs. We believe that we have achieved significant progress in
research regarding stem cells of the central nervous system through the advances
we have made in the isolation, purification and transplantation of central
nervous system stem and progenitor cells. We have also made advances in our
research programs to discover the stem cells of the pancreas and of the liver.
We have established an intellectual property position in all three areas of our
stem cell research--the central nervous system, the pancreas and the liver--by
patenting our discoveries and entering into exclusive licensing arrangements. We
believe that, if successfully developed, our platform of stem cell technologies
may create the basis for therapies that would address a number of conditions
with significant unmet medical needs.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many degenerative diseases of the nervous system, such as
Parkinson's disease, Alzheimer's disease and amyotrophic lateral sclerosis.
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the identification of some of the specific substances or
proteins that are deficient. While administering these substances or proteins as
medication does overcome some of the limitations of traditional pharmaceuticals
such as lack of specificity, there is no existing technology that can deliver
them to the precise sites of action and in the appropriate physiological
quantities or for the duration required to cure the degenerative condition.
Cells, however, do this naturally. As a result, investigators have
considered replacing failing cells that are no longer producing the needed
substances or proteins by implanting stem or progenitor cells capable of
regenerating the cell that the degenerative condition has damaged or destroyed.
Where there has been irreversible tissue damage or organ failure,
transplantation of stem cells offers the possibility of generating new and
healthy tissue, thus potentially restoring the organ function and the patient's
health.
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THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
We believe that, if successfully developed, stem cell-based therapy--the use
of stem or progenitor cells to treat diseases--has the potential to provide a
broad therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves or from donors. Cells obtained from the same person who will
receive them may be abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can be
used for transplantation into individuals whose own cells are not
suitable because of disease or other reasons.
We have developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that reproducibly grows normal
human central nervous system, or CNS, stem and progenitor cells. We believe this
is the first reproducible process for growing normal human CNS stem cells. More
recently, we have discovered markers on the cell surface that identify the human
CNS stem cells. This allows us to purify them and eliminate other unwanted cell
types. Together, these discoveries enable us to select normal human CNS stem
cells and to expand them in culture to produce a large number of pure stem
cells.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells.
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. In our research, we have shown that stem cells of
the central nervous system transplanted into hosts are accepted, migrate, and
successfully specialize to produce mature neurons and glial cells.
More generally, because the stem cell is the pivotal cell that produces all
the functional mature cell types in an organ, we believe these cells, if
successfully identified and developed for transplantation, may serve as
platforms for five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- gene discovery and use, and
- diagnostics.
We will be pursuing key alliances in these areas.
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OUR PLATFORM OF STEM CELL TECHNOLOGIES
Stem cells have two defining characteristics:
- some of the cells developed from stem cells produce all the kinds of
mature cells making up the particular organ; and
- they "self renew"--that is, other cells developed from stem cells are
themselves new stem cells, thus permitting the process to continue again
and again.
Stem cells are known to exist for many systems of the human body, including
the blood and immune system, the central and peripheral nervous systems
(including the brain), and the liver, pancreas endocrine, and the skin systems.
These cells are responsible for organ regeneration during normal cell
replacement and, to a more or less limited extent, after injury. We believe that
further research and development will allow stem cells to be cultivated and
administered in ways that enhance their natural function, so as to form the
basis of therapies that will replace specific subsets of cells that have been
damaged or lost through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture any of the finite number of different
types of human stem cells will be able to obtain patent protection for the
methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human central
nervous system stem and progenitor cells in our proprietary chemically defined
medium, and our published studies show that these cultured and expanded cells
give rise to all three major cell types of the central nervous system. Also, a
separate study sponsored by us using these cultured stem and progenitor cells
showed that the cells are accepted, migrate, and successfully specialize to
produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human central nervous system stem cells can be successfully isolated by markers
present on the surface of freshly obtained brain cells. We believe this is the
first reproducible process for isolating highly purified populations of
well-characterized normal human central nervous system stem cells, and have
applied for a composition of matter patent. Because the cells are highly
purified and have not been genetically modified, they may be especially suitable
for transplantation and may provide a safer and more effective alternative than
therapies that are based on cells derived from cancer cells, or from cells
modified by a cancer gene to make them grow, or from an unpurified mixture of
many different cell types or cells derived from animals. We have also filed an
improved process patent for the growth and expansion of these purified normal
human central nervous system cells.
Neurological disorders such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke, affect a significant portion of the
U.S. population and there currently are no effective long-term therapies for
them. We believe that therapies based on our process for identifying, isolating
and culturing neural stem and progenitor cells may be useful in treating such
diseases. We are continuing our research into, and have initiated the
development of, human central nervous system stem and progenitor cell-based
therapies for these diseases.
We continue to advance our research programs to discover the islet stem cell
in the human pancreas and the liver stem cell. Islet cells are the cells that
produce insulin, so islet stem cells may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin secretion is
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 sites, such
as bone marrow or peripheral blood cell transplants, where transplantation of
the patient's own cells is now feasible. In a few additional areas, including
the liver, transplantation of donor organs is now used, but is limited by the
scarcity of organs available through donation. We believe that our stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and specialize
into the multiple kinds of cells that are commonly lost in various diseases,
transplanted stem cells may be able to migrate limited distances to the proper
location within the body, to expand and specialize and to replace damaged or
defective cells, facilitating the return to proper function. We believe that
such replacement of damaged or defective cells by functional cells is unlikely
to be achieved with any other treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for, and
current status of, our primary research and product development programs and
projects. The table is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology
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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.
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RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
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PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
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HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central - Demonstrated IN VITRO the ability to initiate and expand
nervous system tissue (including stem cell-containing human neural cultures and
spinal cord, degenerated retinas specialization into three types of central nervous system
and tissue affected by certain cells
genetic disorders) - Demonstrated the ability of neurosphere-initiating stem
cells from human brain
- Demonstrated in rodent studies that transplanted human
brain-derived stem cells are accepted and properly
specialized into the three major cell types of the
central nervous system.
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas - Identified markers on the surface of cells to identify,
islet tissue isolate and culture islet stem cells of the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver - Demonstrated the production of hepatocytes from purified
tissue including tissue resulting mouse hematopoietic stem cells
from certain metabolic genetic - Identified IN VITRO culture assay for growth of human
diseases bipotent liver progenitor cells that can produce both
bile duct and hepatocytes
- Showed that the in vitro culture of human bipotent liver
cells can also grow human hepatitis virus
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(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of central nervous system, stem and progenitor cell technology, animal models
for the identification and/or testing of stem and progenitor cells and our own
research and development efforts to date. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We have assembled an experienced team of scientists
and scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
BRAIN STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with central nervous system stem and progenitor cell
cultures in collaboration with NeuroSpheres, Ltd., in 1992. We believe that
NeuroSpheres was the first to invent these cultures. We are the exclusive,
worldwide licensee from NeuroSpheres to such inventions and associated patents
and patent applications for all uses, including transplantation in the human
body as embodied in these patents. See "License Agreements and Sponsored
Research Agreements--NeuroSpheres, Ltd."
In 1997, our scientists invented a reproducible method for growing human
CNS, stem and progenitor cells in cultures. In preclinical IN VITRO and early IN
VIVO studies, we demonstrated that these cells specialize
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into all three of the cell types of the central nervous system. Because of these
results, we believe that these cells may form the basis for replacement of cells
lost in certain degenerative diseases. We are continuing research into, and have
initiated the development of, our human CNS stem and progenitor cell cultures.
We have initiated the cultures and demonstrated that these cultures can be
expanded for a number of generations IN VITRO in chemically defined media. In
collaboration with us, Dr. Anders Bjorklund has shown that cells from these
cultures can be successfully transplanted and accepted into the brains of
rodents where they subsequently migrated and specialized into the appropriate
cell types for the site of the brain into which they were placed.
In 1998, we expanded our preclinical efforts in this area by initiating
programs aimed at the discovery and use of specific monoclonal antibodies to
facilitate identification and isolation of CNS and other stem and progenitor
cells or their specialized progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human CNS stem cells that
resulted in a 100-fold increase in CNS stem and progenitor cell production after
6 passages. We are expanding our preclinical efforts toward the goal of
selecting the proper indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering our methods for the human CNS cell
cultures containing central nervous system stem cells, for compositions of human
CNS cells expanded by these methods, and for use of these cultures in human
transplantation. These human CNS stem and progenitor cells expanded in culture
may be useful for repairing or replacing damaged central nervous system tissue,
including the brain and the spinal cord.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS stem cells, and also allowed a separate patent
application for our media for culturing human CNS stem cells.
Also in 1999, we announced the filing of a US patent application covering
our proprietary process for the direct isolation of normal human CNS stem cells
based on the markers found to be present on the surface of freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human CNS stem cells
utilizing this proprietary process. In November 1999, we announced the study's
first results: Our researchers, by using our proprietary markers on the surface
of the cell, had succeeded in identifying, isolating and purifying human CNS
stem cells from brain tissue, and were able to expand the number of these cells
in culture.
We believe that this is the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human CNS
stem cells. Because the cells are normal human CNS stem cells and have not been
genetically modified, they may be especially suitable for transplantation and
may provide a safer and more effective alternative to therapies that are based
on cells derived from cancer cells or from an unpurified mix of many different
cell types, or from animal derived cells.
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were able to take these
purified and expanded stem cells and transplant them into normal mouse brain
hosts, where they take hold and grow into neurons and glial cells.
During the course of the study, the transplanted human CNS stem cells
survived for as long as one year and migrated to specific functional domains of
the host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
when CNS stem cells isolated and cultured with our proprietary processes are
transplanted, they adopt the characteristics of the host brain and act like
normal stem cells. In other words, the study suggests the possibility of a
continual replenishment of normal human brain cells.
As noted above, human CNS stem and progenitor cells harvested and purified
and expanded using our proprietary processes may be useful for creating
therapies for the treatment of degenerative brain diseases such as Parkinson's,
Huntington's and Alzheimer's disease. These conditions affect more than
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5 million people in the United States and there are no effective long-term
therapies currently available. We believe the ability to purify human brain stem
cells directly from fresh tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types, that can be expanded in culture
without fear of also expanding some unwanted cell types;
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development and function of the
brain is absent. Brain-derived stem cell cultures might be genetically
modified to produce those proteins. The modified brain stem cells could be
transplanted into patients with these genetic diseases;
- the efficient acceptance of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
nerve cells.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreas stem and progenitor cells 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, which is often called "juvenile
diabetes" and most commonly diagnosed in childhood; and 30,000 new patients are
diagnosed with the disease every year. It is a costly, serious, lifelong
condition, requiring constant attention and insulin injections every day for
survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreas stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. We
believe that stem cells produce the regeneration, in which case this animal
model may be useful for identifying specific markers on the cell surface unique
to the pancreas stem cells. We believe this may lead to the development of
cell-based treatments for Type 1 diabetes and that portion of Type 2 diabetes
characterized by defective secretion of insulin.
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel markers on the cell surface identified by Dr. Sarvetnick and her research
team as being unique to the pancreas islet stem cell for which we have now filed
a US patent application. In collaboration with Dr. Sarvetnick, we continue to
advance the discovery program directed at the identification, isolation and
culturing of pancreas stem and progenitor cells utilizing this technology.
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
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Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments.
In 1998, our researchers continued to advance methods for establishing
enriched cell populations suitable for transplantation in preclinical animal
models. We are focused on discovering and utilizing our proprietary methods to
identify, isolate and culture liver stem and progenitor cells and to evaluate
these cells in preclinical animal models.
In 1999, our researchers devised a culture assay that we will use in our
efforts to identify liver stem and progenitor cells. In addition to supporting
the growth of an early human liver bipotent progenitor cell, it is also possible
to infect this culture with human hepatitis virus, providing a valuable system
for study of the virus. This technology could also provide a unique IN VITRO
model for the testing of drugs that act on, or are metabolized by, human liver
cells.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999, AstraZeneca terminated the collaboration.
Consequently, in July 1999, we announced plans for the restructuring of our
research operations to abandon all further ECT research and to concentrate our
resources on the research and development of our proprietary platform of stem
cell technology. We reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
Sunnyvale, California. We are actively seeking to sublease, assign or sell our
interest in our former corporate headquarters building and our pilot
manufacturing and cell processing facility in Rhode Island.
In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. We retained certain
non-exclusive rights to use the ECT in combination with our proprietary stem
cell technology, and in the field of vaccines for prevention and treatment of
infectious diseases.
In a related development, by mutual consent we and the Advanced Technology
Program of the National Institute of Standards and Technology terminated two
grants previously awarded to us for our encapsulated cell therapy and stem
cell-related research. The encapsulated cell therapy grant was obviated by the
sale of the technology to Neurotech. The funding agency has invited us to
resubmit a proposal consistent with the new directions we are taking in our
research and development of our platform of stem cell technologies.
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SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation, in exchange for 1,320,691 shares of
our common stock and options and warrants for the purchase of 259,296 common
shares. Simultaneously with the acquisition, its President, Richard M. Rose,
M.D., became our President, Chief Executive Officer and a director, and Irving
L. Weissman, M.D., a founder of the California corporation, became a member of
our board of directors. We, as the sole stockholder of our subsidiary, voted on
February 23, 2000, to amend its Certificate of Incorporation to change its name
to StemCells California, Inc.
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics SA, a Swiss biotherapeutics company, to pursue extensions of
our former technology of ECT for certain applications outside the central
nervous system. Modex, headquartered in Lausanne, Switzerland, was formed to
integrate technologies developed by us and by several other institutions to
develop products to treat diseases such as diabetes, obesity and anemia. After
our disposition of the encapsulated cell technology in December 1999, we no
longer had common research or development interests with Modex, but we held
approximate 17% of its stock. Modex completed an initial public offering on
June 23, 2000, in the course of which we realized a gain of approximately
$1.4 million from the sale of certain shares. 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 Neue Market exchange
on October 31, 2000, was 329.5 Swiss Francs, or approximately $183, per share.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
We have entered into a number of license agreements with commercial and
non-profit institutions, as well as a number of research-plus-license agreements
with academic organizations. The research agreements provide that we will fund
certain research costs, and in return, will have a license or an option for a
license to the resulting inventions. Under the license agreements, we will
typically be subject to obligations of due diligence and the requirement to pay
royalties on products that use patented technology licensed under such
agreements.
ASTRAZENECA PLC
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. Under the agreement, we conducted
research and development and received approximately $42 million, including
research and development funding, through June 1999 when, as noted above (SEE
WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM),
AstraZeneca exercised its right to terminate the agreement. (SEE ALSO LIQUIDITY
AND CAPITAL RESOURCES UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND NOTE 17--"RESEARCH AGREEMENTS" TO THE
ACCOMPANYING FINANCIAL STATEMENTS.)
GENENTECH, INC.
In November 1996, we signed collaborative development and licensing
agreements with Genentech relating to the development of products using the
Company's ECT technology to deliver certain of Genentech's proprietary growth
factors to treat Parkinson's disease, Huntington's disease and amyotrophic
lateral sclerosis.
Under the terms of the agreement for Parkinson's disease, Genentech had the
right, at its discretion, to terminate the program at specified milestones. On
May 21, 1998, Genentech exercised its right to
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terminate the Parkinson's collaboration. Pursuant to the terms of the agreement,
Genentech demanded that we redeem certain shares of the Company's redeemable
common stock held by them for approximately $3.1 million, at a price of $10.01
per share. This amount, per the agreement, was equal to the funds invested by
Genentech to acquire such stock less the amount we expended on the terminated
program. In March 2000, we announced a settlement of this claim at no cost to
us, and also terminated the Huntington's disease and ALS agreements. (FOR
FURTHER DETAILS AND INFORMATION REGARDING THIS SETTLEMENT, SEE LIQUIDITY AND
CAPITAL RESOURCES UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.)
STATE OF RHODE ISLAND
In 1989 we entered into an agreement with the Rhode Island Partnership for
Science and Technology, or RIPSAT, for reimbursement of $1,172,000 for certain
research activities we funded at Brown University. Under the terms of this grant
we were obligated to pay royalties ranging from three to five percent of
revenues from products developed under the agreement, to a maximum of
$1,758,000. In July 1999, when we announced our plans to terminate ECT research,
wind down operations in Rhode Island and relocate research activities and
corporate headquarters to Sunnyvale, California, RIPSAT alleged that we were in
default under this funding agreement. While we believed that we were not in
default, in March 2000, we entered into a settlement of the claim. (FOR FURTHER
DETAILS AND INFORMATION REGARDING THIS SETTLEMENT, SEE LIQUIDITY AND CAPITAL
RESOURCES UNDER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.)
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in a License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation, subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired. We have developed additional intellectual
property relating to the subject matter of the license. We entered into an
additional license agreement with NeuroSpheres as of October 31, 2000, under
which we obtained an exclusive license in the field of non-transplant uses, such
as drug discovery and drug testing, so that together the licenses are exclusive
for all uses of the technology. We will make up-front payments to NeuroSpheres
of 65,000 shares of our common stock and $50,000, and additional cash payments
when milestones are achieved in the non-transplant field, or in any products
employing NeuroSpheres patents for generating cells of the blood and immune
system from neural stem cells. Milestone payments would total $500,000 for each
product that is approved for market. Our agreements with NeuroSpheres will
terminate at the expiration of all patents licensed to us, but can terminate
earlier if we breach without curing our obligations under the agreement or if we
declare bankruptcy. We would have a security interest in the licensed technology
in the event that NeuroSpheres declares bankruptcy.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene. Each agreement with Signal will terminate at
the expiration of all patents licensed under it, but the licensing party can
terminate earlier if the other party breaches its obligations under the
agreement or declares bankruptcy. Also, the party receiving the license can
terminate the agreement at any time upon notice to the other party. Under these
agreements, we must reimburse Signal for payments it must make to the University
of California based on products we develop and for 50% of certain other payments
Signal must make.
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SPONSORED RESEARCH AGREEMENTS
When we decided to abandon further research and development of our ECT
technology in July 1999, we terminated our academic collaborations with Brown
University and Dr. Patrick Aebischer at the Centre Hospitalier Universitaire
Vaudois in Switzerland. Research and development expenses paid in connection
with these collaborations aggregated approximately $156,600, $701,000 and
$1,326,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
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. We paid Scripps and Oregon respectively
approximately $77,000 and $28,000 in 1997, $307,000 and $251,000 in 1998, and
$309,000 and $172,000 in 1999 under these agreements.
Our research agreement with Scripps expires on November 14, 2000 and we are
negotiating with Scripps to extend the term of this agreement or to enter into a
new agreement. As of the date of this report, we have not yet completed our
negotiations with Scripps and we cannot give any assurance that our negotiations
will be successful. If we are unable to extend the term of this agreement, we
will have to find a replacement to perform this research or we will have to
perform this research ourselves. In either case, we may experience delay and
additional expense in connection with this research effort. Our license
agreements with Scripps will terminate upon expiration, revocation or
invalidation of the patents licensed to us, unless governmental regulations
require a shorter term. These license agreements also will terminate earlier if
we breach without curing our obligations under the agreement or if we declare
bankruptcy, and we can terminate the license agreements at any time upon notice.
Upon the initiation of the Phase II trial for our first product using Scripps
licensed technology, we must pay Scripps $50,000 and upon completion of that
Phase II trial we must pay Scripps an additional $125,000. Upon approval of the
first product for sale in the market, we must pay Scripps $250,000.
Our license agreements with the California Institute of Technology will
expire upon expiration, revocation, invalidation or abandonment of the patents
licensed to us. We can terminate any of these license agreements by giving 30
days' notice to the California Institute of Technology. Either party can
terminate these license agreements upon a material breach by the other party. We
paid $10,000 to the California Institute of Technology upon execution of the
license agreements, and we must pay an additional $10,000 upon the issuance of
the patent licensed to us under the relevant agreement. We also will pay $5,000
on the anniversary of the issuance of the patent licensed to us under the
relevant agreement. These amounts are creditable against royalties we must pay
under the license agreements. The maximum royalties that we will have to pay to
the California Institute of Technology will be $2 million per year, with an
overall maximum of $15 million. Once we pay the $15 million maximum royalty, the
licenses will become fully paid and irrevocable.
MANUFACTURING
The keys to successful commercialization of brain stem and progenitor cells
are efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier. The carrier may also be used to
improve the stability and acceptance of the stem cells or their progeny. Because
of the early stage of our stem and progenitor cell programs, all of the issues
that will affect manufacture of stem and progenitor cell products are not yet
clear.
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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 thirteen patent
applications are pending, one of which has been allowed.
We own or have filed patent applications which have been published for the
following U.S. patents: Patent Number 5,968,829 (Human CNS neural stem cells);
Patent Number 6,103,530 (Human CNS neural stem cells--culture media);
Application Number WO 99/11758 (Cultures of human CNS neural stem cells); and
Application Number WO 00/36091 (An animal model for identifying a common stem/
progenitor to liver cells and pancreatic cells).
We have licensed the following patents or pending patent applications from
Neurospheres Holdings Ltd.: Patent Number 5,851,832 (In vitro proliferation);
Patent Number 5,750,376 (In vitro genetic modification); Patent
Number 5,981,165 (In vitro production of dopaminergic cells from mammalian
central nervous system multipotent stem cell compositions); Patent Number
6,093,531 (Generation of hematopoietic cells from multipotent neural stem
cells); Application Number WO 93/01275 (Mammalian central nervous system
multipotent stem cell compositions); Application Number WO 94/09119
(Remyelination using mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/10292 (Biological factors useful in
differentiating mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/16718 (Genetically engineered mammalian
central nervous system multipotent stem cell compositions); Application Number
WO 96/15224 (Differentiation of mammalian central nervous system multipotent
stem cell compositions); and Application Number WO 96/15226 (In vitro production
of dopaminergic cells from mammalian central nervous system multipotent stem
cell composition).
We have licensed the following patents or pending patent applications from
the University of California, San Diego: Patent Number 5,776,948 (Method of
production of neuroblasts); Patent Number 6,013,521 (Method of production of
neuroblasts); Patent Number 6,020,197 (Method of production of neuroblasts); and
Application Number WO 94/16059 (Method of production of neuroblasts).
We have licensed the following patents or pending patent applications from
the California Institute of Technology: Patent Number 5,629,159 (Immortalization
and disimmortalization of cells); Application Number WO 96/40877
(Immortalization and disimmortalization of cells); Patent Number 5,935,811
(Neuron restrictive silencer factor proteins); Application Number WO 96/27665
(Neuron restrictive
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silencer factor proteins); Patent Number 5,589,376 (Mammalian neural crest stem
cells); Patent Number 5,824,489 (Methods for isolating mammalian multipotent
neural crest stem cells); Application Number WO 94/02593 (Mammalian neural crest
stem cells); Patent Number 5,654,183 (Genetically engineered mammalian neural
crest stem cells); Patent Number 5,928,947 (Mammalian multipotent neural crest
stem cells); Patent Number 5,693,482 (In vitro neural crest stem cell assay);
Patent Number 6,001,654 (Methods for differentiating neural stem cells to
neurons or smooth muscle cells (TGFb)); Application Number WO 98/48001 (Methods
for differentiating neural stem cells to neurons or smooth muscle cells (TGFb));
Patent Number 5,672,499 (Methods for immortalizing multipotent neural crest stem
cells); Patent Number 5,849,553 (Immortalizing and disimmortalizing multipotent
neural crest stem cells); and Patent Number 6,033,906 (Differentiating mammalian
neural stem cells to glial cells using neuregulins).
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University, to certain patents and
know-how regarding present and certain future developments in CNS and pancreas
stem cells.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative and liver diseases, diabetes
and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products, when
successfully developed, will compete with these products principally on the
basis of improved and extended efficacy and safety and their overall economic
benefit to the health care system.
The market for therapeutic products that address degenerative diseases is
large, and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies. Smaller companies may
also be significant competitors, particularly through collaborative arrangements
with large pharmaceutical or biotechnology companies. Many of these competitors
have significant products approved or in development that could be competitive
with our potential products.
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect
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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 approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a
number of years and involves significant uncertainty combined with the
expenditure of substantial resources. In addition, the federal, state, and other
jurisdictions have restrictions on the use of fetal tissue.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
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STEPS CONSIDERATIONS
1. Preclinical laboratory and animal tests Preclinical tests include laboratory
evaluation of the product and animal studies
in specific disease models to assess the
potential safety and efficacy of the product
and our formulation as well as the quality
and consistency of the manufacturing process.
2. Submission to the FDA of an application The results of the preclinical tests are
for an Investigational New Drug Exemption, or submitted to the FDA as part of an IND, and
IND, which must become effective before U.S. the IND becomes effective 30 days following
human clinical trials may commence its receipt by the FDA, as long as there are
no questions, requests for delay or
objections from the FDA.
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3. Adequate and well-controlled human Clinical trials involve the evaluation of the
clinical trials to establish the safety and product in healthy volunteers or, as may be
efficacy of the product the case with our potential products, in a
small number of patients under the
supervision of a qualified physician.
Clinical trials are conducted in accordance
with protocols that detail the objectives of
the study, the parameters to be used to
monitor safety and the efficacy criteria to
be evaluated. Any product administered in a
U.S. clinical trial must be manufactured in
accordance with clinical Good Manufacturing
Practices, or cGMP, determined by the FDA.
Each protocol is submitted to the FDA as part
of the IND. The protocol for each clinical
study must be approved by an independent
Institutional Review Board, or IRB, at the
institution at which the study is conducted
and the informed consent of all participants
must be obtained. The IRB will consider,
among other things, the existing information
on the product, ethical factors, the safety
of human subjects, the potential benefits of
the therapy and the possible liability of the
institution.
Clinical development is traditionally
conducted in three sequential phases, which
may overlap:
- In Phase I, products are typically
introduced into healthy human subjects or
into selected patient populations to test for
adverse reactions, dosage tolerance,
absorption and distribution, metabolism,
excretion and clinical pharmacology.
- Phase II involves studies in a limited
patient population to (i) determine the
efficacy of the product for specific targeted
indications and populations, (ii) determine
optimal dosage and dosage tolerance and (iii)
identify possible adverse effects and safety
risks. When a dose is chosen and a candidate
product is found to be effective and to have
an acceptable safety profile in Phase II
evaluations, Phase III trials begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical efficacy
and to test further for safety within an
expanded patient population, generally at
multiple study sites.
The FDA continually reviews the clinical
trial plans and results and may suggest
changes or may require discontinuance of the
trials at any time if significant safety
issues arise.
4. Submission to the FDA of marketing The results of the preclinical studies and
authorization applications clinical studies are submitted to the FDA in
the form of marketing approval authorization
applications.
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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.
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After FDA approval for the initial indications and requisite approval of the
manufacturing facility, further clinical trials may be required to gain approval
for the use of the product for additional indications. The FDA may also require
unusual or restrictive post-marketing testing and surveillance to monitor for
adverse effects, which could involve significant expense, or may elect to grant
only conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirement. Even after product licensure approval, the
manufacturer must comply with cGMP on a continuing basis, and what constitutes
cGMP may change as the state of the art of manufacturing changes. Domestic
manufacturing facilities are subject to regular FDA inspections for cGMP
compliance which are normally held at least every two years. Foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. Domestic manufacturing facilities may also be subject to inspection by
foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. We
may apply for orphan drug status for certain of our therapies.
Under the Orphan Drug Act, a manufacturer of a designated orphan product can
seek tax benefits, and the holder of the first FDA approval of a designated
orphan product will be granted a seven-year period of marketing exclusivity in
the United States for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of products from being approved for the same use including,
in some cases, slight variations on the originally designated orphan product.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which contain such research. Certain of our collaborators have stock
options or other equity interests in us that could subject such collaborators
and us to the proposed regulations.
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which relates to the use of human cells. We
cannot now determine the effects of that approach or what regulatory actions
might be taken from it. Restrictions exist on the testing or use of cells,
whether human or non-human.
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OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations which govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
EMPLOYEES
As of 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 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
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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.
ITEM 2. PROPERTIES
The Company's current research laboratories and administrative offices are
located in a leased 7,950 square-foot multipurpose building housing wet labs,
specialty research areas and administrative offices located in Sunnyvale,
California. The facilities are leased pursuant to lease agreements expiring
August 31, 2001, and we have certain renewal options. Our current facilities are
expected to be sufficient to accommodate our needs at least through the end of
2000.
We continue to be contractually obligated with respect to two facilities in
Lincoln, Rhode Island obtained in connection with our former encapsulated cell
technology. We leased our former research laboratory and corporate headquarters
building which contains 65,000 square feet of wet labs, specialty research areas
and administrative offices on a fifteen-year lease agreement which expires
October 2012. We also own a 21,000 square-foot pilot manufacturing facility and
a 3,000 square-foot cell processing facility financed by bonds issued by the
Rhode Island Industrial Facilities Corporation. We are actively seeking to
sublease, assign or sell our interests in these properties.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of CytoTherapeutics is traded on the National Market System
of NASDAQ under the Symbol STEM (formerly CTII). The quarterly ranges of high
and low sales prices since January 1, 1997 are shown below:
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2000 HIGH LOW
---- ------------- ------------
<S> <C> <C>
First Quarter (through March 20, 2000)...................... $20 $1 3/8
1999 HIGH LOW
------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 1 5/8 $1
Third Quarter............................................... $ 2 3/8 $ 11/16
Second Quarter.............................................. $ 1 3/8 $ 17/32
First Quarter............................................... $ 1 25/32 $1 5/32
1998 HIGH LOW
------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 2 17/32 $ 26/32
Third Quarter............................................... $ 1 19/32 $ 29/32
Second Quarter.............................................. $ 3 7/16 $1 1/16
First Quarter............................................... $ 4 3/8 $2 1/2
1997 HIGH LOW
------------------------------------------------------------ ------------- ------------
Fourth Quarter.............................................. $ 7 5/8 $3 7/16
Third Quarter............................................... $ 6 1/4 $4 5/8
Second Quarter.............................................. $ 8 3/4 $4 3/4
First Quarter............................................... $11 3/8 $7 1/2
</TABLE>
No cash dividends have been declared on the Common Stock since the Company's
inception.
As of August 15, 2000, there were approximately 249 holders of record of the
Common Stock.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue from collaborative agreements....... $ 5,022 $ 8,803 $ 10,617 $ 7,104 $11,761
Research and development expenses........... 9,991 17,659 18,604 17,130 14,730
Acquired research and development........... 8,344
ECT wind-down expenses...................... 6,048
Net loss.................................... (15,709) (12,628) (18,114) (13,759) (8,891)
Basic and diluted net loss per share........ (0.84) (0.69) (1.08) (0.89) (0.69)
Shares used in computing basic and diluted
net loss per share........................ 18,706 18,291 16,704 15,430 12,799
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and marketable
securities................................ $ 4,760 $ 17,386 $ 29,050 $ 42,607 $44,192
Total assets................................ 15,781 32,866 44,301 58,397 56,808
Long-term debt, including capitalized
leases.................................... 2,937 3,762 4,108 8,223 5,441
Redeemable common stock..................... 5,249 5,249 5,583 8,159
Stockholders' equity........................ 3,506 17,897 28,900 34,747 45,391
</TABLE>
22
<PAGE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations for the years ended December 31, 1999, 1998, and 1997 should be read
in conjunction with our consolidated financial statements and their related
footnotes.
The statements contained in this report, other than statements of historical
fact, constitute forward-looking statements. Such statements include, without
limitation, all statements as to expectation or belief and statements as to the
Company's future results of operations, the progress of the Company's research
and product development programs, the need for, and timing of, additional
capital and capital expenditures, partnering prospects, the need for additional
intellectual property rights, effects of regulations, the need for additional
facilities and potential market opportunities. The Company's actual results may
vary materially from those contained in such forward-looking statements because
of risks to which the Company is subject, such as failure to obtain a corporate
partner or partners to support the development of the Company's stem cell
programs, the Company's ability to sell, assign or sublease its interest in its
facilities related to its encapsulated cell technology program, risks of delays
in research, development and clinical testing programs, obsolescence of the
Company's technology, lack of available funding, competition from third parties,
intellectual property rights of third parties, failure of the Company's
collaborators to perform, regulatory constraints, litigation and other risks to
which the Company is subject. See "Cautionary Factors Relevant to
Forward-Looking-Information" filed herewith as Exhibit 99 and incorporated
herein by reference.
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 the 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, 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 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
23
<PAGE>
research collaborations, in addition to the winding-down of terminated research
and development programs referred to above.
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.
Revenues were earned primarily from a Development, Marketing and License
Agreement with AstraZeneca Group plc, which we signed in March 1995. The
decrease in revenues from 1998 to 1999 resulted primarily from the June 1999
termination of the AstraZeneca Agreement. 1997 revenues included a $3,000,000
milestone payment from AstraZeneca related to the Phase II clinical trials for
an ECT product.
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 the ECT, precipitated by termination of the AstraZeneca
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 our platform of stem cell
technologies, which encompasses the technology acquired upon the acquisition of
StemCells California, Inc. and related technology we have developed or licensed.
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. The
1999 General and Administrative expenses were positively impacted by the
reduction in facility costs that were included in the wind-down ($239,000),
reduction in amortization of patents and intangible assets of approximately
$338,000, as well as reduced activities and related personnel costs estimated at
approximately $500,000 that were not incurred. This was due to the wind-down of
our ECT programs and relocation of our headquarters in October 1999. 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 and relocation 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 other Rhode Island operations and the transfer of our corporate headquarters
to Sunnyvale, California.
They include accruals of approximately $1,554,000 for employee severance
costs, $1,858,000 in losses and reserves for the write-down of related patents
and fixed assets, $1,172,000 for our estimate of the costs of settlement of a
1989 funding agreement with the Rhode Island Partnership for Science and
Technology, $702,000 of estimated additional carrying costs through an expected
June 30, 2000 disposition of the Rhode Island facilities, and other related
expenses totaling $762,000.
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.
24
<PAGE>
In October 1997, we recognized a gain in the amount of $3,387,000 related to
the sale of 50 percent of the Company's interest in Modex Therapeutics, Ltd.
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, $0.69 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 AstraZeneca agreement, which
was terminated in June 1999, as well as expenses related to the wind-down of our
ECT research and our other Rhode Island operations, the transfer of our
corporate headquarters to Sunnyvale, California and an accrual of approximately
$1,172,000 for our estimate of the costs of settlement of the 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 the $3,387,000 gain on a
partial sale of the Company's interest in Modex in 1997.
The 1999 decrease in patents of $3,229,932 from 1998 was primarily due to
management's decision to wind down the ECT program and dispose of the related
intellectual property. During the fourth quarter of 1999 we sold the patents
related to our encapsulated cell technology to Neurotech for $3,000,000.
Accrued expenses increased by $1,584,949, primarily due to the accrual of
approximately $1,172,000 for our estimate of the costs of settlement of a 1989
funding agreement with the Rhode Island Partnership for Science and Technology
and $463,000 for the estimated lease payments and operating costs of the Rhode
Island facilities through an expected disposal date of June 30, 2000.
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 $4,760,000 at
December 31, 1999. Cash and 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 technologies.
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 we incurred 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
25
<PAGE>
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 their 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" to the Accompanying
Consolidated Financial Statements.)
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 in 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 believed we were not in
default under the Funding Agreement, we deemed it best to resolve the dispute
without litigation, and on March 3, 2000 entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority, or
IRBA, and the Rhode Island Industrial Facilities Corporation, or RIIFC. We
agreed to pay RIPSAT $1,172,000 in full satisfaction of all of our obligations
to them under the Funding Agreement. At the same time, IRBA agreed to return to
us the full amount of our debt service reserve, comprising approximately
$610,000 of principal and interest relating to the bonds we had with IRBA and
RIIFC. The $610,000 debt service reserve was transferred directly to RIPSAT,
leaving the remainder of approximately $562,000 to be paid by us. We made this
payment in March of 2000.
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of 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 certain shares of our
redeemable common stock held by Genentech for approximately $3,100,000.
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
26
<PAGE>
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
the Company's 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 bank to retire this loan facility rather than seek
a waiver by the bank 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 a warrant for 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 original investment 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 expires 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 in connection with the
sale of common stock to the Fund, to receive additional shares of common stock
on eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of common stock the Fund continues to
hold on each date and the market price of our common stock over a period prior
to each date. We will have the right, under certain circumstances, to cap the
number of additional shares by purchasing part of the entitlement from the Fund.
The Fund also received a warrant to purchase up to 101,587 shares of common
stock at $4.725 per share. This warrant is callable by us at $7.875 per
underlying share.
In addition, the Fund has the option for twelve months to purchase up to
$3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per share.
The Fund paid $750,000 of the purchase price in connection with the
27
<PAGE>
closing on August 30, 2000, and 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 adverse effect
on the Company's 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 or facilities, 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 the Company.
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.
YEAR 2000
The Company tested its material software applications to determine whether
each program was prepared to accommodate date information for the year 2000 and
beyond, and found them to be year 2000 compliant. The Company also tested the
status of its facilities systems such as phones, voice mail, heating/ air
conditioning, electricity and security systems and its laboratory and
manufacturing equipment, and polled its major suppliers and vendors, to
determine if they are year 2000 compliant, again without identifying any
problems. Company has not to date encountered any significant year 2000
problems, but is continuing to monitor for potential issues. The costs of
testing and monitoring have been and are expected to continue to be immaterial
to the Company's operating results, but there can be no assurance that no
problem will reveal itself in the future, or that if a problem does occur it
will not have an adverse effect on the Company's operations or financial
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of the year ended December 31, 1999, the Company did not maintain any
investments that were exposed to market risk from changes in interest rates or
the fair market value of such investments. Interest
28
<PAGE>
rate risk with respect to the Company's short and long-term debt is considered
to be immaterial. As of the year ended December 31, 1999, the Company did not
maintain any hedge positions.
Our investment in 126,193 shares of Modex Therapeutics Ltd. Stock was not
exposed to market risk as of December 31, 1999, however Modex shares were
offered in an IPO on the Swiss Neue Market on June 23, 2000 at a price of 168.00
Swiss francs. At June 30, 2000 our shares were valued at $19,220,165, based on
the per share price of $152.31 which we converted from the market price of
247.50 Swiss francs on June 30, 2000. The market price of the Modex stock on
October 31, 2000 was 329.50 Swiss francs, which converts to $183.28 using
exchange rates on that date, which represents an estimated fair market value of
$23,128,598 for our holdings. Our value in this investment is subject to both
equity price risk and foreign currency exchange risk. From the date of the
Modex IPO to the date hereof, the Modex closing share price has fluctuated from
a low of 200.00 Swiss francs on June 23, 2000 to a high of 390.00 Swiss francs
on October 6, 2000. If we were to seek to liquidate all or part of our
investment in Modex, our proceeds would depend on the share price and foreign
currency exchange rates at the time of conversion. Additionally, if we sell a
sizable portion of our holdings, we may have to sell these shares at a discount
to market price. We are restricted from any sale of our shares in Modex until
December 23, 2000.
The company's sole market risk sensitive instrument is:
<TABLE>
<CAPTION>
MARKET VALUE EXPECTED
ASSOCIATED AT JUNE 30, FUTURE
NO. OF SHARES DESCRIPTION RISKS 2000 CASH FLOWS
<S> <C> <C> <C> <C>
123,193 Modex Equity/Foreign $19,220,165 (1)
Therapeutics Currency
Translation
</TABLE>
------------------------
(1) Although the company has not formally adopted a liquidation plan for this
investment, liquidation may be necessary to meet operating cash flow
requirements. Under the agreement with Modex, the company is restricted from
selling its holding through December 23, 2000.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CytoTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of
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. 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
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
30
<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 --
Debt service fund......................................... 609,905 --
Other current assets...................................... 558,674 841,674
------------- -------------
Total current assets........................................ 8,970,855 18,434,010
Property held for sale...................................... 3,203,491 --
Property, plant and equipment, net.......................... 1,747,885 8,356,009
Other assets, net........................................... 1,858,768 6,075,663
------------- -------------
Total assets................................................ $ 15,780,999 $ 32,865,682
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 631,315 $ 710,622
Accrued expenses.......................................... 2,605,068 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................................... 3,560,550 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 total 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.................. $ 15,780,999 $ 32,865,682
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<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.
32
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
<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)
<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
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<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
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES
------ ----------- ---------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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............ -- -- -- -- -- -- 3,679
Net loss........................... -- -- -- -- -- (12,627,830) --
Comprehensive loss.................
-------- ----------- ---------- -------- ------------ ------------- --------
Balances, December 31, 1998........ 524,337 $ 5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084) $ (5,198)
======== =========== ========== ======== ============ ============= ========
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
<S> <C> <C>
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
Net loss........................... -- (12,627,830)
------------
Comprehensive loss................. (12,624,151)
----------- ------------
Balances, December 31, 1998........ $(1,472,919) $ 17,897,408
=========== ============
</TABLE>
34
<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
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES
------ ----------- ---------- -------- ------------ ------------- -------------
<S> <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
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............ -- -- -- -- -- -- 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) $ --
======== =========== ========== ======== ============ ============= ========
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
<S> <C> <C>
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
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.
35
<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 for
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
Fair market adjustment for property held for sale......... 300,000 -- --
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.................................... 283,000 (265,665) (232,604)
Accounts payable and accrued expenses................... 1,344,142 (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....................... (11,913,282) (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................................. (558,311) (400,219) (1,599,418)
Disposal of other assets.................................... 440,486 -- --
Acquisition of StemCells assets............................. -- -- (640,490)
Advance to Cognetix......................................... -- -- (250,000)
Repayment from Cognetix..................................... -- -- 250,000
------------ ------------ ------------
Net cash provided by investing activities................... 9,962,013 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>
Non-cash transaction:
In December 1999, the Company sold intellectual property related to its
encapsulated cell technology. In association with the transaction, the Company
recorded a receivable of $3,000,000 and reduced intangible assets.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
<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 HELD FOR SALE
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, CA, certain
property considered by management to no longer be necessary has been made
available for sale or lease. The aggregate carrying value of such property has
been reviewed by management, subject to appraisal and adjusted downward to
estimated market value.
PROPERTY, PLANT AND EQUIPMENT
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>
Buildings and improvements.................................. 3-15 years
Machinery and equipment..................................... 3-10 years
Furniture and fixtures...................................... 3-10 years
</TABLE>
37
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. The loss on
this transaction and expenses related to the write-down of ECT are included in
wind-down expenses on the Company's Consolidated Statement of Operations.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted to non-employees, the
Company accounts for these grants in accordance with FAS No. 123--ACCOUNTING FOR
STOCK-BASED COMPENSATION AND EITF96-18--ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES, and accordingly, recognizes as consulting expenses
the estimated fair value of such options as calculated using the Black-Scholes
valuation model. Fair value is determined using methodologies allowable by FAS
No. 123. The cost is amortized over the vesting period of each option or the
recipient's contractual arrangement, if shorter.
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
rates under 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 directly related to the particular
research plan or the achievement of certain
38
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
development milestones as defined within the terms of the collaborative
agreement. Payments received in advance of research performed are designated as
deferred revenue. Recorded revenues are not refundable in the event research
efforts are considered unsuccessful.
RESEARCH AND DEVELOPMENT COSTS
The company expenses all research and development costs as incurred.
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.
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 recognizing revenues received from
collaborative and similar agreements. The Company does not expect this guidance
to result in significant changes to its existing revenue recognition policy,
subject to the specific terms of each individual collaborative agreement.
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 (based on the face value of the
preferred shares). The conversion price may be below the trading market price of
the stock at the time of conversion. The Company has valued the beneficial
conversion feature using the intrinsic value method 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 will be treated as a deemed
dividend as of the commitment date. The holders of the preferred stock have
liquidation rights equal to their original investment plus accrued but unpaid
dividends. 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 (based on the face value of the preferred shares),
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.
39
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4.WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999 AstraZeneca terminated the collaboration, as allowed under the
terms of the original collaborative agreement signed in 1995.
As a result of termination, management determined in July 1999 to
restructure its research operations to abandon all further encapsulated cell
technology research and concentrate its resources on the research and
development of its proprietary platform of stem cell technologies.
The Company wound down its research and manufacturing operations in Lincoln,
Rhode Island, and relocated its remaining research and development activities,
and its corporate headquarters, to the facilities of its wholly owned
subsidiary, StemCells California, Inc., in Sunnyvale, California, in
October 1999. The Company terminated legal, professional and consulting
contractual arrangements in support of ECT research. The Company had used these
legal, professional and consulting contractual arrangements to meet regulatory
requirements in support of its research work, to support contractual
arrangements with clinical sites, to provide assistance at clinical sites in
administering therapy and documenting activities, and to assist in compliance
with FDA and other regulations regarding its clinical trials. ECT related patent
law work was also terminated. The Company also engaged professional consultants
in connection with the determination to exit its ECT activities and restructure
is operations, which concluded with the exit from ECT activities and relocation
of its corporate headquarters to California. The Company reduced its workforce
by approximately 58 employees who had been focused on ECT programs and 10
administrative employees. As a result, the Company sold excess furniture and
equipment in December 1999 and is seeking to sublease the science and
administrative facility and to sell the pilot manufacturing facility.
Wind-down expenses totaled approximately $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, and the transfer of the Company's corporate headquarters to
Sunnyvale, California.
40
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4.WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of these expenses, including the amounts and periods of
recognition, are as follows:
<TABLE>
<CAPTION>
TOTAL
THIRD QUARTER FOURTH QUARTER WIND-DOWN
1999 1999 EXPENSE
------------- -------------- ----------
<S> <C> <C> <C>
Employee severance costs............................... $1,554,000 $ -- $1,554,000
Impairment losses(1):
Fixed assets......................................... 800,000 -- 800,000
ECT patents.......................................... 260,000 -- 260,000
---------- ---------- ----------
1,060,000 -- 1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters............................... 702,000 -- 702,000
Pilot manufacturing plant............................ 562,000 -- 562,000
---------- ---------- ----------
1,264,000 -- 1,264,000
Employee outplacement.................................. 200,000 -- 200,000
RIPSAT settlement(3)................................... -- 1,172,000 1,172,000
Loss on sale of assets(4):
Fixed assets......................................... -- 318,000 318,000
ECT patents.......................................... -- 180,000 180,000
---------- ---------- ----------
-- 498,000 498,000
Write-down of pilot plant(5)........................... -- 300,000 300,000
---------- ---------- ----------
$4,078,000 $1,970,000 $6,048,000
========== ========== ==========
</TABLE>
------------------------
(1) Management's estimate of the fixed asset impairment was derived from
communications with an outside auction house. The patent impairment loss was
based on preliminary negotiations with parties interested in acquiring the
patents.
(2) Facilities carrying costs include the operating lease payments, utilities,
property taxes, insurance, maintenance, interest and other non-employee
related expenses necessary to maintaining these facilities through the
expected date of disposition (June 30, 2000).
(3) The Company originally received funding from the Rhode Island Partnership
for Science and Technology (RIPSAT) for purposes of conducting ECT
activities conditioned upon maintaining the operating within the state.
RIPSAT claimed that the Company's decision to exit ECT activities and close
the Rhode Island operation was in violation of the funding arrangement and
that the Company was obligated to return a portion of the funding proceeds.
Although the Company disputed these claims, during the fourth quarter of
1999, management determined it was in the best interest of the company to
settle the issue.
(4) The Company held an auction to sell all ECT fixed assets. Proceeds from that
sale resulted in a loss, which was related to machinery and equipment
($292,000), and furniture and fixtures ($26,000).
41
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4.WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
(5) The write-down of the pilot plant was based on an independent property
appraisal, which was not available during the third quarter, when the
Company reached a decision to exit ECT activities and relocate the corporate
headquarters.
At December 31, 1999, the Company's $1.6 million wind-down reserve included
approximately $1.2 million for the RIPSAT settlement and approximately
$0.4 million for Rhode Island facility costs.
Property held for sale at December 31, 1999, consisted of $3.2 million
relating to the Company's pilot plant facility located in Lincoln, Rhode Island.
The Company suspended depreciation of these assets totalling approximately
$140,000 for the quarter ended December 31, 1999. The balance reflected the
$300,000 write-down included as part of the additional wind-down expenses
recognized during the fourth quarter, in accordance with Financial Accounting
Standards Board Statement 121, which requires that long-lived assets be reviewed
for impairment whenever events or circumstances indicate that the carrying value
of the asset may not be recoverable. There were no such assets at December 31,
1998.
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 California, Inc. for a purchase price
totaling approximately $9,475,000, consisting of 1,320,691 shares of the
Company's common stock, valued at $6,600,000 and options and warrants for the
purchase of 259,296 common shares at nominal consideration, valued at
$1,300,000, the assumption of certain liabilities of $934,000 and transaction
costs of $641,000. Options and warrants were valued utilizing the intrinsic
method, and the resultant value approximated the value determined using the
Black-Scholes method. The purchase price was allocated, based upon an asset
valuation study using income approach methods, 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. The acquired research and
development had not reached scientific feasibility and had no alternative future
uses. As part of the acquisition of StemCells, Richard M. Rose, M.D., became
President, Chief Executive Officer and director of the Company and Dr. Irving
Weissman became a director of the Company.
Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events.
To attract and retain Drs. Rose, Weissman, Gage and Anderson, and to
expedite the progress of the Company's stem cell program, the Company awarded
these individuals options to acquire a total of approximately 1.6 million shares
of the Company's common stock, at an exercise price of $5.25 per share, the
quoted market price at the grant date. Under the original grants, approximately
100,000 of these options were exercisable immediately on the date of grant,
1,031,000 of these options would vest and become exercisable only upon the
achievement of specified milestones related to the Company's stem cell
development program and the remaining 469,000 options would vest over eight
years. The expense associated with the grants that vested immediately was
considered non-employee compensation and was
42
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. STEMCELLS CALIFORNIA, INC. (CONTINUED)
based on the fair value of the options granted. The expense was considered
immaterial. 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. The fair value was determined using the Black-Scholes method
with the following inputs: volatility .594, expected life 8 years, dividend
yield 0.0%, risk free rate 5.98%. If the milestones specified relating to the
1,031,000 option granted to non-employees, Drs. Weissman and Gage, are achieved,
at that time the company will record compensation expense for the fair market
value 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 is 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 brain 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-brain 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-brain 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 Therapeutics, Ltd. (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.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounted for this
investment under the cost method at December 31, 1999.
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.
43
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 GAINS LOSSES 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............................ $ 665,890 $5,665,077
Machinery and equipment.............................. 1,691,096 9,887,251
Furniture and fixtures............................... 219,260 869,831
---------- ----------
2,576,286 16,422,159
Less accumulated depreciation and amortization....... 828,401 8,066,150
---------- ----------
$1,747,885 $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 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. At the time of the sale, these assets had a net book
value of approximately $1,063,000 after a third quarter write-down of $800,000,
which was based on management's estimate of expected sale proceeds. The third
quarter write-down and actual fourth quarter loss were included as wind-down
expenses.
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. As a
44
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
result of the Company's decision to exit ECT and relocate to Sunnyvale, CA, this
property has been classified as held for sale at December 31, 1999.
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>
The decrease in patents from 1999 to 1998 was primarily due to management's
decision to exit encapsulated cell technology and dispose of the related
intellectual property. Management reached this decision during the third quarter
of 1999, and established a reserve that included $260,000 directly related to
the write-down of encapsulated cell technology patents. During the fourth
quarter, management established an additional reserve that included a $180,000
loss associated with the sale of encapsulated cell technology patents worth
$3,180,000.
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>
Wind-down expenses................................... $1,634,522 $ --
External services.................................... 97,439 412,253
Employee compensation................................ 306,342 262,679
Collaborative research............................... 222,140 196,505
Other................................................ 344,625 148,682
---------- ----------
$2,905,068 $1,020,119
========== ==========
</TABLE>
The reserve for wind-down expenses included approximately $1,172,000
relating to the RIPSAT settlement (Notes 4 and 11) and approximately $463,000
for the estimated six months of lease payments and operating costs for the Rhode
Island Facilities through an expected disposal date of June 30, 2000.
45
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 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 service reserve ("Reserve Funds"), approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. Such amount
has been classified as debt service funds in current assets of the consolidated
balance sheet. 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 has 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>
46
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. LEASES (CONTINUED)
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$947,000, $1,052,000 and $499,000, respectively.
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 program 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 will reclassify the amount currently recorded as Redeemable Common
Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
47
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
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>
On July 10, 1998, the Company re-priced 751,018 outstanding stock options.
No compensation expense was recorded since the re-priced options carried an
exercise price equal to the market price of the Company's common stock on the
date of the re-pricing.
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. The value of such
options utilizing the intrinsic method, which approximated the value determined
using the Black-Scholes method, was accounted for as part of the StemCells
California acquisition price. Additionally, the Company adopted the 1997
CytoTherapeutics, Inc. StemCells California Research Stock Option Plan (the
StemCells California Research Plan)
48
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
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. Under the original grants, approximately 100,000 of these options were
exercisable immediately on the date of grant, 1,031,000 of these options would
vest and become exercisable only upon achievement of specified milestones and
the remaining 469,000 options would vest over eight years. Options granted to
Dr. Rose, in his capacity as Chief Executive Officer, were valued using the
intrinsic value method, in accordance with the provisions of APB 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Options granted to non-employees Drs. Weissman,
Gage and Anderson were accounted for using the fair value method in accordance
with the provisions of Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 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
49
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. STOCKHOLDERS' EQUITY (CONTINUED)
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 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; such warrants were valued using the intrinsic
value method which approximated the value determined using the Black-Scholes
method, and were accounted for as part of the purchase price. In conjunction
with various equipment leasing agreements, the Company had outstanding warrants
to purchase 31,545 shares of common stock at prices ranging from $4.00 to $9.00
per share. The warrants expired in 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 expired 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.
50
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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, and the Company is under no obligation to
provide additional funding.
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. The
Company is under no obligation to provide additional funding under the
agreement.
In 1996, the Company signed certain collaborative development and licensing
agreements with Genentech, Inc. 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 program 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 and at that time the redeemable
common stock was reclassified to common stock. The Company is under no
obligation to provide additional funding to Genentech, Inc.
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.
51
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. RESEARCH AGREEMENTS (CONTINUED)
AstraZeneca made an initial, nonrefundable payment of $5,000,000, included in
revenue from collaborative agreements in 1995, a milestone payment of $3,000,000
in 1997 and was to remit up to an additional $13,000,000 subject to achievement
of certain development milestones. Under the agreement, the Company was
obligated to conduct certain research and development pursuant to a four-year
research plan agreed upon by the parties. Over the term of the research plan,
the Company originally expected to receive annual payments of $5 million to
$7 million from AstraZeneca, which was to approximate the research and
development costs incurred by the Company under the plan. Subject to the
successful development of such products and obtaining necessary regulatory
approvals, AstraZeneca was obligated to conduct all clinical trials of products
arising from the collaboration and to seek approval for their sale and use.
AstraZeneca had the exclusive worldwide right to market products covered by the
agreement. Until the later of either the expiration of all patents included in
the licensed technology or a specified fixed term, the Company was entitled to a
royalty on the worldwide net sales of such products in return for the marketing
license granted to AstraZeneca and the Company's obligation to manufacture and
supply products. AstraZeneca had the right to terminate the original agreement
beginning April 1, 1998. On June 24, 1999, AstraZeneca informed the Company of
the results of AstraZeneca's analysis of the double-blind, placebo-controlled
trial of the Company's encapsulated bovine cell implant for the treatment of
severe, chronic pain in cancer patients. AstraZeneca determined that, based on
criteria it established, the results from the 85-patient trial did not meet the
minimum statistical significance for efficacy established as a basis for
continuing worldwide trials for the therapy. AstraZeneca therefore indicated
that it did not intend to further develop the bovine cell-containing implant
therapy and executed its right to terminate the agreement. The Company has no
additional funding obligations with AstraZeneca.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's Encapsulated Cell Technology
program and its 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. The Company
has no other significant collaborative research funding obligations.
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.
52
<PAGE>
STEMCELLS, INC.
(FORMERLY CYTOTHERAPEUTICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. INCOME TAXES (CONTINUED)
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
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 a member 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.")
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND
CONTROL
DIRECTORS AND EXECUTIVE OFFICERS
The sections entitled "Election of Directors" and "Executive Officer" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
are hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Company's definitive
proxy statement for its 2000 Annual Meeting of Shareholders is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the Company's definitive proxy
statement for its 2000 Annual Meeting of Shareholders is hereby incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K.
(1) Financial Statement Schedules:
Schedules not included herein are omitted because they are not applicable or
the required information appears in the Financial Statements or Notes thereto.
(2) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR 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.
10.4* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.15* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.20* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.21* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
<C> <S>
10.28* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.29* 1988 Stock Option Plan.
10.30* 1992 Equity Incentive Plan.
10.31* 1992 Stock Option Plan for Non-Employee Directors.
10.32* 1992 Employee Stock Purchase Plan.
10.41**!!!! Development and Supply Agreement dated December 1993 between
Registrant and AKZO Faser AG.
10.43##** Research Agreement dated as of February 1, 1994 between
Genentech, Inc. and Registrant.
10.44##** Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.47++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.48++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.49++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
10.50++ Supplementary Agreement dated as of July 1, 1994 between
Akzo Nobel Faser AG and the Registrant.
10.51**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.52++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.53+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.54!** Research and Commercialization Agreement dated as of
September 4, 1995 among the Company, Dr. Patrick Aebischer
and Canton of Vaud, Switzerland.
10.57!! Convertible loan agreement dated as of July 10, 1996 between
the Company and Modex Therapeutiques SA.
10.58### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.59!! 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.
10.60!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.61!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.64!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.65*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.67*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.68### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.69** Amended and Restated Cross License Agreement dated as of
October 29, 1997 between Modex Therapeutiques SA and the
Registrant.
10.70### Letter Agreement dated as of September 30, 1997 between Dr.
Seth Rudnick and the Registrant.
10.71**** StemCells, Inc. 1996 Stock Option Plan.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE OR DESCRIPTION
----------- --------------------
<C> <S>
10.72**** 1997 StemCells Research Stock Option Plan (the "1997 Plan").
10.73**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.74### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.75### Employment agreement dated as of April 17, 1997, between
John S. McBride and the Registrant.
10.78### 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.
10.79[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.*
10.80Section** Employment Agreement dated as of June 8, 1998 between Philip
K. Yachmetz and the Registrant.
10.81Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.82Section** Letter Agreement dated as of December 19, 1998 between
John J. Schwartz and the Registrant.
10.83Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.84Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.85Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.87SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
10.88** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.89** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.90 Employment Agreement dated as of June 8, 1998, as amended
and restated as of June 8, 1999, between Philip K. Yachmetz
and the Registrant.
10.91 Letter Agreement dated as of July 1, 1999 between John J.
Schwartz and the Registrant.
10.92 Severance Agreement dated as of April 2, 1999 between John
McBride and the Registrant.
10.93 Severance Agreement dated as of August 30, 1999 between
Moses Goddard, M.D. and the Registrant.
10.95 Employment Agreement dated as of November 17, 1999 between
George W. Dunbar Jr. and the Registrant.
10.96 Agreement dated as of November 17, 1999 between iCEO, LLC
and the Registrant.
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>
56
<PAGE>
------------------------
<TABLE>
<S> <C>
++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration
Statement on Form S-1, File No. 33-45739.
# Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for fiscal year ended
December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The
term "confidential treatment" and the mark "**" as used
throughout the indicated Exhibits mean that material has
been omitted and separately filed with the Commission.
## Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and
incorporated by reference to, the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996.
!!! Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrant's
Registration Statement on Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
annual report on Form 10-K for the fiscal year ended
December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's
current report on Form 8-K filed on August 3, 1998.
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 8K on January 14, 2000.
</TABLE>
(b) Current Reports on Form 8-K.
None
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
STEMCELLS, INC.
BY: /S/ GEORGE W. DUNBAR, JR.
-----------------------------------------
George W. Dunbar, Jr.
ACTING PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Dated: December 5, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
Acting President And Chief
/s/ GEORGE W. DUNBAR, JR. Executive Officer
------------------------------------------- (principal executive December 5, 2000
George W. Dunbar, Jr. officer)
Controller and Acting Chief
/s/ GEORGE KOSHY Financial Officer
------------------------------------------- (principal financial December 5, 2000
George Koshy officer and principal
accounting officer)
/s/ MARK J. LEVIN Director
------------------------------------------- December 5, 2000
Mark J. Levin
/s/ DONALD KENNEDY, PH.D. Director
------------------------------------------- December 5, 2000
Donald Kennedy, Ph.D.
/s/ JOHN J. SCHWARTZ, PH.D. Director, Chairman of the
------------------------------------------- Board December 5, 2000
John J. Schwartz, Ph.D.
/s/ IRVING L. WEISSMAN, M.D. Director
------------------------------------------- December 5, 2000
Irving L. Weissman, M.D.
</TABLE>
58
