e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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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, 2007
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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
STEMCELLS, INC.
(Exact name of Registrant as
specified in its charter)
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A Delaware Corporation
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94-3078125
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3155 PORTER DRIVE
PALO ALTO, CA
(Address of principal
offices)
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94304
(zip code)
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Registrants telephone number, including area code:
(650) 475-3100
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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Nasdaq Global Market
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Junior Preferred Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Aggregate market value of common stock held by non-affiliates at
June 30, 2007: $182,141,740. Inclusion of shares held
beneficially by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of management policies of the
registrant, or that such person is controlled by or under common
control with the Registrant.
Common stock outstanding at February 29, 2008:
80,732,542 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement
relating to the registrants 2008 Annual Meeting of
Stockholders to be filed with the Commission pursuant to
Regulation 14A are incorporated by reference in
Part III of this report.
FORWARD LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED UNDER
THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS COULD VARY
MATERIALLY. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY
MATERIALLY ARE DESCRIBED HEREIN AND IN OTHER DOCUMENTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS SHOULD PAY
PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE
SECTION OF THIS REPORT ENTITLED MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS WELL AS ITEM 1A UNDER THE HEADING
RISK FACTORS.
Table of
Contents
NOTE REGARDING
REFERENCES TO OUR COMMON STOCK
Throughout this
Form 10-K,
the words we, us, our, and
StemCells refer to StemCells, Inc., including
StemCells California, Inc., a wholly-owned subsidiary, and the
owner or licensee of most of our intellectual property.
Common stock refers to StemCells, Inc., common
stock, $.01 par value.
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PART I
Overview
StemCells, Inc. is engaged in the discovery and development of
cell-based therapeutics to treat damage to, or degeneration of,
major organ systems. Our aim is to restore or support organ
function, improve patients lives and reduce the
substantial health care costs associated with these diseases and
disorders by identifying and developing stem and progenitor
cells as potential therapeutic agents. We currently have product
development programs for two cell types: the human neural stem
cell and human liver engrafting cells. In our CNS Program, we
are conducting a Phase I clinical trial to evaluate the safety
and preliminary efficacy of our
HuCNS-SC®
product candidate (purified human neural stem cells) as a
treatment for infantile and late infantile neuronal ceroid
lipofuscinosis (NCL), two forms of a group of disorders often
referred to as Batten disease. We have completed enrollment and
dosing in this six-patient trial and expect it to be completed
in early 2009. In addition, we are conducting preclinical work
for spinal cord injury, myelin disorders and retinal disorders.
In our Liver Program, we are in preclinical development with,
and are continuing to improve processes to isolate and purify,
our human liver engrafting cells (hLEC).
Many degenerative diseases are caused by the loss of normal
cellular function in a particular organ. When cells are damaged
or destroyed, they no longer produce, metabolize or accurately
regulate substances, such as sugars, amino acids,
neurotransmitters, and hormones, which are essential to life.
Although traditional pharmaceuticals and genetically engineered
biologics may have some utility in addressing a degenerative
condition, there is no technology existing today that can
deliver these essential substances precisely to the sites of
action, under the appropriate physiological regulation, in the
appropriate quantity, or for the duration required to cure the
degenerative condition. Cells, however, can do all this
naturally. Thus, transplantation of stem or progenitor cells may
prevent the loss of, or even generate new, functional cells and
potentially maintain or restore organ function and the
patients health.
We believe that, if successfully developed, our cell
technologies will create the basis for therapies that would
address a number of conditions with significant unmet medical
needs. Many neurodegenerative diseases involve the failure of an
organ that cannot be transplanted, i.e., the brain or spinal
cord. Many liver diseases, such as hepatitis, can be addressed
by a liver transplant, but transplantable livers are in very
limited supply. We estimate that degenerative conditions of the
central nervous system (CNS) and the liver together affect more
than 35 million people in the United States and account for
nearly $200 billion annually in health care
costs.1
The
Potential of Our Tissue-Derived Cell-Based
Therapeutics
We are focused on identifying and purifying tissue-derived stem
and progenitor cells for use in homologous therapy.
Tissue-derived stem cells are developmentally pre-programmed to
become the mature functional cells of the organ from which they
were derived. We believe that homologous use of purified,
unmodified tissue-derived cells (i.e., use of brain-derived
neural stem cells for treatment of CNS disorders and
liver-derived cells for treatment of liver disorders) is the
most direct way to provide for engraftment and differentiation
into functional cells, and should minimize the risk of
transplantation of unwanted cell types.
To our knowledge, no one has developed an effective therapy for
replacing lost or damaged tissues from the human nervous system.
Replacement of tissues in other areas of the human body is
mainly limited to those few cases, such as bone marrow or
peripheral blood cell transplants, where transplantation of the
patients 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. More recently, investigators have isolated
1 This
estimate is based on information from the Alzheimers
Association, the Alzheimers Disease Education &
Referral Center (National Institute on Aging), the National
Parkinson Foundation, the National Institutes of Healths
National Institute on Neurological Disorders and Stroke, the
Foundation for Spinal Cord Injury Prevention, Care &
Cure, the Travis Roy Foundation, the Centers for Disease Control
and Prevention, the Wisconsin Chapter of the Huntingtons
Disease Society of America, the American Liver Foundation, the
Cincinnati Childrens Hospital Medical Center, and JAIDs.
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subpopulations of cells from a specific organ, such as
hepatocytes from the liver or islet cells from the pancreas,
which have been transplanted into patients with a measure of
success. However, these types of cell transplants are also
limited both by the quality of harvested cells and the
availability of suitable organs.
Stem cells are rare and only available in limited supply. They
have two defining characteristics: (i) they produce all of
the mature cells making up the particular organ and
(ii) they self renew that is, some of the cells
developed from stem cells are themselves new stem cells, thus
permitting the process to occur again and again. Because of this
self-renewal property, we believe that cell-based therapeutics
may facilitate the return to proper function potentially for the
life of the patient. To date four human stem cells have been
identified and characterized in vivo: the hemotopoietic
stem cell, the mesenchymal stem cell, the neural stem cell, and
the embryonic stem cell. Many researchers believe stem cells
exist in other organ systems, including the liver, pancreas
endocrine system, and the heart. Stem cells can produce all the
mature functional cell types found in normal organs. Progenitor
cells are cells that have already developed from the stem cells,
but can still produce one or more mature cell type within an
organ. We use cells derived from donated fetal or adult tissue
sources, which are supplied to us in compliance with all
applicable state and federal regulations. We are not developing
embryonic stem cells for therapeutic use nor are we involved in
any activity directed toward human cloning.
In order to develop cell-based therapeutics, three key
challenges must be overcome: (i) identifying the stem or
progenitor cells of a particular organ and testing them for
therapeutic potential; (ii) creating processes to enable
use of these rare cells in clinical applications, such as
expanding and banking them in sufficient quantities to
transplant into multiple patients, or purifying them for use in
direct transplantation; and (iii) demonstrating the safety
and efficacy of these potential therapeutics in human clinical
trials. With respect to our HuCNS-SC product candidate, we
believe we have overcome the first two challenges. We have
(i) identified and characterized the human neural stem cell
and (ii) have developed proprietary and reproducible
processes to purify, expand and bank these cells.
Business
Strategy
Our strategy is to be the first to identify, isolate and patent
multiple types of human stem and progenitor cells with
therapeutic and commercial importance; to develop techniques and
processes either to reproducibly purify these cells for direct
transplant or to enable the expansion and banking of these
cells; and then to take them into clinical development as
therapeutics.
We believe that patent protection will be available to the first
to identify and isolate any of the finite number of different
types of human stem cells, and the first to define methods to
culture such cells, making the commercial development of
cell-based treatments for currently intractable diseases
financially feasible. Thus, a central element of our business
strategy is to obtain patent protection for the compositions,
processes and uses of these multiple types of cells. We have
obtained rights to certain inventions relating to stem cells and
progenitor cells from academic institutions. We expect to
continue to expand our search for, and to seek to acquire rights
from third parties relating to, new stem and progenitor cells,
and to further develop our intellectual property positions with
respect to these cells in-house and through research at
scholarly institutions.
Research
and Development Programs
Overview
The following table summarizes the current status of, and the
anticipated initial indications for, our two product development
programs. A more detailed discussion of each of these follows
the table.
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Program Description and Objective
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Status
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CNS Program
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Cell-based therapeutics to restore or preserve function to
central nervous system tissue by protecting, repairing or
replacing dysfunctional or damaged cells. Initial indications
are lysosomal storage diseases that affect
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Neuronal Ceroid Lipofuscinosis (also known as Batten
disease)
Enrollment and dosing completed
for six-patient Phase I clinical trial; we expect trial
completion in early 2009.
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Program Description and Objective
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Status
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the CNS, such as NCL, and disorders in which demyelination
plays a central role.
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Demonstrated in vivo proof of
principle by showing in a mouse model for infantile NCL that
transplanted HuCNS-SC cells can:
continuously produce the
enzyme that is deficient in infantile NCL
protect host neurons from
death
extend the lifespan of the
HuCNS-SC transplanted mice
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Spinal Cord Injury:
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Demonstrated in vivo proof of
principle by showing in a mouse model for spinal cord injury
that transplanted HuCNS- SC cells can:
restore motor function in
injured animals
directly contribute to the
functional recovery; when human cells are ablated restored
function is lost
become specialized
oligodendrocytes and neurons
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Myelin Disorders:
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Demonstrated in vivo proof of
principle by showing in the myelin deficient shiverer mouse and
spinal cord injured mouse that transplanted HuCNS-SC cells
can:
integrate myelin producing
oligodendrocytes into the mouse brain and spinal cord
tightly wrap the mouse
nerve axons to form myelin sheath
Retinal Disorders:
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Established collaboration with Casey
Eye Institute to obtain in vivo proof of principle that
human neural stem cells protect retinal cells from degeneration
and prevent or slow loss of vision in the Royal College of
Surgeons rat model
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Liver Program
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Cellular therapy to restore function to liver tissue by
replacing dysfunctional or damaged cells. Initial indications
may include liver-based metabolic disorders.
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Demonstrated the engraftment and
survival of hLEC in an in vivo mouse liver degeneration
model
Detected human serum albumin and
alpha-1-antitrypsin in serum of transplanted animals
Detected structural elements of the
liver (bile canaliculi)
Identified cell surface markers and
methods for selection of hLEC from livers of a broad age range,
and including those deemed not suitable for liver
transplantation
Identified in vitro culture
assay for growth of hLEC containing cells that co-express
markers for both bile duct cells and hepatocytes
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CNS
Program
Many neurodegenerative diseases involve the failure of central
nervous system tissue (i.e., the brain, spinal cord and eye) due
to the loss of functional cells. Our CNS Program is initially
focusing on developing clinical applications to prevent the loss
of, or restore function to, neural cells affected by genetic
disorders such as neuronal ceroid lipofuscinosis and certain
other lysosomal storage diseases; diseases in which deficient
myelination plays a central role, such as certain spinal cord
injuries or brain disorders such as cerebral palsy; traumatic
insults to the brain or spinal cord; and disorders in which
retinal degeneration play a central role, such as age-related
macular degeneration or retinitis pigmentosa. These disorders
affect a significant number of people in the United States and
there currently are no effective long-term therapies for them.
Our lead product candidate, HuCNS-SC cells, is a purified
composition of normal human neural stem cells. As such, we
believe it is better suited for transplantation and should
provide a safer and more effective alternative to therapies that
are based on cells derived from cancer cells, animal-derived
cells or are an unpurified mix of cell types. Furthermore, our
HuCNS-SC cells can be directly transplanted, unlike embryonic
stem cells, which require a prerequisite differentiation step
prior to administration in order to preclude teratoma formation
(tumors of multiple differentiated cell types). Our preclinical
research has shown in vivo that HuCNS-SC cells engraft,
migrate, differentiate into neurons and glial cells, and survive
for as long as one year with no sign of tumor formation
or adverse effects; moreover, the HuCNS-SC cells were still
producing progeny cells at the end of the test period. These
findings show that our neural stem cells, when transplanted, act
like normal stem cells, suggesting the possibility of a
continual replenishment of normal human neural cells.
We hold a substantial portfolio of issued and allowed patents in
the neural field. See Patents, Proprietary Rights and
Licenses, below.
Neuronal
Ceroid Lipofuscinosis (NCL; also known as Batten
disease).
Neuronal ceroid lipofuscinosis (NCL), which is often referred to
as Batten disease, is a neurodegenerative disease that affects
infants and young children. Two forms of NCL
infantile and late infantile are caused by the
deficiency of a lysosomal enzyme. Infantile and late infantile
NCL are brought on by inherited genetic mutations in the CLN1
gene, which codes for palmitoyl-protein thioesterase 1
(PPT1) and in the CLN2 gene, which codes for tripeptidyl
peptidase I (TPP-I), respectively. As a result of these
mutations, the relevant enzyme is either defective or missing,
leading to the accumulation of cellular waste product in various
cell types. This accumulation eventually interferes with normal
cellular and tissue function, and leads to seizures and
progressive loss of motor skills, sight and mental capacity.
Today, NCL is always fatal.
We have completed enrollment and dosing of a six-patient Phase I
clinical trial at Oregon Health & Science University
Doernbecher Childrens Hospital to evaluate the safety and
preliminary efficacy of our HuCNS-SC product candidate as a
treatment for infantile and late infantile NCL. This trial is an
open label study with two dose levels. Under the trial protocol,
patients receive immunosuppression for one year following
transplantation of the HuCNS-SC cells. In addition to evaluating
the safety of HuCNS-SC cells, the trial will also evaluate the
ability of the cells to affect the progression of the disease.
We expect the trial to be completed in early 2009. We believe
this clinical trial is the first FDA-approved trial to use
purified human neural stem cells as a potential therapeutic
agent.
Our preclinical data demonstrate that HuCNS-SC cells, when
transplanted in a mouse model of infantile NCL, engraft, migrate
throughout the brain, produce the missing PPT1 enzyme,
measurably reduce the toxic storage material in the brain, and
protect host neurons so that more of them survive. In addition,
we have shown that the lifetime of the mice transplanted with
HuCNS-SC cells is extended compared to the control group. We
have also demonstrated in vitro that HuCNS-SC cells
produce TPP-I, the enzyme that is deficient in late infantile
NCL.
Other
Lysosomal Storage Diseases.
NCL, or Batten disease, is one of a group of approximately 46
lysosomal storage diseases (LSDs). All LSDs are caused by
defective or missing proteins involved in lysosomal function and
some LSDs can be treated by enzyme replacement therapies.
Examples of enzyme replacement products already approved are
Cerezymetm
for Gaucher disease,
Fabryzymetm
for Fabry disease,
Myozyme®
for Pompe disease,
Aldurazymetm
for MPS I, and
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Naglazymetm
for MPS VI. All of these approved products, however, address
LSDs which primarily affect peripheral organs and not the
central nervous system. About half of the lysosomal storage
diseases, however, do primarily affect the central nervous
system; enzyme replacement therapy is not currently a practical
treatment option for this subset of LSDs because enzymes are
typically too large to cross the blood-brain barrier. We believe
that transplanting HuCNS-SC cells directly into the CNS may have
the potential to treat some LSDs that affect the CNS by
supplying missing enzymes to the brain. In addition to infantile
and late infantile NCL, we have found that HuCNS-SC cells can
produce the relevant enzyme in a number of other LSDs that
affect the CNS. And we continue to test for others.
Spinal
Cord Injury.
Stem cells may have the potential to treat various spinal cord
indications. Using a mouse model of spinal cord injury, our
collaborators, Drs. Aileen Anderson and Brian Cummings of
the Reeve-Irvine Center at the University of California, have
shown that HuCNS-SC cells have the potential to protect and
regenerate damaged nerves and nerve fibers, and that injured
mice transplanted with our human neural stem cells showed
improved motor function compared to control animals. Inspection
of the spinal cords from the treated mice showed significant
levels of human neural cells derived from the transplanted stem
cells. Some of these cells were oligodendrocytes, the
specialized neural cell that forms the myelin sheath around
axons, while others had become neurons and showed evidence of
synapse formation, a requirement for proper neuronal function.
Drs. Anderson and Cummings then selectively ablated the
human cells, and found that the functional improvement was lost,
thus demonstrating that the human cells had played a direct role
in the functional recovery of the transplanted mice. We are
continuing preclinical development on our HuCNS-SC product
candidate for various spinal cord indications and our goal is to
initiate a clinical trial for a spinal cord indication in
mid-2008.
Myelin
Disorders.
Loss of myelin characterizes conditions such as multiple
sclerosis, cerebral palsy and certain genetic disorders (for
example, Krabbes disease and metachromatic
leukodystrophy), and also plays a role in certain spinal cord
indications. Myelin is the substance that wraps around and
insulates nerve axons and allows proper signal conductivity
along the nerves. We have shown that HuCNS-SC cells
differentiate into oligodendrocytes, the myelin producing cells,
and produce myelin. We have transplanted HuCNS-SC cells into the
brain of the mutant shiverer mouse, which is deficient in
myelin, and shown widespread engraftment of human cells that
matured into oligodendrocytes. Furthermore, analysis of these
mice shows that the human oligodendrocytes myelinated the mouse
axons. Pilot studies for understanding myelin production and
repair are being conducted in collaboration with researchers at
the Oregon Health & Science University. We are
currently conducting preclinical development on our HuCNS-SC
product candidate for a brain indication characterized by myelin
deficiency and our goal is to initiate a clinical trial for such
an indication by the end of 2008.
Retinal
Disorders.
Published studies have shown that in a well-established animal
model of retinal degeneration known as the Royal College of
Surgeons (RCS) rat model, human neural stem cells protect
retinal function and thereby preserve vision. These studies
indicate that our HuCNS-SC cells could have potential clinical
application as a treatment for retinal degeneration. The retina
is a thin layer of neural cells that lines the back of the eye
and is responsible for converting external light into neural
signals; loss of function in retinal cells leads to impairment
or loss of vision. The most common forms of retinal degeneration
are age-related macular degeneration and retinitis pigmentosa.
In January 2008, we entered into a research collaboration with
the Oregon Health & Science University (OHSU) Casey
Eye Institute to evaluate engraftment and function of our
HuCNS-SC cells in the RCS rat model. If this research
successfully demonstrates in vivo proof of principle with
our proprietary cells, our goal would then be to prepare for and
initiate a human clinical trial for a retinal disorder in 2009.
Other
Neural Collaborations
We have established a number of research collaborations to
assess both the in vitro potential of the HuCNS-SC
cells and the effects of transplanting HuCNS-SC cells into
preclinical animal models, including a collaboration with
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researchers at the Stanford University School of Medicine to
evaluate our human neural stem cells in animal models of stroke.
The results of these studies demonstrate the targeted migration
of the cells toward the stroke lesion and differentiation toward
the neuronal lineage. Another study with researchers at
Stanfords School of Medicine demonstrated that HuCNS-SC
cells labeled with magnetic nanoparticles could non-invasively
track the survival and migration of human cells within the
brain. In addition, we concluded an NIH-funded collaboration
with Dr. George A. Carlson of the McLaughlin Research
Institute to investigate the role of Alzheimers plaques in
neuronal cell death in Alzheimers disease. Under the
collaboration, Dr. Carson transplanted HuCNS-SC cells into
mouse models of Alzheimers disease and the cells showed
robust engraftment in an environment riddled with
Alzheimers plaques.
Liver
Program
According to the American Association for the study of Liver
Diseases website, approximately 25 million Americans are
afflicted with liver-related disease each year. To our knowledge
there currently are no effective, long-term treatments for many
of these. Liver stem or progenitor cells may be useful in the
treatment of some of these diseases, such as hepatitis, liver
failure, blood-clotting disorder, cirrhosis, and liver cancer. A
source of defined human cells capable of engraftment and
substantial liver regeneration could provide a cellular therapy
or cell-based therapeutic product available to a wider patient
base than whole liver transplants.
We have identified and isolated a cell population that we call
human Liver Engrafting Cells (hLEC) which can be derived from
all types of human livers, including those that would not
otherwise be used for liver transplantation. When tested
in vitro, hLEC produce enzymes needed for normal
liver function, such as human serum albumin. When transplanted
into immunodeficient mice, hLEC engraft and produce human
proteins including albumin and alpha-1-antitrypsin and form
structural elements of the liver. In September 2007, we entered
into a research collaboration with Belgiums
Université Catholique de Louvain (UCL) and the
UCL-affiliated Cliniques Universitaires Saint Luc to further the
development of hLEC as a potential cell-based liver therapy.
Under this collaboration, we are working with UCL to improve
processes to isolate and purify hLEC, which we believe is an
important step prior to initiating any clinical study of the
cells. Our initial indication for clinical application will
likely be a liver-based metabolic disorder characterized by an
enzyme deficiency.
We hold a portfolio of issued and allowed patents in the liver
field. See Patents, Proprietary Rights and Licenses,
below.
Manufacturing
We have made considerable investments in our manufacturing
operations. We believe we have the ability to process cells
suitable for use in our ongoing and planned research and
development activities and clinical trials.
Marketing
Because of the early stage of our stem and progenitor cell
programs, we have not yet addressed questions of channels of
distribution and marketing of potential future products.
Patents,
Proprietary Rights and Licenses
We believe that proprietary protection of our inventions will be
critical to our future business. We vigorously seek out
intellectual property that we believe might be useful in
connection with our products, and have an active program of
protecting our intellectual property. We believe that our
know-how will also provide a significant competitive advantage,
and we intend to continue to develop and protect our proprietary
know-how. We may also from time to time seek to acquire licenses
to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of
patents and patent applications related to various stem and
progenitor cells and methods of deriving and using them. These
patents and patent applications relate to compositions of
matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. As of
December 31, 2007, our U.S. patent portfolio included
more than 50 issued or allowed U.S. patents from over 25
separate patent families. Four of our U.S. patents issued
in 2007: (i) U.S. Patent No. 7,211,404,
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(ii) U.S. Patent No. 7,166,277,
(iii) U.S. Patent No. 7,217,565, and
(iv) U.S. Patent No. 7,204,979. These new patents
have further strengthened our already extensive patent
portfolio, which, we believe, gives us a competitive advantage,
especially in the emerging field of neural stem cells, because
our patents broadly cover methods for identification, isolation,
expansion, and transplantation of neural stem cells as well as
their use in drug discovery and testing.
We also have foreign counterparts to a majority of our
U.S. patents and applications; a substantial number of
these have issued in various countries, making a total of over
150 granted or allowed
non-U.S. patents
as of December 31, 2007.
Among our significant U.S. patents:
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U.S. Patent No. 5,968,829, entitled Human CNS
Neural Stem Cells, which covers our composition of matter
for human CNS stem cells;
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U.S. Patent No. 7,153,686, entitled Enriched
Central Nervous System Stem Cell and Progenitor Cell
Populations, and Methods for Identifying, Isolating and
Enriching such Populations, which claims the composition
of matter of various antibody-selected neural stem cell
populations;
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U.S. Patent No. 6,777,233, entitled Cultures of
Human CNS Neural Stem Cells, which discloses a neural stem
cell culture with a doubling rate of 5 to 10 days;
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U.S. Patent No. 6,497,872, entitled Neural
transplantation using proliferated multipotent neural stem cells
and their progeny, which covers transplanting any neural
stem cells or their differentiated progeny, whether the cells
have been cultured in suspension or as adherent cells, for the
treatment of any disease;
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U.S. Patent No. 6,468,794, entitled Enriched
central nervous system stem cell and progenitor cell
populations, and methods for identifying, isolating and
enriching for such populations, which covers the
identification and purification of the human CNS stem cell;
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U.S. Patent Nos. 6,238,922 and 7,049,141, both entitled
Use of collagenase in the preparation of neural stem cell
cultures, which describe methods to advance the in
vivo culture and passage of human CNS stem cells that result
in a 100-fold increase in CNS stem and progenitor cell
production after 6 passages;
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U.S. Patent No. 5,851,832, entitled In Vitro
growth and proliferation of multipotent neural stem cells
and their progeny, which covers our methods for selecting
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 cells derived from these cultures
in human transplantation;
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U.S. Patent No. 6,294,346, entitled Use of
multipotent neural stem cells and their progeny for the
screening of drugs and other biological agents, which
describes the use of human neural stem cells as a tool for
screening the effects of drugs and other biological agents on
such cells, such as small molecule toxicology studies; and
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U.S. Patent No. 7,211,404, entitled Liver
engrafting cells, assays, and uses thereof, which covers
the isolation of an enriched population of hepatic liver
engrafting cells. These cells may be used for transplantation as
well as targets for drug discovery, or as a source of
identifying liver specific genes.
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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
any 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 individuals 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.
9
Licenses
with Research Institutions
We have entered into a number of research-plus-license
agreements with academic organizations including The Scripps
Research Institute (Scripps), the California Institute of
Technology (Cal Tech), the Oregon Health & Science
University (OHSU), and the University of Texas Medical Branch.
The research components of these agreements have been concluded
and have resulted in a number of licenses for resultant
technology. Under these license agreements, we are typically
subject to obligations of due diligence and the requirement to
pay royalties on products that use patented technology licensed
under these agreements. The license agreements with these
institutions relate largely to stem or progenitor cells or to
processes and methods for the isolation, identification,
expansion, or culturing of stem or progenitor cells. Generally
speaking, these license agreements will terminate upon
expiration, revocation or invalidation of the patents licensed
to us, unless governmental regulations require a shorter term.
They also will terminate earlier if we breach our obligations
under the agreement and do not cure the breach or if we declare
bankruptcy. We can terminate these license agreements at any
time upon notice.
In the case of Scripps, we must pay $50,000 upon the initiation
of a Phase II trial for our first product candidate using
Scripps licensed technology, 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.
Pursuant to the terms of our license agreement with Cal Tech, we
must pay $10,000 upon the issuance of the first patent in each
family licensed to us under the relevant agreement and $5,000 on
the first anniversary of the issuance of each such patent,
payable in cash or common stock at our option. We have paid
$50,000 on account of these patents through December 31,
2007; the $10,000 due in 2007 was paid in common stock
(3,865 shares). These amounts are creditable against
royalties we must pay under the license agreements. The maximum
royalties that we will have to pay to Cal Tech 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. In
August 2002 we acquired an additional license from Cal Tech to
different technology, pursuant to which we issued
27,535 shares of our common stock with a market value of
approximately $35,000; we have also issued 9,535 shares of
our common stock with a market value of approximately $15,000 to
Cal Tech on the issuance of two patents covered under this
additional license.
Licenses
with Commercial Entities
NeuroSpheres,
Ltd.
In March 1994, we entered into a contract research and license
agreement with NeuroSpheres, Ltd., which was clarified in a
license agreement dated as of April 1, 1997. Under the
agreement as clarified, we obtained an exclusive patent license
from NeuroSpheres in the field of transplantation, subject to a
limited right of NeuroSpheres to purchase a nonexclusive license
from us, which right was not exercised and has expired. We have
developed additional intellectual property relating to the
subject matter of the license. We entered into an additional
license agreement with NeuroSpheres as of October 30, 2000,
under which we obtained an exclusive license in the field of
non-transplant uses, such as drug discovery and drug testing and
clarified our rights under NeuroSpheres patents for generating
cells of the blood and immune system from neural stem cells.
Together, our rights under the licenses are exclusive for all
uses of the technology. We made up-front payments to
NeuroSpheres of 65,000 shares of our common stock in
October 2000 and $50,000 in January 2001, and we will make
additional cash payments when milestones are achieved under the
terms of the October 2000 agreement. In addition, in October
2000 we reimbursed NeuroSpheres for patent costs amounting to
$341,000. Milestone payments, payable at various stages in the
development of potential products, would total $500,000 for each
product that is approved for market. In addition, beginning in
2004, annual payments of $50,000 became due, payable by the last
day of the year and fully creditable against royalties due to
NeuroSpheres under the October 2000 Agreement. Our agreements
with NeuroSpheres will terminate at the expiration of all
patents licensed to us, but can terminate earlier if we breach
our obligations under the agreement and do not cure the breach,
or if we declare bankruptcy. We have a security interest in the
licensed technology.
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ReNeuron
Limited
In July 2005, we entered into an agreement with ReNeuron
Limited, a wholly owned subsidiary of ReNeuron Group plc, a
listed UK corporation (collectively referred to as
ReNeuron). As part of the agreement, we granted
ReNeuron a license that allows ReNeuron to exploit their
c-mycER conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. We
received a 7.5% fully-diluted equity interest in ReNeuron,
subject to certain anti-dilution provisions, as well as a
cross-license to the exclusive use of ReNeurons technology
for certain diseases and conditions, including lysosomal storage
diseases, spinal cord injury, cerebral palsy, and multiple
sclerosis. The agreement also provides for full settlement of
any potential claims that either we or ReNeuron might have had
against the other in connection with any putative infringement
of certain of each partys patent rights prior to the
effective date of the agreement. See Note 2 Financial
Instruments ReNeuron in Part I,
Item 8 of this
Form 10-K
and Quantitative and Qualitative Disclosures about Market
Risk in Part I, Item 7A of this
Form 10-K
for further information.
Stem Cell
Therapeutics Corp.
In August 2006, we entered into an agreement with Stem Cell
Therapeutics Corp. (SCT), a Canadian corporation listed on the
Toronto Stock Exchange, granting it a non-exclusive,
royalty-bearing license to use several of our patents for
treating specified diseases of the central nervous system; the
grant does not include any rights to cell transplantation. SCT
granted us a royalty-free non-exclusive license to certain of
its patents for research and development and a royalty-bearing
non-exclusive license for certain commercial purposes. SCT paid
an up-front license fee; the license also provides for other
payments including annual maintenance, milestones and royalties.
Other
Commercial Licenses
In 2002, we issued a license to BioWhittaker, Inc. for the
exclusive right to make, sell and distribute one of our
proprietary cells for the research market only. BioWhittaker was
acquired by Cambrex Corporation, and the relevant Cambrex
division was subsequently acquired by Lonza Group. This license
is not expected to generate material revenue.
In 2003, we issued a non-exclusive license to StemCell
Technologies, Inc. to make, use and sell certain proprietary
mouse and rat neural stem cells and in 2004, we issued a
non-exclusive license culture media for all mammalian neural
stem cells, and to R&D Systems to make, use and sell
certain stem cell expansion kits, also for the research market.
These licenses are not expected to generate material revenue.
Competition
In most instances, the targeted indications for our initial
products in development have no effective long-term therapies at
this time. However, we do expect that our initial products will
have to compete with a variety of therapeutic products and
procedures. Other pharmaceutical and biotechnology companies
currently offer a number of pharmaceutical products to treat
lysosomal storage diseases, neurodegenerative and liver
diseases, and other diseases for which our technologies may be
applicable. Many pharmaceutical and biotechnology companies are
investigating new drugs and therapeutic approaches for the same
purposes, which may achieve new efficacy profiles, extend the
therapeutic window for such products, alter the prognosis of
these diseases, or prevent their onset. We believe that our
products, when and if successfully developed, will compete with
these products principally on the basis of improved and extended
efficacy and safety and their overall economic benefit to the
health care system. The market for therapeutic products that
address degenerative diseases is large and competition is
intense. Many companies have significant products approved or in
development that could be competitive with our potential
products. We expect competition to increase.
Competition for any stem and progenitor cell products that we
may develop may be in the form of existing and new drugs, other
forms of cell transplantation, ablative and simulative
procedures, medical devices, and gene therapy. We believe that
some of our competitors are also trying to develop stem and
progenitor cell-based technologies. 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. In the event our therapies should require the use of
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such genetically modified cells, we may be required to seek
licenses from these competitors in order to commercialize
certain of our proposed products, and such licenses may not be
granted.
If we develop products that receive regulatory approval, they
would then have to compete for market acceptance and market
share. For certain of our potential products, an important
success factor will be the timing of market introduction of
competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete
the clinical testing and approval processes, and supply
commercial quantities of a product to market. These competitive
products may also impact the timing of clinical testing and
approval processes by limiting the number of clinical
investigators and patients available to test our potential
products.
We expect that all of these products will compete with our
potential stem and progenitor cell-based products based on
efficacy, safety, cost, and intellectual property positions.
While we believe that these will be the primary competitive
factors, other factors include, in certain instances, obtaining
marketing exclusivity under the Orphan Drug Act, availability of
supply, manufacturing, marketing and sales expertise and
capability, and reimbursement coverage.
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.
U.S.
Regulations
In the United States, pharmaceuticals, biologicals and medical
devices are subject to rigorous regulation by the U.S. Food
and Drug Administration (FDA). The Federal Food, Drug and
Cosmetic Act, the Public Health Service Act, applicable FDA
regulations, and other federal and state statutes and
regulations govern, among other things, the testing,
manufacture, 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, many jurisdictions, both
federal and state, have restrictions on the use of fetal tissue.
FDA
Marketing Approval
The steps required before our potential products may be marketed
in the United States include:
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Steps
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Considerations
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1. Preclinical laboratory and animal tests
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Preclinical tests include laboratory evaluation of the cells and
the formulation intended for use in humans for quality and
consistency. In vivo studies are performed in normal
animals and specific disease models to assess the potential
safety and efficacy of the cell therapy product.
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2. Submission of an Investigational New Drug (IND)
application
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The IND is a regulatory document submitted to the FDA with
preclinical and manufacturing data, a proposed development plan
and a proposed protocol for a study in humans. The IND becomes
effective 30 days following receipt by the FDA, provided
there are no questions, requests for delay or objections from
the FDA. If the FDA has questions or concerns, it notifies the
sponsor, and the IND will then be on clinical hold until the
sponsor responds satisfactorily. In general an IND must become
effective before U.S. human clinical trials may commence.
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Steps
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Considerations
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3. Human clinical trials
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Clinical trials involve the evaluation of a potential product
under the supervision of a qualified physician, in accordance
with a protocol that details the objectives of the study, the
parameters to be used to monitor safety and the efficacy
criteria to be evaluated. 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 (IRB) of
the institution at which the study is conducted and the informed
consent of all participants must be obtained. The IRB reviews
the existing information on the product, considers ethical
factors, the safety of human subjects, the potential benefits of
the therapy, and the possible liability of the institution. The
IRB is responsible for ongoing safety assessment of the subjects
during the clinical investigation.
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Clinical development is traditionally conducted in three
sequential phases, Phase I, II and III.
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Phase I studies for a product are designed to evaluate safety in
a small number of subjects in a selected patient population by
assessing adverse effects, and may include multiple dose levels.
This study may also gather preliminary evidence of a beneficial
effect on the disease.
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Phase II studies typically involve a larger, but still
limited, patient population to determine biological and clinical
effects of the investigational product and to identify possible
adverse effects and safety risks of the product in the selected
patient population.
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Phase III studies are undertaken to demonstrate clinical
benefit or effect in a statistically significant manner and to
test further for safety within a broader patient population,
generally at multiple study sites.
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The FDA continually reviews the clinical trial plans and results
and may suggest changes or may require discontinuance of the
trials at any time if significant safety issues arise.
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4. Submission of a Biologics Licensing Application (BLA)
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The results of the preclinical studies and clinical studies are
submitted to the FDA in an application for marketing approval
authorization.
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5. Regulatory Approval
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The testing and approval process will require substantial time,
effort and expense. The time for approval is affected by a
number of factors, including relative risks and benefits
demonstrated in clinical trials, the 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. FDA approval of the
application(s) is required prior to any commercial sale or
shipment of the therapeutic product. Biologic product
manufacturing facilities located in certain states also may be
subject to separate regulatory and licensing requirement.
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Steps
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Considerations
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6. Post-marketing studies
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After receiving FDA marketing approval for a product for an
initial indication, further clinical trials may be required to
gain approval for the use of the product for additional
indications. The FDA may also require post-marketing testing and
surveillance to monitor for adverse effects, which could involve
significant expense, or the FDA may elect to grant only
conditional approvals subject to collection of post-marketing
data. In addition, the recently enacted FDA Amendments Act of
2007 provides the FDA with expanded authority over drug products
after approval, including the authority to require post-approval
studies and clinical trials, labeling changes based on new
safety information, and compliance with risk evaluation and
mitigation strategies approved by the FDA.
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FDA
Manufacturing Requirements
Among the conditions for product licensure is the requirement
that the prospective manufacturers quality control and
manufacturing procedures conform to the FDAs current good
manufacturing practice (cGMP) requirements. Even after a
products licensure approval, its 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. 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 compounds or products from being approved for the
same use including, in some cases, slight variations on the
originally designated orphan product.
FDA Human
Cell and Tissue Regulations
Our research and development is based on the use of human stem
and progenitor cells. The FDA has initiated a risk-based
approach to regulating Human Cell, Tissue and Cellular and
Tissue-based (HCT/P) products and has published current
Good Tissue Practice (cGTP) regulations. As part of this
approach, the FDA has published final rules for registration of
establishments that recover, process, store, label, package, or
distribute HCT/P products or that screen or test the donor of
HCT/P products, and for the listing of such products. In
addition, the FDA has published rules for determining the
suitability of donors of cells and tissue, the eligibility of
the cells and tissues for clinical use and for current good
tissue practice for manufacturers using them, which came into
effect in May 2005. We cannot yet determine the full effects of
this regulatory initiative, including precisely how it may
affect the extent of regulatory obligations associated with
multipotent stem cell research, and the manufacture and
marketing of stem cell products.
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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.
International
Law
Outside the United States, we will be subject to regulations
that govern the import of drug products from the United States
or other manufacturing sites and foreign regulatory requirements
governing human clinical trials and marketing approval for our
products. The requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursements vary
widely from country to country. In particular, the European
Union, or EU, is revising its regulatory approach to
biotechnology 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. This process
increases uncertainty over regulatory requirements in our
industry. Furthermore, human stem and progenitor cells may be
regulated in the EU and other countries as transplant material
or as a somatic cell therapy medicinal product, depending on the
processing, indication and country.
Environment
We have made, and will continue to make, expenditures for
environmental compliance and protection. Expenditures for
compliance with environmental laws have not had, and are not
expected to have, a material effect on our capital expenditures,
results of operations or competitive position.
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 revenue and profitability of some health care-related
companies have been affected by the continuing efforts of
governmental and third party payors to contain or reduce the
cost of health care through various means. Payors are
increasingly attempting to limit both coverage and the levels 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. In certain foreign markets, pricing or profitability
of prescription pharmaceuticals is subject to government
control. In the United States, there have been a number of
federal and state proposals to implement government control over
health care costs.
Employees
As of December 31, 2007, we had 63 full-time
employees, 17 of whom have Ph.D., M.D. or D.V.M. degrees.
49 full-time employees work in research and development and
laboratory support services. 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,
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not to provide any services to any other entities that would
conflict with the services the member provides to us. We are
entitled to terminate the arrangements if we determine that
there is such a conflict. Members of our 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, the Scientific Advisory
Board members assist us in assessing the appropriateness of
moving our projects to more advanced stages. The following
persons are members of our Scientific Advisory Board:
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Irving L. Weissman, M.D., Chairman of our Scientific
Advisory Board, is the Virginia and Daniel K. Ludwig Professor
of Cancer Research, Professor of Pathology and Professor of
Developmental Biology at Stanford University, Director of the
Stanford University Institute for Stem Cell Biology and
Regenerative Medicine, and Director of the Stanford
Comprehensive Cancer Center, all in Stanford, California.
Dr. Weissmans lab was responsible for the discovery
and isolation of the first ever mammalian tissue stem cell, the
hematopoietic (blood-forming) stem cell. Dr. Weissman was
responsible for the formation of three stem cell companies,
SyStemix, Inc., StemCells, Inc. and Cellerant, Inc.
Dr. Weissman co-discovered the mammalian and human
hematopoietic stem cells and the human neural stem cell. He has
extended these stem cell discoveries to cancer and leukemia,
discovering the leukemic stem cells in human and mouse acute or
blast crisis myeloid leukemias, and has enriched the cancer stem
cells in several human brain cancers as well as human head and
neck squamous cell carcinoma. Past achievements of
Dr. Weissmans laboratory include identification of
the states of development between stem cells and mature blood
cells, the discovery and molecular isolation and
characterization of lymphocyte and stem cell homing receptors,
and identification of the states of thymic lymphocyte
development. His laboratory at Stanford has developed accurate
mouse models of human leukemias, and has shown the central role
of inhibition of programmed cell death in that process. He has
also established the evolutionary origins of pre-vertebrate stem
cells, and identified and cloned the transplantation genes that
prevent their passage from one organism to another.
Dr. Weissman has been elected to the National Academy of
Science, the Institute of Medicine of the National Academies,
the American Academy of Arts and Sciences, the American Society
of Microbiology, and several other societies. He has received
the Kaiser Award for Excellence in Preclinical Teaching, the
Pasarow Foundation Award for Cancer Research, the California
Scientist of the Year (2002), the Kovalenko Medal of the
National Academy of Sciences, the Elliott Joslin Medal for
Diabetes Research, the de Villiers Award for Leukemia Research,
the Irvington Award for Immunologist of the Year, the Bass Award
of the Society of Neurosurgeons, the New York Academy of
Medicine Award for Medical Research, the Alan Cranston Award for
Aging Research, the Linus Pauling Award for Biomedical Research,
the E. Donnall Thomas Award for Hematology Research, the van
Bekkum Award for Stem Cell Research, the Outstanding
Investigator Award from the National Institutes of Health, and
many other awards.
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David J. Anderson, Ph.D., is Roger W. Sperry Professor of
Biology, California Institute of Technology, Pasadena,
California and Investigator, Howard Hughes Medical Institute.
His laboratory was the first to isolate a multipotent,
self-renewing, stem cell for the peripheral nervous system, the
first to identify instructive signals that promote the
differentiation of these stem cells along various lineages, and
the first to accomplish a direct purification of peripheral
neural stem cells from uncultured tissue.
Dr. Andersons laboratory also was the first to
isolate transcription factors that act as master regulators of
neuronal fate. More recently, he has identified signals that
tell a neural stem cell to differentiate to oligodendrocytes,
the myelinating glia of the central nervous system, as well as
factors for astrocyte differentiation. Dr. Anderson is a
co-founder of the Company and a member of our Scientific
Advisory Board, and was a founding member of the scientific
advisory board of the International Society for Stem Cell
Research. Dr. Anderson also serves on the scientific
advisory board of Allen Institute for Brain Science. He has held
a presidential Young Investigator Award from the National
Science Foundation, a Sloan foundation Fellowship in
Neuroscience, and has been Donald D. Matson lecturer at Harvard
Medical School. He has received the Charles Judson Herrick Award
from the American Association of Anatomy, the
1999 W. Alden Spencer Award in Neurobiology from
Columbia University, and the Alexander von Humboldt Foundation
Award. Dr. Anderson has been elected to the National
Academy of Science and is a member of the American Academy of
Arts and Sciences.
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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.
Dr. Gages lab was the first to discover Neurogenesis
in the adult human brain. His research focus is on the
development of strategies to induce recovery of function
following central nervous system damage. Dr. Gage is a
co-founder of StemCells and of BrainCells, Inc., and a member of
the scientific advisory board of each. Dr. Gage also serves
on the Scientific Advisory Board of Ceregene, Inc, and he is a
founding member of the scientific advisory board of the
International Society for Stem Cell Research. Dr. Gage has
been the recipient of numerous awards, including the 1993
Charles A. Dana Award for Pioneering Achievements in Health and
Education, the Christopher Reeves Medal, the Decade of the Brain
Medal, the Max-Planck research Prize, and the Pasarow Foundation
Award. Professor Gage is a member of the Institute of Medicine,
a member of the National Academy of Science, and a Fellow of the
American Academy of Arts and Science.
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Available
Information
The following information can be obtained free of charge through
our website at
http://www.
stemcellsinc.com or by sending an
e-mail
message to irpr@stemcellsinc.com:
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our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed with the
Securities and Exchange Commission;
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our policies related to corporate governance, including
StemCells Code of Conduct and Ethics and Procedure for
Submission of Complaints; and
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the charters of the Audit Committee, the
Compensation & Stock Option Committee and the
Corporate Governance & Nominating Committee of our
Board of Directors.
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The public may read and copy any material we file with the SEC
at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C., 20549. The public
may obtain information on the operations of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site,
http://www.sec.gov,
which contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC.
This annual report of
Form 10-K
contains forward looking statements that involve risks and
uncertainties. Our business, operating results, financial
performance, and share price may be materially adversely
affected by a number of factors, including but not limited to
the following risk factors, any one of which could cause actual
results to vary materially from anticipated results or from
those expressed in any forward-looking statements made by us in
this annual report of
Form 10-K
or in other reports, press releases or other statements issued
from time to time. Additional factors that may cause such a
difference are set forth elsewhere in this annual report of
Form 10-K.
Risks
Related to our Business
Any
adverse development relating to our HuCNS-SC product candidate,
such as a significant clinical trial failure, could
substantially depress our stock price and prevent us from
raising additional capital.
At present our ability to progress as a company is significantly
dependent on a single product candidate, our HuCNS-SC cells
(purified human neural stem cells), and on a single early stage
clinical trial, our Phase I clinical trial for neuronal ceroid
lipofuscinosis (NCL, also often referred to as Batten disease).
Any clinical, regulatory or other development that significantly
delays or prevents us from completing this trial, any material
safety issue or adverse side effect to any study participant in
this trial, or the failure of this trial to show the results
expected would likely depress our stock price significantly and
could prevent us from raising the substantial additional capital
we will need to further develop our cellular technologies.
Moreover, any material adverse occurrence in our first clinical
trial for Batten disease could substantially impair our ability
to initiate clinical trials to test our HuCNS-SC cells in
patients with spinal cord injuries, myelin disorders or other
potential indications. This, in turn, could
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adversely impact our ability to raise additional capital and
pursue our planned research and development efforts in both our
CNS and liver programs.
We
have limited capital resources and we may not obtain the
significant additional capital needed to sustain our research
and development efforts.
We have limited liquidity and capital resources and must obtain
significant additional capital resources in order to sustain our
product development efforts, acquire businesses, technologies
and intellectual property rights which may be important to our
business, continue preclinical and clinical testing of our
investigative products, pursue regulatory approvals, acquire
capital equipment, laboratory and office facilities, establish
production capabilities, maintain and enforce our intellectual
property portfolio, and support our general and administrative
expenses and other working capital requirements. We rely on cash
reserves and proceeds from equity and debt offerings, proceeds
from the transfer, license, lease, or sale of our intellectual
property rights, equipment, facilities, or investments, and
government grants and funding from collaborative arrangements,
if obtainable, to fund our operations.
We intend to pursue opportunities for additional fundraising in
the future through equity or debt financings, corporate
alliances or combinations, grants or collaborative research
arrangements, or any combination of these. However, the source,
timing and availability of any future fundraising will depend
principally upon market conditions, interest rates and, more
specifically, on progress in our research, preclinical and
clinical development programs. Funding may not be available when
needed at all or on terms acceptable to us. While we
actively manage our programs and resources in order to conserve
cash between fundraising opportunities, our existing capital
resources may not be sufficient to fund our operations beyond
the next twelve to eighteen months. If we exhaust our cash
reserves and are unable to realize adequate additional
fundraising, we may be unable to meet operating obligations and
be required to initiate bankruptcy proceedings or delay, scale
back or eliminate some or all of our research and product
development programs.
Our
product development programs are based on novel technologies and
are inherently risky.
We are subject to the risks of failure inherent in the
development of products based on new technologies. The novel
nature of these therapies creates significant challenges in
regard to product development and optimization, manufacturing,
government regulation, third party reimbursement, and market
acceptance. For example, the pathway to regulatory approval for
cell-based therapies, including our product candidates, may be
more complex and lengthy than the pathway for conventional
drugs. These challenges may prevent us from developing and
commercializing products on a timely or profitable basis or at
all.
Our
technology is at an early stage of discovery and development,
and we may fail to develop any commercially acceptable or
profitable products.
We have incurred significant operating losses and negative cash
flows since inception. We have not achieved profitability and
may not be able to realize sufficient revenue to achieve or
sustain profitability in the future. We have yet to develop any
products that have been approved for marketing and we do not
expect to become profitable within the next several years, but
rather expect to incur additional and increasing operating
losses. Before commercializing any medical product, we will need
to obtain regulatory approval from the FDA or from equivalent
foreign agencies after conducting extensive preclinical studies
and clinical trials that demonstrate that the product candidate
is safe and effective. Except for the NCL trial currently being
conducted at the Oregon Health & Science University
(OHSU), we have had no experience conducting human clinical
trials. We expect that none of our cell-based therapeutic
product candidates will be commercially available for several
years, if at all.
While the FDA has permitted us to initiate our Phase I clinical
trial of our proprietary HuCNS-SC product candidate in NCL, and
the Institutional Review Board of OHSU has approved the protocol
and we have completed dosing the six patients planned for the
trial, there can be no assurance that the trial will be
completed or result in a successful outcome. We may elect to
delay or discontinue other studies or clinical trials based on
unfavorable results. Any product developed from or based on
cellular technologies may fail to:
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survive and persist in the desired location;
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provide the intended therapeutic benefit;
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engraft into existing tissue in the desired manner; or
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achieve therapeutic benefits equal to, or better than, the
standard of treatment at the time of testing.
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In addition, our products may cause undesirable side effects.
Results of preclinical research in animals may not be indicative
of future clinical results in humans.
Ultimately if regulatory authorities do not approve our products
or if we fail to maintain regulatory compliance, we would be
unable to commercialize our products, and our business and
results of operations would be harmed. Even if we do succeed in
developing products, we will face many potential obstacles such
as the need to develop or obtain manufacturing, marketing and
distribution capabilities. Furthermore, because transplantation
of cells is a new form of therapy, the marketplace may not
accept any products we may develop.
Moreover, because our cell-based therapeutic products will be
derived from tissue of individuals other than the patient (that
is, they will be non-self or allogeneic
transplant products), patients will likely require the use of
immunosuppressive drugs. While immunosuppression is now standard
in connection with allogeneic transplants of various kinds, such
as heart or liver transplants, long-term maintenance on
immunosuppressive drugs can result in complications such as
infection, cancer, cardiovascular disease, and renal
dysfunction. Immunosuppression is currently being tested with
our therapeutic product candidate in our Phase I clinical trial
for NCL.
Our
success will depend in large part on our ability to develop and
commercialize products that treat diseases other than neuronal
ceroid lipofuscinosis (Batten disease).
Although we have initially focused on evaluating our neural stem
cell product for the treatment of infantile and late infantile
NCL (Batten disease), this disease is rare and the market for
treating this disease is small. Accordingly, even if we obtain
marketing approval for our HuCNS-SC product candidate for
infantile and late infantile NCL, in order to achieve
profitability, we will likely need to obtain approval to treat
additional diseases that present more significant market
opportunities.
Acquisitions
of companies, businesses or technologies may substantially
dilute our stockholders and increase our operating
losses.
We may make acquisitions of businesses, technologies or
intellectual property rights or otherwise expand our business
activities in ways we believe to be necessary, useful or
complementary to our current product development efforts and
cell-based therapeutics business. Any such acquisition or change
in business activities may require assimilation of the
operations, products or product candidates and personnel of the
acquired business and the training and integration of its
employees, and could substantially increase our operating costs,
without any offsetting increase in revenue. Acquisitions may not
provide the intended technological, scientific or business
benefits and could disrupt our operations and divert our limited
resources and managements attention from our current
operations, which could harm our existing product development
efforts. We would likely issue equity securities to pay for any
future acquisitions. The issuance of equity securities for an
acquisition could be substantially dilutive to our stockholders.
In addition, our results of operations may suffer because of
acquisition-related costs or the post-acquisition costs of
funding the development of an acquired technology or product
candidates or operation of the acquired business, or due to
amortization or impairment costs for acquired goodwill and other
intangible assets. Any investment made in, or funds advanced to,
a potential acquisition target could also significantly
adversely affect our results of operation and could further
reduce our limited capital resources. Any acquisition or action
taken in anticipation of a potential acquisition or other change
in business activities could substantially depress the price of
our stock.
We
have payment obligations resulting from real property owned or
leased by us in Rhode Island, which diverts funding from our
cell-based therapeutics research and development.
Prior to our reorganization in 1999 and the consolidation of our
business in California, we carried out our former encapsulated
cell therapy programs in Lincoln, Rhode Island, where we also
had our administrative offices. Although we have vacated the
Rhode Island facilities, we remain obligated to make lease
payments and payments
19
for operating costs for our former science and administrative
facility, which we have leased through June 30, 2013. These
costs, before
sub-tenant
rental income, amounted to approximately $1,523,000 in 2007; our
rent payments will increase over the term of the lease, and our
operating costs may increase as well. In addition to these costs
of our former science and administrative facility, we are
obligated to make debt service payments and payments for
operating costs of approximately $400,000 per year for our
former encapsulated cell therapy pilot manufacturing facility,
which we own. We have currently subleased a portion of the
science and administrative facility, and we are seeking to
sublease the remaining portion, but we cannot be sure that we
will be able to keep any part of the facility subleased for the
duration of our obligation. We are currently seeking to sublease
the pilot manufacturing facility, but may not be able to
sublease or sell the facility in the future. These continuing
costs significantly reduce our cash resources and adversely
affect our ability to fund further development of our cellular
technologies. In addition, changes in real estate market
conditions and assumptions regarding the length of time it may
take us to either fully sublease, assign or sell our remaining
interest in the our former research facility in Rhode Island may
have a significant impact on and cause large variations in our
quarter to quarter results of operations. In 1999, in connection
with exiting our former research facility in Rhode Island, we
created a reserve for the estimated lease payments and operating
expenses related to it. The reserve is periodically re-evaluated
and adjusted based on assumptions relevant to real estate market
conditions and the estimated time until we can either, fully
sublease, assign or sell our remaining interests in the
property. At December 31, 2007, the reserve was $6,143,000.
For the year 2007, we incurred $1,420,000 in operating expenses
net of
sub-tenant
income for this facility. Expenses for this facility will
fluctuate based on changes in tenant occupancy rates and other
operating expenses related to the lease. Even though it is our
intent to sublease, assign, sell, or otherwise divest ourselves
of our interests in the facility at the earliest possible time,
we cannot determine with certainty a fixed date by which such
events will occur. In light of this uncertainty, based on
estimates, we will periodically re-evaluate and adjust the
reserve, as necessary, and we may make significant adverse
adjustments to the reserve in the future.
We may
be unable to obtain partners to support our cell-based
therapeutic product development efforts when needed to
commercialize our technologies.
Equity and debt financings alone may not be sufficient to fund
the cost of developing our cellular technologies, and we may
need to rely on partnering or other arrangements to provide
financial support for our cellular discovery and development
efforts. In addition, in order to successfully develop and
commercialize our technologies, we may need to enter into
various arrangements with corporate sponsors, pharmaceutical
companies, universities, research groups, and others. While we
have engaged, and expect to continue to engage, in discussions
regarding such arrangements, we have not reached any agreement,
and we may fail to obtain any such agreement on terms acceptable
to us. Even if we enter into such arrangements, we may not be
able to satisfy our obligations under them or renew or replace
them after their original terms expire. Furthermore, these
arrangements may require us to grant rights to third parties,
such as exclusive marketing rights to one or more products, may
require us to issue securities to our collaborators and may
contain other terms that are burdensome to us or result in a
decrease in our stock price.
If we
are unable to protect our patents and proprietary rights, our
business, financial condition and results of operations may be
materially harmed.
We either own or license a number of patents and pending patent
applications related to various stem and progenitor cells,
including human neural stem cell cultures, as well as methods of
deriving and using them. The process of obtaining patent
protection for products such as those we propose to develop is
highly uncertain and involves complex and continually evolving
factual and legal questions. The governmental authorities that
consider patent applications can deny or significantly reduce
the patent coverage requested in an application either before or
after issuing the patent. For example, under the procedures of
the European Patent Office, third parties may oppose our issued
European patents during the relevant opposition period. These
proceedings and oppositions could result in substantial
uncertainties and cost for us, even if the eventual outcome is
favorable to us, and the outcome might not be favorable to us.
In the United States, third parties may seek to invalidate
issued patents through a U.S. PTO reexamination process or
through the courts. In addition, changes to the laws protecting
intellectual property rights could adversely impact the
perceived or actual value of our Company. Consequently, we do
not know whether any of our pending applications will result in
the issuance of patents, whether any of our issued patents will
be invalidated or restricted, whether any existing or future
patents will provide sufficient protection or significant
20
commercial advantage, or whether others will circumvent these
patents, whether or not lawfully. In addition, our patents may
not afford us adequate protection from competing products.
Moreover, because patents issue for a limited term, our patents
may expire before we can commercialize a product covered by the
issued patent claims or before we can utilize the patents
profitably. Some of our most important patents begin to expire
in 2015.
If we learn of third parties who infringe our patent rights, we
may decide to initiate legal proceedings to enforce these
rights. Patent litigation is inherently unpredictable and highly
risky and may result in unanticipated challenges to the validity
or enforceability of our intellectual property, which could
result in the loss of these rights. In general litigation
proceedings are also very costly and the parties we bring
actions against may have significantly greater financial
resources than our own. We may not prevail in these proceedings.
Proprietary trade secrets and unpatented know-how are also
important to our research and development activities. We cannot
be certain that others will not independently develop the same
or similar technologies on their own or gain access to our trade
secrets or disclose such technology or that we will be able to
meaningfully protect our trade secrets and unpatented know-how.
We require our employees, consultants and significant scientific
collaborators and sponsored researchers to execute
confidentiality agreements upon the commencement of an
employment or consulting relationship with us. These agreements
may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or
disclosure of such information or technology.
If we
are unable to obtain necessary licenses to third-party patents
and other rights, we may not be able to commercially develop our
expected products.
A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent
applications or have received patents relating to cell therapy,
stem and progenitor cells and other technologies potentially
relevant to, or necessary for, our expected products. We cannot
predict which, if any, of these applications will issue as
patents or how many of these issued patents will be found valid
and enforceable. There may also be existing issued patents which
we are currently unaware of which would be infringed by the
commercialization of one or more of our product candidates. If
so, we may be prevented from commercializing these products
unless the third party is willing to grant a license to us. We
may be unable to obtain licenses to the relevant patents at a
reasonable cost, if at all, and may also be unable to develop or
obtain alternative non-infringing technology. If we are unable
to obtain such licenses or develop non-infringing technology at
a reasonable cost, our business could be significantly harmed.
Also, any infringement lawsuits commenced against us may result
in significant costs, divert our managements attention and
result in an award against us for substantial damages, or
potentially prevent us from continuing certain operations.
We are aware of intellectual property rights held by third
parties that relate to products or technologies we are
developing. For example, some aspects of our cell-based
therapeutic product candidates involve the use of growth
factors, antibodies and other reagents that may, in certain
cases, be the subject of third party rights. Before we
commercialize any product using these growth factors, antibodies
or reagents, we may need to obtain license rights from third
parties or use alternative growth factors, antibodies and
reagents that are not then the subject of third party patent
rights. We currently believe that the commercialization of our
products as currently planned will not infringe these third
party rights, or, alternatively, that we will be able to obtain
necessary licenses or otherwise use alternative non-infringing
technology. However, third parties may nonetheless bring suit
against us claiming infringement. If we are unable to prove that
our technology does not infringe their patents, or if we are
unable to obtain necessary licenses or otherwise use alternative
non-infringing technology, we may not be able to commercialize
any products.
We have obtained rights from companies, universities and
research institutions to technologies, processes and compounds
that we believe may be important to the development of our
products. These licensors, however, may cancel our licenses or
convert them to non-exclusive licenses if we fail to use the
relevant technology or otherwise breach these agreements. Loss
of these licenses could expose us to the risk that our
technology infringes the rights of third parties. We can give no
assurance that any of these licenses will provide effective
protection against our competitors.
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We
compete with companies that have significant advantages over
us.
The market for therapeutic products to treat diseases of, or
injuries to, the central nervous system (CNS) is large and
competition is intense. The majority of the products currently
on the market or in development are small molecule
pharmaceutical compounds, and many pharmaceutical companies have
made significant commitments to the CNS field. We believe
cellular therapies, if proven safe and effective, will have
unique properties that will make them desirable over small
molecule drugs, none of which currently replace damaged tissue.
However, any cell-based therapeutic to treat diseases of, or
injuries to, the CNS is likely to face intense competition from
the small molecule sector, biologics, as well as medical
devices. We expect to compete with a host of companies, some of
which are privately owned and some of which have resources far
greater than ours.
In the liver field, there are no broad-based therapies for the
treatment of liver disease at present. The primary therapy is
liver transplantation, which is limited by the availability of
matched donor organs. Liver-assist devices, when and if they
become available, could also be used to help patients while they
await suitably matched organs for transplantation. Liver
transplantation may remain the standard of care even if we
successfully develop a cellular therapy. In addition, new
therapies may become available before we successfully develop a
cell-based therapy for liver disease.
Development
of our technologies is subject to, and restricted by, extensive
government regulation, which could impede our
business.
Our research and development efforts, as well as any future
clinical trials, and the manufacturing and marketing of any
products we may develop, will be subject to, and restricted by,
extensive regulation by governmental authorities in the United
States and other countries. The process of obtaining FDA and
other necessary regulatory approvals is lengthy, expensive and
uncertain. We or our collaborators may fail to obtain the
necessary approvals to commence or continue clinical testing or
to manufacture or market our potential products in reasonable
time frames, if at all. In addition, the U.S. Congress and
other legislative bodies may enact regulatory reforms or
restrictions on the development of new therapies that could
adversely affect the regulatory environment in which we operate
or the development of any products we may develop.
We base our research and development on the use of human stem
and progenitor cells obtained from human tissue, including fetal
tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue,
including those incorporated in federal Good Tissue Practice, or
cGTP, regulations. These regulatory and other constraints could
prevent us from obtaining cells and other components of our
products in the quantity or quality needed for their development
or commercialization. These restrictions change from time to
time and may become more onerous. Additionally, we may not be
able to identify or develop reliable sources for the cells
necessary for our potential products that is,
sources that follow all state and federal guidelines for cell
procurement. Certain components used to manufacture our stem and
progenitor cell product candidates will need to be manufactured
in compliance with the FDAs Good Manufacturing Practices,
or cGMP. Accordingly, we will need to enter into supply
agreements with companies that manufacture these components to
cGMP standards.
We are
dependent on the services of key personnel.
We are highly dependent on the principal members of our
management and scientific staff and some of our outside
consultants, including the members of our scientific advisory
board, our chief executive officer, our chief operating officer,
our vice presidents, and the heads of key departments or
functions within the company. Although we have entered into
employment agreements with some of these individuals, they may
terminate their agreements at any time. In addition, our
operations are dependent upon our ability to attract and retain
additional qualified scientific and management personnel. We may
not be able to attract and retain the personnel we need on
acceptable terms given the competition for experienced personnel
among pharmaceutical, biotechnology and health care companies,
universities and research institutions.
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Our
activities involve hazardous materials and experimental animal
testing; improper handling of these animals and materials by our
employees or agents could expose us to significant legal and
financial penalties.
Our research and development activities involve the controlled
use of test animals as well as hazardous chemicals and
potentially hazardous biological materials such as human tissue.
Their use subjects us to environmental and safety laws and
regulations such as those governing laboratory procedures,
exposure to blood-borne pathogens, use of laboratory animals,
and the handling of biohazardous materials. Compliance with
current or future laws and regulations may be expensive and the
cost of compliance could adversely affect us.
Although we believe that our safety procedures for using,
handling, storing, and disposing of hazardous and potentially
hazardous materials comply with the standards prescribed by
California and federal regulations, the risk of accidental
contamination or injury from these materials cannot be
eliminated. In the event of such an accident or of any violation
of these or future laws and regulations, state or federal
authorities could curtail our use of these materials; we could
be liable for any civil damages that result, the cost of which
could be substantial; and we could be subjected to substantial
fines or penalties. In addition, any failure by us to control
the use, disposal, removal, or storage, or to adequately
restrict the discharge, or to assist in the cleanup, of
hazardous chemicals or hazardous, infectious or toxic substances
could subject us to significant liability. Any such liability
could exceed our resources and could have a material adverse
effect on our business, financial condition and results of
operations. Moreover, an accident could damage our research and
manufacturing facilities and operations and result in serious
adverse effects on our business.
The
development, manufacturing and commercialization of cell-based
therapeutic products expose us to product liability claims,
which could lead to substantial liability.
By developing and, ultimately, commercializing medical products,
we are exposed to the risk of product liability claims. Product
liability claims against us could result in substantial
litigation costs and damage awards against us. We have obtained
liability insurance that covers our clinical trials, and we will
need to increase our insurance coverage if and when we begin
commercializing products. We may not be able to obtain insurance
on acceptable terms, if at all, and the policy limits on our
insurance policies may be insufficient to cover our liability.
The
manufacture of cell-based therapeutic products is novel, highly
regulated, critical to our business, and dependent upon
specialized key materials.
The proliferation and manufacture of cell-based therapeutic
products are complicated and difficult processes, dependent upon
substantial know-how and subject to the need for continual
process improvements to be competitive. Our manufacturing
experience is limited and the technologies are comparatively
new. In addition, our ability to
scale-up
manufacturing to satisfy the requirements of our planned
clinical trials is uncertain. Manufacturing disruptions may
occur and despite efforts to regulate and control all aspects of
manufacturing, the potential for human or system failure
remains. Manufacturing irregularities or lapses in quality
control could have a serious adverse effect on our reputation
and business, which could cause a significant loss of
stockholder value. Many of the materials that we use to prepare
our cell-based products are highly specialized and available
from a limited number of suppliers. At present, some of our
material requirements are single sourced, and the loss of one or
more of these sources may adversely affect our business if we
are unable to obtain alternatives or alternative sources at all
or upon terms that are acceptable to us.
Because
health care insurers and other organizations may not pay for our
products or may impose limits on reimbursements, our ability to
become profitable could be adversely affected.
In both domestic and foreign markets, sales of potential
products are likely to depend in part upon the availability and
amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health
care insurers and other health care payors, such as health
maintenance organizations and self-insured employee plans. There
is considerable pressure to reduce the cost of therapeutic
products. Government and other third party payors are
increasingly attempting to contain health care costs by limiting
both coverage and the level of reimbursement for new therapeutic
products and by refusing, in some cases, to provide any coverage
for
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uses of approved products for disease indications for which the
FDA or other relevant authority has not granted marketing
approval. Moreover, in some cases, government and other third
party payors have refused to provide reimbursement for uses of
approved products for disease indications for which the FDA or
other relevant authority has granted marketing approval.
Significant uncertainty exists as to the reimbursement status of
newly approved health care products or novel therapies such as
ours. Even if we obtain regulatory approval to market our
products, we can give no assurance that reimbursement will be
provided by such payors at all or without substantial delay or,
if such reimbursement is provided, that the approved
reimbursement amounts will be sufficient to enable us to sell
products we develop on a profitable basis. Changes in
reimbursement policies could also adversely affect the
willingness of pharmaceutical companies to collaborate with us
on the development of our cellular technologies. In certain
foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We also expect
that there will continue to be a number of federal and state
proposals to implement government control over health care
costs. Efforts to change regulatory and reimbursement standards
are likely to continue in future legislative sessions. We do not
know what legislative proposals federal or state governments
will adopt or what actions federal, state or private payors for
health care goods and services may take in response to such
proposals or legislation. We cannot predict the effect of
government control and health care reimbursement practices on
our business.
Ethical
and other concerns surrounding the use of stem or
progenitor-based cell therapy may negatively affect regulatory
approval or public perception of our product candidates, which
could reduce demand for our products or depress our stock
price.
The use of stem cells for research and therapy has been the
subject of debate regarding related ethical, legal and social
issues. Although these concerns have mainly been directed to the
use of embryonic stem cells, which we do not use, the
distinction between embryonic and non-embryonic stem cells is
frequently overlooked; moreover, our use of human stem or
progenitor cells from fetal sources might raise these or similar
concerns. Negative public attitudes toward stem cell therapy
could result in greater governmental regulation of stem cell
therapies, which could harm our business. For example, concerns
regarding such possible regulation could impact our ability to
attract collaborators and investors. Also, existing regulatory
constraints on the use of embryonic stem cells may in the future
be extended to use of fetal stem cells, and these constraints
might prohibit or restrict us from conducting research or from
commercializing products. Existing and potential
U.S. government regulation of embryonic tissue may lead
researchers to leave the field of stem cell research or the
country altogether, in order to assure that their careers will
not be impeded by restrictions on their work. Similarly, these
factors may induce graduate students to choose other fields less
vulnerable to changes in regulatory oversight, thus exacerbating
the risk that we may not be able to attract and retain the
scientific personnel we need in face of the competition among
pharmaceutical, biotechnology and health care companies,
universities and research institutions for what may become a
shrinking class of qualified individuals.
Our
corporate documents and Delaware law contain provisions that
could make it difficult for us to be acquired in a transaction
that might be beneficial to our stockholders.
Our board of directors has the authority to issue shares of
preferred stock and to fix the rights, preferences, privileges,
and restrictions of these shares without stockholder approval.
In addition, we have adopted a rights plan that generally
permits our existing stockholders to acquire additional shares
at a substantial discount to the market price in the event of
certain attempts by third parties to acquire us. These rights,
along with certain provisions in our corporate documents and
Delaware law, may make it more difficult for a third party to
acquire us or discourage a third party from attempting to
acquire us, even if the acquisition might be beneficial to our
stockholders.
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Risks
Related to the Securities Market
Our
stock price has been, and will likely continue to be, highly
volatile, which may negatively affect our ability to obtain
additional financing in the future.
The market price per share of our common stock has been and is
likely to continue to be highly volatile due to the risks and
uncertainties described in this section of this Annual Report on
Form 10-K,
as well as other factors, including:
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our ability to develop and test our technologies;
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our ability to patent or obtain licenses to necessary
technologies;
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conditions and publicity regarding the industry in which we
operate, as well as the specific areas our product
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candidates seek to address;
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competition in our industry;
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price and volume fluctuations in the stock market at large that
are unrelated to our operating performance; and
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comments by securities analysts, or our failure to meet market
expectations.
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Over the two-year period ended December 31, 2007, the
trading price of our common stock as reported on the Nasdaq
Global Market ranged from a high of $4.06 to a low of $1.40. As
a result of this volatility, your investment in our stock is
subject to substantial risk. Furthermore, the volatility of our
stock price could negatively impact our ability to raise capital
or acquire businesses or technologies.
We are
contractually obligated to issue shares in the future, diluting
the interest of current stockholders.
As of December 31, 2007, there were outstanding warrants to
purchase 1,355,000 shares of our common stock, at a
weighted average exercise price of $1.85 per share. Also as of
December 31, 2007, there were outstanding options to
purchase 9,028,810 shares of our common stock, at a
weighted average exercise price of $2.36 per share. Moreover, we
expect to issue additional options to purchase shares of our
common stock to compensate employees, consultants and directors,
and may issue additional shares to raise capital, to acquire
other companies or technologies, to pay for services, or for
other corporate purposes. Any such issuances will have the
effect of diluting the interest of current stockholders.
|
|
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
As part of a review by the staff of the Securities and Exchange
Commission (the Staff) of our Annual Report on
Form 10-K
for the year ended December 31, 2006, we have received and
responded to comments from the Staff. The Staffs comments
pertain to (i) our determination as to which of our license
agreements are considered material contracts required to be
filed as exhibits, (ii) our determination as to which of
our consulting agreements are considered material contracts
required to be filed as exhibits, (iii) our description of
certain patent related disputes, including the patents at issue
in those proceedings, and (iv) our disclosures with respect
to our research and development activities. We filed our
response to the Staff on February 29, 2008, but as of the
date of the filing of this Annual Report on
Form 10-K,
the Staffs comments remain unresolved.
We entered into a
5-year
lease, as of February 1, 2001, for a 40,000 square
foot facility, located in the Stanford Research Park in Palo
Alto, California. This facility includes space for animals as
well as laboratories, offices and a suite designed to be used to
manufacture materials for clinical trials. Effective
July 1, 2006, under an agreement that extends the lease
through March 31, 2010, we leased the remainder of the
building, adding approximately 27,500 square feet to our
leased premises. We have a space-sharing agreement with Stanford
University for part of the animal facility not needed for our
own use.
25
We continue to lease the following facilities in Lincoln, Rhode
Island obtained in connection with our former encapsulated cell
technology: our former research laboratory and corporate
headquarters building which contains 62,500 square feet of
wet labs, specialty research areas and administrative offices
held on a lease agreement that goes through June 2013, as well
as a 21,000 square-foot pilot manufacturing facility and a
3,000 square-foot cell processing facility financed by
bonds issued by the Rhode Island Industrial Facilities
Corporation. We have subleased small portions of the
62,500 square foot facility, amounting to approximately
21 percent of the total space. We are actively seeking to
sublease, assign or sell our remaining interests in these
properties.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
In July 2006, we filed suit against Neuralstem, Inc., in the
Federal District Court for the District of Maryland, alleging
that Neuralstems activities violate claims in four of the
patents we exclusively licensed from NeuroSpheres. Neuralstem
has filed a motion for dismissal or summary judgment in the
alternative, citing Title 35, Section 271(e)(1) of the
United States Code, which says that it is not an act of patent
infringement to make, use or sell a patented invention
solely for uses reasonably related to the development and
submission of information to the FDA. Neuralstem argues
that because it does not have any therapeutic products on the
market yet, the activities complained of fall within the
protection of Section 271(e)(1) that is,
basically, that the suit is premature. This issue will be
decided after discovery is complete. Subsequent to filing its
motion to dismiss, in December 2006, Neuralstem petitioned the
U.S. Patent and Trademark Office (PTO) to reexamine two of
the patents in our infringement action against Neuralstem,
namely U.S. Patent No. 6,294,346 (claiming the use of
human neural stem cells for drug screening) and U.S. Patent
No. 7,101,709 (claiming the use of human neural stem cells
for screening biological agents). In April 2007, Neuralstem
petitioned the PTO to reexamine the remaining two patents in the
suit, namely U.S. Patent No. 5,851,832 (claiming
methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for
transplanting human neural stem cells). These requests were
granted by the PTO and, in June 2007, the parties voluntarily
agreed to stay the pending litigation while the PTO considers
these reexamination requests. In October 2007, Neuralstem
petitioned the PTO to reexamine a fifth patent, namely
U.S. Patent No. 6,103,530, which claims a culture
medium for proliferating mammalian neural stem cells. In
September 2007, the PTO issued first office actions in each of
the first four reexaminations. The Company has since filed its
first responses to each of these, and expects all four patents
to re-issue in 2008.
In 2003, Geron Corporation filed an opposition to two of our
issued European patent cases, namely EP0594669 (claiming, among
other things, methods for proliferating and using human neural
stem cells as therapeutic and drug screening agents) and
EP0669973 (claiming, among other things, methods for
proliferating and differentiating human neural stem cells). Both
oppositions were heard in 2005, and the patents were maintained
in somewhat altered form by the Opposition Division of the
European Patent Office. In essence the scope of each patent was
limited to proliferation using specific growth factors and each
had to disclaim derivation of human neural stem cells from human
embryonic tissue in order to comply with the European law which
precludes the patenting of embryonic stem cells. The time for
appeal has run in each case. U.S. counterparts to these
patents are part of our issued patent portfolio; they are not
subject to opposition, because that procedure does not exist
under U.S. patent law, although other types of proceedings
may be available to third parties to contest our
U.S. patents.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
26
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
(a) Market
price and dividend information
Our stock is traded on the Nasdaq Global Market under the symbol
STEM. The quarterly ranges of high and low bid prices for the
last two fiscal years as reported by Nasdaq are shown below:
|
|
|
|
|
|
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
3.63
|
|
|
$
|
2.36
|
|
Second Quarter
|
|
$
|
3.09
|
|
|
$
|
2.27
|
|
Third Quarter
|
|
$
|
2.45
|
|
|
$
|
1.90
|
|
Fourth Quarter
|
|
$
|
2.53
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.06
|
|
|
$
|
3.45
|
|
Second Quarter
|
|
$
|
3.58
|
|
|
$
|
1.77
|
|
Third Quarter
|
|
$
|
2.55
|
|
|
$
|
1.90
|
|
Fourth Quarter
|
|
$
|
3.49
|
|
|
$
|
2.05
|
|
No cash dividends have been declared on our common stock since
our inception.
27
PERFORMANCE
GRAPH
We show below the cumulative total return to our stockholders
during the period from December 31, 2002 through
December 31,
20071
in comparison to the cumulative return on the
Standard & Poors 500 Index and the Amex
Biotechnology Index during that same period.
The stock price performance shown on the graph below is not
necessarily indicative of future stock price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
StemCells, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
181.65
|
|
|
|
$
|
388.07
|
|
|
|
$
|
316.51
|
|
|
|
$
|
243.12
|
|
|
|
$
|
137.61
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
126.38
|
|
|
|
$
|
137.75
|
|
|
|
$
|
141.88
|
|
|
|
$
|
161.20
|
|
|
|
$
|
166.89
|
|
Amex Biotechnology Index
|
|
|
$
|
100.00
|
|
|
|
$
|
144.91
|
|
|
|
$
|
160.92
|
|
|
|
$
|
201.32
|
|
|
|
$
|
223.01
|
|
|
|
$
|
232.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cumulative total returns assumes a hypothetical investment of
$100 on December 31, 2002. |
The information under Performance Graph is not
deemed filed with the Securities and Exchange Commission and is
not to be incorporated by reference in any filing of StemCells,
Inc. under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before
or after the date of this
10-K and
irrespective of any general incorporation language in those
filings.
(b)
Approximate Number of Holders of Common Stock
As of February 29, 2008, there were approximately 582
holders of record of our common stock and the closing price per
share of our common stock on the Nasdaq Global Market was $1.51.
(c)
Recent Sales of Unregistered Securities (last three years ending
December 31, 2007)
We issued the following unregistered securities in 2007:
|
|
|
|
|
In June 2007, we issued 3,865 shares of common stock to the
California Institute of Technology (Cal Tech) for payment of
annual fees of $5,000 for each of two patents to which we hold a
license from Cal Tech, payable in cash or stock at our choice.
We elected to pay the fees in stock. The shares were issued in a
transaction not involving any public offering pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
|
28
We issued the following unregistered securities in 2006:
|
|
|
|
|
In August 2006, we issued 3,848 shares of common stock to
the California Institute of Technology (Cal Tech) as payment of
annual fees of $5,000 for each of two patents to which we hold a
license from Cal Tech, payable in cash or stock at our choice.
We elected to pay the fees in stock. The shares were issued in a
transaction not involving any public offering pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
|
No unregistered securities were issued in 2005.
Equity
Compensation Plan Information
The following table provides certain information with respect to
all of our equity compensation plans in effect as of
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities to
|
|
|
|
|
|
Remaining Available for
|
|
|
|
be Issued Upon
|
|
|
Weighted-average
|
|
|
Future Issuance Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and rights
|
|
|
Reflected in Column(a))
|
|
Plan category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
9,028,810
|
|
|
$
|
2.36
|
|
|
|
3,024,408
|
|
Equity compensation arrangements not approved by security
holders(2)
|
|
|
100,000
|
|
|
$
|
1.20
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
9,128,810
|
|
|
$
|
2.33
|
|
|
|
3,024,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of options issued to employees and directors and
options issued as compensation to consultants for consultation
services. These options were issued under our 1992 Equity
Incentive Plan, Directors Stock Option Plan, StemCells,
Inc. Stock Option Plan, or our 2001, 2004 and 2006 Equity
Incentive Plans. |
(2) |
|
Represents the portion outstanding of a fully vested warrant
issued in January 2003 to purchase 200,000 shares with an
exercise price of $1.20 per share and exercisable, in whole or
in part, for five years from the date of issuance. The warrant
which constitutes an equity compensation arrangement not
approved by security holders was issued in exchange for advisory
services by non-employees. |
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following selected financial and operating data are derived
from our audited consolidated financial statements. The selected
financial and operating data should be read in conjunction with
Item 7. Managements
29
Discussion and Analysis of Financial Condition and Results of
Operation and the consolidated financial statements and
notes thereto contained elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from licensing agreements and grants
|
|
$
|
57
|
|
|
$
|
93
|
|
|
$
|
206
|
|
|
$
|
141
|
|
|
$
|
273
|
|
Research and development expenses
|
|
|
19,937
|
|
|
|
13,600
|
|
|
|
8,226
|
|
|
|
7,844
|
|
|
|
5,479
|
|
General and administrative expenses
|
|
|
7,927
|
|
|
|
7,154
|
|
|
|
5,540
|
|
|
|
4,870
|
|
|
|
4,056
|
|
Wind-down expenses(1)
|
|
|
783
|
|
|
|
709
|
|
|
|
2,827
|
|
|
|
2,827
|
|
|
|
2,885
|
|
License & settlement agreement income, net(2)
|
|
|
551
|
|
|
|
103
|
|
|
|
3,736
|
|
|
|
|
|
|
|
|
|
Gain on sale of marketable securities
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before deemed dividends and cumulative effect of change in
accounting principle
|
|
|
(25,023
|
)
|
|
|
(18,948
|
)
|
|
|
(11,738
|
)
|
|
|
(15,330
|
)
|
|
|
(12,291
|
)
|
Net loss
|
|
|
(25,023
|
)
|
|
|
(18,948
|
)
|
|
|
(11,738
|
)
|
|
|
(15,330
|
)
|
|
|
(14,425
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.45
|
)
|
Shares used in computing basic and diluted loss per share amounts
|
|
|
79,772
|
|
|
|
74,611
|
|
|
|
63,643
|
|
|
|
49,606
|
|
|
|
32,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,759
|
|
|
$
|
51,795
|
|
|
$
|
34,541
|
|
|
$
|
41,060
|
|
|
$
|
13,082
|
|
Marketable securities
|
|
|
29,847
|
|
|
|
7,266
|
|
|
|
3,721
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
48,283
|
|
|
|
66,857
|
|
|
|
44,839
|
|
|
|
47,627
|
|
|
|
19,786
|
|
Accrued wind-down expenses
|
|
|
6,143
|
|
|
|
6,750
|
|
|
|
7,306
|
|
|
|
5,528
|
|
|
|
3,823
|
|
Long-term debt, including capital leases
|
|
|
1,034
|
|
|
|
1,145
|
|
|
|
1,351
|
|
|
|
1,646
|
|
|
|
1,850
|
|
Stockholders equity
|
|
|
35,212
|
|
|
|
54,376
|
|
|
|
32,376
|
|
|
|
36,950
|
|
|
|
10,964
|
|
|
|
|
(1) |
|
Relates to wind-down expenses in respect of our Rhode Island
facility. See Note 7 Wind-down and exit costs
in the Notes to the Consolidated Financial Statements of
Part II, Item 8 of this
Form 10-K
for further information. |
|
(2) |
|
Relates to an agreement with ReNeuron Limited. See Note 2
Financial Instruments in the Notes to Consolidated
Financial Statements of Part II, Item 8 of this
Form 10-K
for further information. |
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This report contains forward looking statements within the
meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act that involve
substantial risks and uncertainties. Such statements include,
without limitation, all statements as to expectation or belief
and statements as to our future results of operations; the
progress of our research, product development and clinical
programs; the need for, and timing of, additional capital and
capital expenditures; partnering prospects; costs of manufacture
of products; the protection of, and the need for, additional
intellectual property rights; effects of regulations; the need
for additional facilities; and potential market opportunities.
Our actual results may vary materially from those contained in
such forward-looking statements because of risks to which we are
subject, including uncertainty as to whether the U.S. Food
and Drug Administration (FDA) or other regulatory authorities
will permit us to proceed with clinical testing of proposed
products despite the novel and unproven nature of our
technologies; the risk that our initial clinical trial and any
other clinical trials or studies could be substantially delayed
beyond their expected dates or cause us to incur substantial
unanticipated costs; uncertainties in our ability to obtain the
capital resources needed to continue our current research and
development operations and to conduct the research, preclinical
development and clinical trials necessary for regulatory
approvals; the uncertainty regarding our ability to obtain a
corporate partner or partners, if
30
needed, to support the development and commercialization of our
potential cell-based therapeutics products; the uncertainty
regarding the outcome of our Phase I clinical trial in NCL and
any other clinical trials or studies we may conduct in the
future; the uncertainty regarding the validity and
enforceability of our issued patents; the uncertainty whether
any products that may be generated in our cell-based
therapeutics programs will prove clinically safe and effective;
the uncertainty whether we will achieve revenue from product
sales or become profitable; uncertainties regarding our
obligations with respect to our former encapsulated cell therapy
facilities in Rhode Island; obsolescence of our technologies;
competition from third parties; intellectual property rights of
third parties; litigation risks; and other risks to which we are
subject. All forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements and risk factors set forth
in Risk Factors in Part I, Item 1A of this
Form 10-K.
Overview
The
Company
Our research and development (R&D) programs are focused on
identifying and developing potential cell-based therapeutics
which can either restore or support organ function. Since we
relocated our corporate headquarters and research laboratories
to California in 1999 our R&D efforts have primarily been
directed at refining our methods for identifying, isolating,
culturing, and purifying the human neural stem cell and human
liver engrafting cells (hLEC) and developing these as potential
cell-based therapeutics for the central nervous system (CNS) and
the liver, respectively. We are currently conducting a Phase I
clinical trial of our
HuCNS-SC®
product candidate (purified human neural stem cells) as a
treatment for infantile and late infantile neuronal ceroid
lipofuscinosis (NCL), a fatal neurodegenerative disease often
referred to as Batten disease. We have completed enrollment and
dosing for this six-patient trial and expect it to be completed
in early 2009. Our CNS Program is continuing basic research and
preclinical development for additional potential indications in
the CNS field. We are targeting to initiate clinical trials to
test our HuCNS-SC product candidate for a spinal cord indication
by mid-2008 and for a myelin disorder in the brain by the end of
2008. In our Liver Program, we are in preclinical development
with our human liver engrafting cells and are exploring their
applicability as a cellular therapy to restore function to liver
tissue by replacing dysfunctional or damaged cells. See Overview
Research and Development Programs in the Business
Section of Part I, Item 1 of this
Form 10-K
for a brief description of our significant research and
development programs. We have also conducted research on several
other cell types and in other areas, which could lead to other
possible product candidates, process improvements or further
research activities.
We have not derived any revenue or cash flows from the sale or
commercialization of any products except for license revenue for
certain of our patented cells and media for use in research. As
a result, we have incurred annual operating losses since
inception and expect to incur substantial operating losses in
the future. Therefore, we are dependent upon external financing
from equity and debt offerings and revenue from collaborative
research arrangements with corporate sponsors to finance our
operations. We have no such collaborative research arrangements
at this time and there can be no assurance that such financing
or partnering revenue will be available when needed or on terms
acceptable to us.
Before we can derive revenue or cash inflows from the
commercialization of any of our product candidates, we will need
to: (i) conduct substantial in vitro testing
and characterization of our proprietary cell types,
(ii) undertake preclinical and clinical testing for
specific disease indications; (iii) develop, validate and
scale-up
manufacturing processes to produce these cell-based
therapeutics, and (iv) pursue required regulatory
approvals. These steps are risky, expensive and time consuming.
Overall, we expect our R&D expenses to be substantial and
to increase for the foreseeable future as we continue the
development and clinical investigation of our current and future
product candidates. However, expenditures on R&D programs
are subject to many uncertainties, including whether we develop
our product candidates with a partner or independently. We
cannot forecast with any degree of certainty which of our
current product candidates will be subject to future
collaboration, when such collaboration agreements will be
secured, if at all, and to what degree such arrangements would
affect our development plans and capital requirements. In
addition, there are numerous factors associated with the
successful commercialization of any of our cell-based
therapeutics, including future trial design and regulatory
requirements, many of which cannot be determined with accuracy
at this
31
time given the stage of our development and the novel nature of
stem cell technologies. The regulatory pathways, both in the
United States and internationally, are complex and fluid given
the novel and, in general, clinically unproven nature of stem
cell technologies. At this time, due to such uncertainties and
inherent risks, we cannot estimate in a meaningful way the
duration of, or the costs to complete, our R&D programs or
whether, when or to what extent we will generate revenues or
cash inflows from the commercialization and sale of any of our
product candidates. While we are currently focused on advancing
each of our product development programs, our future R&D
expenses will depend on the determinations we make as to the
scientific and clinical prospects of each product candidate, as
well as our ongoing assessment of the regulatory requirements
and each product candidates commercial potential.
Given the early stage of development of our product candidates,
any estimates of when we may be able to commercialize one or
more of these products would not be meaningful. Moreover, any
estimate of the time and investment required to develop
potential products based upon our proprietary HuCNS-SC and hLEC
technologies will change depending on the ultimate approach or
approaches we take to pursue them, the results of preclinical
and clinical studies, and the content and timing of decisions
made by the FDA and other regulatory authorities. There can be
no assurance that we will be able to develop any product
successfully, or that we will be able to recover our development
costs, whether upon commercialization of a developed product or
otherwise. We cannot provide assurance that any of these
programs will result in products that can be marketed or
marketed profitably. If certain of our development-stage
programs do not result in commercially viable products, our
results of operations could be materially adversely affected.
Significant
Events
In January 2008, we completed enrollment and dosing of a
six-patient Phase I clinical trial of our HuCNS-SC product
candidate as a treatment for infantile and late infantile
neuronal ceroid lipofuscinosis (NCL) at Oregon Health &
Science University (OHSU) Doernbecher Childrens Hospital.
In January 2008, we entered into a research collaboration with
the OHSU Casey Eye Institute to evaluate our HuCNS-SC product
candidate as a potential treatment for retinal degeneration, a
leading cause of blindness.
In December 2007, we announced that we were exploring the
possible acquisition of privately held Progenitor Cell Therapy,
LLC (PCT), a provider of cGMP-quality cell processing services
headquartered in Hackensack, NJ. PCT agreed to a period of
exclusivity to allow for due diligence and negotiations, and in
consideration thereof, we agreed to make a secured loan of up to
$3.8 million to PCT, of which $1.0 million was lent.
In March 2008, we terminated discussions to acquire PCT because
the parties were unable to reach mutually agreeable terms and
conditions. We anticipate the $1.0 million loan will be
repaid in accordance with its terms.
In September 2007, we entered into a research collaboration with
Belgiums Université Catholique de Louvain (UCL) and
the UCL-affiliated Cliniques Universitaires Saint Luc to further
the development of hLEC as a potential cell-based liver therapy.
Under the collaboration, we are working with UCL to improve
processes to isolate and purify hLEC, which we believe is an
important step prior to initiating any clinical study of the
cells.
In June 2007, we announced that we had successfully completed
enrollment and dosing of the low-dose cohort in our Phase I
trial. A review of the trial data to that point, conducted by an
independent Data Safety Monitoring Committee comprised of
experts in pediatric neurosurgery, pediatric neurology, solid
organ transplantation, and genetics, identified no safety issues
to preclude advancing to the next dose level.
In June 2007, we announced the publication of a paper describing
a new technique for non-invasive tracking of human neural stem
cells transplanted into the brains of mice. The technique, which
involves tagging the human neural stem cells with
Feridex®,
a commonly used magnetic resonance imaging agent approved by the
FDA for use in humans, does not appear to alter the stem
cells function or viability.
In February 2007, we raised net proceeds of approximately
$3 million through the sale of 5,275,000 ordinary shares of
ReNeuron Group plc. We received the shares as part of a license
and settlement agreement we entered into with ReNeuron in 2005
in which we granted ReNeuron a license under some of our patents
to exploit their conditionally immortalized adult human neural
stem cell technology for therapy and other purposes.
32
In January 2007, Desmond H. OConnell, Jr., joined our
Board of Directors. Currently an independent management
consultant and private investor, Mr. OConnell is a
director of Abiomed, Inc. and was formerly a director, acting
chief executive officer and chairman of the board of
Serologicals Corporation until that company was sold in 2006.
Critical
Accounting Policies and the Use of Estimates
The accompanying discussion and analysis of our financial
condition and results of operations are based on our
Consolidated Financial Statements and the related disclosures,
which have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP). The preparation of these
Consolidated Financial Statements requires management to make
estimates, assumptions, and judgments that affect the reported
amounts in our Consolidated Financial Statements and
accompanying notes. These estimates form the basis for making
judgments about the carrying values of assets and liabilities.
We base our estimates and judgments on historical experience and
on various other assumptions that we believe to be reasonable
under the circumstances, and we have established internal
controls related to the preparation of these estimates. Actual
results and the timing of the results could differ materially
from these estimates.
Stock-Based
Compensation
On January 1, 2006, we adopted Statement of Financial
Accounting Standards 123 (revised 2004) (SFAS 123R),
Share-Based Payment, which revises SFAS 123,
Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees. SFAS 123R requires us to recognize
expense related to the fair value of our stock-based
compensation awards, including employee stock options. Under the
provisions of SFAS 123R, employee stock-based compensation
is estimated at the date of grant based on the awards fair
value using the Black-Scholes-Merton (Black-Scholes)
option-pricing model and is recognized as expense ratably over
the requisite service period. The Black-Scholes option-pricing
model requires the use of certain assumptions, the most
significant of which are our estimates of the expected
volatility of the market price of our stock and the expected
term of the award. Our estimate of the expected volatility is
based on historical volatility. We currently use the simplified
method to estimate the expected term of the option. Under this
method, the expected term is the average of the contractual life
of the option and its vesting period. As required under
SFAS 123R, we review our valuation assumptions at each
grant date and, as a result, our assumptions in future periods
may change. For the year ended December 31, 2007, employee
stock-based compensation expense was approximately $3,061,000.
As of December 31, 2007, total compensation cost related to
unvested stock options not yet recognized was approximately
$6,956,000, which is expected to be recognized as expense over a
weighted-average period of 1.6 years.
Wind-down
expenses
In connection with our wind-down of our research and
manufacturing operations in Lincoln, Rhode Island, and the
relocation of our corporate headquarters and remaining research
laboratories to California in October 1999, we provided a
reserve for our estimate of the exit cost obligation in
accordance with
EITF 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring. The reserve reflects
estimates of the ongoing costs of our former research and
administrative facility in Lincoln, which we hold on a lease
that terminates on June 30, 2013. We are seeking to
sublease, assign, sell, or otherwise divest ourselves of our
interest in the facility at the earliest possible time, but we
cannot determine with certainty a fixed date by which such
events will occur, if at all.
In determining the facility exit cost reserve amount, we are
required to consider our lease payments through to the end of
the lease term and estimate other relevant factors such as
facility operating expenses, real estate market conditions in
Rhode Island for similar facilities, occupancy rates, and
sublease rental rates projected over the course of the
leasehold. We re-evaluate the estimate each quarter, taking
account of changes, if any, in each underlying factor. The
process is inherently subjective because it involves projections
over time from the date of the estimate through the
end of the lease and it is not possible to determine
any of the factors except the lease payments with certainty over
that period.
33
Management forms its best estimate on a quarterly basis, after
considering actual sublease activity, reports from our
broker/realtor about current and predicted real estate market
conditions in Rhode Island, the likelihood of new subleases in
the foreseeable future for the specific facility and significant
changes in the actual or projected operating expenses of the
property. We discount the projected net outflow over the term of
the leasehold to arrive at the present value, and adjust the
reserve to that figure. The estimated vacancy rate for the
facility is an important assumption in determining the reserve
because changes in this assumption have the greatest effect on
estimated sublease income. In addition, the vacancy rate
estimate is the variable most subject to change, while at the
same time it involves the greatest judgment and uncertainty due
to the absence of highly predictive information concerning the
future of the local economy and future demand for specialized
laboratory and office space in that area. The average vacancy
rate of the facility over the last five years (2003 through
2007) was approximately 73%, varying from 66% to 89%. As of
December 31, 2007, based on current information available
to management, the vacancy rate is projected to be 80% for 2008,
and approximately 70% from 2009 through the end of the lease.
These estimates are based on actual occupancy as of
December 31, 2007, predicted lead time for acquiring new
subtenants, historical vacancy rates for the area and
assessments by our broker/realtor of future real estate market
conditions. If the assumed vacancy rate for 2009 to the end of
the lease had been five percentage points higher or lower at
December 31, 2007, then the reserve would have increased or
decreased by approximately $214,000. Similarly, a 5% increase or
decrease in the operating expenses for the facility from 2008 on
would have increased or decreased the reserve by approximately
$122,000, and a 5% increase or decrease in the assumed average
rental charge per square foot would have increased or decreased
the reserve by approximately $80,000. Management does not wait
for specific events to change its estimate, but instead uses its
best efforts to anticipate them on a quarterly basis.
For the year ended December 31, 2007, we recorded actual
expenses against this reserve of approximately $1,420,000. Based
on managements evaluation of the factors mentioned above,
and particularly the projected vacancy rates described above, we
adjusted the reserve to $6,143,000 at December 31, 2007 by
recording an additional $783,000 for the year ended
December 31, 2007.
Income
Taxes
We account for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes (SFAS 109) and
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109, as amended by FASB Staff Position
No. 48-1
(FIN 48). Under SFAS 109 and FIN 48, we must
recognize deferred tax assets and liabilities for expected
future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities. Income
tax receivables and liabilities, and deferred tax assets and
liabilities, are recognized based on the amounts that more
likely than not would be sustained upon ultimate settlement with
taxing authorities.
Developing our provision for income taxes and analyzing our tax
positions requires significant judgment and knowledge of federal
and state income tax laws, regulations and strategies, including
the determination of deferred tax assets and liabilities and,
any valuation allowances that may be required for deferred tax
assets.
We assess the likelihood of realizing our deferred tax assets to
determine whether an income tax valuation allowance is required.
Based on such evidence that can be objectively verified, we
determine whether it is more likely than not that all or a
portion of the deferred tax assets will be realized. The main
factors that we consider include:
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cumulative losses in recent years;
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|
income/losses expected in future years; and
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|
the applicable statute of limitations.
|
Tax benefits associated with uncertain tax positions are
recognized in the period in which one of the following
conditions is satisfied: (1) the more likely than not
recognition threshold is satisfied; (2) the position is
ultimately settled through negotiation or litigation; or
(3) the statute of limitations for the taxing authority to
examine and challenge the position has expired. Tax benefits
associated with an uncertain tax position are reversed in the
period in which the more likely than not recognition threshold
is no longer satisfied.
34
We concluded that the realization of deferred tax assets is
dependent upon future earnings, if any, the timing and amount of
which are uncertain. Accordingly, the net deferred tax assets
have been fully offset by a valuation allowance.
Contingencies
We are currently involved in certain legal proceedings. See
Note 8, Commitments and Contingencies, in the
Notes to Consolidated Financial Statements of Part II,
Item 8 of this
Form 10-K
for further information on these matters.
Results
of Operations
Our results of operations have varied significantly from year to
year and quarter to quarter and may vary significantly in the
future due to the occurrence of material recurring and
nonrecurring events, including without limitation the receipt
and payment of recurring and nonrecurring licensing payments,
the initiation or termination of research collaborations, the
on-going expenses to lease and maintain our Rhode Island
facilities, and the increasing costs associated with operating
our California facility. To expand and provide high quality
systems and support to our research and development programs, we
will need to hire more personnel, which will lead to higher
operating expenses.
Revenue
Revenue totaled approximately $57,000 in 2007, $93,000 in 2006,
and $206,000 in 2005.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
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|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Versus 2006
|
|
|
Versus 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing agreements and grants
|
|
$
|
56,722
|
|
|
$
|
92,850
|
|
|
$
|
205,914
|
|
|
$
|
(36,128
|
)
|
|
|
(39
|
)%
|
|
$
|
(113,064
|
)
|
|
|
(55
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
The decrease in licensing and grant revenue in 2007 as compared
to 2006 was primarily attributable to the completed draw down in
2006 of a $464,000 Small Business Technology Transfer Grant for
studies in Alzheimers disease that was awarded in
September 2004. The grant supported joint work with
Dr. George A. Carlson of the McLaughlin Research Institute
(MRI) in Great Falls, Montana. The decrease in licensing and
grant revenue in 2006 as compared to 2005 was primarily
attributable to lesser amounts drawn down in 2006 from the grant
as compared to 2005. We received and recognized approximately
$38,000 in 2006, $186,000 in 2005, and $26,000 in 2004 as grant
revenue, the remainder was reimbursed to MRI.
35
Operating
Expenses
Operating expense totaled approximately $28,648,000 in 2007,
$21,464,000 in 2006, and $16,594,000 in 2005.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Versus 2006
|
|
|
Versus 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development
|
|
$
|
19,937,426
|
|
|
$
|
13,600,433
|
|
|
$
|
8,226,734
|
|
|
$
|
6,336,993
|
|
|
|
47
|
%
|
|
$
|
5,373,699
|
|
|
|
65
|
%
|
General & administrative
|
|
|
7,927,443
|
|
|
|
7,154,042
|
|
|
|
5,539,845
|
|
|
|
773,401
|
|
|
|
11
|
%
|
|
|
1,614,197
|
|
|
|
29
|
%
|
Wind-down expenses
|
|
|
783,022
|
|
|
|
709,209
|
|
|
|
2,827,403
|
|
|
|
73,813
|
|
|
|
10
|
%
|
|
|
(2,118,194
|
)
|
|
|
(75
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
28,647,891
|
|
|
$
|
21,463,684
|
|
|
$
|
16,593,982
|
|
|
$
|
7,184,207
|
|
|
|
33
|
%
|
|
$
|
4,869,702
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
Research
and Development Expenses
Our R&D expenses consist primarily of salaries and related
personnel expenses, costs associated with clinical trials and
regulatory submissions; costs associated with preclinical
activities such as toxicology studies; certain patent-related
costs such as licensing; facilities-related costs such as
depreciation; lab equipment and supplies. Clinical trial
expenses include payments to vendors such as clinical research
organizations, contract manufacturers, clinical trial sites,
laboratories for testing clinical samples and consultants.
Cumulative R&D costs incurred since we refocused our
activities on developing cell-based therapeutics (fiscal years
2000 through 2007) were approximately $75 million.
Over this period, the majority of these cumulative costs were
related to: (i) characterization of our proprietary
HuCNS-SC cell, (ii) expenditures for toxicology and other
preclinical studies, preparation and submission of our
Investigational New Drug (IND) application for our Phase I trial
for NCL to the FDA, and obtaining FDA clearance; and
(iii) expenditures in connection with our HuCNS-SC Phase I
clinical trial.
We use and manage our R&D resources, including our
employees and facilities, across various projects rather than on
a
project-by-project
basis for the following reasons. The allocations of time and
resources change as the needs and priorities of individual
projects and programs change, and many of our researchers are
assigned to more than one project at any given time.
Furthermore, we are exploring multiple possible uses for each of
our proprietary cell types, so much of our R&D effort is
complementary to and supportive of each of these projects.
Lastly, much of our R&D effort is focused on manufacturing
processes, which can result in process improvements useful
across cell types. We also use external service providers to
assist in the conduct of our clinical trials, to manufacture
certain of our product candidates and to provide various other
R&D related products and services. Many of these costs and
expenses are complementary to and supportive of each of our
programs. Because we do not have a development collaborator for
any of our product programs, we are currently responsible for
all costs incurred with respect to our product candidates.
R&D expense totaled approximately $19,937,000 in 2007, as
compared to $13,600,000 in 2006 and $8,227,000 in 2005. At
December 31, 2007, we had 49 full-time employees
working in research and development and laboratory support
services as compared to 35 at December 31, 2006 and 33 at
December 31, 2005.
2007 versus 2006. The increase of
approximately $6,337,000, or 47%, from 2006 to 2007 was
primarily attributable to the continued expansion of our
operations in cell processing and clinical development,
including an increase in external services and clinical study
costs of approximately $3,954,000, and an increase in personnel
costs of approximately $1,442,000, of which approximately
$206,000 was attributable to stock-based compensation expense.
The remainder of the increase in 2007 was due to increases in
supplies, rent, and other operating expenses.
2006 versus 2005. The increase of
approximately $5,374,000, or 65%, from 2005 to 2006 was
primarily attributable to expansion of our operations in cell
processing and clinical development, which consisted of an
increase in personnel costs of approximately $2,669,000, an
increase in external services of approximately
36
$1,464,000, an increase in supplies and other expenses of
$771,000 and the cost of additional space leased in 2006
allocated to research and development. Of the approximately
$2,669,000 increase in personnel costs, approximately $1,344,000
was attributable to stock-based compensation expense. The
remaining increase was primarily attributable to increased head
count.
General
and Administrative Expenses
General and administrative (G&A) expenses totaled
approximately $7,927,000 in 2007, compared with $7,154,000 in
2006 and $5,540,000 in 2005.
2007 versus 2006. The increase of
approximately $773,000, or 11%, from 2006 to 2007 was primarily
attributable to an increase in external services of
approximately $763,000, driven by an increase in legal fees
related to patent prosecutions and litigation, and an increase
in personnel costs of approximately $425,000, of which
approximately $211,000 was attributable to an increase in
stock-based compensation expense. These increases were partially
offset by a decrease in other G&A expenses.
2006 versus 2005. The increase of
approximately $1,614,000, or 29%, from 2005 to 2006 was
primarily due to the increase in personnel costs of
approximately $1,826,000, of which approximately $1,423,000 was
attributable to stock-based compensation expense. The increase
in personnel costs was partially offset by a net decrease in
other costs primarily attributable to the expensing of the fair
value of options granted to a consultant in 2005. No such
options were granted in 2006.
Wind-down
Expenses
In 1999, in connection with exiting our former research facility
in Rhode Island, we created a reserve for the estimated lease
payments and operating expenses related to it. The reserve has
been re-evaluated and adjusted based on assumptions relevant to
real estate market conditions and the estimated time until we
could either fully sublease, assign or sell our remaining
interests in the property. The reserve was approximately
$6,145,000 at December 31, 2007 and $6,750,000 at
December 31, 2006. Payments net of subtenant income were
recorded against this reserve of $1,420,000 in 2007, $1,295,000
in 2006, and $1,079,000 in 2005. We re-evaluated the estimate
and adjusted the reserve by recording in aggregate, additional
wind-down expenses of $783,000 in 2007, $709,000 in 2006, and
$2,827,000 in 2005. Expenses for this facility will fluctuate
based on changes in tenant occupancy rates and other operating
expenses related to the lease. Even though it is our intent to
sublease, assign, sell, or otherwise divest ourselves of our
interests in the facility at the earliest possible time, we
cannot determine with certainty a fixed date by which such
events will occur. In light of this uncertainty, based on
estimates, we will periodically re-evaluate and adjust the
reserve, as necessary. See Note 7 Wind-down and exit
costs, in the Notes to Consolidated Financial Statements
of Part II, Item 8 of this
Form 10-K
for further information.
Other
Income (Expense)
Other income totaled approximately $3,568,000 in 2007, compared
with $2,422,000 in 2006 and $4,650,000 in 2005.
37
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Versus 2006
|
|
|
Versus 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement
|
|
$
|
550,467
|
|
|
$
|
103,359
|
|
|
$
|
3,735,556
|
|
|
$
|
447,108
|
|
|
|
433
|
%
|
|
$
|
(3,632,197
|
)
|
|
|
(97
|
)%
|
Interest income
|
|
|
2,459,820
|
|
|
|
2,479,740
|
|
|
|
1,122,963
|
|
|
|
(19,920
|
)
|
|
|
(1
|
)%
|
|
|
1,356,777
|
|
|
|
121
|
%
|
Interest expense
|
|
|
(123,606
|
)
|
|
|
(143,001
|
)
|
|
|
(171,909
|
)
|
|
|
19,395
|
|
|
|
(14
|
)%
|
|
|
28,908
|
|
|
|
(17
|
)%
|
Gain on sale of investment
|
|
|
715,584
|
|
|
|
|
|
|
|
|
|
|
|
715,584
|
|
|
|
|
*%
|
|
|
|
|
|
|
|
*%
|
Other expense, net
|
|
|
(33,899
|
)
|
|
|
(17,644
|
)
|
|
|
(36,892
|
)
|
|
|
(16,255
|
)
|
|
|
92
|
%
|
|
|
19,248
|
|
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
3,568,366
|
|
|
$
|
2,422,454
|
|
|
$
|
4,649,718
|
|
|
$
|
1,145,912
|
|
|
|
47
|
%
|
|
$
|
(2,227,264
|
)
|
|
|
(48
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Calculation can not be performed or is not meaningful. |
License
and Settlement Agreement
In July 2005, we entered into an agreement with ReNeuron
Limited, a wholly owned subsidiary of ReNeuron Group plc, a
listed UK corporation (collectively referred to as
ReNeuron). As part of the agreement, we granted
ReNeuron a license that allows ReNeuron to exploit their
c-mycER conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. We
received a 7.5% fully-diluted equity interest in ReNeuron,
subject to certain anti-dilution provisions, and a cross-license
to the exclusive use of ReNeurons technology for certain
diseases and conditions, including lysosomal storage diseases,
spinal cord injury, cerebral palsy, and multiple sclerosis. The
agreement also provides for full settlement of any potential
claims that either we or ReNeuron might have had against the
other in connection with any putative infringement of certain of
each partys patent rights prior to the effective date of
the agreement.
Other income from the license and settlement agreement totaled
approximately $550,000 in 2007, $103,000 in 2006, and $3,736,000
in 2005, which was the fair value of the ReNeuron shares we
received under such agreement, net of legal fees and the value
of the shares that were transferred to NeuroSpheres Ltd., an
Alberta corporation from which we have licensed some of the
patent rights that are the subject of the agreement with
ReNeuron. See Note 2 Financial
Instruments ReNeuron License Agreement in the
Notes to Consolidated Financial Statements of Part II,
Item 8 of this
Form 10-K
for further information regarding this transaction.
Interest
Income
Interest income totaled approximately $2,460,000 in 2007,
$2,480,000 in 2006, and $1,123,000 in 2005. Interest income in
2007 was relatively flat compared to 2006, as a result of lower
average bank balances offset by higher average yields. The
increase in interest income from 2005 to 2006 was primarily
attributable to a higher average bank balance as a result of our
financing transactions. See Cash Used in or Provided by
Financing Activities, in Liquidity and Capital Resources
below for further information.
Interest
Expense
Interest expense was approximately $124,000 in 2007, $143,000 in
2006, and $172,000 in 2005. The decreases in 2007 as compared to
2006 and in 2006 as compared to 2005 were attributable to lower
outstanding debt and capital lease balances. See Note 8
Commitment and Contingencies, in the Notes to
Consolidated Financial Statements of Part II, Item 8
of this
Form 10-K
for further information.
38
Gain on
Sale of Marketable Equity Securities
The gain on sale of marketable equity securities of
approximately $716,000 in 2007 was attributable to sales of
ReNeuron shares. See Note 2 Financial
Instruments, in the Notes to Consolidated Financial
Statements of Part II, Item 8 of this
Form 10-K
for further information on this transaction.
Other
Expense, net
Other expense, net for 2007 were approximately $34,000, which
included approximately $34,000 for state franchise taxes paid,
partially offset by a gain of approximately $1,500 from the
disposal of old equipment. Other expense, net for 2006 were
approximately $18,000, which included approximately $20,000 for
state franchise taxes paid, partially offset by a gain of
approximately $2,000 from the disposal of old equipment. Other
expense, net for 2005 were approximately $37,000, which included
approximately $36,000 for state franchise taxes and
approximately $1,000 from a write-off of obsolete equipment.
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, revenue from
collaborative agreements, research grants, license fees, and
interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Versus 2006
|
|
|
Versus 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
At December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and highly liquid investments(1)
|
|
$
|
37,645,085
|
|
|
$
|
51,795,529
|
|
|
$
|
34,540,908
|
|
|
$
|
(14,150,444
|
)
|
|
|
(27
|
)%
|
|
$
|
17,254,621
|
|
|
|
50
|
%
|
Year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(20,856,746
|
)
|
|
$
|
(16,104,120
|
)
|
|
$
|
(11,870,568
|
)
|
|
$
|
(4,752,626
|
)
|
|
|
29
|
%
|
|
$
|
(4,233,552
|
)
|
|
|
36
|
%
|
Net cash used in investing activities
|
|
|
(27,155,656
|
)
|
|
|
(1,297,124
|
)
|
|
|
(847,505
|
)
|
|
|
(25,858,532
|
)
|
|
|
1994
|
%
|
|
|
(449,619
|
)
|
|
|
53
|
%
|
Net cash provided by financing activities
|
|
|
5,976,042
|
|
|
|
34,655,865
|
|
|
|
6,199,449
|
|
|
|
(28,679,823
|
)
|
|
|
(83
|
)%
|
|
|
28,456,416
|
|
|
|
459
|
%
|
|
|
|
(1) |
|
Cash and highly liquid investments include unrestricted cash,
cash equivalents, and short-term and long-term marketable debt
securities. Marketable equity securities, which are comprised of
4,821,924 ordinary shares of ReNeuron, are excluded from the
amounts above. See Note 2, Financial
Instruments, in the Notes to the Consolidated Financial
Statements of Part II, Item 8 of this
Form 10-K
for further information. |
Total cash and highly liquid investments were approximately
$37,645,000 at December 31, 2007, compared with
approximately $51,796,000 at December 31, 2006, and
$34,541,000 at December 31, 2005.
2007 versus 2006. The decrease in our cash and
highly liquid investments of approximately $14,150,000, or 27%,
from December 31, 2006 to December 31, 2007 was
primarily attributable to cash used in operating activities;
partially offset by cash generated from financing activities.
2006 versus 2005. The increase in our cash and
highly liquid investments of approximately $17,255,000, or 50%,
from December 31, 2005 to December 31, 2006 was
primarily attributable to cash generated from financing
activities; partially offset by cash used in operating
activities.
Net
Cash Used in Operating Activities
In our operating activities we used approximately $20,857,000 in
cash in 2007, $16,104,000 in cash in 2006, and $11,871,000 in
cash in 2005. The increase in cash used in operating activities
in 2007 as compared to 2006 and 2006 as compared to 2005 was
primarily attributable to the expansion of our operations in
cell processing and clinical development, including increases in
headcount and headcount related expenses and external services.
39
Net
Cash Used in Investing Activities
The increase from 2006 to 2007 of approximately $25,859,000 for
net cash used in investing activities was almost entirely due to
the redeployment of cash held in money market funds (classified
as cash equivalents) to marketable debt securities (classified
as marketable securities). In February 2007, we sold 5,275,000
ordinary shares of ReNeuron for net proceeds of approximately
$3,077,000. In addition, cash used in investing activities in
2007 includes a secured loan of $1,000,000 made to PCT in
December 2007. See Note 2, Financial
Instruments, in the Notes to the Consolidated Financial
Statements of Part II, Item 8 of this
Form 10-K
for further information on our investing activities. The
increase from 2005 to 2006 of approximately $450,000 for net
cash used in investing activities was primarily attributable to
an increase in capital expenditures.
Net
Cash Provided by Financing Activities
The decrease from 2006 to 2007 of approximately $28,680,000 and
the increase in 2006 from 2005 of approximately $28,456,000 for
net cash provided by financing activities was primarily
attributable to the sale, on April 6, 2006, of
11,750,820 shares of our common stock to a limited number
of institutional investors at a price of $3.05 per share. We
received total proceeds, net of offering expenses and placement
agency fees, of approximately $33,422,000.
Listed below are key financing transactions entered into by us
in the last three years:
|
|
|
|
|
In April 2007, a warrant issued as part of a June 16, 2004
financing arrangement, was exercised to purchase an aggregate of
575,658 shares of our common stock at $1.90 per share. We
issued 575,658 shares of our common stock and received
proceeds of approximately $1,094,000.
|
|
|
|
On December 29, 2006, we filed a Prospectus Supplement
announcing the entry of a sales agreement with Cantor
Fitzgerald & Co. under which up to
10,000,000 shares may be sold from time to time under a
shelf registration statement. In 2007, we sold a total of
1,807,000 shares of our common stock under this agreement
at an average price per share of $2.84 for gross proceeds of
approximately $5,133,000. Cantor is paid compensation equal to
5.0% of the gross proceeds pursuant to the terms of the
agreement.
|
|
|
|
On April 6, 2006, we sold 11,750,820 shares of our
common stock to a limited number of institutional investors at a
price of $3.05 per share, for gross proceeds of approximately
$35,840,000. The shares were offered as a registered direct
offering under an effective shelf registration statement
previously filed with and declared effective by the Securities
and Exchange Commission. We received total proceeds, net of
offering expenses and placement agency fees, of approximately
$33,422,000. No warrants were issued as part of this financing
transaction.
|
|
|
|
In March 2006, a warrant issued as part of a June 16, 2004
financing arrangement was exercised to purchase an aggregate of
526,400 shares of our common stock at $1.89 per share. We
issued 526,400 shares of our common stock and received
proceeds of approximately $995,000.
|
|
|
|
In 2005, warrants for the purchase of up to an aggregate of
2,958,348 shares were exercised. For the exercise of these
warrants, we issued 2,842,625 shares of our common stock
and received proceeds of approximately $5,939,000.
|
We have incurred significant operating losses and negative cash
flows since inception. We have not achieved profitability and
may not be able to realize sufficient revenue to achieve or
sustain profitability in the future. We do not expect to be
profitable in the next several years, but rather expect to incur
additional operating losses. We have limited liquidity and
capital resources and must obtain significant additional capital
resources in order to sustain our product development efforts,
for acquisition of technologies and intellectual property
rights, for preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of
capital equipment, laboratory and office facilities,
establishment of production capabilities, for general and
administrative expenses and other working capital requirements.
We rely on cash balances and proceeds from equity and debt
offerings, proceeds from the transfer or sale of our
intellectual property rights, equipment, facilities or
investments, and government grants and funding from
collaborative arrangements, if obtainable, to fund our
operations.
40
We intend to pursue opportunities to obtain additional financing
in the future through equity and debt financings, grants and
collaborative research arrangements. We have a shelf
registration statement which, as of December 31, 2007,
covered shares of our common stock up to a value of
approximately $59 million that could be available for
financings. On December 29, 2006, we filed a Prospectus
Supplement announcing the entry of a sales agreement with Cantor
Fitzgerald & Co. under which up to
10,000,000 shares may be sold from time to time under the
shelf registration statement. The source, timing and
availability of any future financing will depend principally
upon market conditions, interest rates and, more specifically,
on our progress in our exploratory, preclinical and future
clinical development programs. Funding may not be available when
needed at all, or on terms acceptable to us. Lack of
necessary funds may require us, among other things, to delay,
scale back or eliminate some or all of our research and product
development programs, planned clinical trials,
and/or our
capital expenditures or to license our potential products or
technologies to third parties.
Commitments
See Note 8, Commitments and Contingencies in
the Notes to Consolidated Financial Statements of Part II,
Item 8 of this
Form 10-K
for further information.
Off-Balance
Sheet Arrangements
We have certain contractual arrangements that create potential
risk for us and are not recognized in our Consolidated Balance
Sheets. Discussed below are those off-balance sheet arrangements
that have or are reasonably likely to have a material current or
future effect on our financial condition, changes in financial
condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Operating
Leases
We lease various real properties under operating leases that
generally require us to pay taxes, insurance, maintenance, and
minimum lease payments. Some of our leases have options to renew.
We entered into and amended a lease agreement for an
approximately 68,000 square foot facility located at the
Stanford Research Park in Palo Alto, California. At
December 31, 2007, we had a space-sharing agreement
covering approximately 10,451 square feet of this facility.
We receive base payments plus a proportionate share of the
operating expenses based on square footage over the term of the
agreement. For the year 2008, we expect to receive, in
aggregate, approximately $376,000 as part of the space-sharing
agreement. As a result of the above transactions, our estimated
net cash outlay for rent will be approximately $1,921,000 for
2008.
We continue to have outstanding obligations in regard to our
former facilities in Lincoln, Rhode Island. In 1997, we had
entered into a fifteen-year lease for a scientific and
administrative facility (the SAF) in a sale and leaseback
arrangement. The lease includes escalating rent payments. For
the year 2008, we expect to pay approximately $1,172,000 in
operating lease payments and estimated operating expenses of
approximately $550,000, before receipt of
sub-tenant
income. For the year 2008, we expect to receive, in aggregate,
approximately $282,000 in
sub-tenant
rent. As a result of the above transactions, our estimated cash
outlay net of
sub-tenant
rent for the SAF will be approximately $1,440,000 for 2008.
With the exception of leases discussed above, we have not
entered into any off balance sheet financial arrangements and
have not established any special purpose entities. We have not
guaranteed any debts or commitments of other entities or entered
into any options on non-financial assets.
See Note 8, Commitments and Contingencies, in
the Notes to Consolidated Financial Statements of Part II,
Item 8 of this
Form 10-K
for further information.
41
Contractual
Obligations
In the table below, we set forth our legally binding and
enforceable contractual cash obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
Obligations
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
Payable in
|
|
|
and
|
|
|
|
at 12/31/07
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Beyond
|
|
|
Operating lease payments(1)
|
|
$
|
11,849,336
|
|
|
$
|
3,469,017
|
|
|
$
|
3,536,843
|
|
|
$
|
1,767,304
|
|
|
$
|
1,171,875
|
|
|
$
|
1,171,875
|
|
|
$
|
732,422
|
|
Capital lease (equipment)
|
|
|
46,347
|
|
|
|
19,862
|
|
|
|
19,862
|
|
|
|
6,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Payable (principal & interest)(2)
|
|
|
1,589,093
|
|
|
|
244,531
|
|
|
|
244,572
|
|
|
|
242,559
|
|
|
|
242,321
|
|
|
|
240,666
|
|
|
|
374,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
13,484,776
|
|
|
$
|
3,733,410
|
|
|
$
|
3,801,277
|
|
|
$
|
2,016,486
|
|
|
$
|
1,414,196
|
|
|
$
|
1,412,541
|
|
|
$
|
1,106,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease payments exclude
space-sharing and
sub-lease
income. See Off-Balance Sheet Arrangements
Operating Leases above for further information.
|
|
(2)
|
|
See Note 8, Commitments
and Contingencies in the Notes to Consolidated Financial
Statements of Part II, Item 8 of this
Form 10-K
for further information.
|
We do not have any material unconditional purchase obligations
or commercial commitments related to capital expenditures,
clinical development, clinical manufacturing, or other external
services contracts at December 31, 2007.
The above table excludes our obligation to lend up to an
additional $2.8 million to PCT. This obligation is subject
to the satisfaction of certain preconditions, which we do not
expect to occur. See Overview above for further
information.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently assessing the impact
that SFAS 157 may have on our results of operations and
financial position.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 is expected to
expand the use of fair value accounting but does not affect
existing standards which require certain assets or liabilities
to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under
SFAS 159, a company may choose, at specified election
dates, to measure eligible items at fair value and report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We are currently
assessing the impact that SFAS 159 may have on our results
of operations and financial position.
In December 2007, the SEC issued Staff Accounting
Bulletin 110, Share-Based Payment (SAB 110),
which amends SAB 107, Share-Based Payment, to permit
public companies, under certain circumstances, to use the
simplified method in SAB 107 for employee option grants
after December 31, 2007. Use of the simplified method after
December 2007 is permitted only for companies whose historical
data about their employees exercise behavior does not
provide a reasonable basis for estimating the expected term of
the options. We currently use the simplified method to estimate
the expected term for employee option grants as adequate
historical experience is not available to provide a reasonable
estimate. SAB 110 is effective for employee options granted
after December 31, 2007. We intend to adopt SAB 110
effective January 1, 2008 and we are currently assessing
our historical experience to evaluate if it can provide a
reasonable estimate of the expected term for employee option
grants.
42
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
Rate and Credit Risk
Our interest-bearing assets, or interest-bearing portfolio,
consists of cash, cash equivalents, restricted cash, and
marketable debt securities. The balance of our interest-bearing
portfolio, was approximately $38,414,000, or 79%, of total
assets at December 31, 2007 and $52,567,000, or 79%, of
total assets at December 31, 2006. Interest income earned
on these assets was approximately $2,460,000 in 2007 and
$2,478,000 in 2006. Our interest income is sensitive to changes
in the general level of interest rates, primarily
U.S. interest rates. Our debt securities are primarily
comprised of commercial paper, corporate debt and asset-backed
securities. Generally, corporate obligations must have senior
credit ratings of A2/A or the equivalent. See Note 1,
Summary of Significant Accounting Policies
Financial Instruments and Note 2 Financial
Instruments section in the Notes to Consolidated Financial
Statements in Part II, Item 8 of this
Form 10-K
for further information.
Our long-term debt is comprised of industrial revenue bonds
issued by the State of Rhode Island to finance the construction
of our pilot manufacturing facility in Rhode Island. See
Note 8, Commitments and Contingencies, section
in the Notes to Consolidated Financial Statements in
Part II, Item 8 of this
Form 10-K
for further information.
Equity
Security and Foreign Exchange Risks
In July 2005, we entered into a license and settlement agreement
with ReNeuron Limited, a wholly owned subsidiary of ReNeuron
Group plc, a publicly listed UK corporation (collectively
referred to as ReNeuron). As part of the agreement,
we granted ReNeuron a license that allows ReNeuron to exploit
their c-mycER conditionally immortalized adult human
neural stem cell technology for therapy and other purposes. In
return for the license, we received a 7.5% fully-diluted equity
interest in ReNeuron, subject to certain anti-dilution
provisions, and a cross-license to the exclusive use of
ReNeurons technology for certain diseases and conditions,
including lysosomal storage diseases, spinal cord injury,
cerebral palsy and multiple sclerosis. The agreement also
provides for full settlement of any potential claims that either
we or ReNeuron might have had against the other in connection
with any putative infringement of certain of each partys
patent rights prior to the effective date of the agreement. In
February 2007, we sold 5,275,000 ordinary shares of ReNeuron for
net proceeds of approximately $3,075,000. We recorded
approximately $716,000 as realized gain for this transaction. In
February 2007, ReNeuron issued additional shares of common stock
as a consequence of certain anti-dilution provisions in the
agreement. We were entitled to approximately 822,000 shares
net of approximately 12,000 shares were transferred to
NeuroSpheres. We recorded approximately $551,000 as other income
for the fair value of the additional shares received.
Changes in market value as a result of changes in market price
per share or the exchange rate between the U.S. dollar and
the British pound are accounted for under other
comprehensive income (loss) if deemed temporary and are
not recorded as other income or loss until the
shares are disposed of and a gain or loss realized. The
unrealized loss as of December 31, 2007 was approximately
$249,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
price at
|
|
|
Exchange
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
December 31,
|
|
|
Rate at
|
|
|
Value
|
|
|
Expected
|
|
|
|
|
|
|
at
|
|
|
2007
|
|
|
December 31,
|
|
|
in USD at
|
|
|
Future
|
|
|
|
|
Associated
|
|
December 31,
|
|
|
in
|
|
|
2007
|
|
|
December 31,
|
|
|
Cash
|
Company/Stock Symbol
|
|
Exchange
|
|
Risks
|
|
2007
|
|
|
GBP(£)
|
|
|
1 GBP = USD
|
|
|
2007
|
|
|
Flows
|
|
ReNeuron Group plc/RENE
|
|
AIM (AIM is the London Stock Exchanges Alternative
Investment Market)
|
|
Lower share price
Foreign currency translation
Liquidity
Bankruptcy
|
|
|
4,821,924
|
|
|
|
0.205
|
|
|
|
1.9843
|
|
|
$
|
1,961,469
|
|
|
(1)
|
|
|
|
(1) |
|
It is our intention to liquidate this investment when we can do
so at prices acceptable to us. Although we are not legally
restricted from selling the stock, the share price is subject to
change and the volume traded has often been very small since the
stock was listed on the AIM on August 12, 2005. The
performance of ReNeuron Group plc stock since its listing does
not predict its future value. |
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders
StemCells, Inc.
We have audited StemCells, Inc.s (a Delaware corporation)
internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). StemCells, Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on StemCells, Inc.s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, StemCells, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007 based on criteria established in
Internal Control Integrated Framework issued
by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of StemCells, Inc. and subsidiary as
of December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated March 7, 2008
expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
San Francisco, California
March 7, 2008
44
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLMENTARY DATA
|
STEMCELLS,
INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
StemCells, Inc.
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (a Delaware corporation) and subsidiary as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of StemCells, Inc. and subsidiary as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2006 the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, applying the
modified-prospective method.
We also have audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), StemCells,
Inc.s internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 7, 2008
expressed an unqualified opinion thereon.
San Francisco, California
March 7, 2008
46
StemCells,
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,759,169
|
|
|
$
|
51,795,529
|
|
Marketable securities, current
|
|
|
26,696,413
|
|
|
|
4,132,646
|
|
Other receivables
|
|
|
264,631
|
|
|
|
482,850
|
|
Note receivable
|
|
|
1,000,000
|
|
|
|
|
|
Prepaid assets
|
|
|
1,032,482
|
|
|
|
1,119,467
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
38,752,695
|
|
|
|
57,530,492
|
|
Marketable securities, non current
|
|
|
3,150,971
|
|
|
|
3,133,632
|
|
Property, plant and equipment, net
|
|
|
3,905,404
|
|
|
|
3,596,150
|
|
Other assets, non-current
|
|
|
1,710,829
|
|
|
|
1,720,361
|
|
Intangible assets, net
|
|
|
762,667
|
|
|
|
876,182
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,282,566
|
|
|
$
|
66,856,817
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,813,595
|
|
|
$
|
620,765
|
|
Accrued expenses and other liabilities
|
|
|
2,462,252
|
|
|
|
2,053,902
|
|
Accrued wind-down expenses, current
|
|
|
1,374,632
|
|
|
|
1,252,483
|
|
Deferred revenue, current
|
|
|
43,909
|
|
|
|
16,826
|
|
Capital lease obligation, current
|
|
|
17,530
|
|
|
|
|
|
Bonds payable, current
|
|
|
136,250
|
|
|
|
205,833
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,848,168
|
|
|
|
4,149,809
|
|
Capital lease obligation, non-current
|
|
|
25,269
|
|
|
|
|
|
Bonds payable, non-current
|
|
|
1,009,166
|
|
|
|
1,145,416
|
|
Deposits and other long-term liabilities
|
|
|
527,804
|
|
|
|
547,392
|
|
Accrued wind-down expenses, non-current
|
|
|
4,768,859
|
|
|
|
5,497,774
|
|
Deferred rent
|
|
|
727,535
|
|
|
|
959,732
|
|
Deferred revenue, non-current
|
|
|
163,865
|
|
|
|
180,691
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,070,666
|
|
|
|
12,480,814
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 125,000,000 shares
authorized; issued and outstanding 80,681,087 at
December 31, 2007 and 78,046,304 at December 31, 2006
|
|
|
806,810
|
|
|
|
780,462
|
|
Additional paid-in capital
|
|
|
264,603,711
|
|
|
|
255,299,508
|
|
Accumulated deficit
|
|
|
(229,914,747
|
)
|
|
|
(204,891,945
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(283,874
|
)
|
|
|
3,187,978
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,211,900
|
|
|
|
54,376,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
48,282,566
|
|
|
$
|
66,856,817
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
47
StemCells,
Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from licensing agreements and grants
|
|
$
|
56,722
|
|
|
$
|
92,850
|
|
|
$
|
205,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,937,426
|
|
|
|
13,600,433
|
|
|
|
8,226,734
|
|
General and administrative
|
|
|
7,927,443
|
|
|
|
7,154,042
|
|
|
|
5,539,845
|
|
Wind-down expenses
|
|
|
783,022
|
|
|
|
709,209
|
|
|
|
2,827,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,647,891
|
|
|
|
21,463,684
|
|
|
|
16,593,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating losses
|
|
|
(28,591,169
|
)
|
|
|
(21,370,834
|
)
|
|
|
(16,388,068
|
)
|
Other Income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
License and settlement agreement, net
|
|
|
550,467
|
|
|
|
103,359
|
|
|
|
3,735,556
|
|
Realized gain on sale of marketable securities
|
|
|
715,584
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,459,820
|
|
|
|
2,479,740
|
|
|
|
1,122,963
|
|
Interest expense
|
|
|
(123,606
|
)
|
|
|
(143,001
|
)
|
|
|
(171,909
|
)
|
Other income (expense)
|
|
|
(33,898
|
)
|
|
|
(17,644
|
)
|
|
|
(36,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
3,568,367
|
|
|
|
2,422,454
|
|
|
|
4,649,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,022,802
|
)
|
|
$
|
(18,948,380
|
)
|
|
$
|
(11,738,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted loss per share
|
|
|
79,772,351
|
|
|
|
74,611,196
|
|
|
|
63,643,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
48
StemCells,
Inc.
Consolidated
Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
Equity
|
|
|
Balances, December 31, 2004
|
|
|
62,129,407
|
|
|
$
|
621,294
|
|
|
$
|
211,419,300
|
|
|
$
|
(174,205,215
|
)
|
|
$
|
|
|
|
$
|
(885,832
|
)
|
|
$
|
36,949,547
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,738,350
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,738,350
|
)
|
Change in unrealized loss on securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,992,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses related to equity financing
|
|
|
|
|
|
|
|
|
|
|
(193,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,946
|
)
|
Common stock issued for external services
|
|
|
2,022
|
|
|
|
20
|
|
|
|
8,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,330
|
|
Common stock issued pursuant to employee benefit plan
|
|
|
28,459
|
|
|
|
285
|
|
|
|
110,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,057
|
|
Compensation expense from grant of options and stock (fair value)
|
|
|
|
|
|
|
|
|
|
|
461,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,675
|
|
Exercise of employee and consultant stock options
|
|
|
393,509
|
|
|
|
3,935
|
|
|
|
733,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,688
|
|
Exercise of warrants
|
|
|
2,842,625
|
|
|
|
28,426
|
|
|
|
5,910,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,939,106
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(531,208
|
)
|
|
|
|
|
|
|
|
|
|
|
531,208
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,624
|
|
|
|
354,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
65,396,022
|
|
|
|
653,960
|
|
|
|
217,919,336
|
|
|
|
(185,943,565
|
)
|
|
|
(254,147
|
)
|
|
|
|
|
|
|
32,375,584
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,948,380
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,948,380
|
)
|
Change in unrealized gain on securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,442,125
|
|
|
|
|
|
|
|
3,442,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,506,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock related to equity financing net of
issuance cost of $2,418,467
|
|
|
11,750,820
|
|
|
|
117,508
|
|
|
|
33,304,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,421,534
|
|
Common stock issued for licensing agreements
|
|
|
3,848
|
|
|
|
38
|
|
|
|
9,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Common stock issued pursuant to employee benefit plan
|
|
|
50,120
|
|
|
|
501
|
|
|
|
121,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,456
|
|
Compensation expense from grant of options and stock (fair value)
|
|
|
|
|
|
|
|
|
|
|
2,409,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,409,509
|
|
Exercise of employee and consultant stock options
|
|
|
319,094
|
|
|
|
3,191
|
|
|
|
545,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
548,279
|
|
Exercise of warrants
|
|
|
526,400
|
|
|
|
5,264
|
|
|
|
989,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
994,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
78,046,304
|
|
|
|
780,462
|
|
|
|
255,299,508
|
|
|
|
(204,891,945
|
)
|
|
|
3,187,978
|
|
|
|
|
|
|
|
54,376,003
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,022,802
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,022,802
|
)
|
Change in unrealized loss on securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,471,852
|
)
|
|
|
|
|
|
|
(3,471,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,494,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock related to equity financing net of
issuance cost of $297,465
|
|
|
1,807,000
|
|
|
|
18,070
|
|
|
|
4,816,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,835,053
|
|
Common stock issued for licensing agreements
|
|
|
3,865
|
|
|
|
39
|
|
|
|
9,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Common stock issued pursuant to employee benefit plan
|
|
|
73,074
|
|
|
|
731
|
|
|
|
172,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,160
|
|
Compensation expense from grant of options and stock (fair value)
|
|
|
|
|
|
|
|
|
|
|
3,008,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,008,315
|
|
Exercise of employee stock options
|
|
|
175,186
|
|
|
|
1,752
|
|
|
|
208,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,273
|
|
Exercise of warrants
|
|
|
575,658
|
|
|
|
5,756
|
|
|
|
1,087,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,093,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
80,681,087
|
|
|
$
|
806,810
|
|
|
$
|
264,603,711
|
|
|
$
|
(229,914,747
|
)
|
|
$
|
(283,874
|
)
|
|
$
|
|
|
|
$
|
35,211,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
49
StemCells,
Inc.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,022,802
|
)
|
|
$
|
(18,948,380
|
)
|
|
$
|
(11,738,350
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,174,510
|
|
|
|
1,044,688
|
|
|
|
1,082,793
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
354,624
|
|
Issue of shares and options in exchange for services
|
|
|
3,181,475
|
|
|
|
2,531,966
|
|
|
|
581,062
|
|
(Gain) loss on disposal of fixed assets
|
|
|
(1,500
|
)
|
|
|
1,573
|
|
|
|
1,377
|
|
Gain on sale of marketable securities
|
|
|
(715,584
|
)
|
|
|
|
|
|
|
|
|
Non-cash income from license and settlement agreement, net
|
|
|
(550,467
|
)
|
|
|
(103,359
|
)
|
|
|
(3,974,941
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and other receivables
|
|
|
218,219
|
|
|
|
(280,931
|
)
|
|
|
(20,956
|
)
|
Prepaid assets
|
|
|
86,985
|
|
|
|
(732,501
|
)
|
|
|
(177,892
|
)
|
Intangible and other assets, net
|
|
|
19,532
|
|
|
|
56,270
|
|
|
|
(47,053
|
)
|
Accounts payable and accrued expenses
|
|
|
1,601,180
|
|
|
|
554,245
|
|
|
|
48,135
|
|
Accrued wind-down expenses
|
|
|
(606,766
|
)
|
|
|
(555,469
|
)
|
|
|
1,777,697
|
|
Deferred revenue
|
|
|
10,257
|
|
|
|
197,517
|
|
|
|
|
|
Deferred rent
|
|
|
(232,198
|
)
|
|
|
105,735
|
|
|
|
330,196
|
|
Deposits and other long-term liabilities
|
|
|
(19,587
|
)
|
|
|
24,526
|
|
|
|
(87,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,856,746
|
)
|
|
|
(16,104,120
|
)
|
|
|
(11,870,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(27,861,561
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
3,074,654
|
|
|
|
|
|
|
|
|
|
Advance made under note receivable
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(1,319,374
|
)
|
|
|
(1,258,749
|
)
|
|
|
(817,505
|
)
|
Purchase of other assets
|
|
|
(49,375
|
)
|
|
|
(38,375
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(27,155,656
|
)
|
|
|
(1,297,124
|
)
|
|
|
(847,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds (expense) from issuance of common stock, net
|
|
|
4,835,053
|
|
|
|
33,421,534
|
|
|
|
(193,946
|
)
|
Proceeds from the exercise of stock options
|
|
|
210,273
|
|
|
|
548,279
|
|
|
|
737,688
|
|
Proceeds from the exercise of warrants
|
|
|
1,093,750
|
|
|
|
994,896
|
|
|
|
5,939,106
|
|
Proceeds (repayments) of capital lease obligations
|
|
|
42,799
|
|
|
|
(54,676
|
)
|
|
|
(39,232
|
)
|
Repayments of debt obligations
|
|
|
(205,833
|
)
|
|
|
(254,168
|
)
|
|
|
(244,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,976,042
|
|
|
|
34,655,865
|
|
|
|
6,199,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(42,036,360
|
)
|
|
|
17,254,621
|
|
|
|
(6,518,624
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
51,795,529
|
|
|
|
34,540,908
|
|
|
|
41,059,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
9,759,169
|
|
|
$
|
51,795,529
|
|
|
$
|
34,540,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
123,606
|
|
|
$
|
143,001
|
|
|
$
|
171,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for licensing
agreements(1)
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under terms of a license agreement with the California Institute
of Technology (Cal Tech), annual fees of $5,000 were due on each
of two patents to which StemCells holds a license from Cal Tech,
payable in cash or stock at our choice. We elected to pay the
fees in stock and issued shares of 3,865 in 2007 and 3,848 in
2006 to Cal Tech. |
See Notes to Consolidated Financial Statements.
50
StemCells,
Inc.
Notes to
Consolidated Financial Statements
December 31,
2007
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
Nature
of Business
StemCells, Inc., a Delaware corporation, is a biopharmaceutical
company that operates in one segment, the development of novel
cell-based therapeutics designed to treat human diseases and
disorders.
The accompanying consolidated financial statements have been
prepared on the basis that we will continue as a going concern.
Since inception, we have incurred annual losses and negative
cash flows from operations and an accumulated deficit of
approximately $230 million at December 31, 2007. We
have not derived revenue from the sale of products, and do not
expect to receive revenue from product sales for at least
several years. We may never be able to realize sufficient
revenue to achieve or sustain profitability in the future.
We expect to incur additional operating losses over the
foreseeable future. We have limited liquidity and capital
resources and must obtain significant additional capital and
other resources in order to sustain our product development
efforts, to provide funding for the acquisition of technologies
and intellectual property rights, preclinical and clinical
testing of our anticipated products, pursuit of regulatory
approvals, acquisition of capital equipment, laboratory and
office facilities, establishment of production capabilities,
general and administrative expenses and other working capital
requirements. We rely on our cash reserves, proceeds from equity
and debt offerings, proceeds from the transfer or sale of
intellectual property rights, equipment, facilities or
investments, government grants and funding from collaborative
arrangements, to fund our operations. If we exhaust our cash
reserves and are unable to obtain adequate financing, we may be
unable to meet our operating obligations and we may be required
to initiate bankruptcy proceedings. The financial statements do
not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Principles
of Consolidation
The consolidated financial statements include the accounts of
StemCells, Inc., and our wholly owned subsidiary, StemCells
California, Inc. Material intercompany accounts and transactions
have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and
accompanying notes. Actual results could differ materially from
those estimates.
Significant estimates include the following:
|
|
|
|
|
Accrued wind-down expenses (See Note 7).
|
|
|
|
The grant date fair value of share-based awards recognized as
compensation expense in accordance with the provisions of
Statement of Financial Accounting Standards No. 123
(Revised 2004) Share Based Payment
(SFAS 123R). (See Note 6).
|
|
|
|
Valuation allowance against net deferred tax assets (See
Note 12).
|
Financial
Instruments
Cash
Equivalents and Marketable Securities
All money market and highly liquid investments with a maturity
of 90 days or less at the date of purchase are classified
as cash equivalents. Highly liquid investments with maturities
of 365 days or less not previously classified as cash
equivalents are classified as marketable securities, current.
Investments with maturities greater than 365 days
51
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
are classified as marketable securities, non-current. Our
marketable debt and equity securities have been classified and
accounted for as available-for-sale. Management determines the
appropriate classification of its investments in marketable debt
and equity securities at the time of purchase and reevaluates
the available-for-sale designations as of each balance sheet
date. These securities are carried at fair value (see
Note 2, Financial Instruments, below), with the
unrealized gains and losses reported as a component of
stockholders equity. The cost of securities sold is based
upon the specific identification method.
If the estimated fair value of a security is below its carrying
value, we evaluate whether we have the intent and ability to
retain our investment for a period of time sufficient to allow
for any anticipated recovery to the cost of the investment, and
whether evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs
evidence to the contrary. Other-than-temporary declines in
estimated fair value of all marketable securities are charged to
other income (expense), net. No such impairment was
recognized during the years ended December 31, 2007, 2006
and 2005.
Other
Receivables
Our non-trade receivables generally consist of interest income
on our financial instruments, revenue from licensing agreements
and rent from our sub-lease tenants.
Estimated
Fair Value of Financial Instruments
The estimated fair value of cash and cash equivalents, other
receivables, accounts payable and the current portion of the
bonds payable approximates their carrying values due to the
short maturities of these instruments. The estimated fair value
of our marketable debt securities approximates its carrying
value based on current rates available to us for similar debt
securities.
Property,
Plant and Equipment
Property, plant, and equipment, including those held under
capital lease, are stated at cost. Depreciation is computed by
use of the straight-line method over the estimated useful lives
of the assets, or the lease term if shorter, as follows:
|
|
|
|
|
|
|
|
|
Building and improvements
|
|
|
|
|
|
|
3 - 20 years
|
|
Machinery and equipment
|
|
|
|
|
|
|
3 - 10 years
|
|
Furniture and fixtures
|
|
|
|
|
|
|
3 - 10 years
|
|
Repairs and maintenance costs are expensed as incurred.
Intangible
Assets (Patent and License Costs)
Prior to fiscal year 2001, we capitalized certain patent costs,
which are being amortized over the estimated life of the patent
and would be expensed at the time such patents are deemed to
have no continuing value. Since 2001, all patent costs are
expensed as incurred. License costs are capitalized as incurred
and amortized over the estimated life of the license agreement.
Impairment
of Long-Lived Assets
We review property, plant, and equipment and certain
identifiable intangibles for impairment in accordance with
Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Long-lived assets are
reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of these assets is measured by
comparing the carrying amount to future undiscounted cash flows
the assets are expected to generate. If property, plant, and
equipment and patents are
52
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
considered to be impaired, the impairment to be recognized
equals the amount by which the carrying value of the assets
exceeds its estimated fair market value. No such impairment was
recognized during the years ended December 31, 2007, 2006
and 2005.
Revenue
Recognition
We currently recognize revenue resulting from the licensing and
use of our technology and intellectual property. Such licensing
agreements may contain multiple elements, such as upfront fees,
payments related to the achievement of particular milestones and
royalties. Revenue from upfront fees for licensing agreements
that contain multiple elements are generally deferred and
recognized on a straight-line basis over the term of the
agreement. Fees associated with substantive at risk
performance-based milestones are recognized as revenue upon
completion of the scientific or regulatory event specified in
the agreement, and royalties received are recognized as earned.
Revenue from collaborative agreements and grants are recognized
as earned upon either the incurring of reimbursable expenses
directly related to the particular research plan or the
completion of certain development milestones as defined within
the terms of the relevant collaborative agreement or grant.
Research
and Development Costs
Our research and development expenses consist primarily of
salaries and related personnel expenses, costs associated with
clinical trials and regulatory submissions; costs associated
with preclinical activities such as toxicology studies; certain
patent-related costs such as licensing; facilities-related costs
such as depreciation; lab equipment and supplies. Clinical trial
expenses include payments to vendors such as clinical research
organizations, contract manufacturers, clinical trial sites,
laboratories for testing clinical samples and consultants. All
research and development costs are expensed as incurred.
Stock-Based
Compensation
On January 1, 2006, we adopted SFAS No. 123
(revised 2004) (SFAS 123R), Share-Based Payment,
which revises SFAS 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board
Opinion 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS 123R requires us to expense the fair
value of our stock-based compensation awards to employees. We
elected to use the modified prospective transition method as
permitted by SFAS 123R and therefore have not restated our
financial results for prior periods. Under this transition
method, we apply SFAS 123R to new awards, as well as to
awards that vest, are modified, repurchased, or cancelled after
January 1, 2006. The compensation cost we record for these
awards are based on their grant-date fair value as calculated
and amortized over their vesting period. See Note 6,
Stock-Based Compensation for further information.
Prior to the adoption of SFAS 123R, we accounted for
stock-based compensation awards using the intrinsic value method
of APB 25. Accordingly, we did not recognize compensation
expense in our Consolidated Statement of Operations for options
we granted that had an exercise price equal to the market value
of the underlying common stock on the date of grant. As required
by SFAS 123, we also provided certain pro forma disclosures
for stock-based awards as if the fair-value-based approach of
SFAS 123 had been applied.
We account for stock options granted to non-employees in
accordance with SFAS 123 and Emerging Issues Task Force
(EITF) 96-18
Accounting For Equity Instruments That Are Issued To Other
Than Employees For Acquiring, Or In Conjunction With Selling,
Goods Or Services, and accordingly, expense the estimated
fair value of such options as calculated using the Black-Scholes
model over the service period. The estimated fair value is
re-measured at each reporting date and is amortized over the
remaining service period.
53
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
Income
Taxes
We account for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes (SFAS 109) and
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109, as amended by FASB Staff Position
No. 48-1
(FIN 48). This approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Income tax
receivables and liabilities and deferred tax assets and
liabilities are recognized based on the amounts that more likely
than not will be sustained upon ultimate settlement with taxing
authorities.
Developing our provision for income taxes and analyzing our
uncertain tax positions requires significant judgment and
knowledge of federal and state income tax laws, regulations and
strategies, including the determination of deferred tax assets
and liabilities and, any valuation allowances that may be
required for deferred tax assets.
We assess the realization of our deferred tax assets to
determine whether an income tax valuation allowance is required.
Based on such evidence that can be objectively verified, we
determine whether it is more likely than not that all or a
portion of the deferred tax assets will be realized. The main
factors that we consider include:
|
|
|
|
|
Cumulative losses in recent years;
|
|
|
|
Income/losses expected in future years;
|
|
|
|
The applicable statute of limitations.
|
Tax benefits associated with uncertain tax positions are
recognized in the period in which one of the following
conditions is satisfied: (1) the more likely than not
recognition threshold is satisfied; (2) the position is
ultimately settled through negotiation or litigation; or
(3) the statute of limitations for the taxing authority to
examine and challenge the position has expired. Tax benefits
associated with an uncertain tax position are derecognized in
the period in which the more likely than not recognition
threshold is no longer satisfied.
We concluded that the realization of deferred tax assets is
dependent upon future earnings, if any, the timing and amount of
which are uncertain. Accordingly, the net deferred tax assets
have been fully offset by a valuation allowance.
Net
Loss per Share
Basic net loss per share is computed based on the
weighted-average number of shares of our common stock
outstanding during the period. Diluted net loss per share is
computed based on the weighted-average number of shares of our
common stock and other dilutive securities.
The following are the basic and dilutive net loss per share
computations for the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(25,022,802
|
)
|
|
$
|
(18,948,380
|
)
|
|
$
|
(11,738,350
|
)
|
Weighted average shares outstanding used to compute basic and
diluted net loss per share
|
|
|
79,772,351
|
|
|
|
74,611,196
|
|
|
|
63,643,176
|
|
Basic and diluted net loss per share
|
|
$
|
(0.31
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
54
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
Outstanding options and warrants to purchase shares of our
common stock were excluded from the computation of diluted net
loss per share because the effect would have been anti-dilutive
for all periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Outstanding options
|
|
|
9,028,810
|
|
|
|
8,501,503
|
|
|
|
6,608,109
|
|
Outstanding warrants
|
|
|
1,355,000
|
|
|
|
1,930,658
|
|
|
|
2,521,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,383,810
|
|
|
|
10,432,161
|
|
|
|
9,129,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
Comprehensive income (loss) is comprised of net losses and other
comprehensive income (or OCI). OCI includes certain
changes in stockholders equity that are excluded from net
losses. Specifically, we include in OCI changes in unrealized
gains and losses on our marketable securities. Comprehensive
income for the years ended December 31, 2007, 2006 and 2005
has been reflected in the Consolidated Statements of
Stockholders Equity.
The activity in OCI is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease) increase in unrealized gains/(losses) on marketable
securities
|
|
$
|
(2,756,268
|
)
|
|
$
|
3,442,125
|
|
|
$
|
(254,147
|
)
|
Reclassification adjustment for gains on marketable securities
included in net income
|
|
|
(715,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(3,471,852
|
)
|
|
$
|
3,442,125
|
|
|
$
|
(254,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently assessing the impact
that SFAS 157 may have on our results of operations and
financial position.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 is expected to
expand the use of fair value accounting but does not affect
existing standards which require certain assets or liabilities
to be carried at fair value. The objective of SFAS 159 is
to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under
SFAS 159, a company may choose, at specified election
dates, to measure eligible items at fair value and report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We are currently
assessing the impact that SFAS 159 may have on our results
of operations and financial position.
In December 2007, the SEC issued Staff Accounting
Bulletin 110, Share-Based Payment (SAB 110),
which amends SAB 107, Share-Based Payment, to permit
public companies, under certain circumstances, to use the
simplified method in SAB 107 for employee option grants
after December 31, 2007. Use of the simplified method after
December 2007 is permitted only for companies whose historical
data about their employees exercise behavior does not
provide a reasonable basis for estimating the expected term of
the options. We currently use the simplified method to estimate
the expected term for employee option grants as adequate
historical experience is not
55
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
available to provide a reasonable estimate. SAB 110 is
effective for employee options granted after December 31,
2007. We intend to adopt SAB 110 effective January 1,
2008 and we are currently assessing our historical experience to
evaluate if it can provide a reasonable estimate of the expected
term for employee option grants.
|
|
Note 2.
|
Financial
Instruments
|
Cash,
cash equivalents and marketable securities
The following table summarizes the fair value of our cash, cash
equivalents and available-for-sale securities held in our
investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
549,544
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
549,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
|
5,079,564
|
|
|
|
|
|
|
|
|
|
|
|
5,079,564
|
|
Marketable debt securities (maturity within 90 days)
|
|
|
4,130,404
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
4,130,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
9,209,968
|
|
|
|
|
|
|
|
(343
|
)
|
|
|
9,209,625
|
|
Marketable debt securities (maturity within 1 year)
|
|
|
26,680,824
|
|
|
|
19,137
|
|
|
|
(3,548
|
)
|
|
|
26,696,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities, current
|
|
|
26,680,824
|
|
|
|
19,137
|
|
|
|
(3,548
|
)
|
|
|
26,696,413
|
|
Marketable debt securities
|
|
|
1,180,394
|
|
|
|
9,109
|
|
|
|
|
|
|
|
1,189,503
|
|
Marketable equity securities
|
|
|
2,269,697
|
|
|
|
|
|
|
|
(308,229
|
)
|
|
|
1,961,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities, non-current
|
|
|
3,450,091
|
|
|
|
9,109
|
|
|
|
(308,229
|
)
|
|
|
3,150,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
39,890,427
|
|
|
$
|
28,246
|
|
|
$
|
(312,120
|
)
|
|
$
|
39,606,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
162,685
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
162,685
|
|
Money market accounts
|
|
|
51,632,844
|
|
|
|
|
|
|
|
|
|
|
|
51,632,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
51,795,529
|
|
|
|
|
|
|
|
|
|
|
|
51,795,529
|
|
Marketable equity securities, current
|
|
|
2,319,505
|
|
|
|
1,813,141
|
|
|
|
|
|
|
|
4,132,646
|
|
Marketable equity securities, non-current
|
|
|
1,758,795
|
|
|
|
1,374,837
|
|
|
|
|
|
|
|
3,133,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
55,873,829
|
|
|
$
|
3,187,978
|
|
|
$
|
|
|
|
$
|
59,061,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investment in marketable debt securities consist primarily
of commercial paper, corporate debt securities, and asset-backed
securities. Our marketable debt securities classified as a
non-current investment consists of a single security which has
an effective maturity date in February 2009.
Our investment in marketable equity securities consists of
shares in ReNeuron Group plc, a publicly listed UK corporation.
In July 2005, we entered into a license and settlement agreement
with ReNeuron Limited, a wholly owned subsidiary of ReNeuron
Group plc, (collectively referred to as ReNeuron).
As part of the agreement, we granted ReNeuron a license that
allows ReNeuron to exploit their c-mycER
conditionally immortalized adult
56
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
human neural stem cell technology for therapy and other
purposes. In return for the license, we received a 7.5%
fully-diluted equity interest in ReNeuron, subject to certain
anti-dilution provisions, and a cross-license to the exclusive
use of ReNeurons technology for certain diseases and
conditions, including lysosomal storage diseases, spinal cord
injury, cerebral palsy and multiple sclerosis. The agreement
also provides for full settlement of any potential claims that
either we or ReNeuron might have had against the other in
connection with any putative infringement of certain of each
partys patent rights prior to the effective date of the
agreement. In February 2007, we sold 5,275,000 ordinary shares
of ReNeuron for net proceeds of approximately $3,075,000. We
recognized approximately $716,000 as realized gain from this
transaction. In February 2007, as a consequence of certain
anti-dilution provisions in the agreement, ReNeuron issued us an
additional 822,000 shares of common stock net of
approximately 12,000 shares which were transferred to
NeuroSpheres Ltd., (NeuroSpheres) an Alberta corporation from
which we have licensed some of the patent rights that are
subject to the agreement with ReNeuron. We recorded
approximately $550,000 as other income for the additional
shares. We owned 4,821,924 ordinary shares of ReNeuron at
December 31, 2007 and 9,274,837 at December 31, 2006.
Changes in market value as a result of changes in market price
per share or the exchange rate between the US dollar and the
British pound are accounted for under other comprehensive
income (loss) if deemed temporary and are not recorded as
other income or loss until the shares are disposed
of and a gain or loss realized.
In accordance with FASB Staff Position
FAS 115-1
and
FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, the following table
shows the gross unrealized losses and fair value for those
investments that were in an unrealized loss position as of
December 31, 2007, aggregated by investment category and
the length of time that individual securities have been in a
continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months of Greater
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt securities
|
|
$
|
9,418,713
|
|
|
$
|
(3,891
|
)
|
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
9,418,713
|
|
|
$
|
(3,891
|
)
|
Marketable equity securities
|
|
|
1,961,468
|
|
|
|
(308,229
|
)
|
|
|
|
|
|
|
|
|
|
|
1,961,468
|
|
|
|
(308,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,380,181
|
|
|
$
|
(312,120
|
)
|
|
$
|
|
|
|
$
|
(
|
)
|
|
$
|
11,380,181
|
|
|
$
|
(312,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses in our marketable debt securities portfolio
are due to eight U.S. corporate debt securities primarily
consisting of commercial paper. For these securities, the
unrealized losses are primarily due to a change in interest
rates. Because we have the ability and intent to hold these
investments until a forecasted recovery of carrying value, which
may be maturity or call date, we do not consider these
investments to be other-than-temporarily impaired as of
December 31, 2007. See Note 1, Summary of
Significant Accounting Policies Cash Equivalents and
Marketable Securities, for further discussion of the
criteria used to determine impairment of our marketable
securities.
Note
Receivable
In December 2007, we committed to make a secured loan of up to
$3.8 million to Progenitor Cell Therapy, LLC (PCT) in
return for a period of exclusivity to allow for due diligence
and negotiation of a possible acquisition transaction. Of this
amount, $1.0 million was lent and outstanding at
December 31, 2007 with the maturity date within twelve
months from the effective date of the loan. In March 2008, we
terminated discussions to acquire PCT. We anticipate the
$1.0 million loan will be repaid in accordance with its
terms.
57
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
|
|
Note 3.
|
Property,
Plant and Equipment
|
Property, plant and equipment balances at December 31 are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Building and improvements
|
|
$
|
3,397,639
|
|
|
$
|
3,369,775
|
|
Machinery and equipment
|
|
|
6,002,945
|
|
|
|
4,712,950
|
|
Furniture and fixtures
|
|
|
369,068
|
|
|
|
366,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,769,652
|
|
|
|
8,448,778
|
|
Less accumulated depreciation and amortization
|
|
|
(5,864,248
|
)
|
|
|
(4,852,628
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment, net
|
|
$
|
3,905,404
|
|
|
$
|
3,596,150
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $1,012,000 in 2007,
$944,000 in 2006, and $958,000 in 2005.
|
|
Note 4.
|
Intangible
and Other Assets
|
The components of our intangible assets at December 31 are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
Intangible Asset Class
|
|
amount
|
|
|
Amortization
|
|
|
Net Carrying Amount
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
979,612
|
|
|
$
|
(459,452
|
)
|
|
$
|
520,160
|
|
License agreements
|
|
|
1,761,623
|
|
|
|
(1,519,116
|
)
|
|
|
242,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
2,741,235
|
|
|
$
|
(1,978,568
|
)
|
|
$
|
762,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
979,612
|
|
|
$
|
(403,650
|
)
|
|
$
|
575,962
|
|
License agreements
|
|
|
1,712,248
|
|
|
|
(1,412,028
|
)
|
|
|
300,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
2,691,860
|
|
|
$
|
(1,815,678
|
)
|
|
$
|
876,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was approximately $163,000 in 2007,
$101,000 in 2006, and $125,000 in 2005.
The expected future annual amortization expense based on current
balances of our intangible assets is as follows:
|
|
|
|
|
|
|
|
|
For the year ending December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
$
|
107,249
|
|
2009
|
|
|
|
|
|
$
|
107,249
|
|
2010
|
|
|
|
|
|
$
|
107,249
|
|
2011
|
|
|
|
|
|
$
|
69,468
|
|
2012
|
|
|
|
|
|
$
|
68,295
|
|
Other assets at December 31 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Prepaid royalties
|
|
$
|
180,250
|
|
|
$
|
189,782
|
|
Security deposit (building lease)
|
|
|
752,500
|
|
|
|
752,500
|
|
Restricted cash (letter of credit)
|
|
|
778,079
|
|
|
|
778,079
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets
|
|
$
|
1,710,829
|
|
|
$
|
1,720,361
|
|
|
|
|
|
|
|
|
|
|
58
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
|
|
Note 5.
|
Accrued
Expenses and Other
|
Accrued expenses at December 31 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
External services
|
|
$
|
360,340
|
|
|
$
|
323,162
|
|
Employee compensation
|
|
|
1,885,249
|
|
|
|
1,570,915
|
|
Other
|
|
|
216,663
|
|
|
|
159,825
|
|
|
|
|
|
|
|
|
|
|
Total other accrued liabilities
|
|
$
|
2,462,252
|
|
|
$
|
2,053,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Stock-Based
Compensation
|
We currently grant options under three equity incentive plans
and as of December 31, 2007, we had 12,000,000 shares
authorized under these three plans. However, at our annual
stockholders meeting held on June 12, 2007, our
stockholders approved an amendment to our 2006 Equity Incentive
Plan to provide for an annual increase in the number of shares
of common stock available for issuance under the plan each
January 1 (beginning January 1, 2008) equal to 4% of
the outstanding common shares as of that date. The amendment
further provided an aggregate limit of 30,000,000 shares
issuable pursuant to incentive stock options under the plan.
Under these three plans we may grant incentive stock options,
nonqualified stock options, stock appreciation rights,
restricted stock, and performance-based shares to our employees,
directors and consultants, at prices determined by our Board of
Directors. Incentive stock options may only be granted to
employees under these plans with a grant price not less than the
fair market value on the date of grant.
Generally, stock options granted to employees have a maximum
term of ten years, and vest over a four year period from the
date of grant; 25% vest at the end of one year, and 75% vest
monthly over the remaining three-year service period. We may
grant options with different vesting terms from time to time.
Upon employee termination of service, any unexercised vested
option will be forfeited three months following termination or
the expiration of the option, whichever is earlier.
Our compensation expense for stock options issued from our
equity incentive plans for the last two fiscal years was as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Research and development expense
|
|
$
|
1,347,239
|
|
|
$
|
1,048,697
|
|
General and administrative expense
|
|
|
1,558,056
|
|
|
|
1,236,334
|
|
|
|
|
|
|
|
|
|
|
Total employee stock-based compensation expense and effect on
net loss
|
|
$
|
2,905,295
|
|
|
$
|
2,285,031
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we have approximately $6,956,000
of total unrecognized compensation expense related to unvested
awards granted under our various share-based plans that we
expect to recognize over a weighted-average period of
1.6 years.
59
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
The following table illustrates the effect of net loss and net
loss per common share as if we had applied the fair value
recognition provisions of SFAS 123 to stock-based
compensation for the year ended December 31, 2005:
|
|
|
|
|
|
|
2005
|
|
|
Net loss:
|
|
|
|
|
Net loss, as reported
|
|
$
|
(11,738,350
|
)
|
Deduct: Stock-based employee compensation expense determined
under fair value-based method for all awards
|
|
|
(1,019,120
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(12,757,470
|
)
|
|
|
|
|
|
Basic and diluted earnings per common share:
|
|
|
|
|
As reported
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
Shares used in computing basic and diluted loss per share
|
|
|
63,643,176
|
|
|
|
|
|
|
The fair value of options granted is estimated as of the date of
grant using the Black-Scholes option pricing model, which
requires certain assumptions as of the date of grant. The
weighted-average assumptions used for the last three fiscal
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected life (years)(1)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
5.00
|
|
Risk-free interest rate(2)
|
|
|
4.36
|
%
|
|
|
4.72
|
%
|
|
|
4.14
|
%
|
Expected volatility(3)
|
|
|
95.2
|
%
|
|
|
109.0
|
%
|
|
|
100.7
|
%
|
Expected dividend yield(4)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
(1) |
|
The expected term in 2007 and 2006 is equal to the average of
the contractual life of the stock option and its vesting period
as of the date of grant. In 2005 we assumed a reasonable term
based on information available at the time. |
|
(2) |
|
The risk-free interest rate is based on U.S. Treasury debt
securities with maturities close to the expected term of the
option as of the date of grant. |
|
(3) |
|
Expected volatility is based on historical volatility over the
most recent historical period equal to the length of the
expected term of the option as of the date of grant. |
|
(4) |
|
We have neither declared nor paid dividends on any share of
common stock and we do not expect to do so in the foreseeable
future. |
At the end of each reporting period we estimate forfeiture rates
based on our historical experience within separate groups of
employees and adjust the stock-based compensation expense
accordingly.
60
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
A summary of our stock option activity and related information
for the last three fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
Shares Available
|
|
|
Number
|
|
|
Average
|
|
|
remaining
|
|
|
Intrinsic
|
|
|
|
for Grant
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
contractual term
|
|
|
Value(1)
|
|
|
Balance at December 31, 2004
|
|
|
6,339,406
|
|
|
|
6,682,201
|
|
|
$
|
2.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,075,481
|
)
|
|
|
1,075,481
|
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(423,989
|
)
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
Cancelled (forfeited and expired)
|
|
|
725,584
|
|
|
|
(725,584
|
)
|
|
$
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
5,989,509
|
|
|
|
6,608,109
|
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,818,684
|
)
|
|
|
2,818,684
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(369,214
|
)
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
Cancelled (forfeited and expired)
|
|
|
556,076
|
|
|
|
(556,076
|
)
|
|
$
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
3,726,901
|
|
|
|
8,501,503
|
|
|
$
|
2.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,484,100
|
)
|
|
|
2,484,100
|
|
|
$
|
2.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
(175,186
|
)
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
Cancelled (forfeited and expired)
|
|
|
1,781,607
|
|
|
|
(1,781,607
|
)
|
|
$
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
3,024,408
|
|
|
|
9,028,810
|
|
|
$
|
2.36
|
|
|
|
7.26
|
|
|
$
|
826,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
|
|
|
|
4,600,618
|
|
|
$
|
2.24
|
|
|
|
5.68
|
|
|
$
|
826,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest(2)
|
|
|
|
|
|
|
8,337,077
|
|
|
$
|
2.34
|
|
|
|
7.34
|
|
|
$
|
826,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate intrinsic value represents the value of the closing
price per share of our common stock on the last trading day of
the fiscal period in excess of the exercise price multiplied by
the number of options outstanding or exercisable. |
|
(2) |
|
Shares include options vested and those expected to vest net of
estimated forfeitures. |
The estimated weighted average fair value per share of options
granted was approximately $1.85 in 2007, $2.37 in 2006, and
$3.75 in 2005, based on the assumptions in the Black-Scholes
model discussed above. Total intrinsic value of options
exercised at time of exercise was approximately $396,700 in
2007, $453,000 in 2006, and $519,000 in 2005.
The following is a summary of changes in unvested options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
grant date fair
|
|
Unvested Options
|
|
Number of options
|
|
|
value
|
|
|
Unvested options at December 31, 2006
|
|
|
3,598,784
|
|
|
$
|
2.16
|
|
Granted
|
|
|
2,484,100
|
|
|
|
1.85
|
|
Vested
|
|
|
(1,485,573
|
)
|
|
|
2.14
|
|
Cancelled
|
|
|
(169,119
|
)
|
|
|
1.88
|
|
|
|
|
|
|
|
|
|
|
Unvested options at December 31, 2007
|
|
|
4,428,192
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of options vested were approximately
$3,173,000 in 2007 and $2,292,000 in 2006.
61
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
The following table presents weighted average exercise price and
term information about significant option groups outstanding at
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
Exercise Prices
|
|
Number Outstanding
|
|
|
Term (Yrs.)
|
|
|
Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Less than $2.00
|
|
|
2,383,594
|
|
|
|
5.4
|
|
|
$
|
1.19
|
|
|
$
|
826,558
|
|
$2.00 $3.99
|
|
|
5,882,631
|
|
|
|
8.1
|
|
|
$
|
2.45
|
|
|
|
|
|
$4.00 $5.99
|
|
|
762,585
|
|
|
|
7.0
|
|
|
$
|
5.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,028,810
|
|
|
|
|
|
|
|
|
|
|
$
|
826,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested at December 31, 2007
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
Exercise Prices
|
|
Number Outstanding
|
|
|
Term (Yrs.)
|
|
|
Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Less than $2.00
|
|
|
2,100,174
|
|
|
|
5.1
|
|
|
$
|
1.14
|
|
|
$
|
826,558
|
|
$2.00 $3.99
|
|
|
1,999,056
|
|
|
|
6.1
|
|
|
$
|
2.65
|
|
|
|
|
|
$4.00 $5.99
|
|
|
501,388
|
|
|
|
6.7
|
|
|
$
|
5.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,600,618
|
|
|
|
|
|
|
|
|
|
|
$
|
826,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest after at December 31, 2007
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
Exercise Prices
|
|
Number Outstanding
|
|
|
Term (Yrs.)
|
|
|
Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Less than $2.00
|
|
|
232,886
|
|
|
|
7.5
|
|
|
$
|
1.61
|
|
|
$
|
|
|
$2.00 $3.99
|
|
|
3,278,971
|
|
|
|
9.1
|
|
|
$
|
2.35
|
|
|
|
|
|
$4.00 $5.99
|
|
|
224,602
|
|
|
|
7.7
|
|
|
$
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,736,459
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Appreciation Rights
In July 2006, we granted cash-settled Stock Appreciation Rights
(SARs) to certain employees under the 2006 Equity Incentive
Plan. The SARs give the holder the right, upon exercise, to the
difference between the price per share of our common stock at
the time of exercise and the exercise price of the SAR. The
exercise price of the SAR is equal to the market price of our
common stock at the date of grant. The SARs vest 25% on the
first anniversary of the grant date and 75% vest monthly over
the remaining three-year service period. Compensation expense is
based on the fair value of SARs which is calculated using the
Black-Scholes option pricing model. The share-based compensation
expenses and liability are re-measured at each reporting date
through the date of settlement.
62
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
The following is a summary of the changes in non-vested SARs for
the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Exercise
|
|
|
|
|
|
Average Exercise
|
|
|
|
Number
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
|
Outstanding at January 1
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(86,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding SARs at December 31
|
|
|
1,478,219
|
|
|
$
|
2.00
|
|
|
|
1,564,599
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable at December 31
|
|
|
47,370
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total compensation expense related to SARs was approximately
$135,000 in 2007 and $294,000 in 2006. At December 31,
2007, approximately $752,000 of unrecognized compensation
expense related to SARs is expected to be recognized over a
weighted average period of approximately 1.5 years. The
resulting effect on net loss and net loss per share attributable
to common stockholders is not likely to be representative of the
effects in future periods, due to changes in the fair value
calculation which is dependent on the stock price, volatility,
interest and forfeiture rates, additional grants and subsequent
periods of vesting.
|
|
Note 7.
|
Wind-down
and exit costs
|
In October 1999, we relocated to California from Rhode Island
and established a wind down reserve for the estimated lease
payments and operating costs of the Rhode Island facilities
through an expected disposal date of June 30, 2000. We did
not fully sublet the Rhode Island facilities in 2000. Even
though we intend to dispose of the facility at the earliest
possible time, we cannot determine with certainty a fixed date
by which such disposal will occur. In light of this uncertainty,
we periodically re-evaluate and adjust the reserve. We consider
various factors such as our lease payments through to the end of
the lease, operating expenses, the current real estate market in
Rhode Island, and estimated subtenant income based on actual and
projected occupancy.
The components of our wind-down reserve at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued wind-down reserve at beginning of period
|
|
$
|
5,512,000
|
|
|
$
|
6,098,000
|
|
Less actual expenses recorded against estimated reserve during
the period
|
|
|
(1,420,000
|
)
|
|
|
(1,295,000
|
)
|
Additional expense recorded to revise estimated reserve at
period-end
|
|
|
783,000
|
|
|
|
709,000
|
|
|
|
|
|
|
|
|
|
|
Revised reserve at period-end
|
|
|
4,875,000
|
|
|
|
5,512,000
|
|
Add deferred rent at period end
|
|
|
1,268,000
|
|
|
|
1,238,000
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end (current and non
current)
|
|
$
|
6,143,000
|
|
|
$
|
6,750,000
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down expenses, current
|
|
$
|
1,374,000
|
|
|
$
|
1,252,000
|
|
Non current
|
|
|
4,769,000
|
|
|
|
5,498,000
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses
|
|
$
|
6,143,000
|
|
|
$
|
6,750,000
|
|
|
|
|
|
|
|
|
|
|
63
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
|
|
Note 8.
|
Commitments
and Contingencies
|
Leases
Capital
leases
We entered into 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 Rhode Islands pilot manufacturing
facility. The related lease agreements are structured such that
lease payments fully fund all semiannual interest payments and
annual principal payments through maturity in August 2014.
Interest rates vary with the respective bonds maturities,
ranging from 8.2% 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.
Operating
leases
We entered into a fifteen-year lease agreement for a laboratory
facility in Rhode Island in connection with a sale and leaseback
arrangement in 1997. The lease term expires June 30, 2013.
The lease contains escalating rent payments, which we recognize
on a straight-line basis. At December 31, 2007, deferred
rent expense was approximately $1,268,000 for this facility and
is included as part of the wind-down accrual on the accompanying
Consolidated Balance Sheet.
We entered into and amended a lease agreement for an
approximately 68,000 square foot facility located at the
Stanford Research Park in Palo Alto, California. The facility
includes space for animals, laboratories, offices, and a GMP
(Good Manufacturing Practices) suite. GMP facilities can be used
to manufacture materials for clinical trials. The lease term
expires March 31, 2010. Under the term of the agreement we
were required to provide a letter of credit for a total of
approximately $778,000, which serves as a security deposit for
the duration of the lease term. The letter of credit issued by
our financial institution is collateralized by a certificate of
deposit for the same amount, which is reflected as restricted
cash in other assets, non-current on our Consolidated Balance
Sheets. The lease contains escalating rent payments, which we
recognize on a straight-line basis. At December 31, 2007,
deferred rent was approximately $728,000, and is reflected as
deferred rent on our Consolidated Balance Sheet. At
December 31, 2007, we had a space-sharing agreement
covering approximately 10,451 square feet of this facility.
We receive base payments plus a proportionate share of the
operating expenses based on square footage over the term of the
agreement.
The table below summarizes the components of rent expense at
fiscal year end as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Rent expense
|
|
$
|
2,963,339
|
|
|
$
|
2,967,911
|
|
|
$
|
2,983,879
|
|
Sublease income
|
|
|
(492,306
|
)
|
|
|
(616,600
|
)
|
|
|
(962,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense, net
|
|
$
|
2,471,033
|
|
|
$
|
2,351,311
|
|
|
$
|
2,021,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
Future minimum lease payments under all leases at
December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
Capital
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Payable
|
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
2008
|
|
$
|
244,531
|
|
|
$
|
19,862
|
|
|
$
|
3,469,017
|
|
|
$
|
388,989
|
|
2009
|
|
|
244,572
|
|
|
|
19,862
|
|
|
|
3,536,843
|
|
|
|
387,210
|
|
2010
|
|
|
242,559
|
|
|
|
6,623
|
|
|
|
1,767,304
|
|
|
|
97,508
|
|
2011
|
|
|
242,321
|
|
|
|
|
|
|
|
1,171,875
|
|
|
|
|
|
2012
|
|
|
240,666
|
|
|
|
|
|
|
|
1,171,875
|
|
|
|
|
|
Thereafter
|
|
|
374,444
|
|
|
|
|
|
|
|
732,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
1,589,093
|
|
|
|
46,347
|
|
|
$
|
11,849,336
|
|
|
$
|
873,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
443,677
|
|
|
|
3,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of bonds payable payments
|
|
|
1,145,416
|
|
|
|
42,799
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
136,250
|
|
|
|
17,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds payable, less current maturities
|
|
$
|
1,009,166
|
|
|
$
|
25,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
Consulting
Arrangements
In September 1997, we entered into consulting arrangements with
the principal scientific founders of StemCells California,
Dr. Irving Weissman, Dr. Fred H. Gage, and
Dr. David Anderson and with Dr. Richard M. Rose, then
President and CEO of StemCells California. To attract and retain
Drs. Rose, Weissman, Gage, and Anderson, and to expedite
the progress of our stem cell program, we awarded these
individuals options to acquire a total of approximately
1.6 million shares of our common stock, vesting over a
period of eight years and at an exercise price of $5.25 per
share, the quoted market price at the grant date. Based on the
fair value of these options and their respective vesting
schedules, we recorded an expense of approximately $355,000 in
2006 and $830,000 in 2005, no expense was recorded in 2007. The
fair value was determined using the Black Scholes method. As of
December 31, 2005, these options were fully vested and
expensed.
Other
In December 2007, we committed to make a secured loan of up to
$3.8 million to Progenitor Cell Therapy, LLC (PCT) in
return for a period of exclusivity to allow for due diligence
and negotiation of a possible acquisition transaction. Of this
amount, $1.0 million was lent and outstanding at
December 31, 2007 with the maturity date within twelve
months from the effective date of the loan. In March 2008, we
terminated discussions to acquire PCT. We anticipate the
$1.0 million loan will be repaid in accordance with its
terms.
Contingencies
In July 2006, we filed suit against Neuralstem, Inc., in the
Federal District Court for the District of Maryland, alleging
that its Neuralstems activities violate claims in four of
the patents we exclusively licensed from NeuroSpheres.
Neuralstem has filed a motion for dismissal or summary judgment
in the alternative, citing Title 35, Section 271(e)(1)
of the United States Code, which says that it is not an act of
patent infringement to make, use or sell a patented invention
solely for uses reasonably related to the development and
submission of information to the FDA. Neuralstem argues
that because it does not have any therapeutic products on the
market yet, the activities complained of fall within the
protection of Section 271(e)(1) that is,
basically, that the suit is premature. This issue will be
decided after discovery is complete. Subsequent to filing its
motion to dismiss, in December 2006, Neuralstem petitioned the
U.S. Patent and Trademark Office (PTO) to reexamine two of
the patents in our infringement action against Neuralstem,
namely U.S. Patent No. 6,294,346 (claiming the use of
human neural stem
65
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
cells for drug screening) and U.S. Patent
No. 7,101,709 (claiming the use of human neural stem cells
for screening biological agents). In April 2007, Neuralstem
petitioned the PTO to reexamine the remaining two patents in the
suit, namely U.S. Patent No. 5,851,832 (claiming
methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for
transplanting human neural stem cells). These requests were
granted by the PTO and, in June 2007, the parties voluntarily
agreed to stay the pending litigation while the PTO considers
these reexamination requests. In October 2007, Neuralstem
petitioned the PTO to reexamine a fifth patent, namely
U.S. Patent No. 6,103,530, which claims a culture
medium for proliferating mammalian neural stem cells. In
September 2007, the PTO issued first office actions in each of
the first four reexaminations. The Company has since filed its
first responses to each of these, and expects all four patents
to re-issue in 2008.
We have neither declared nor paid dividends on any share of
common stock and do not expect to do so in the foreseeable
future.
Sale
of common stock
Major transactions involving our common stock for the previous
three years include the following:
|
|
|
|
|
In April 2007, a warrant issued as part of a June 16, 2004
financing arrangement, was exercised to purchase an aggregate of
575,658 shares of our common stock at $1.90 per share. We
issued 575,658 shares of our common stock and received
proceeds of approximately $1,094,000.
|
|
|
|
On December 29, 2006, we filed a Prospectus Supplement
announcing the entry of a sales agreement with Cantor under
which up to 10,000,000 shares may be sold from time to time
under a shelf registration statement. In 2007, we sold a total
of 1,807,000 shares of our common stock under this
agreement at an average price per share of $2.84 for gross
proceeds of approximately $5,133,000. Cantor is paid
compensation equal to 5.0% of the gross proceeds pursuant to the
terms of the agreement.
|
|
|
|
On April 6, 2006, we sold 11,750,820 shares of our
common stock to a limited number of institutional investors at a
price of $3.05 per share, for gross proceeds of approximately
$35,840,000. The shares were offered as a registered direct
offering under an effective shelf registration statement
previously filed with and declared effective by the Securities
and Exchange Commission. We received total proceeds, net of
offering expenses and placement agency fees, of approximately
$33,422,000. No warrants were issued as part of this financing
transaction.
|
|
|
|
In March 2006, a warrant issued as part of a June 16, 2004
financing arrangement was exercised to purchase an aggregate of
526,400 shares of our common stock at $1.89 per share. We
issued 526,400 shares of our common stock and received
proceeds of approximately $995,000.
|
|
|
|
In 2005, an aggregate of 2,958,348 warrants were exercised. For
the exercise of these warrants, we issued 2,842,625 shares
of our common stock and received proceeds of approximately
$5,939,000.
|
Stock
Issued For Technology Licenses
Under license agreements with NeuroSpheres, Ltd., we obtained an
exclusive patent license covering all uses of certain neural
stem cell technology. We made up-front payments to NeuroSpheres
of 65,000 shares of our common stock and $50,000, and will
make additional cash payments as stated milestones are achieved.
Effective in 2004, we began making annual $50,000 payments,
creditable against certain royalties.
Pursuant to the terms of a license agreement with the California
Institute of Technology (Cal Tech) and our acquisition of its
wholly owned subsidiary, StemCells California, we issued
14,513 shares of common stock to Cal Tech. We issued an
additional 12,800 shares of common stock to Cal Tech with a
market value of approximately $40,000 in May 2000, upon
execution of an amendment adding four families of patent
applications to the license
66
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
agreement. In August 2002, we acquired an additional license
from Cal Tech for a different technology, pursuant to which we
issued 27,535 shares of our common stock with a market
value of approximately $35,000. We also issued 3,865 shares
(market value of approximately $10,000) in 2007,
3,848 shares (market value of approximately $10,000) in
2006, and 9,535 shares (market value of approximately
$15,000) in 2004 of our common stock to Cal Tech for the
issuance and annual license fees of two patents covered under
this additional license.
Common
Stock Reserved
We reserved the following shares of common stock for the
exercise of options, warrants and other contingent issuances of
common stock, as of December 31, 2007:
|
|
|
|
|
Shares reserved for exercise of stock options
|
|
|
13,574,178
|
|
Shares reserved for warrants related to financing transactions
|
|
|
1,255,000
|
|
Shares reserved for compensation related to external services
|
|
|
100,000
|
|
Shares reserved for warrants related to previously converted 3%
convertible preferred stock
|
|
|
514,072
|
|
Shares reserved for license agreements
|
|
|
92,287
|
|
Shelf reserve for possible future issuances of shares
|
|
|
9,264,962
|
|
|
|
|
|
|
Total
|
|
|
24,800,499
|
|
|
|
|
|
|
In September 2004, we were awarded a Small Business Technology
Transfer (STTR) grant for approximately $464,000 for studies in
Alzheimers disease conducted over an 18 month period.
The grant supported joint work with Dr. George A. Carlson
of the McLaughlin Research Institute (MRI) in Great Falls,
Montana. We received and recognized approximately $26,000 in
2006, $186,000 in 2005, and $38,000 in 2004 as grant revenue,
the remainder was reimbursed to MRI.
Our 401(k) Plan covers substantially all of our employees.
Participants in the plan are permitted to contribute a fixed
percentage of their total annual cash compensation to the plan
(subject to the maximum employee contribution defined by law).
We match 50% of employee contributions, up to a maximum of 6% of
each employees eligible compensation in the form of shares
of common stock. We recorded expense of $179,000 in 2007,
$157,000 in 2006, and $111,000 in 2005 for our contributions
under our 401(k) Plan.
In July 2006, the FASB issued FIN 48 which clarifies the
accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before
being recognized in the financial statements. We adopted
FIN 48 effective January 1, 2007. The adoption of
FIN 48 did not impact our consolidated financial condition,
results of operations or cash flows. At the adoption date of
January 1, 2007 and as of December 31, 2007, we have
not recorded any unrecognized tax benefits. Deferred income
taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting
67
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and
liabilities at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Capitalized research and development costs
|
|
$
|
31,779,000
|
|
|
$
|
25,058,000
|
|
Net operating losses
|
|
|
42,730,000
|
|
|
|
41,015,000
|
|
Research and development credits
|
|
|
6,103,000
|
|
|
|
5,671,000
|
|
Accrued wind down cost
|
|
|
1,950,000
|
|
|
|
2,205,000
|
|
Stock-based compensation
|
|
|
245,000
|
|
|
|
180,000
|
|
Other
|
|
|
315,000
|
|
|
|
361,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,122,000
|
|
|
|
74,490,000
|
|
Valuation allowance
|
|
|
(83,122,000
|
)
|
|
|
(74,490,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset
by a valuation allowance. The valuation allowance increased by
approximately $8,632,000 in 2007, $7,105,000 in 2006, and
$5,027,000 in 2005.
As of December 31, 2007, we had the following:
|
|
|
|
|
Net operating loss carry forwards for federal income tax
purposes of approximately $122,230,000 which expire in the years
2008 through 2027.
|
|
|
|
Federal research and development tax credits of approximately
$4,696,000 which expire in the years 2008 through 2027.
|
|
|
|
Net operating loss carry forwards for state income tax purposes
of approximately $19,309,000 which expire in the years 2009
through 2017.
|
|
|
|
State research and development tax credits of approximately
$2,132,000 ($1,407,000 net of federal tax effect) which do not
expire.
|
The effective tax rate as a percentage of income before income
taxes differs from the statutory federal income tax rate (when
applied to income before income taxes) for the years ended
December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory federal income tax (benefit) rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State income tax (benefit) rate
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses not deductible for taxes
|
|
|
4.9
|
|
|
|
5.3
|
|
|
|
2.8
|
|
Increase in valuation allowance
|
|
|
35.1
|
|
|
|
34.7
|
|
|
|
37.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax (benefit) rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our policy is to recognize interest and penalties related to
income tax matters in income tax expense. Because we have no tax
liabilities, no tax-related interest and penalties have been
expensed in our consolidated statements of operations during
2007 or accrued as a liability in our consolidated balance
sheets at December 31, 2007. We do not anticipate any
significant changes to total unrecognized tax benefits as a
result of settlement of audits or the expiration of statute of
limitations within the next twelve months.
68
StemCells,
Inc.
Notes to
Consolidated Financial Statements
(Continued)
We file U.S. federal income tax returns, as well as tax
returns with the State of California and the State of Rhode
Island. Due to the carry forward of unutilized net operating
losses and research and development credits, our federal tax
returns from 1993 forward remain subject to examination by the
Internal Revenue Service, and our State of California tax
returns from 1999 forward and our State of Rhode Island tax
returns from 2002 forward remain subject to examination by the
respective state tax authorities.
*****
QUARTERLY
FINANCIAL DATA (unaudited)
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenue
|
|
$
|
30
|
|
|
$
|
13
|
|
|
$
|
8
|
|
|
$
|
6
|
|
Operating expenses(1)
|
|
|
8,353
|
|
|
|
7,749
|
|
|
|
6,041
|
|
|
|
6,505
|
|
Other income, net
|
|
|
497
|
|
|
|
582
|
|
|
|
609
|
|
|
|
1,880
|
|
Net loss
|
|
|
(7,825
|
)
|
|
|
(7,154
|
)
|
|
|
(5,424
|
)
|
|
|
(4,620
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Total revenue
|
|
$
|
12
|
|
|
$
|
18
|
|
|
$
|
21
|
|
|
$
|
42
|
|
Operating expenses(1)
|
|
|
6,583
|
|
|
|
5,581
|
|
|
|
4,775
|
|
|
|
4,525
|
|
Other income, net
|
|
|
668
|
|
|
|
699
|
|
|
|
765
|
|
|
|
291
|
|
Net loss
|
|
|
(5,903
|
)
|
|
|
(4,863
|
)
|
|
|
(3,989
|
)
|
|
|
(4,193
|
)
|
Basic and diluted (loss) per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
(1) |
|
Includes adjustment of wind-down accrual see
Note 7. |
69
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation of its
chief executive officer and chief financial officer, evaluated
the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this annual report. Based on this
evaluation, the Companys principal executive officer and
principal financial officer concluded that these disclosure
controls and procedures are effective to ensure that the
information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time
periods, and to provide reasonable assurance that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Companys management,
including its chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Controls
There have been no changes in the Companys internal
control over financial reporting during the quarter ended
December 31, 2007, that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Managements
Report on Internal Control Over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting.
The Companys management, including its principal executive
officer and principal financial officer, assessed the
effectiveness of its internal control over financial reporting
based on the framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The evaluation
of the design and operating effectiveness of internal controls
over financial reporting include among others those policies and
procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
During the fiscal year 2007, the Company periodically tested the
design and operating effectiveness of its internal controls.
Among other matters, the Company sought in its evaluation to
determine whether there were any significant
deficiencies or material weakness in its
internal control over financial reporting, or whether it had
identified any acts of fraud involving management or other
employees.
Based on the above evaluation, the Companys chief
executive officer and chief financial officer have concluded
that as of December 31, 2007, the Companys internal
controls over financial reporting were effective. Nonetheless,
it is important to acknowledge that due to its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even systems
determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
70
|
|
Item 9B.
|
Other
Information
|
None
PART III
|
|
Item 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Executive
Officers
Below are the name, age and principal occupations for the last
five years of each executive officer of StemCells, Inc., as of
February 29, 2008. All such persons have been elected to
serve until their successors are elected and qualified or until
their earlier resignation or removal.
|
|
|
|
|
|
|
Martin M. McGlynn,
President and Chief
Executive Officer
|
|
|
61
|
|
|
Martin M. McGlynn joined the company on January 2001, when he
was appointed President and Chief Executive Officer of the
company and of its wholly-owned subsidiary, StemCells
California, Inc. He was elected to the Board of Directors in
February 2001.
|
Ann Tsukamoto, PhD
Chief Operating Officer
|
|
|
55
|
|
|
Ann Tsukamoto, Ph.D., joined the company in November 1997
as Senior Director of Scientific Operations; was appointed Vice
President, Scientific Operations in June 1998 and Vice
President, Research and Development in February 2002. In
November 2006, she was promoted to Chief Operating Officer, in
which role she retains responsibility for the companys
research and development efforts.
|
Rodney K.B. Young,
Chief Financial Officer
and Vice President,
Finance and Administration
|
|
|
45
|
|
|
Rodney K.B. Young joined the company in September 2005 as Chief
Financial Officer and Vice President, Finance. In November 2006
he became CFO and Vice President, Finance and Administration,
with responsibilities for administrative functions including
Human Resources and Information Technology in addition to
Finance. From 2003 to 2005, Mr. Young was Chief Financial
Officer and a director of Extropy Pharmaceuticals, Inc., a
private biopharmaceutical company focused on developing drugs
for pediatric indications.
|
Directors
Below are the name, age and principal occupations for the last
five years of each Director of StemCells, Inc., as of
February 29, 2008. Directors are elected to staggered three
year terms.
|
|
|
|
|
|
|
Eric H. Bjerkholt
|
|
|
48
|
|
|
Eric H. Bjerkholt was elected to the Board of Directors in March
2004. Mr. Bjerkholt joined Sunesis Pharmaceuticals, Inc.,
in 2004 as Senior Vice President and Chief Financial Officer.
Since February 2007, he has served as Senior Vice President,
Corporate Development and Finance, and Chief Financial Officer.
From 2002 to 2004, Mr. Bjerkholt was Senior Vice President
and Chief Financial Officer at IntraBiotics Pharmaceuticals, Inc.
|
Ricardo B. Levy, Ph.D.
|
|
|
63
|
|
|
Ricardo B. Levy, Ph.D. was elected to the Board of
Directors in September 2001. He currently serves on several
boards of directors.
|
Martin M. McGlynn
|
|
|
61
|
|
|
Martin M. McGlynn was elected to the Board of Directors in
February 2001. He is President and Chief Executive Officer of
the Company, a position he has held since January 2001.
|
Desmond H. OConnell, Jr.
|
|
|
72
|
|
|
Desmond H. OConnell, Jr. was elected to the Board of
Directors in January 2007. He has been an independent management
consultant and private investor since 1990.
|
71
|
|
|
|
|
|
|
Roger Perlmutter, M.D., Ph.D.
|
|
|
55
|
|
|
Roger M. Perlmutter, M.D., Ph.D., was elected to the
Board of Directors in December 2000. He is Executive Vice
President, Research and Development, of Amgen, Inc., a position
he has held since January 2001.
|
John J. Schwartz, Ph.D.
|
|
|
73
|
|
|
John J. Schwartz, Ph.D., was elected to the Board of
Directors in December 1998 and was elected Chairman of the Board
at the same time. He is currently President of Quantum
Strategies Management Company.
|
Irving Weissman, M.D.
|
|
|
68
|
|
|
Irving L. Weissman, M.D., was elected to the Board of
Directors in September 1997. He is the Virginia and Daniel K.
Ludwig Professor of Cancer Research, Professor of Pathology and
Professor of Developmental Biology at Stanford.
|
Certain other information required by this Item regarding our
officers, Directors, and corporate governance is incorporated
herein by reference to the information appearing under the
headings Information About Our Directors and
Information About Ownership of Our Common Stock in
our definitive proxy statement to be filed with the Securities
and Exchange Commission within 120 days of
December 31, 2007 (the 2008 Proxy Statement).
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item is incorporated by
reference from Item 5 of this Annual Report on
Form 10-K
and our Proxy Statement for the 2008 Annual Meeting of
Stockholders.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item is incorporated by
reference from Item 5 of this Annual Report on
Form 10-K
and from our Proxy Statement for the 2008 Annual Meeting of
Stockholders.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2008 Annual Meeting
of Stockholders.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated by
reference from our Proxy Statement for the 2008 Annual Meeting
of Stockholders.
PART IV
|
|
Item 15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are included as part of this
Annual Report on
Form 10-K.
(1) Financial Statements:
The financial statements filed as part of this Report are listed
and indexed under Item 8 above.
(2) Financial Statement Schedules:
Schedules are not included herein because they are not
applicable or the required information appears in the Financial
Statements or Notes thereto.
(3) Exhibits.
The documents set forth below are filed herewith or incorporated
by reference to the location indicated.
72
|
|
|
|
|
Exhibit No.
|
|
Title or Description
|
|
|
3
|
.1-
|
|
Restated Certificate of Incorporation of the Registrant
|
|
3
|
.2--
|
|
Amended and Restated By-Laws of the Registrant
|
|
4
|
.1^ ^
|
|
Specimen common stock Certificate
|
|
4
|
.2++
|
|
Form of Warrant Certificate issued to a certain purchaser of the
Registrants common stock in April 1995
|
|
4
|
.3X
|
|
common stock Purchase Warrant
|
|
4
|
.4X
|
|
Callable Warrant
|
|
4
|
.5XXX
|
|
Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P.
|
|
4
|
.6XXX
|
|
Common stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P.
|
|
4
|
.7{*}
|
|
Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of 3% Cumulative Convertible Preferred Stock for
StemCells, Inc.
|
|
4
|
.8{*}
|
|
Warrant to Purchase common stock Riverview Group, LLC
|
|
4
|
.9XXXX
|
|
Warrant to Purchase common stock Cantor
Fitzgerald & Co.
|
|
4
|
.10&&
|
|
Warrant to Purchase common stock Riverview Group, LLC
|
|
10
|
.1*
|
|
Form of at-will Employment Agreement between the Registrant and
most of its employees
|
|
10
|
.2*
|
|
Form of Agreement for Consulting Services between the Registrant
and members of its Scientific Advisory Board
|
|
10
|
.3*
|
|
Form of Nondisclosure Agreement between the Registrant and its
Contractors
|
|
10
|
.4*
|
|
1992 Equity Incentive Plan
|
|
10
|
.5*
|
|
1992 Stock Option Plan for Non-Employee Directors
|
|
10
|
.7+
|
|
Research Agreement, dated as of March 16, 1994, between
NeuroSpheres, Ltd. and Registrant
|
|
10
|
.8+
|
|
Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992
|
|
10
|
.9+
|
|
First Amendment to Lease Agreement between Registrant and The
Rhode Island Industrial Facilities Corporation dated as of
September 15, 1994
|
|
10
|
.10#
|
|
Lease Agreement, dated as of November 21, 1997, by and
between Hub RI Properties Trust, as Landlord, and
CytoTherapeutics, Inc., as Tenant
|
|
10
|
.11!!
|
|
CTI individual stockholders option agreement, dated as of
July 10, 1996, among the Company and the individuals listed
therein
|
|
10
|
.12!
|
|
Consulting Agreement, dated as of September 25, 1997,
between Dr. Irving Weissman and the Registrant
|
|
10
|
.13!!!
|
|
StemCells, Inc. 1996 Stock Option Plan
|
|
10
|
.14!!!
|
|
1997 StemCells Research Stock Option Plan (the 1997
Plan)
|
|
10
|
.15!!!
|
|
Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan
|
|
10
|
.16$**
|
|
License Agreement, dated as of October 27, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.17$**
|
|
License Agreement, dated as of October 27, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.18$**
|
|
License Agreement, dated as of November 20, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.19++**
|
|
License Agreement, dated as of June 199,9 between The Scripps
Research Institute and the Registrant
|
|
10
|
.20++**
|
|
License Agreement, dated as of June 1999, between The Scripps
Research Institute and the Registrant
|
|
10
|
.21XX
|
|
License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd.
|
|
10
|
.22XX
|
|
Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn
|
|
10
|
.23XX
|
|
Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant
|
|
10
|
.24$$
|
|
2001 Equity Incentive Plan
|
|
10
|
.25&
|
|
Agreement, dated as of April 9, 2003, between the
Registrant and Riverview Group, L.L.C.
|
|
10
|
.26&&
|
|
Form of Registration Rights Agreement between the Registrant and
Riverview Group, L.L.C.
|
73
|
|
|
|
|
Exhibit No.
|
|
Title or Description
|
|
|
10
|
.27&&&
|
|
Securities Purchase Agreement, dated as of May 7, 2003,
between the Registrant and Riverview Group, L.L.C.
|
|
10
|
.28%
|
|
Securities Purchase Agreement, dated as of December 9,
2003, between the Registrant and Riverview Group, L.L.C.
|
|
10
|
.29^ ^ ^
|
|
Form of Securities Purchase Agreement, dated as of June 16,
2004, between the Registrant and certain Purchasers parties
thereto
|
|
10
|
.30^ ^ ^
|
|
Form of Warrant
|
|
10
|
.31^ ^ ^ ^
|
|
Amended and Restated 2004 Equity Incentive Plan of the Registrant
|
|
10
|
.32§
|
|
License Agreement, dated as of July 1, 2005, between the
Registrant and ReNeuron Limited
|
|
10
|
.33§§
|
|
Letter Agreement, effective as of September 6, 2005,
between the Registrant and Rodney K.B. Young
|
|
10
|
.34§§
|
|
Consulting Agreement, effective as of September 6, 2005,
between the Registrant and Judi R. Lum
|
|
10
|
.35^
|
|
Sales Agreement with Cantor Fitzgerald
|
|
10
|
.36XX
|
|
Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement, dated
October 30, 2000
|
|
10
|
.37
|
|
Note Purchase Agreement with Progenitor Cell Therapy, LLC, dated
December 3, 2007.
|
|
10
|
.38@
|
|
License Agreement, dated April 1, 1997, by and among
Registrant, NeuroSpheres Ltd. and NeuroSpheres Holdings Ltd.
|
|
14
|
.1%%
|
|
Code of Ethics
|
|
21
|
X
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Grant Thornton, LLP , Independent Registered Public
Accounting Firm
|
|
31
|
.1
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Martin McGlynn, Chief Executive Officer)
|
|
31
|
.2
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Martin McGlynn, Chief Executive Officer)
|
|
32
|
.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
|
|
|
! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 an Exhibit to and
incorporated by reference to, the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 1996. |
|
!!! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1998 and filed on
March 31, 1999. |
|
$$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 10, 2003. |
|
%% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 |
|
& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on April 15, 2003. |
|
&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 13, 2003. |
74
|
|
|
&&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 15, 2003. |
|
* |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1,
File No. 33-45739. |
|
** |
|
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 an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 29, 2006. |
|
^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants Registration
Statement on
Form S-3,
File
No. 333-117360. |
|
^ ^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on June 17, 2004. |
|
^ ^ ^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-118263. |
|
{*} |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on December 7, 2001. |
|
+ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
Registration Statement on
Form S-1,
File
No. 33-91228. |
|
- |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 and filed on
March 15, 2007. |
|
-- |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 7, 2007. |
|
§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005. |
|
§§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on September 7, 2005. |
|
X |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 333-45496. |
|
XX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000 and filed on
April 2, 2001. |
|
XXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-1
as amended to
Form S-3,
File No.
333-61726. |
|
XXXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-3,
File
No. 333-75806. |
|
@ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2006 and filed on
April 1, 1997. |
|
# |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1997 and filed on
March 30, 1998. |
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STEMCELLS, INC.
Martin McGlynn
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Dated: March 13, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ Martin
McGlynn
Martin
McGlynn
|
|
President and Chief Executive Officer and Director (principal
executive officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Rodney
K.B. Young
Rodney
K.B. Young
|
|
Chief Financial Officer
(principal financial officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ George
Koshy
George
Koshy
|
|
Chief Accounting Officer
(principal accounting officer)
|
|
March 13, 2008
|
|
|
|
|
|
/s/ Eric
Bjerkholt
Eric
Bjerkholt
|
|
Director
|
|
March 11, 2008
|
|
|
|
|
|
/s/ Ricardo
B. Levy, Ph.D.
Ricardo
B. Levy, Ph.D.
|
|
Director
|
|
March 9, 2008
|
|
|
|
|
|
/s/ Desmond
H. OConnell, Jr.
Desmond
H. OConnell, Jr.
|
|
Director
|
|
March 10, 2008
|
|
|
|
|
|
/s/ Roger
M. Perlmutter, M.D.
Roger
M. Perlmutter, M.D.
|
|
Director
|
|
March 10, 2008
|
|
|
|
|
|
/s/ John
J. Schwartz, Ph.D.
John
J. Schwartz, Ph.D.
|
|
Director, Chairman of the Board
|
|
March 11, 2008
|
|
|
|
|
|
/s/ Irving
L. Weissman, M.D.
Irving
L. Weissman, M.D.
|
|
Director
|
|
March 11, 2008
|
76
Exhibit
Index
|
|
|
|
|
Exhibit No.
|
|
Title or Description
|
|
|
3
|
.1-
|
|
Restated Certificate of Incorporation of the Registrant
|
|
3
|
.2--
|
|
Amended and Restated By-Laws of the Registrant
|
|
4
|
.1^ ^
|
|
Specimen common stock Certificate
|
|
4
|
.2++
|
|
Form of Warrant Certificate issued to a certain purchaser of the
Registrants common stock in April 1995
|
|
4
|
.3X
|
|
common stock Purchase Warrant
|
|
4
|
.4X
|
|
Callable Warrant
|
|
4
|
.5XXX
|
|
Callable Warrant, dated June 21, 2001, issued to Millennium
Partners, L.P.
|
|
4
|
.6XXX
|
|
Common stock Purchase Warrant, Class A, dated June 21,
2001, issued to Millennium Partners, L.P.
|
|
4
|
.7{*}
|
|
Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of 3% Cumulative Convertible Preferred Stock for
StemCells, Inc.
|
|
4
|
.8{*}
|
|
Warrant to Purchase common stock Riverview Group, LLC
|
|
4
|
.9XXXX
|
|
Warrant to Purchase common stock Cantor
Fitzgerald & Co.
|
|
4
|
.10&&
|
|
Warrant to Purchase common stock Riverview Group, LLC
|
|
10
|
.1*
|
|
Form of at-will Employment Agreement between the Registrant and
most of its employees
|
|
10
|
.2*
|
|
Form of Agreement for Consulting Services between the Registrant
and members of its Scientific Advisory Board
|
|
10
|
.3*
|
|
Form of Nondisclosure Agreement between the Registrant and its
Contractors
|
|
10
|
.4*
|
|
1992 Equity Incentive Plan
|
|
10
|
.5*
|
|
1992 Stock Option Plan for Non-Employee Directors
|
|
10
|
.7+
|
|
Research Agreement, dated as of March 16, 1994, between
NeuroSpheres, Ltd. and Registrant
|
|
10
|
.8+
|
|
Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992
|
|
10
|
.9+
|
|
First Amendment to Lease Agreement between Registrant and The
Rhode Island Industrial Facilities Corporation dated as of
September 15, 1994
|
|
10
|
.10#
|
|
Lease Agreement, dated as of November 21, 1997, by and
between Hub RI Properties Trust, as Landlord, and
CytoTherapeutics, Inc., as Tenant
|
|
10
|
.11!!
|
|
CTI individual stockholders option agreement, dated as of
July 10, 1996, among the Company and the individuals listed
therein
|
|
10
|
.12!
|
|
Consulting Agreement, dated as of September 25, 1997,
between Dr. Irving Weissman and the Registrant
|
|
10
|
.13!!!
|
|
StemCells, Inc. 1996 Stock Option Plan
|
|
10
|
.14!!!
|
|
1997 StemCells Research Stock Option Plan (the 1997
Plan)
|
|
10
|
.15!!!
|
|
Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan
|
|
10
|
.16$**
|
|
License Agreement, dated as of October 27, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.17$**
|
|
License Agreement, dated as of October 27, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.18$**
|
|
License Agreement, dated as of November 20, 1998, between
The Scripps Research Institute and the Registrant
|
|
10
|
.19++**
|
|
License Agreement, dated as of June 199,9 between The Scripps
Research Institute and the Registrant
|
|
10
|
.20++**
|
|
License Agreement, dated as of June 1999, between The Scripps
Research Institute and the Registrant
|
|
10
|
.21XX
|
|
License Agreement, dated as of October 30, 2000, between
the Registrant and NeuroSpheres Ltd.
|
|
10
|
.22XX
|
|
Letter Agreement, dated January 2, 2001, between the
Registrant and Martin McGlynn
|
|
10
|
.23XX
|
|
Lease, dated February 1, 2001, between the Board of
Trustees of Stanford University and the Registrant
|
|
10
|
.24$$
|
|
2001 Equity Incentive Plan
|
|
10
|
.25&
|
|
Agreement, dated as of April 9, 2003, between the
Registrant and Riverview Group, L.L.C.
|
77
|
|
|
|
|
Exhibit No.
|
|
Title or Description
|
|
|
10
|
.26&&
|
|
Form of Registration Rights Agreement between the Registrant and
Riverview Group, L.L.C.
|
|
10
|
.27&&&
|
|
Securities Purchase Agreement, dated as of May 7, 2003,
between the Registrant and Riverview Group, L.L.C.
|
|
10
|
.28%
|
|
Securities Purchase Agreement, dated as of December 9,
2003, between the Registrant and Riverview Group, L.L.C.
|
|
10
|
.29^ ^ ^
|
|
Form of Securities Purchase Agreement, dated as of June 16,
2004, between the Registrant and certain Purchasers parties
thereto
|
|
10
|
.30^ ^ ^
|
|
Form of Warrant
|
|
10
|
.31^ ^ ^ ^
|
|
Amended and Restated 2004 Equity Incentive Plan of the Registrant
|
|
10
|
.32§
|
|
License Agreement, dated as of July 1, 2005, between the
Registrant and ReNeuron Limited
|
|
10
|
.33§§
|
|
Letter Agreement, effective as of September 6, 2005,
between the Registrant and Rodney K.B. Young
|
|
10
|
.34§§
|
|
Consulting Agreement, effective as of September 6, 2005,
between the Registrant and Judi R. Lum
|
|
10
|
.35^
|
|
Sales Agreement with Cantor Fitzgerald
|
|
10
|
.36XX
|
|
Side Letter, dated March 17, 2001, between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement, dated
October 30, 2000
|
|
10
|
.37
|
|
Note Purchase Agreement with Progenitor Cell Therapy, LLC, dated
December 3, 2007.
|
|
10
|
.38@
|
|
License Agreement, dated April 1, 1997, by and among
Registrant, NeuroSpheres Ltd. and NeuroSpheres Holdings Ltd.
|
|
14
|
.1%%
|
|
Code of Ethics
|
|
21
|
X
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Grant Thornton, LLP , Independent Registered Public
Accounting Firm
|
|
31
|
.1
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Martin McGlynn, Chief Executive Officer)
|
|
31
|
.2
|
|
Certification Pursuant to Securities Exchange Act
Rule 13(a)-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Martin McGlynn, Chief Executive Officer)
|
|
32
|
.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Rodney K.B. Young, Chief Financial Officer)
|
|
|
|
! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 an Exhibit to and
incorporated by reference to, the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 1996. |
|
!!! |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1998 and filed on
March 31, 1999. |
|
$$ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
definitive proxy statement filed May 1, 2001. |
|
% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 10, 2003. |
|
%% |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 |
|
& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on April 15, 2003. |
78
|
|
|
&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 13, 2003. |
|
&&& |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 15, 2003. |
|
* |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, Registration Statement on
Form S-1,
File No. 33-45739. |
|
** |
|
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 an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on December 29, 2006. |
|
^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated by reference to, the Registrants Registration
Statement on
Form S-3,
File
No. 333-117360. |
|
^ ^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on June 17, 2004. |
|
^ ^ ^ ^ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-8,
File
No. 333-118263. |
|
{*} |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on December 7, 2001. |
|
+ |
|
Previously filed with the Commission as Exhibits to, and
incorporated herein by reference to, the Registrants
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 Registrants
Registration Statement on
Form S-1,
File
No. 33-91228. |
|
- |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006 and filed on
March 15, 2007. |
|
-- |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
on May 7, 2007. |
|
§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005. |
|
§§ |
|
Previously filed with the Commission as an Exhibit to and
incorporated herein by reference to, the Registrants
current report on
Form 8-K
filed on September 7, 2005. |
|
X |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement on
Form S-1,
File
No. 333-45496. |
|
XX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000 and filed on
April 2, 2001. |
|
XXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-1
as amended to
Form S-3,
File No.
333-61726. |
|
XXXX |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Registration Statement filed on
Form S-3,
File
No. 333-75806. |
|
@ |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
Annual Report on
Form 10-K/A
for the fiscal year ended December 31, 2006 and filed on
April 1, 1997. |
|
# |
|
Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrants
annual report on
Form 10-K
for the fiscal year ended December 31, 1997 and filed on
March 30, 1998. |
79