AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 25, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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STEMCELLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other Jurisdiction 2836 94-3078125
of Incorporation or (Primary Standard Industrial (I.R.S. Employer
Organization) Classification Code Number) Identification No.)
------------------------
3155 PORTER DRIVE
PALO ALTO, CA 94304
(650) 475-3100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
IRIS BREST, ESQ.
STEMCELLS, INC.
3155 PORTER DRIVE
PALO ALTO, CA 94304
(650) 475-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
GEOFFREY B. DAVIS, ESQ.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(617) 951-7000
(617) 951-7050 (fax)
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
Common Stock, par value $.01 per share...... up to 10,000,000(1) (2) $31,914,894(3) $7,979
Common Stock, par value $.01 per share(4)... 350,000 $3.15(5) $ 1,102,500 $ 276
Total:.................................... 10,350,000 $33,017,394 $8,255
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The price per share will vary based on the volume-weighted average daily
price of the Company's common stock during the drawdown periods described in
this registration statement.
(3) This represents the maximum fair market value of shares sold to Sativum
Investments Limited under the common stock purchase agreement. The maximum
net proceeds the Company can receive is $30,000,000 less an aggregate cash
placement fee of 3% of net proceeds payable to its placement agents Pacific
Crest Securities, Inc. and Granite Financial Group, Inc.
(4) Issuable upon exercise of the warrants issued to Sativum Investments
Limited, Pacific Crest Securities, Inc. and Granite Financial Group, Inc.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, based on the average
of the high and low prices as reported on the Nasdaq National Market on
May 18, 2001.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 25, 2001
STEMCELLS, INC.
10,350,000 SHARES OF COMMON STOCK
---------------
This prospectus relates to up to 10,000,000 shares of common stock that may
be issued from time to time at our discretion pursuant to a common stock
purchase agreement, as further described in this prospectus, with Sativum
Investments Limited, a British Virgin Islands corporation, and 350,000 shares of
common stock issuable upon the exercise of warrants issued to Sativum, Pacific
Crest Securities, Inc. and Granite Financial Group, Inc. in connection with the
common stock purchase agreement. The total number of shares of common stock that
may be sold by Sativum, Pacific Crest and Granite pursuant to this prospectus
would constitute 48.2% of our issued and outstanding common stock as of May 10,
2001, the date of the common stock purchase agreement. However, we may not sell
pursuant to the common stock purchase agreement more than 3,922,606 shares of
common stock, which equals 19.9% of our issued and outstanding common stock as
of May 10, 2001, minus the shares underlying the warrants, unless and until we
receive the approval of our stockholders as required pursuant to the Nasdaq
National Market's issuer designation requirements.
We will receive the net sale price of any common stock that we sell to
Sativum pursuant to the common stock purchase agreement or that we issue upon
the exercise of the warrants by Sativum, Pacific Crest or Granite. Sativum,
Pacific Crest and Granite may resell those shares pursuant to this prospectus.
The price at which we will sell the shares to Sativum pursuant to the common
stock purchase agreement will be equal to 94% of the average of the volume
weighted average price of our common stock during the twenty trading days
immediately following our request to draw down an investment by Sativum under
the common stock purchase agreement. The registration of shares of our common
stock issued pursuant to the common stock purchase agreement and upon the
exercise of the warrants that may be offered pursuant to this prospectus does
not necessarily mean that any of those shares will ultimately be offered and
sold.
Sativum is an "underwriter" within the meaning of the Securities Act of 1933
in connection with its sales.
Our common stock is listed on the Nasdaq National Market under the symbol
"STEM." The last reported sales price for our common stock on the Nasdaq
National Market on May 24, 2001 was $3.60 per share.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2001.
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary..................... 2
Risk Factors........................... 6
Forward-Looking Statements............. 13
Industry and Market Data............... 13
Use of Proceeds........................ 13
Price Range of Common Stock............ 14
Dividend Policy........................ 14
Capitalization......................... 15
Selected Consolidated Financial Data... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 23
PAGE
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Management............................. 42
Related Party Transactions............. 49
Principal Stockholders................. 51
Description of Capital Stock........... 52
Common Stock Purchase Agreement........ 55
The Drawdown Procedure and the Stock
Purchases............................ 56
Selling Stockholders................... 60
Plan of Distribution................... 62
Legal Matters.......................... 65
Experts................................ 65
Where You Can Find More Information.... 65
Index to Financial Statements.......... F-1
i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION REGARDING OUR BUSINESS AND
THIS OFFERING. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND RELATED
NOTES, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
STEMCELLS, INC.
We are engaged in research and development efforts focused on the
identification, isolation and expansion of stem cells as the underlying
technology for developing potential cell transplant therapies. Stem cells are
key cells in the body that produce all of the functional mature cell types found
in normal, healthy individuals. Our goal is to develop therapies that will use
stem cells to repopulate or repair tissues, such as those of the brain, pancreas
or liver, that have been damaged or lost as a result of disease or injury. All
of our programs are currently at the discovery or pre-clinical stage.
Many diseases, such as Alzheimer's, Parkinson's and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
We believe that our stem cell technologies, if successfully developed, may
provide the basis for effective therapies for these and other conditions. Our
aim is to return patients to productive lives and significantly reduce the
substantial health care costs often associated with these diseases and
disorders. We have made significant progress toward developing stem cell
therapies for the nervous system by identifying and characterizing the human
central nervous system stem cell. We have also made significant advances in our
search for the stem cells of the pancreas and the liver by identifying novel
markers on the surface of cells so they can be isolated and tested to determine
whether they are stem cells.
We have established our intellectual property position with respect to stem
cell therapies for each of these three areas--the central nervous system, the
pancreas and the liver--by patenting or seeking patent protection for our
discoveries and by entering into exclusive licensing arrangements. Our portfolio
of issued patents includes a method of culturing normal human neural stem cells
in our proprietary medium, and our published studies show that our cultured and
expanded cells give rise to all three major cell types of the central nervous
system. In addition, the Company recently announced the results of a new study
that showed that human brain stem cells can be successfully isolated with the
use of markers present on the surface of freshly obtained brain cells. We
believe this is the first reproducible process for isolating highly purified
populations of well-characterized normal human neural stem cells, and we have
applied for a composition of matter patent. We also have filed an improved
process patent for the growth and expansion of these purified normal human
neural cells.
Historical Note: We were formerly known as CytoTherapeutics and were
incorporated in Delaware in 1988. We currently have one subsidiary, StemCells
California, Inc., a California corporation we acquired in September 1997. Until
mid-1999, we had programs in a different technology, encapsulated cell therapy,
as well as stem cell programs. In 1999, we embarked on a major restructuring of
our research and development operations and sold the encapsulated cell therapy
technology. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
2
RECENT DEVELOPMENTS
SALE OF MODEX SHARES
On April 30, 2001, we sold 103,577 shares in Modex Therapeutics, Ltd., a
Swiss biotherapeutics company, for a net price of 87.30 Swiss Francs per share,
which converts to approximately $50.30, for total proceeds of approximately
$5,200,000, net of commissions and fees. We no longer hold any shares of Modex.
See "Business--Corporate Collaboration."
COMMON STOCK PURCHASE AGREEMENT RELATING TO EQUITY LINE
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 million of our common stock, subject to restrictions and other
obligations that are described throughout this prospectus. We, at our sole
discretion, may draw down on this facility, sometimes termed an equity line,
from time to time, and Sativum is obligated to purchase shares of our common
stock at a 6% discount to a volume weighted average market price over the 20
trading days following the drawdown notice. Our volume weighted average market
price is calculated by adding the total dollars traded in every transaction in a
given trading day and dividing that number by the total number of shares traded
during that trading day. We are limited with respect to how often we can
exercise a drawdown and the amount of each drawdown. For more details on the
equity line, see "Common Stock Purchase Agreement" elsewhere in this prospectus.
------------------------
Our principal executive office is located at 3155 Porter Drive, Palo Alto,
California 94304 and our telephone number is (650) 475-3100. We maintain a
website on the Internet at WWW.STEMCELLSINC.COM. Our website, and the
information contained therein, is not a part of this prospectus.
3
THE OFFERING
Common stock offered......................... Up to 10,350,000 shares of common stock. None
of these shares will be offered by us.
Up to 10,000,000 of these shares may be
offered for resale by Sativum Investments
Limited. We may require Sativum to purchase
up to $30,000,000 of shares of our common
stock from time to time at our discretion at
a discount to a market-based price at the
time of each sale to Sativum. The number of
shares sold by us to Sativum and resold by
this prospectus may be significantly lower
than 10,000,000 shares. See "Common Stock
Purchase Agreement and "Risk Factors--Risks
Related to the Equity Line and Our Financial
Condition."
The remaining 350,000 shares, issuable upon
the exercise of warrants, may be offered for
resale by this prospectus by Sativum, Pacific
Crest Securities Inc., Granite Financial
Group Inc. or their transferees.
Common stock to be outstanding after this
offering..................................... Up to 36,808,211 shares of common stock,
based on shares outstanding as of March 31,
2001 and assuming that 10,350,000 shares are
issued under the common stock purchase
agreement and the warrants. We are not
permitted to issue more than 3,922,606 shares
pursuant to the common stock purchase
agreement without stockholder approval, which
we have not yet sought or received. In
calculating the number of shares of common
stock, we did not include 3,962,087 shares
issuable upon exercise of warrants and
options outstanding as of March 31, 2001,
shares issuable to a stockholder upon
exercise of an option to purchase up to
$2,000,000 in common stock or shares issuable
upon conversion of our 6% cumulative
convertible preferred stock. See
"Capitalization."
Use of proceeds.............................. We will not receive any of the proceeds of
the resale of shares by Sativum, Pacific
Crest or Granite. We will, however, receive
proceeds from sales of shares to Sativum
under the common stock purchase agreement and
upon exercise of warrants by Sativum, Pacific
Crest or Granite, and we intend to use these
net proceeds for general corporate purposes.
See "Use of Proceeds."
Nasdaq National market symbol................ STEM
4
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the consolidated financial data for our
business. You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes included elsewhere in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- -------------------
1998 1999 2000 2000 2001
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue from collaborative agreements and grants............ $ 8,803 $ 5,022 $ 74 $ -- $ 100
Gain on sale of investment.................................. -- -- 1,428 -- 2,550
Research and development expenses........................... 17,659 9,984 5,979 907 1,644
ECT wind-down expenses...................................... -- 6,048 3,327 234 --
Net income (loss)........................................... $(12,628) $(15,709) $(11,125) $(1,794) $ 269
AS OF AS OF
DECEMBER 31, MARCH 31,
2000 2001
------------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 6,069 $ 4,499
Restricted investments...................................... 16,356 8,413
Total assets................................................ 29,795 21,507
Long-term debt, including capitalized leases................ 2,605 2,521
Stockholders' equity........................................ 22,982 15,462
In July 1999 we began restructuring the company to focus solely on our stem
cell technology. As part of this restructuring we terminated all activities
related to our former encapsulated cell technology and we relocated our
headquarters from Rhode Island to California. The results shown for the year
ended December 31, 1999 and 2000 includes $6,047,806 and $3,327,360,
respectively, in expenses related to the restructuring. For more information on
this restructuring see "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes included elsewhere in this prospectus.
During 2000, in connection with our investment in Modex Therapeutics, Ltd.,
a Swiss biotechnology company that completed an initial public offering on
June 23, 2000, we realized a $1,427,686 gain and recognized an increase in value
related to our remaining holdings of $16,356,334 as of December 31, 2000. During
the three months ended March 31, 2001, we realized a gain of $2,550,000 in
connection with further sales of Modex shares. After a subsequent sale on
April 30, 2001, we no longer hold any shares of Modex. For more information on
Modex, see "Recent Developments" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes included elsewhere in this prospectus.
5
RISK FACTORS
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
MAKING AN INVESTMENT DECISION REGARDING STEMCELLS, INC.OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED IF ANY
OF THESE RISKS ACTUALLY OCCUR. CONSEQUENTIALLY, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, RESULTING IN THE LOSS OF ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT AND WE MAY
FAIL TO DEVELOP ANY PRODUCTS.
Our stem cell technology is at the early pre-clinical stage for the brain
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any proposed product. We may fail to
discover the stem cells we are seeking, to develop any products, to obtain
regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product using stem cell technology may fail to (i) survive and
persist in the desired location, (ii) provide the intended therapeutic benefits,
(iii) properly integrate into existing tissue in the desired manner, or
(iv) achieve benefits therapeutically equal to or better than the standard of
treatment at the time of testing. In addition, any such product may cause
undesirable side effects. Results of early pre-clinical research may not be
indicative of the results that will be obtained in later stages of preclinical
or clinical research. If the appropriate regulatory authorities do not approve
our products, or if we fail to maintain regulatory compliance, we would have
limited ability to commercialize our products, and our business and results of
operations would be harmed. Furthermore, since stem cells are a new form of
therapy, the marketplace may not accept any products we may develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH ADVERSELY AFFECT OUR ABILITY TO FUND OUR STEM CELL
RESEARCH AND DEVELOPMENT.
Prior to our reorganization in 1999 and the resulting consolidation of all
functions in California, we carried out our former encapsulated cell therapy
programs at facilities in Lincoln, Rhode Island, where we also had our
administrative offices. Although we have vacated these facilities, we have
continuing obligations for lease payments and operating costs of approximately
$1,200,000 per year for our former science and administrative facility, which we
have leased through June 30, 2013, and debt service payments and operating costs
of approximately $1,000,000 per year for our former encapsulated cell therapy
pilot manufacturing facility. We are currently seeking to sublease the science
and administrative facility and to sell the pilot manufacturing facility, but
may not be able to do so. These continuing costs significantly reduce our cash
resources and adversely affect our ability to fund further development of our
stem cell technology. The lease for the science and administrative facility
contains a provision requiring occupancy of the premises and we currently may be
in violation of this provision. The landlord agreed not to take any action as a
result of this violation until November 19, 2000. We cannot give any assurance
that the landlord will extend any additional forebearance. If the landlord
decides to pursue its rights after any period of forebearance, we may be
required to pay the landlord the entire amount due for the rest of the lease
period. In March 2001, the landlord approved a sublease of part of the premises.
6
WE MAY NEED BUT FAIL TO OBTAIN PARTNERS TO SUPPORT OUR STEM CELL DEVELOPMENT
EFFORTS AND TO COMMERCIALIZE OUR TECHNOLOGY.
Equity and debt financings alone may not be sufficient to fund the cost of
developing our stem cell technologies and we may need to rely on our ability to
reach partnering arrangements to provide financial support for our stem cell
discovery and development efforts. In addition, in order to successfully develop
and commercialize our technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies, universities,
research groups and others. While we have engaged, and expect to continue to
engage, in discussions regarding such arrangements, we have not reached any
agreement regarding any such arrangement and we may fail to obtain any such
agreement on terms acceptable to us, if at all. Even if we enter into these
arrangements, we may not be able to satisfy our obligations under them or renew
or replace them after their original terms. Furthermore, these arrangements may
require us to grant certain rights to third parties, including exclusive
marketing rights to one or more products, or may have other terms that are
burdensome to us, and may involve the acquisition of our securities. If any of
our collaborators terminates its relationship with us or fails to perform its
obligations in a timely manner, the development or commercialization of our
technology and potential products may be adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We have incurred $130,229,646 in operating losses through March 31, 2001 and
expect to continue to incur substantial operating losses in the future in order
to conduct our research and development activities, and if those activities are
successful, to fund clinical trials and other expenses. These expenses include
the cost of acquiring technology, product testing, acquiring regulatory
approvals, establishing production, marketing, sales and distribution programs,
and administrative expenses. We have not earned any revenues from sales of any
product. All of our past revenues have been derived from, and any revenues we
may obtain for the foreseeable future are expected to be derived from,
cooperative agreements, research grants, investments and interest on invested
capital. We have no cooperative agreements and we have received only two
research grants for our stem cell technology, and we may not obtain any such
agreements or additional grants in the future, or receive any revenues from
them.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS TO PROTECT OUR INTELLECTUAL
PROPERTY FROM INFRINGEMENT. NEVERTHELESS, SUCH PROTECTION IS UNCERTAIN AND, IF
GAINED, MAY OFFER ONLY LIMITED PROTECTION. IF WE ARE UNABLE TO PROTECT OUR
PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATION WILL BE HARMED.
We own or license a number of patents or pending patent applications
covering human nerve stem cell cultures, central nervous system stem cell
cultures, neuroblast cultures, peripheral nervous system stem cell cultures, and
an animal model for liver failure. 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 before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result in the issuance
of patents, or if any existing or future patents will provide sufficient
protection or significant commercial advantage or if others will circumvent
these patents. Since patent applications are secret until patents are issued in
the United States or until the applications are published in foreign countries,
and since publication of discoveries in the scientific or patent literature
often lags behind actual discoveries, we cannot be certain that we were the
first to make the inventions covered by each of our pending patent applications
or that we were the first to file patent applications for such inventions. Our
patents may not issue from our pending or future patent applications or, if
issued, may not be of commercial benefit to us, or may not afford us adequate
protection from competing products. In addition, third parties may challenge our
patents or governmental authorities may declare them invalid. In the event that
a third party has also filed a patent application relating to inventions claimed
in our patent applications,
7
we may have to participate in proceedings to determine priority of invention.
This could result in substantial uncertainties and cost for us, even if the
eventual outcome is favorable to us, and the outcome might not be favorable to
us. Even if a patent issues, a court could decide that the patent was issued
invalidly.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT ANY STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THAT STEM CELL, AND OUR
BUSINESS WOULD BE HARMED.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important to our development efforts for us or our collaborators to be the
first to discover any stem cell that we are seeking. Failure to be the first
could prevent us from commercializing all of our research and development
related to such stem cell and have a material adverse effect on us.
WE MAY NEED TO OBTAIN LICENSES TO THIRD PARTY PATENTS, AND MAY NOT BE ABLE
TO GET THEM.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have received
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents. We are also aware of a number of
patent applications and patents claiming use of genetically modified cells to
treat disease, disorder or injury. We are aware of three patents issued to two
competitors claiming certain methods for enriching central nervous system stem
cells through gene modification of in vitro cultured cells. These patents were
issued or licensed to NeuralStem and Layton Bioscience. It is possible that
NeuralStem or Layton Bioscience will be able to produce commercially available
stem cell products before we can. These genetically modified cells may be
effective in treating defective, diseased or damaged central nervous system
tissue.
If third party patents or patent applications contain claims infringed by
our technology and these claims are valid, we may be unable to obtain licenses
to these patents at a reasonable cost, if at all, and may also be unable to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, our business could be significantly harmed. We
may have to to defend ourselves in court against allegations of infringement of
third party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. An adverse outcome
in such a suit could subject us to significant liabilities to third parties,
require disputed rights to be licensed from third parties, or require us to
cease using such technology.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own 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 and keep them
secret.
We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Licensors 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 such licenses could expose us to the risks of
third party patents and/or technology. We can give no assurance that any of
these licenses will provide effective protection against our competitors.
8
WE COMPETE WITH COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic products that address degenerative diseases is
large and competition is intense. We expect competition to increase. We believe
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies, such as Biogen, Inc. and
Genzyme, an Elan Corporation. These companies already produce or are developing
treatments for degenerative diseases that are not stem-cell based, and they have
significantly greater capital resources and expertise in research and
development, manufacturing, testing, obtaining regulatory approvals and
marketing than we do. Many of these potential competitors have significant
products approved or in development that could be competitive with our potential
products, and also operate large, well-funded research and development programs.
In addition, we expect to compete with smaller companies such as NeuralStem and
Layton Bioscience and with universities and other research institutions who are
developing treatments for degenerative diseases that are stem-cell based.
Our competitors may succeed in developing technologies and products that are
more effective than those being developed by us, or that would render our
technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY WILL BE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to extensive regulation by governmental authorities in the United States
and other countries. The process of obtaining U.S. Food and Drug Administration
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 United States Congress and
other legislative bodies may enact regulatory reforms or restrictions on the
development of new therapies that could adversely affect the regulatory
environment in which we operate or the development of any products we may
develop.
We base our research and development on the use of human stem and progenitor
cells obtained from fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue. These restrictions
change from time to time and 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. Further, we may not be able to obtain such
cells in the quantity or quality sufficient to satisfy the commercial
requirements of our potential products. As a result we may be unable to develop
or produce our products in a profitable manner.
We may apply for status under the Orphan Drug Act for certain of our
therapies, in order to gain a seven year period of marketing exclusivity for
those therapies. The U.S. Congress in the past considered, and in the future
again may consider, legislation that would restrict the extent and duration of
the market exclusivity of an orphan drug. If enacted, such legislation could
prevent us from obtaining some or all of the benefits of the existing statute
even if we were to apply for and be granted orphan drug status with respect to a
potential product.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL.
We are highly dependent on the principal members of our management and
scientific staff and certain of our outside consultants, including the members
of our scientific advisory board, our chief
9
executive officer, each of our vice presidents and the directors of our neural
stem cell and liver stem cell programs. Although we have entered into employment
agreements with some of these individuals, they may terminate their agreements
at any time. We currently have outside consultants and interim personnel in key
management and scientific positions who are not permanent employees. Loss of
services of any of these individuals could have a material adverse effect on our
operations, because these individuals possess management experience or
specialized scientific skills which we do not otherwise have and which we may
not be able to replace. In addition, our operations are dependent upon our
ability to attract and retain additional qualified scientific and management
personnel. More generally, 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. If we lose the services of these key
personnel or are unable to attract and retain additional qualified personnel, we
may have to delay, reduce or eliminate some or all of our research and
development programs.
HEALTHCARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR PRODUCTS OR
MAY IMPOSE LIMITS ON REIMBURSEMENTS.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the Food and Drug Administration has not
granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care 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 policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
us on the development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We expect that there will
continue to be a number of Federal and state proposals to implement government
control over health care costs. Efforts at healthcare reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals Federal or state governments will adopt or what actions Federal, state
or private payers for healthcare goods and services may take in response to
healthcare reform proposals or legislation. We cannot predict the effect
government control and other healthcare reforms may have on our business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
Our operating results have varied, and may in the future continue to vary,
significantly from quarter to quarter due to a variety of factors. These factors
include the receipt of one-time license or milestone payments under
collaborative agreements, costs associated with the winddown of our encapsulated
cell therapy programs, variation in the level of expenses related to our
research and development efforts, receipt of grants or other support for our
research and development efforts, and other factors. Quarterly comparisons of
our financial results are not necessarily meaningful and you should not rely
upon them as an indication of future performance.
10
RISKS RELATED TO THE EQUITY LINE AND OUR FINANCIAL CONDITION
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses. If
we do not obtain the necessary capital resources, we may have to delay, reduce
or eliminate some or all of our research and development programs or license our
technology or any potential products to third parties rather than
commercializing them ourselves.
If we are unable to draw down on the equity line or choose not to do so, we
intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
We may fail to obtain the necessary capital resources from any such sources when
needed or on terms acceptable to us. Our ability to complete any such
arrangements successfully will depend upon market conditions and, more
specifically, on continued progress in our research and development efforts. We
are prohibited from entering into other stand-by equity based credit facilities
during the term of the common stock purchase agreement.
WE MAY BE UNABLE TO ACCESS ALL OR PART OF OUR EQUITY LINE.
If the trading volume and/or price of our common stock falls below
established levels, then we will not be able to draw down all of the
$30 million committed by Sativum pursuant to the equity line. In addition, we
may choose not to draw down some or all of the equity line. If we do not receive
stockholder approval to issue more than 3,922,606 shares under the equity line,
we also will not be able to access some of the funds in the equity line.
Furthermore, if our common stock is delisted from the Nasdaq National Market, or
if we experience a material adverse change to our business, operations,
properties or financial condition that is not cured within 30 days of the
change, the common stock purchase agreement will terminate. If we are unable to
meet the conditions to a drawdown in the common stock purchase agreement, we
will not be able to draw down any funds until those conditions are met. See
"Common Stock Purchase Agreement."
OUR COMMON STOCK PURCHASE AGREEMENT WITH SATIVUM AND THE ISSUANCE OF SHARES
TO SATIVUM THEREUNDER MAY CAUSE SIGNIFICANT DILUTION TO OUR STOCKHOLDERS OR
CONTRIBUTE TO A PERCEIVED RISK OF DILUTION.
The resale by Sativum of the common stock that it purchases from us will
increase the number of our publicly traded shares, which could depress the
market price of our common stock. Moreover, because all the shares we sell to
Sativum will be available for immediate resale, the prospect of our sales to
Sativum could depress the market price for our common stock. The shares of our
common stock issuable to Sativum under the equity line will be sold at a 6%
discount to the volume-weighted average daily price of our common stock during
the applicable drawdown period, and the proceeds paid to us upon each drawdown
will be net of an aggregate 3% placement fee to our placement agents, Pacific
Crest Securities Inc. and Granite Financial Group, Inc., so we will be required
to issue more shares than would be necessary at a market price to receive a
given amount of cash proceeds. If we require Sativum to purchase our common
stock at a time when our stock price is low, our existing common stockholders
will experience substantial dilution. The perceived risk of dilution may cause
some stockholders to sell their shares or encourage short sales, which may
contribute to a downward movement in the market price of our common stock.
11
IF OUR COMMON STOCK PRICE DROPS SIGNIFICANTLY, WE MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET, WHICH COULD ELIMINATE THE TRADING MARKET FOR OUR COMMON
STOCK.
Our common stock is quoted on the Nasdaq National Market. In order to
continue to be included in the Nasdaq National Market, a company must meet
Nasdaq's maintenance criteria. The maintenance criteria most applicable to us
requires a minimum bid price of $1.00 per share, $4,000,000 in net tangible
assets and $5,000,000 market value of the public float. The public float
excludes shares held directly or indirectly by any of our officers, directors
and holders of 10% or more of our outstanding common stock. As of March 31,
2001, we had approximately $15.4 million of net tangible assets. As of May 24,
2001, the market value of our public float was approximately $71.6 million, and
the lowest bid price of our common stock since March 31, 2001 was $1.47. We
cannot assure you that we will continue to meet these listing criteria. The
issuance by us of shares of common stock to Sativum, or the subsequent resale by
Sativum of those shares, in either case at a discount to the market price, may
cause the trading price of our common stock to fall to a level below the Nasdaq
minimum bid price requirement. Failure to meet these maintenance criteria may
result in the delisting of our common stock from the Nasdaq National Market. If
our common stock is delisted and in order to have our common stock relisted on
the Nasdaq National Market, we would be required to meet the criteria for
initial listing, which are more stringent than the maintenance criteria.
Accordingly, we cannot assure you that if we were delisted we would be able to
have our common stock relisted on the Nasdaq National Market.
If our common stock were delisted from the Nasdaq National Market, we would
not be able to draw down any additional funds on the equity line, and we also
may be required to pay damages to other holders of our common stock under
agreements we previously entered into with them in connection with equity
financings. Finally, if our common stock were removed from listing on the Nasdaq
National Market, it might become more difficult for us to raise funds through
the sale of our common stock or securities convertible into our common stock.
12
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "possibly," "expect,"
"anticipate," "project," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition, or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there will be events in the future that
we have not been able to accurately predict or control and that may cause our
actual results to differ materially from those discussed. For example,
contaminations at our facilities, changes in the pharmaceutical or biotechnology
industries, competition and changes in government regulations or general
economic or market conditions could all have significant effects on our results.
These factors should be considered carefully and readers should not place undue
reliance on our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections and elsewhere in this prospectus
could harm our business, operating results and financial condition. All forward
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements and risk
factors contained throughout this prospectus.
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information and statistics
regarding disease occurrences, costs of treatment, biotechnology, and the market
sectors in which we may compete in the future. We obtained this information and
statistics from various third party sources, discussions with our consultants
and/or our own internal estimates. We believe that these sources and estimates
are reliable, but we have not independently verified them.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares offered by
Sativum under this prospectus. However, we will receive the net sale price of
any common stock we sell to Sativum under the terms of the common stock purchase
agreement described in this prospectus. We intend to use the net proceeds from
any sales to Sativum primarily for general corporate purposes. Our management
will have significant flexibility and discretion in applying the net proceeds
received by us. Pending any use, we will invest the net proceeds of any common
stock sold to Sativum in short-term, investment grade, interest-bearing
securities.
13
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"STEM." The following table sets forth the high and low sale prices of our
common stock for the periods indicated on the Nasdaq National Market.
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- --------
First Quarter 1999...................................... $ 1.78 $1.16
Second Quarter 1999..................................... $ 1.37 $0.53
Third Quarter 1999...................................... $ 2.38 $0.69
Fourth Quarter 1999..................................... $ 1.62 $1.00
First Quarter 2000...................................... $20.00 $1.38
Second Quarter 2000..................................... $ 8.06 $2.00
Third Quarter 2000...................................... $11.67 $3.53
Fourth Quarter 2000..................................... $ 6.75 $2.25
First Quarter 2001...................................... $ 3.75 $1.72
There were approximately 287 record holders of our common stock as of
April 25, 2001. On May 24, 2001, the reported last sale price on the Nasdaq
National Market for our common stock was $3.60 per share.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not, therefore, anticipate paying any cash
dividends within the next five years. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent on
then existing conditions, including our financial stability, results of
operations, contractual restrictions, capital requirements, business prospects
and other factors our board of directors deems relevant.
14
CAPITALIZATION
The following table presents our consolidated capitalization as of
March 31, 2001. This table excludes:
- 3,962,087 shares of common stock issuable upon the exercise of outstanding
stock options and warrants as follows:
a) as of March 31, 2001, 3,164,618 shares of common stock issuable upon the
exercise of stock options pursuant to our stock option plans at a
weighted average price of $4.11 per share.
b) 622,469 shares of common stock issuable upon the exercise of warrants
held by Millennium Partners, at an exercise price of $0.01 per share.
c) 121,487 shares of common stock issuable upon the exercise of warrants
held by Millennium Partners at a weighted average exercise price of
$4.94 per share.
d) 100,000 shares of common stock issuable upon the exercise of warrants
granted to May Davis Group, Inc. and four of its affiliates at an
exercise price of $5.0375 per share.
e) 75,000 shares of common stock issuable upon the exercise of warrants at
$6.58 per share held by holders of our 6% cumulative convertible
preferred stock.
- Millennium Partners, L.P.'s option to purchase a maximum of 461,894 shares
of common stock for up to $2,000,000 on or prior to August 3, 2001 and
receive a warrant to purchase additional shares upon exercise of that
option.
- The right of the holders of our 6% cumulative convertible preferred stock
to convert their shares of preferred stock into shares of common stock at
$3.77 per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included elsewhere in this prospectus.
AS OF
MARCH 31,
2001
-------------
(UNAUDITED)
Stockholders' equity:
Convertible Preferred Stock, par value $0.01 per share,
1,000,000 shares authorized, 2,626 designated as 6%
Cumulative Convertible Preferred Stock, 1,500 shares
issued.................................................. $ 1,500,000
Common stock, par value $0.01 per share, 45,000,000 shares
authorized, 21,458,211 shares issued.................... 214,612
Additional paid-in-capital................................ 137,608,696
Accumulated deficit....................................... (130,229,646)
Accumulated other comprehensive income.................... 8,412,650
Deferred compensation..................................... (2,044,609)
-------------
Total stockholders' equity.............................. $ 15,461,703
=============
15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements and other financial information included elsewhere in this
prospectus.
The consolidated historical financial data presented below as of
December 31, 1996, 1997, 1998, 1999 and 2000 and for the years then ended are
derived from our consolidated financial statements, which have been audited by
Ernst & Young LLP, our independent auditors. The selected consolidated financial
data as of March 31, 2001, and for the three months ended March 31, 2000 and
2001 are derived from our unaudited financial statements. In the opinion of our
management, the unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
periods. The selected consolidated financial data for the three months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001 or any other future period.
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT INCOME PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue from collaborative agreements
and grants............................ $ 7,104 $ 10,617 $ 8,803 $ 5,022 $ 74 $ -- $ 100
Gain on sale of investment.............. -- -- -- -- 1,428 -- 2,550
-------- -------- -------- -------- -------- ------- --------
Research and development expenses....... 17,130 18,604 17,659 9,984 5,979 907 1,644
Acquired research and development....... -- 8,344 -- -- -- -- --
ECT wind-down and corporate relocation
expenses.............................. -- -- -- 6,048 3,327 234 --
Net income (loss)....................... $(13,759) $(18,114) $(12,628) $(15,709) $(11,125) $(1,794) $ 269
Basic and diluted net income (loss) per
share applicable to common
stockholders before cumulative effect
of a change in accounting principle... $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.57) $ (0.09) $ 0.01
Cumulative effect of a change in
accounting principle.................. -- -- -- -- (0.01) -- --
-------- -------- -------- -------- -------- ------- --------
Net income (loss) per share applicable
to common stockholders................ $ (0.89) $ (1.08) $ (0.69) $ (0.84) $ (0.58) $ (0.09) $ 0.01
Shares used in computing basic net
income (loss) per share............... 15,430 16,704 18,291 18,706 20,068 19,330 20,989
Shares used in computing diluted income
(loss) per share...................... 15,430 16,704 18,291 18,706 20,068 19,330 22,405
AS OF
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $42,607 $29,050 $17,386 $ 4,760 $ 6,069 $ 4,499
Restricted investments............................... -- -- -- -- 16,356 8,413
Total assets......................................... 58,397 44,301 32,866 15,781 29,795 21,507
Long-term debt, including capitalized leases......... 8,223 4,108 3,762 2,937 2,605 2,521
Redeemable common stock.............................. 8,159 5,583 5,249 5,249 -- --
Stockholders' equity................................. 34,747 28,900 17,897 3,506 22,982 15,462
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 AND THE YEARS
ENDED DECEMBER 31, 2000, 1999 AND 1998 SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED CONSOLIDATED FINANCIAL DATA" SECTION OF THIS PROSPECTUS AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER
FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FORWARD-LOOKING
STATEMENTS IN THIS DISCUSSION REGARDING OUR EXPECTATIONS REGARDING OUR FUTURE
PERFORMANCE, LIQUIDITY AND CAPITAL RESOURCES AND OTHER NON-HISTORICAL STATEMENTS
IN THIS DISCUSSION INVOLVE NUMEROUS RISKS AND UNCERTAINTIES AS DESCRIBED IN THE
"RISK FACTORS" SECTION OF THIS PROSPECTUS. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
OVERVIEW
Since our inception in 1988, we have been primarily engaged in research and
development of human therapeutic products. At the beginning of 1999, our
corporate headquarters, most of our employees, and the main focus of our
operations were primarily devoted to a different technology--encapsulated cell
therapy, or ECT. Since that time, we terminated a clinical trial of the ECT then
in progress, we wound down our other operations relating to the ECT, we
terminated the employment of those who worked on the ECT, we sold the ECT and we
relocated from Rhode Island to California. As a result of a restructuring in the
second half of 1999, our sole focus is now on our stem cell technology. The year
2000 was a year of transition, in which we completed the consolidation and
restructuring of our operations. Comparisons with results of operations prior to
2000 are correspondingly less meaningful than they may be under other
circumstances.
We were known as CytoTherapeutics, Inc., until May 23, 2000, when we changed
our name to StemCells, Inc.
We have not derived any revenues from the sale of any products, and we do
not expect to receive revenues from product sales for at least several years. We
have not commercialized any product and in order to do so we must, among other
things, substantially increase our research and development expenditures as
research and product development efforts accelerate and clinical trials are
initiated. We have incurred annual operating losses since inception and expect
to incur substantial operating losses in the future. As a result, we are
dependent upon external financing from equity and debt offerings and revenues
from collaborative research arrangements with corporate sponsors to finance our
operations. There are no such collaborative research arrangements at this time
and there can be no assurance that such or partnering revenues will be available
when needed or on terms acceptable to us.
Our results of operations have varied significantly from year to year and
quarter to quarter and may vary significantly in the future due to the
occurrence of material, nonrecurring events, including without limitation the
receipt of one-time, nonrecurring licensing payments, sale of marketable
securities and the initiation or termination of research collaborations, in
addition to the winding-down of terminated research and development programs
referred to above.
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
For the three months ended March 31, 2001, revenues from grants totaled
$100,000. There was no such revenue for the three months ended March 31, 2000.
On January 9, 2001, we sold 22,616 Modex shares for a net price of 182.00
Swiss francs per share, which converts to $112.76 per share, for total proceeds
and a realized gain of $2,550,000.
17
Research and development expenses totaled $1,644,257 for the three months
ended March 31, 2001, compared with $906,632 for the same period in 2000. The
increase of $737,625 or 81% from 2000 to 2001 was primarily attributable to the
related costs of an increase in personnel from 11 full time employees to 19 full
time employees to facilitate the expansion of our research programs and initiate
development and the cost of leasing a larger facility.
General and administrative expenses were $996,862 for the three months ended
March 31, 2001, compared with $657,714 for the same period in 2000. The increase
of $339,148, or 52%, from 2000 to 2001 was primarily attributable to the related
costs of an increase in personnel from 5 full time employees to 8 full time
employees, which included the hiring of senior management personnel as part of
the restructuring and consolidation of our operations in California and the cost
of leasing a larger facility.
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to California for the three months ended
March 31, 2000 were $234,386. In December 2000, we created a reserve of
$1,780,578 related to the carrying costs for the Rhode Island facilities through
2001. At March 31, 2001 the reserve was $1,381,946.
Interest income for the three months ended March 31, 2001 and 2000 was
$79,041 and $73,332 respectively. Interest expense of $64,460 for the three
months ended March 31, 2001 was booked against the wind-down reserve created in
2000 for the whole of 2001, as the expense was part of the bond payments related
to the Rhode Island facilities. Interest expense for the same period in 2000 was
$68,858. The decrease in 2001 was attributable to lower outstanding debt and
capital lease balances in 2001 compared to 2000.
Other income for the three months ended March 31, 2001 was $180,389, which
was a refund from the Citizens Bank of Rhode Island for an overpayment of
property taxes in prior years.
Net income for the three months ended March 31, 2001 was $268,541 or $0.01
per share, as compared to net loss of $1,794,258, or $0.09 per share, for the
comparable period in 2000. The decrease in net loss of $2,062,800 or 115% from
the same period in 2000 was primarily attributable to a realized gain of
$2,550,230 from the sale of a portion of our Modex investment, offset by an
increase in expenses attributable to an increase in personnel and the costs
associated with our move to a larger facility.
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Revenues totaled $74,000, $5,022,000 and $8,803,000 for the years ending
December 31, 2000, 1999 and 1998, respectively. Revenues for 2000 are from
Neurotech, S.A. in return for the assignment of our intellectual property assets
relating to Encapsulated Cell Technology. Revenues for 1999 and 1998 were from
collaborative agreements, earned primarily from a Development, Marketing and
License Agreement with AstraZeneca Group plc, which was signed in March 1995.
The decrease in revenues from 1998 to 1999 to 2000 resulted primarily from the
June 1999 termination of the Astra agreement.
Research and development expenses totaled $5,979,000 in 2000, as compared to
$9,984,000 in 1999 and $17,659,000 in 1998. The decrease of $4,005,000, or 40%,
from 1999 to 2000 and the decrease of $7,675,000 or 43%, from 1998 to 1999, was
primarily attributable to the wind-down of research activities relating to our
encapsulated cell technology, precipitated by termination of the Astra
Agreement.
General and administrative expenses were $3,361,000 in 2000, compared with
$4,927,000 in 1999 and $4,603,000 in 1998. The decrease of $1,566,000 or 32%,
from 1999 to 2000 was primarily attributable to the relocation of our
headquarters to a smaller facility as well as a reduction of personnel.
18
Wind-down expenses related to our ECT research, our Rhode Island operations
and the transfer of our headquarters to California totaled $3,327,000 and
$6,048,000 for 2000 and 1999, respectively. No such expenses were incurred in
1998. 1999 expenses included accruals of approximately $1.6 million for employee
severance costs, $1.9 million in losses and reserves for the write-down of
related patents and fixed assets, $1.2 million for our costs of settlement of a
1989 funding agreement with RIPSAT, $700,000 of estimated additional carrying
costs through June 30, 2000, and other related expenses totaling $760,000.
During 2000, we incurred approximately $290,000 of costs in excess of the
amounts accrued as of December 31, 1999 for the carrying costs, including lease
payments, property taxes and utilities, through the expected June 30, 2000
disposition of the Rhode Island facilities. During the third and fourth quarters
of 2000 we incurred additional $1.3 million in carrying costs for the Rhode
Island facilities, because we were unable to dispose of them as we had expected.
We have created a reserve of $1,780,000 related to the carrying costs for the
Rhode Island facilities through 2001. In February 2001, we subleased portions of
the facilities and are actively seeking to sublease, assign or sell our
remaining interests in the properties. However, there can be no assurance that
we will be able to dispose of these facilities in a reasonable time, if at all.
Interest income for the years ended December 31, 2000, 1999 and 1998 totaled
$303,000, $564,000 and $1,254,000, respectively. The average cash and investment
balances were $5,668,000, $10,663,000 and $21,795,000 in 2000, 1999 and 1998,
respectively. The decrease in interest income from 1998 to 1999 to 2000 was
attributable to lower average balances.
In 2000, interest expense was $273,000, compared to $335,000 in 1999 and
$472,000 in 1998. The decrease from 1998 to 1999 to 2000 was attributable to
lower outstanding debt and capital lease balances.
During the second quarter 2000 we realized a $1,427,000 gain in connection
with the sale of a portion of our investment in Modex. Modex
Therapeutics, Ltd., a Swiss biotechnology company that completed an initial
public offering on June 23, 2000, and is publicly traded on the Swiss Neue
Market exchange.
The net loss in 2000, 1999 and 1998 was $11,125,000, $15,709,000, and
$12,628,000, respectively. The loss per share was $0.58, $.84 and $.69 in 2000,
1999 and 1998, respectively. The decrease from 1999 to 2000 is primarily
attributable to the wind-down of our encapsulated cell technology research and
our Rhode Island operations and offset by the elimination of revenue from the
Astra Agreement. The increase from 1998 to 1999 is primarily attributable to the
elimination of revenue from the Astra Agreement, which was terminated in
June 1999, as well as expenses related to the wind-down of our encapsulated cell
technology research and our other Rhode Island operations, the transfer of our
corporate headquarters to California and an accrual for the our estimate of the
costs of settlement of a funding agreement with RIPSAT.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through the sale of our
common and preferred stock, the issuance of long-term debt and capitalized lease
obligations, revenues from collaborative agreements, research grants, sales of
marketable securities and interest income.
We had unrestricted cash and cash equivalents totaling $4,499,000 at
March 31, 2001. Cash equivalents are invested in money market funds.
Our liquidity and capital resources were, in the past, significantly
affected by our relationships with corporate partners, which were related to our
former encapsulated cell technology, or ECT. These relationships are now
terminated, and we have not yet established corporate partnerships with respect
to our stem cell technology.
19
In the third quarter of 1999, we announced restructuring plans to wind down
operations relating to our ECT and to focus our resources on the research and
development of our platform of proprietary stem cell technologies. We terminated
approximately 68 full time employees and, in October 1999, relocated our
corporate headquarters to California. As part of our restructuring of operations
and relocation of corporate headquarters to California, we identified a
significant amount of excess fixed assets. In December 1999, we completed the
disposition of those excess fixed assets, from which we received more than
$746,000.
On December 30, 1999 we sold our ECT and assigned our intellectual property
assets in it to Neurotech S.A. for a payment of $3,000,000, royalties on future
product sales, and a portion of certain Neurotech revenues from third parties.
In addition, we retained certain non-exclusive rights to use ECT in combination
with our proprietary stem cell technologies and in the field of vaccines for
prevention and treatment of infectious diseases.
In July 1999, as a result of our decision to close our Rhode Island
facilities, the Rhode Island Partnership for Science and Technology, or RIPSAT,
alleged that we were in default under a June, 1989 Funding Agreement, and
demanded payment of approximately $2.6 million. While we believe we were not in
default under the Funding Agreement, we deemed it best to resolve the dispute
without litigation and, on March 3, 2000, entered into a settlement agreement
with RIPSAT, the Rhode Island Industrial Recreational Building Authority, or
IRBA, and the Rhode Island Industrial Facilities Corporation, or RIIFC. We
agreed to pay RIPSAT $1,172,000 in full satisfaction of all of our obligations
to them under the Funding Agreement. At the same time, IRBA agreed to return to
us the full amount of our debt service reserve, comprising approximately
$610,000 of principal and interest, relating to the bonds we had with IRBA and
RIIFC. The $610,000 debt service reserve was transferred directly to RIPSAT,
leaving the remainder of approximately $562,000 to be paid by us. We made this
payment in March of 2000.
Our liquidity and capital resources could have also been affected by a claim
by Genentech, Inc., arising out of the their collaborative development and
licensing agreement with us relating to the development of products for the
treatment of Parkinson's disease; however, the claim was resolved with no effect
on our resources. On May 21, 1998, Genentech exercised its right to terminate
the Parkinson's collaboration and demanded that we redeem, for approximately
$3,100,000, certain shares of our redeemable Common Stock held by Genentech.
Genentech's claim was based on provisions in the agreement requiring us to
redeem, at the price of $10.01 per share, the shares representing the difference
between the funds invested by Genentech to acquire such stock and the amount
expended by us on the terminated program less an additional $1,000,000. In
March 2000, we entered into a Settlement Agreement with Genentech under which
Genentech released us from any obligation to redeem any shares of our Common
Stock held by Genentech, without cost to us. Accordingly, the $5.2 million of
redeemable common stock shown as a liability in our December 31, 1999 balance
sheet was transferred to equity in March, 2000 without any impact on our
liquidity and capital resources. We and Genentech also agreed that all
collaborations between us were terminated, and that neither of us had any rights
to the intellectual property of the other.
We continue to have outstanding obligations in regard to our former
facilities in Lincoln, Rhode Island, including lease payments and operating
costs of approximately $1,200,000 per year associated with our former research
laboratory and corporate headquarters building, and debt service payments and
operating costs of approximately $1,000,000 per year with respect to our pilot
manufacturing and cell processing facility. We are actively seeking to sublease,
assign or sell our interests in these facilities. Failure to do so within a
reasonable period of time will have a material adverse effect on our liquidity
and capital resources.
On April 13, 2000, we sold 1,500 shares of our 6% cumulative convertible
preferred stock plus warrants for a total of 75,000 shares of our common stock
to two members of our Board of Directors
20
for $1,500,000, on terms more favorable to us than we were able to obtain from
outside investors. The face value of the shares of preferred stock is
convertible at the option of the holders into common stock at $3.77 per share.
The holders of the preferred stock have liquidation rights equal to their
original investments plus accrued but unpaid dividends. Any unconverted
preferred stock will be converted to common stock, at the applicable conversion
price, on April 13, 2002. The warrants expire on April 13, 2005.
On August 3, 2000, we completed a $4 million common stock financing
transaction with Millennium Partners, LP, or the Fund, an investment fund with
more than a billion dollars in assets under management. We received $3 million
of the purchase price at the closing and received the remaining $1 million upon
effectiveness of a registration statement covering the shares purchased by the
Fund. The Fund purchased our common stock at $4.33 per share. The Fund is
entitled, pursuant to an adjustable warrant issued on August 3, 2000 in
connection with the sale of common stock to the Fund, to purchase additional
shares of common stock for $0.01 per share. The adjustments to the adjustable
warrant are calculated on eight dates beginning six months from the closing and
every three months thereafter. The number of additional shares the Fund may be
entitled to on each date will be based on the number of shares of common stock
the Fund continues to hold on each date and the market price of our common stock
over a period prior to each date. We will have the right, under certain
circumstances, to cap the number of additional shares by purchasing part of the
entitlement from the Fund. On January 27, 2001, the Fund's adjustable warrant
became exercisable for 463,369 shares of our common stock, and the Fund
purchased all of those shares on March 30, 2001, for $4,634. On April 27, 2001,
the Fund's adjustable warrant became exercisable for an additional 622,469
shares of our common stock, and the warrant has not been exercised with respect
to those shares. The Fund also received on August 3, 2000 a warrant to purchase
up to 101,587 shares of common stock at $4.725 per share. This warrant is
callable by us at $7.875 per underlying share.
In addition, the Fund was granted an option for twelve months to purchase up
to $3 million of additional common stock. On August 23, 2000 the Fund exercised
$1,000,000 of its option to purchase additional common stock at $5.53 per share.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and paid the remaining $250,000 upon effectiveness of a
registration statement covering the shares owned by the Fund. At the closing on
August 30, 2000, we issued to the Fund an adjustable warrant similar to the one
issued on August 3, 2000. This adjustable warrant was canceled by agreement
between us and the Fund on November 1, 2000. The Fund also received on
August 23, 2000 a warrant to purchase up to 19,900 shares of common stock at
$6.03 per share. This warrant is callable by us at $10.05 per underlying share.
If Millennium exercises all or part of its remaining $2 million option, it will
receive additional callable warrants.
We have sold all of our shares of Modex Therapeutics, Ltd. Our final sale of
Modex shares occurred on April 30, 2001, when we realized a gain of $5,232,168
net of commissions and other fees. All other sales occurred prior to March 31,
2001. In addition, on April 30, 2001, we sold Modex our rights to future
payments under the agreement between us and Neurotech S.A. for $300,000.
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited for the potential future issuance and sale of up to
$30,000,000 million of our common stock, subject to restrictions and other
obligations that are described throughout this prospectus. We, at our sole
discretion, may draw down on this facility, sometimes termed an equity line,
from time to time, and Sativum is obligated to purchase shares of our common
stock at a 6% discount to a volume weighted average market price over the 20
trading days following the drawdown notice. We are limited with respect to how
often we can exercise a drawdown and the amount of each drawdown. For more
details on the equity line, see "Common Stock Purchase Agreement" elsewhere in
this prospectus.
We have limited liquidity and capital resources and must obtain significant
additional capital resources in the future in order to sustain our product
development efforts. Substantial additional funds
21
will be required to support our research and development programs, for
acquisition of technologies and intellectual property rights, for preclinical
and clinical testing of our anticipated products, pursuit of regulatory
approvals, acquisition of capital equipment, laboratory and office facilities,
establishment of production capabilities and for general and administrative
expenses. Our ability to obtain additional capital will be substantially
dependent on our ability to obtain partnering support for our stem cell
technology. Failure to do so will have a material effect on our liquidity and
capital resources. Until our operations generate significant revenues from
product sales, we must rely on cash reserves and proceeds from equity and debt
offerings, proceeds from the transfer or sale of our intellectual property
rights, equipment, facilities or investments, government grants and funding from
collaborative arrangements, if obtainable, to fund our operations.
We may, but are not required to, draw down on the equity line from time to
time as necessary and possible under the terms of the facility. We also intend
to pursue opportunities to obtain additional financing in the future through
grants and collaborative research arrangements. We are permitted under the terms
of the equity line to pursue unrelated debt and equity financing other than
other stand-by equity based credit facilities. The source, timing and
availability of any future financing will depend principally upon market
conditions, interest rates and, more specifically, on our progress in our
exploratory, preclinical and future clinical development programs. Lack of
necessary funds may require us to delay, reduce or eliminate some or all of our
research and product development programs or to license our potential products
or technologies to third parties. Funding may not be available when needed--at
all, or on terms acceptable to us.
While our cash requirements may vary, as noted above, we currently expect
that our existing capital resources, including income earned on invested
capital, will be sufficient to fund our operations through December 2001. Our
cash requirements may vary, however, depending on numerous factors. If for some
reason we are not able to drawdown on the equity line, lack of necessary funds
may require us to delay, scale back or eliminate some or all of our research and
product development programs and/or our capital expenditures or to license our
potential products or technologies to third parties.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
statement requires us to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value of derivatives are either offset against the change in
fair value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Because we had no derivative instruments and do not currently engage
in hedging activities, the adoption of Statement No. 133 on January 1, 2001 had
no impact on our results of operations or financial position.
22
BUSINESS
OVERVIEW
We are engaged in research aimed at the development of therapies that would
use stem and progenitor cells derived from fetal or adult sources to treat, and
possibly cure, human diseases and injuries such as Parkinson's disease,
hepatitis, diabetes, and spinal cord injuries. The body uses certain key cells
known as stem cells to produce all the functional mature cell types found in
normal organs of healthy individuals. Progenitor cells are cells that have
already developed from the stem cells, but can still produce one or more types
of mature cells within an organ.
Many diseases, such as Alzheimer's, Parkinson's, and other degenerative
diseases of the brain or nervous system, involve the failure of organs that
cannot be transplanted. Other diseases, such as hepatitis and diabetes, involve
organs such as the liver or pancreas that can be transplanted, but there is a
very limited supply of those organs available for transplant. We estimate, based
on information available to us from the Alzheimer's Association, the Centers for
Disease Control, the Family Caregiver's Alliance and the Spinal Cord Injury
Information Network, that these conditions affect more than 18 million people in
the United States and account for more than $150 billion annually in health care
costs.
Our proposed therapies are based on the transplanting of healthy human stem
and progenitor cells to repair or replace central nervous system, pancreas or
liver tissue that has been damaged or lost as a result of disease or injury,
potentially returning patients to productive lives and significantly reducing
health care costs. We believe that we have achieved significant progress in
research regarding stem cells of the central nervous system through the advances
we have made in the isolation, purification and transplantation of central
nervous system stem and progenitor cells. We have also made advances in our
research programs to discover the stem cells of the pancreas and of the liver.
We have established an intellectual property position in all three areas of our
stem cell research--the central nervous system, the pancreas and the liver--by
patenting our discoveries and entering into exclusive licensing arrangements. We
believe that, if successfully developed, our platform of stem cell technologies
may create the basis for therapies that would address a number of conditions
with significant unmet medical needs.
We were formerly known as CytoTherapeutics, Inc. Until mid-1990 we had
programs in a different technology, encapsulated cell therapy, as well as stem
cell programs. We now focus exclusively on the discovery, development and
commercialization of our proprietary platform of stem cell technologies.
Effective May 2000 we changed our name to StemCells, Inc.
CELL THERAPY BACKGROUND
ROLE OF CELLS IN HUMAN HEALTH AND TRADITIONAL THERAPIES
Cells maintain normal physiological function in healthy individuals by
secreting or metabolizing substances, such as sugars, amino acids,
neurotransmitters and hormones, which are essential to life. When cells are
damaged or destroyed, they no longer produce, metabolize or accurately regulate
those substances. Impaired cellular function is associated with the progressive
decline common to many degenerative diseases of the nervous system, such as
Parkinson's disease, Alzheimer's disease and amyotrophic lateral sclerosis.
Recent advances in medical science have identified cell loss or impaired
cellular function as leading causes of degenerative diseases. Biotechnology
advances have led to the identification of some of the specific substances or
proteins that are deficient. While administering these substances or proteins as
medication does overcome some of the limitations of traditional pharmaceuticals
such as lack of specificity, there is no existing technology that can deliver
them to the precise sites of action and in the appropriate physiological
quantities or for the duration required to cure the degenerative condition.
Cells, however, do this naturally. As a result, investigators have
23
considered replacing failing cells that are no longer producing the needed
substances or proteins by implanting stem or progenitor cells capable of
regenerating the cell that the degenerative condition has damaged or destroyed.
Where there has been irreversible tissue damage or organ failure,
transplantation of stem cells offers the possibility of generating new and
healthy tissue, thus potentially restoring the organ function and the patient's
health.
THE POTENTIAL OF OUR STEM CELL-BASED THERAPY
We believe that, if successfully developed, stem cell-based therapy--the use
of stem or progenitor cells to treat diseases--has the potential to provide a
broad therapeutic approach comparable in importance to traditional
pharmaceuticals and genetically engineered biologics.
Stem cells are rare and only available in limited supply, whether from the
patients themselves or from donors. Cells obtained from the same person who will
receive them may be abnormal if the patient is ill or the tissue is contaminated
with disease-causing cells. Also, the cells can often be obtained only through
significant surgical procedures. The challenge, therefore, has been three-fold:
1) to identify the stem cells;
2) to create techniques and processes that can be used to expand these rare
cells in sufficient quantities for effective transplants; and
3) to establish a bank of normal human stem or progenitor cells that can be
used for transplantation into individuals whose own cells are not suitable
because of disease or other reasons.
We have developed and demonstrated a process, based on a proprietary IN
VITRO culture system in chemically defined media, that reproducibly grows normal
human central nervous system, or CNS, stem and progenitor cells. We believe this
is the first reproducible process for growing normal human CNS stem cells. More
recently, we have discovered markers on the cell surface that identify the human
CNS stem cells. This allows us to purify them and eliminate other unwanted cell
types. Together, these discoveries enable us to select normal human CNS stem
cells and to expand them in culture to produce a large number of pure stem
cells.
Because these cells have not been genetically modified, they may be
especially suitable for transplantation and may provide a safer and more
effective alternative to therapies that are based on cells derived from cancer
cells, from cells modified by a cancer gene to make them grow, from an
unpurified mixture of many different cell types, or from animal derived cells.
We believe our proprietary stem cell technologies may enable therapies to
replace specific cells that have been damaged or destroyed, permitting the
restoration of function through the replacement of normal cells where this has
not been possible in the past. In our research, we have shown that stem cells of
the central nervous system transplanted into hosts are accepted, migrate, and
successfully specialize to produce mature neurons and glial cells.
More generally, because the stem cell is the pivotal cell that produces all
the functional mature cell types in an organ, we believe these cells, if
successfully identified and developed for transplantation, may serve as
platforms for five major areas of regenerative medicine and biotechnology:
- tissue repair and replacement,
- correction of genetic disorders,
- drug discovery and screening,
- gene discovery and use, and
24
- diagnostics.
We will be pursuing alliances in these key areas.
OUR PLATFORM OF STEM CELL TECHNOLOGIES
Stem cells have two defining characteristics:
- some of the cells developed from stem cells produce all the kinds of
mature cells making up the particular organ; and
- they "self renew"--that is, other cells developed from stem cells are
themselves new stem cells, thus permitting the process to continue again
and again.
Stem cells are known to exist for many systems of the human body, including
the blood and immune system, the central and peripheral nervous systems
(including the brain), and the liver, pancreas endocrine, and the skin systems.
These cells are responsible for organ regeneration during normal cell
replacement and, to a more or less limited extent, after injury. We believe that
further research and development will allow stem cells to be cultivated and
administered in ways that enhance their natural function, so as to form the
basis of therapies that will replace specific subsets of cells that have been
damaged or lost through disease, injury or genetic defect.
We also believe that the person or entity that first identifies and isolates
a stem cell and defines methods to culture any of the finite number of different
types of human stem cells will be able to obtain patent protection for the
methods and the composition, making the commercial development of stem cell
treatment and possible cure of currently intractable diseases financially
feasible.
Our strategy is to be the first to identify, isolate and patent multiple
types of human stem and progenitor cells with commercial importance. Our
portfolio of issued patents includes a method of culturing normal human central
nervous system stem and progenitor cells in our proprietary chemically defined
medium, and our published studies show that these cultured and expanded cells
give rise to all three major cell types of the central nervous system. Also, a
separate study sponsored by us using these cultured stem and progenitor cells
showed that the cells are accepted, migrate, and successfully specialize to
produce neurons and glial cells.
More recently, we announced the results of a new study that showed that
human central nervous system stem cells can be successfully isolated by markers
present on the surface of freshly obtained brain cells. We believe this is the
first reproducible process for isolating highly purified populations of
well-characterized normal human central nervous system stem cells, and have
applied for a composition of matter patent. Because the cells are highly
purified and have not been genetically modified, they may be especially suitable
for transplantation and may provide a safer and more effective alternative than
therapies that are based on cells derived from cancer cells, or from cells
modified by a cancer gene to make them grow, or from an unpurified mixture of
many different cell types or cells derived from animals. We have also filed an
improved process patent for the growth and expansion of these purified normal
human central nervous system cells.
Neurological disorders such as Parkinson's disease, epilepsy, Alzheimer's
disease, and the side effects of stroke, affect a significant portion of the
U.S. population and there currently are no effective long-term therapies for
them. We believe that therapies based on our process for identifying, isolating
and culturing neural stem and progenitor cells may be useful in treating such
diseases. We are continuing our research into, and have initiated the
development of, human central nervous system stem and progenitor cell-based
therapies for these diseases.
We continue to advance our research programs to discover the islet stem cell
in the human pancreas and the liver stem cell. Islet cells are the cells that
produce insulin, so islet stem cells may be useful in the treatment of Type 1
diabetes and those cases of Type 2 diabetes where insulin secretion is
25
defective. Liver stem cells may be useful in the treatment of diseases such as
hepatitis, cirrhosis of the liver and liver cancer.
EXPECTED ADVANTAGES OF OUR STEM CELL TECHNOLOGY
NO OTHER TREATMENT
To the best of our knowledge, no one has developed an FDA-approved method
for replacing lost or damaged tissues from the human nervous system. Replacement
of tissues in other areas of the human body is limited to those few sites, such
as bone marrow or peripheral blood cell transplants, where transplantation of
the patient's own cells is now feasible. In a few additional areas, including
the liver, transplantation of donor organs is now used, but is limited by the
scarcity of organs available through donation. We believe that our stem cell
technologies have the potential to reestablish function in at least some of the
patients who have suffered the losses referred to above.
REPLACED CELLS PROVIDE NORMAL FUNCTION
Because stem cells can duplicate themselves, or self-renew, and specialize
into the multiple kinds of cells that are commonly lost in various diseases,
transplanted stem cells may be able to migrate limited distances to the proper
location within the body, to expand and specialize and to replace damaged or
defective cells, facilitating the return to proper function. We believe that
such replacement of damaged or defective cells by functional cells is unlikely
to be achieved with any other treatment.
RESEARCH EFFORTS AND PRODUCT DEVELOPMENT PROGRAMS
OVERVIEW OF RESEARCH AND PRODUCT DEVELOPMENT STRATEGY
We have devoted substantial resources to our research programs to isolate
and develop a series of stem and progenitor cells that we believe can serve as a
basis for replacing diseased or injured cells. Our efforts to date have been
directed at methods to identify, isolate and culture large varieties of stem and
progenitor cells of the human nervous system, liver and pancreas and to develop
therapies utilizing these stem and progenitor cells.
The following table lists the potential therapeutic indications for, and
current status of, our primary research and product development programs and
projects. The table is qualified in its entirety by reference to the more
detailed descriptions of such programs and projects appearing elsewhere in this
prospectus. We continually evaluate our research and product development efforts
and reallocate resources among existing programs or to new programs in light of
experimental results, commercial potential, availability of third party funding,
likelihood of near-term efficacy, collaboration success or significant
technology enhancement, as well as other factors. Our research and product
development programs are at relatively early stages of development and will
require substantial resources to commercialize.
26
RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS
PROGRAM DESCRIPTION AND OBJECTIVE STAGE/STATUS(1)
------------------------------------------- -------------------------------------------------------
HUMAN NEURAL STEM CELL PRECLINICAL
Repair or replace damaged central nervous - Demonstrated IN VITRO the ability to
system tissue (including spinal cord, initiate and expand stem cell-containing
degenerated retinas and tissue affected by human neural cultures and specialization
certain genetic disorders) into three types of central nervous system
cells
- Demonstrated the ability of neurosphere-
initiating stem cells from human brain
- Demonstrated in rodent studies that
transplanted human brain-derived stem cells
are accepted and properly specialized into
the three major cell types of the central
nervous system
PANCREAS ISLET STEM CELL RESEARCH
Repair or replace damaged pancreas islet - Identified markers on the surface of cells
tissue to identify, isolate and culture islet stem
cells of the pancreas
- Commenced small animal testing
LIVER STEM CELL RESEARCH
Repair or replace damaged liver tissue - Demonstrated the production of hepatocytes
including tissue resulting from certain from purified mouse hematopoietic stem
metabolic genetic diseases cells
- Identified IN VITRO culture assay for
growth of human bipotent liver progenitor
cells that can produce both bile duct and
hepatocytes
- Showed that the in vitro culture of human
bipotent liver cells can also grow human
hepatitis virus
------------------------
(1) "Research" refers to early stage research and product development activities
IN VITRO, including the selection and characterization of product candidates
for preclinical testing. "Preclinical" refers to further testing of a
defined product candidate IN VITRO and in animals prior to clinical studies.
RESEARCH AND DEVELOPMENT PROGRAMS
Our portfolio of stem cell technology results from our exclusive licensing
of central nervous system, stem and progenitor cell technology, animal models
for the identification and/or testing of stem and progenitor cells and our own
research and development efforts to date. We believe that therapies using stem
cells represent a fundamentally new approach to the treatment of diseases caused
by lost or damaged tissue. We have assembled an experienced team of scientists
and scientific advisors to consult with and advise our scientists on their
continuing research and development of stem and progenitor cells. This team
includes, among others, Irving L. Weissman, M.D., of Stanford University, Fred
H. Gage, Ph.D., of The Salk Institute and David Anderson, Ph.D., of the
California Institute of Technology.
BRAIN STEM AND PROGENITOR CELL RESEARCH AND DEVELOPMENT PROGRAM
We began our work with central nervous system stem and progenitor cell
cultures in collaboration with NeuroSpheres, Ltd., in 1992. We believe that
NeuroSpheres was the first to invent these cultures.
27
We are the exclusive, worldwide licensee from NeuroSpheres to such inventions
and associated patents and patent applications for all uses, including
transplantation in the human body, as embodied in these patents. See "License
Agreements and Sponsored Research Agreements--NeuroSpheres, Ltd."
In 1997, our scientists invented a reproducible method for growing human
CNS, stem and progenitor cells in cultures. In preclinical IN VITRO and early IN
VIVO studies, we demonstrated that these cells specialize into all three of the
cell types of the central nervous system. Because of these results, we believe
that these cells may form the basis for replacement of cells lost in certain
degenerative diseases. We are continuing research into, and have initiated the
development of, our human CNS stem and progenitor cell cultures. We have
initiated the cultures and demonstrated that these cultures can be expanded for
a number of generations IN VITRO in chemically defined media. In collaboration
with us, Dr. Anders Bjorklund has shown that cells from these cultures can be
successfully transplanted and accepted into the brains of rodents where they
subsequently migrated and specialized into the appropriate cell types for the
site of the brain into which they were placed.
In 1998, we expanded our preclinical efforts in this area by initiating
programs aimed at the discovery and use of specific monoclonal antibodies to
facilitate identification and isolation of CNS and other stem and progenitor
cells or their specialized progeny. Also in 1998, our researchers devised
methods to advance the IN VITRO culture and passage of human CNS stem cells that
resulted in a 100-fold increase in CNS stem and progenitor cell production after
6 passages. A U.S. patent on those methods has since been allowed. We are
expanding our preclinical efforts toward the goal of selecting the proper
indications to pursue.
In December 1998, we announced that the US Patent and Trademark Office had
granted patent No. 5,851,832, covering our methods for the human CNS cell
cultures containing central nervous system stem cells, for compositions of human
CNS cells expanded by these methods, and for use of these cultures in human
transplantation. These human CNS stem and progenitor cells expanded in culture
may be useful for repairing or replacing damaged central nervous system tissue,
including the brain and the spinal cord.
In October 1999, the US Patent and Trademark Office granted patent number
5,968,829 entitled "Human CNS Neural Stem Cells," covering our composition of
matter patent for human CNS stem cells, and also allowed a separate patent
application for our media for culturing human CNS stem cells.
Also in 1999, we announced the filing of a US patent application covering
our proprietary process for the direct isolation of normal human CNS stem cells
based on the markers found to be present on the surface of freshly obtained
brain cells. Since the filing of this patent application, our researchers have
completed a study designed to identify, isolate and culture human CNS stem cells
utilizing this proprietary process. In November 1999, we announced the study's
first results: Our researchers, by using our proprietary markers on the surface
of the cell, had succeeded in identifying, isolating and purifying human CNS
stem cells from brain tissue, and were able to expand the number of these cells
in culture.
We believe that this is the first study to show a reproducible process for
isolating highly purified populations of well-characterized normal human CNS
stem cells. Because the cells are normal human CNS stem cells and have not been
genetically modified, they may be especially suitable for transplantation and
may provide a safer and more effective alternative to therapies that are based
on cells derived from cancer cells or from an unpurified mix of many different
cell types, or from animal derived cells.
In January 2000, we reported what we regard as an even more important
result: In long term animal studies, our researchers were able to take these
purified and expanded stem cells and transplant them into the normal brains of
immunodeficient mouse hosts, where they take hold and grow into neurons and
glial cells.
28
During the course of the study, the transplanted human CNS stem cells
survived for as long as one year and migrated to specific functional domains of
the host brain, with no sign of tumor formation or adverse effects on the animal
recipients; moreover, the cells were still dividing. These findings show that
when CNS stem cells isolated and cultured with our proprietary processes are
transplanted, they adopt the characteristics of the host brain and act like
normal stem cells. In other words, the study suggests the possibility of a
continual replenishment of normal human brain cells.
As noted above, human CNS stem and progenitor cells harvested and purified
and expanded using our proprietary processes may be useful for creating
therapies for the treatment of degenerative brain diseases such as Parkinson's,
Huntington's and Alzheimer's disease. These conditions affect more than
5 million people in the United States and there are no effective long-term
therapies currently available. We believe the ability to purify human brain stem
cells directly from fresh tissue is important because:
- it provides an enriched source of normal stem cells, not contaminated by
other unwanted or diseased cell types, that can be expanded in culture
without fear of also expanding some unwanted cell types;
- it opens the way to a better understanding of the properties of these
cells and how they might be manipulated to treat specific diseases. For
example, in certain genetic diseases such as Tay Sachs and Gaucher's, a
key metabolic enzyme required for normal development and function of the
brain is absent. Brain-derived stem cell cultures might be genetically
modified to produce those proteins. The modified brain stem cells could be
transplanted into patients with these genetic diseases;
- the efficient acceptance of these non-transformed normal human stem cells
into host brains means that the cell product can be tested in animal
models for its ability to correct deficiencies caused by various human
neurological diseases. This technology could also provide a unique animal
model for the testing of drugs that act on human brain cells either for
effectiveness of the drug against the disease or its toxicity to human
nerve cells.
PANCREAS STEM CELLS DISCOVERY RESEARCH PROGRAMS
Our discovery program directed to the identification, isolation and
culturing of the pancreas stem and progenitor cells has, to the present, been
conducted by Nora Sarvetnick, Ph.D., of The Scripps Research Institute, in
collaboration with some of our senior researchers. It is our intention to bring
the research on stem and progenitor cells of the pancreas in house. We expect
that Dr. Sarvetnick will continue to consult with us.
According to diabetes and juvenile diabetes foundations, between 800,000 and
1.5 million Americans have Type 1 diabetes, which is often called "juvenile
diabetes" and most commonly diagnosed in childhood; and 30,000 new patients are
diagnosed with the disease every year. It is a costly, serious, lifelong
condition, requiring constant attention and insulin injections every day for
survival.
About 15 million other people in the United States have Type 2 diabetes
mellitus, which is also a chronic and potentially fatal condition; and more than
700,000 new patients are diagnosed annually.
In 1998, we obtained an exclusive, worldwide license from The Scripps
Research Institute to novel technology developed by Dr. Sarvetnick which may
facilitate the identification and isolation of pancreas stem and progenitor
cells by using a mouse model that continuously regenerates the pancreas. We
believe that stem cells produce the regeneration, in which case this animal
model may be useful for identifying specific markers on the cell surface unique
to the pancreas stem cells. We believe this may lead to the development of
cell-based treatments for Type 1 diabetes and that portion of Type 2 diabetes
characterized by defective secretion of insulin.
29
In 1999, advances in the research sponsored by us resulted in our obtaining
additional exclusive, worldwide licenses from The Scripps Research Institute to
novel markers on the cell surface identified by Dr. Sarvetnick and her research
team as being unique to the pancreas islet stem cell for which we have now filed
a US patent application. In collaboration with Dr. Sarvetnick, we continue to
advance the discovery program directed at the identification, isolation and
culturing of pancreas stem and progenitor cells utilizing this technology.
LIVER STEM CELLS DISCOVERY RESEARCH PROGRAMS
We initiated our discovery work for the liver stem and progenitor cell
through a sponsored research agreement with Markus Grompe, Ph.D., of Oregon
Health Sciences University. Dr. Grompe's work focuses on the discovery and
development of a suitable method for identifying and assessing liver stem and
progenitor cells for use in transplantation. We have also obtained a worldwide
exclusive license to a novel mouse model of liver failure for evaluating cell
transplantation developed by Dr. Grompe.
Approximately 1 in 10 Americans suffers from diseases and disorders of the
liver for which there are currently no effective, long-term treatments. In 1998,
our researchers continued to advance methods for establishing enriched cell
populations suitable for transplantation in preclinical animal models. We are
focused on discovering and utilizing our proprietary methods to identify,
isolate and culture liver stem and progenitor cells and to evaluate these cells
in preclinical animal models.
In 1999, our researchers devised a culture assay that we will use in our
efforts to identify liver stem and progenitor cells. In addition to supporting
the growth of an early human liver bipotent progenitor cell, it is also possible
to infect this culture with human hepatitis virus, providing a valuable system
for study of the virus. This technology could also provide a unique IN VITRO
model for the testing of drugs that act on, or are metabolized by, human liver
cells.
An important element of our stem cell discovery program is the further
development of intellectual property positions with respect to stem and
progenitor cells. We have also obtained rights to certain inventions relating to
stem cells from, and are conducting stem cell related research at, several
academic institutions. We expect to expand our search for new stem and
progenitor cells and to seek to acquire rights to additional inventions relating
to stem and progenitor cells from third parties.
WIND-DOWN OF ENCAPSULATED CELL THERAPY RESEARCH AND DEVELOPMENT PROGRAMS
Until mid-1999, we engaged in research and development in encapsulated cell
therapy technology, or ECT, including a pain control program funded by
AstraZeneca Group plc. The results from the 85-patient double-blind,
placebo-controlled trial of our encapsulated bovine cell implant for the
treatment of severe, chronic pain in cancer patients did not, however, meet the
criteria AstraZeneca had established for continuing trials for the therapy, and
in June 1999, AstraZeneca terminated the collaboration.
Consequently, in July 1999, we announced plans for the restructuring of our
research operations to abandon all further ECT research and to concentrate our
resources on the research and development of our proprietary platform of stem
cell technology. We reduced our workforce by approximately 68 full-time
employees who had been focused on ECT programs, wound down our research and
manufacturing operations in Lincoln, Rhode Island, and relocated our remaining
research and development activities, and our corporate headquarters, to the
facilities of our wholly owned subsidiary, StemCells California, Inc., in
California. We have subleased a portion of our former corporate headquarters
building and our pilot manufacturing and cell processing facility in Rhode
Island are actively seeking to sublease, assign or sell our interest in the
remainder.
30
In December 1999 we sold our intellectual property assets related to our ECT
to Neurotech S.A., a privately held French company, in exchange for a payment of
$3 million, royalties on future product sales, and a portion of certain revenues
Neurotech may in the future receive from third parties. These rights to
royalties and other payments have now been transferred to Modex. We retained
certain non-exclusive rights to use the ECT in combination with our proprietary
stem cell technology, and in the field of vaccines for prevention and treatment
of infectious diseases.
SUBSIDIARY
STEMCELLS CALIFORNIA, INC.
On September 26, 1997, we acquired by merger StemCells, Inc. (now StemCells
California, Inc.), a California corporation, in exchange for 1,320,691 shares of
our common stock and options and warrants for the purchase of 259,296 common
shares. Simultaneously with the acquisition, its President, Richard M. Rose,
M.D., became our President, Chief Executive Officer and a director, and Irving
L. Weissman, M.D., a founder of the California corporation, became a member of
our board of directors. We, as the sole stockholder of our subsidiary, voted on
February 23, 2000, to amend its Certificate of Incorporation to change its name
to StemCells California, Inc.
CORPORATE COLLABORATIONS
CORPORATE INVESTMENT
In July 1996, we, together with certain founding scientists, established
Modex Therapeutics, Ltd., a Swiss biotherapeutics company, to pursue extensions
of our former technology of ECT for certain applications outside the central
nervous system. Modex, headquartered in Lausanne, Switzerland, was formed to
integrate technologies developed by us and by several other institutions to
develop products to treat diseases such as diabetes, obesity and anemia. After
our disposition of the encapsulated cell technology in December 1999, we no
longer had common research or development interests with Modex, but we held
approximate 17% of its stock. Modex completed an initial public offering on
June 23, 2000, in the course of which we realized a gain of approximately
$1.4 million from the sale of certain shares. After Modex's IPO, we owned
126,193 shares, or approximately 9%, of Modex's equity, subject to a lockup
until December 23, 2000. The closing market price of Modex stock on the Swiss
Neue Market exchange on January 2, 2001 was 210.00 Swiss francs, or
approximately $130.39, per share. On January 9, 2001, we sold 22,616 Modex
shares for a net price of 182.00 Swiss francs per share, which converts to
$112.76 per share, for total proceeds of approximately $2,550,000. In connection
with this sale, we agreed not to resell any more of our remaining 103,577 Modex
shares until April 12, 2001. On April 30, 2001, we sold our remaining 103,577
Modex shares for a net price of 87.30 Swiss francs per share, which converts to
approximately $50.30, for proceeds from that sale of approximately $5,200,000.
LICENSE AGREEMENTS AND SPONSORED RESEARCH AGREEMENTS
SPONSORED RESEARCH AGREEMENTS
Under Sponsored Research Agreements with The Scripps Research Institute and
Oregon Health Sciences University, we funded certain research in return for
licenses or options to license the inventions resulting from the research. We
have also entered into license agreements with the California Institute of
Technology. All of these agreements relate largely to stem or progenitor cells
and or to processes and methods for the isolation, identification, expansion or
culturing of stem or progenitor cells.
Our research agreement with Scripps expired on November 14, 2000. It is our
intention to bring the research on stem and progenitor cells of the pancreas in
house. Dr. Nora Sarvetnick, who led the
31
research at Scripps, will continue to consult with us. Our license agreements
with Scripps are not affected by the expiration of the research agreement. They
will terminate upon expiration, revocation or invalidation of the patents
licensed to us, unless governmental regulations require a shorter term. These
license agreements also will terminate earlier if we breach without curing our
obligations under the agreement or if we declare bankruptcy, and we can
terminate the license agreements at any time upon notice. Upon the initiation of
the Phase II trial for our first product using Scripps licensed technology, we
must pay Scripps $50,000 and upon completion of that Phase II trial we must pay
Scripps an additional $125,000. Upon approval of the first product for sale in
the market, we must pay Scripps $250,000. Our license agreements with the
California Institute of Technology will expire upon expiration, revocation,
invalidation or abandonment of the patents licensed to us. We can terminate any
of these license agreements by giving 30 days' notice to the California
Institute of Technology. Either party can terminate these license agreements
upon a material breach by the other party. We issued 12,800 shares of common
stock amounting to $10,000 to the California Institute of Technology upon
execution of the license agreements, and we must pay an additional $10,000 upon
the issuance of the patent licensed to us under the relevant agreement. We also
will pay $5,000 on the anniversary of the issuance of the patent licensed to us
under the relevant agreement. These amounts are creditable against royalties we
must pay under the license agreements. The maximum royalties that we will have
to pay to the California Institute of Technology will be $2 million per year,
with an overall maximum of $15 million. Once we pay the $15 million maximum
royalty, the licenses will become fully paid and irrevocable.
LICENSE AGREEMENTS
We have entered into a number of license agreements with commercial and
non-profit institutions, as well as a number of research-plus-license agreements
with academic organizations. The research agreements provide that we will fund
certain research costs, and in return, will have a license or an option for a
license to the resulting inventions. Under the license agreements, we will
typically be subject to obligations of due diligence and the requirement to pay
royalties on products that use patented technology licensed under such
agreements.
SIGNAL PHARMACEUTICALS, INC.
In December 1997, we entered into two license agreements with Signal
Pharmaceuticals, Inc. under which each party licensed to the other certain
patent rights and biological materials for use in defined fields. An initial
disagreement as to the interpretation of the licensed rights was resolved by the
parties, and the agreements are operating in accordance with their terms. Signal
has now been acquired by Celgene. Each agreement with Signal will terminate at
the expiration of all patents licensed under it, but the licensing party can
terminate earlier if the other party breaches its obligations under the
agreement or declares bankruptcy. Also, the party receiving the license can
terminate the agreement at any time upon notice to the other party. Under these
agreements, we must reimburse Signal for payments it must make to the University
of California based on products we develop and for 50% of certain other payments
Signal must make.
32
NEUROSPHERES, LTD.
In March 1994, we entered into a Contract Research and License Agreement
with NeuroSpheres, Ltd., which was clarified in a License Agreement dated as of
April 1, 1997. Under the agreement as clarified, we obtained an exclusive patent
license from NeuroSpheres in the field of transplantation, subject to a limited
right of NeuroSpheres to purchase a nonexclusive license from us, which right
was not exercised and has expired. We have developed additional intellectual
property relating to the subject matter of the license. We entered into an
additional license agreement with NeuroSpheres as of October 30, 2000, under
which we obtained an exclusive license in the field of non-transplant uses, such
as drug discovery and drug testing, so that together the licenses are exclusive
for all uses of the technology. We made up-front payments to NeuroSpheres of
65,000 shares of our common stock in October 2000 and $50,000 in January 2001,
and we will make additional cash payments when milestones are achieved in the
non-transplant field, or in any products employing NeuroSpheres patents for
generating cells of the blood and immune system from neural stem cells. In
addition we reimbursed Neurospheres for patent costs amounting to $341,000.
Milestone payments would total $500,000 for each product that is approved for
market. Our agreements with NeuroSpheres will terminate at the expiration of all
patents licensed to us, but can terminate earlier if we breach without curing
our obligations under the agreement or if we declare bankruptcy. We would have a
security interest in the licensed technology in the event that NeuroSpheres
declares bankruptcy.
MANUFACTURING
The keys to successful commercialization of brain stem and progenitor cells
are efficacy, safety, consistency of the product, and economy of the process. We
expect to address these issues by appropriate testing and banking representative
vials of large-scale cultures. Commercial production is expected to involve
expansion of banked cells and packaging them in appropriate containers after
formulating the cells in an effective carrier. The carrier may also be used to
improve the stability and acceptance of the stem cells or their progeny. Because
of the early stage of our stem and progenitor cell programs, all of the issues
that will affect manufacture of stem and progenitor cell products are not yet
clear.
MARKETING
We expect to market and sell our products primarily through co-marketing,
licensing or other arrangements with third parties. There are a number of
substantial companies with existing distribution channels and large marketing
resources who are well equipped to market and sell our products. It is our
intent to have the marketing of our products undertaken by such partners,
although we may seek to retain limited marketing rights in specific narrow
markets where the product may be addressed by a specialty or niche sales force.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of our inventions will be of major
importance to our future business. We have an aggressive program of vigorously
seeking and protecting our intellectual property which we believe might be
useful in connection with our products. We believe that our know-how will also
provide a significant competitive advantage, and we intend to continue to
develop and protect our proprietary know-how. We may also from time to time seek
to acquire licenses to important externally developed technologies.
We have exclusive or non-exclusive rights to a portfolio of patents and
patent applications related to various stem and progenitor cells and methods of
deriving and using them. These patents and patent applications relate mainly to
compositions of matter, methods of obtaining such cells, and methods for
preparing, transplanting and utilizing such cells. Currently, our U.S. patent
portfolio in the stem cell
33
therapy area includes 24 issued U.S. patents, eight of which issued in 2000. An
additional 23 patent applications are pending, four of which have been allowed.
We own, or have filed, the following United States Patents and patent
applications: U.S. Patent Number 5,968,829 (Human CNS neural stem cells); U.S.
Patent Number 6,103,530 (Human CNS neural stem cells--culture media);
Application Number WO 99/11758 (Cultures of human CNS neural stem cells); and
Application Number WO 00/36091 (An animal model for identifying a common stem/
progenitor to liver cells and pancreatic cells); Application Number WO98/50526
(Generation, characterization, and isolation of neuroepithelial stem cells and
lineage restricted intermediate precursor); Application Number WO 00/50572 (Use
of collagenase in the preparation of neural stem cell cultures); and Application
Number WO 00/47762 (Enriched neural stem cell populations and methods of
identifying, isolating, and enriching neural stem cells).
We have licensed the following United States Patents or pending patent
applications from Neurospheres Holdings Ltd.: U.S. Patent Number 5,851,832 (IN
VITRO proliferation); U.S. Patent Number 5,750,376 (IN VITRO genetic
modification); U.S. Patent Number 5,981,165 (IN VITRO production of dopaminergic
cells from mammalian central nervous system multipotent stem cell compositions);
U.S. Patent Number 6,093,531 (Generation of hematopoietic cells from multipotent
neural stem cells); U.S. Patent Number 5,980,885 (Methods for inducing IN VIVO
proliferation of precursor cells); U.S. Patent Number 6,071,889 (Methods for IN
VIVO transfer of a nucleic acid sequence to proliferating neural cells); U.S.
Patent Number 6,165,783 (Methods of inducing differentiation of multipotent
neural stem cells); Application Number WO 93/01275 (Mammalian central nervous
system multipotent stem cell compositions); Application Number WO 94/09119
(Remyelination using mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/10292 (Biological factors useful in
differentiating mammalian central nervous system multipotent stem cell
compositions); Application Number WO 94/16718 (Genetically engineered mammalian
central nervous system multipotent stem cell compositions); Application Number
WO 96/15224 (Differentiation of mammalian central nervous system multipotent
stem cell compositions); Application Number WO 99/2196 (Erythropoietin-mediated
neurogenesis); Application Number WO 99/16863 (Generation of hematopoietic
cells); Application Number WO 98/22127 (Pretreatment with growth factors to
protect against CNS damage); Application Number WO 97/3560 (IN SITU manipulation
of cells of the hippocampus); Application Number WO 96/09543 (IN VITRO models of
CNS functions and dysfunctions); Application Number WO 95/13364 (IN SITU
modification and manipulation of stem cells of the CNS); Application Number WO
96/15226 (IN VITRO production of dopaminergic cells from mammalian central
nervous system multipotent stem cell composition); and Application Number WO
96/15266 (Regulation of neural stem cell proliferation).
We have licensed the following United States Patents or pending patent
applications from the University of California, San Diego: U.S. Patent Number
5,776,948 (Method of production of neuroblasts); U.S. Patent Number 6,013,521
(Method of production of neuroblasts); U.S. Patent Number 6,020,197 (Method of
production of neuroblasts); Application Number WO 94/16059 (Method of production
of neuroblasts); and Application Number WO 00/52143 (Methods of enriching a
population of uncultured cells).
We have licensed the following United States Patents or pending patent
applications from the California Institute of Technology: U.S. Patent Number
5,629,159 (Immortalization and disimmortalization of cells); Application Number
WO 96/40877 (Immortalization and disimmortalization of cells); U.S. Patent
Number 5,935,811 (Neuron restrictive silencer factor proteins); Application
Number WO 96/27665 (Neuron restrictive silencer factor proteins); U.S. Patent
Number 5,589,376 (Mammalian neural crest stem cells); U.S. Patent Number
5,824,489 (Methods for isolating mammalian multipotent neural crest stem cells);
Application Number WO 94/02593 (Mammalian neural crest stem cells); U.S. Patent
Number 5,654,183 (Genetically engineered mammalian neural crest stem cells);
U.S. Patent Number 5,928,947 (Mammalian multipotent neural
34
crest stem cells); U.S. Patent Number 5,693,482 (IN VITRO neural crest stem cell
assay); U.S. Patent Number 6,001,654 (Methods for differentiating neural stem
cells to neurons or smooth muscle cells (TGFb)); Application Number WO 98/48001
(Methods for differentiating neural stem cells to neurons or smooth muscle cells
(TGFb)); U.S. Patent Number 5,672,499 (Methods for immortalizing multipotent
neural crest stem cells); U.S. Patent Number 5,849,553 (Immortalizing and
disimmortalizing multipotent neural crest stem cells); and U.S. Patent Number
6,033,906 (Differentiating mammalian neural stem cells to glial cells using
neuregulins).
We also rely upon trade-secret protection for our confidential and
proprietary information and take active measures to control access to that
information.
Our policy is to require our employees, consultants and significant
scientific collaborators and sponsored researchers to execute confidentiality
agreements upon the commencement of an employment or consulting relationship
with us. These agreements generally provide that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees and
consultants, the agreements generally provide that all inventions conceived by
the individual in the course of rendering services to us shall be our exclusive
property.
The patent positions of pharmaceutical and biotechnology companies,
including us, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application can be denied or
significantly reduced before or after the patent is issued. Consequently, we do
not know whether any of its pending applications will result in the issuance of
patents, or if any existing or future patents will provide significant
protection or commercial advantage or will be circumvented by others. Since
patent applications are secret until patents are issued in the United States or
until the applications are published in foreign countries, and since publication
of discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that it was the first to make the inventions
covered by each of its pending patent applications or that it was the first to
file patent applications for such inventions. There can be no assurance that
patents will issue from our pending or future patent applications or, if issued,
that such patents will be of commercial benefit to us, afford us adequate
protection from competing products or not be challenged or declared invalid.
In the event that a third party has also filed a patent application relating
to inventions claimed in our patent applications, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
uncertainties and cost for the Company, even if the eventual outcome is
favorable to us. There can be no assurance that our patents, if issued, would be
held valid by a court of competent jurisdiction.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have been issued
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of genetically modified cells to treat disease, disorder or
injury. We are aware of two patents issued to a competitor claiming certain
methods for treating defective, diseased or damaged cells in the mammalian CNS
by grafting genetically modified donor cells from the same mammalian species.
If third party patents or patent applications contain claims infringed by
our technology and such claims or claims in issued patents are ultimately
determined to be valid, there can be no assurance that we would be able to
obtain licenses to these patents at a reasonable cost, if at all, or be able to
develop or obtain alternative technology. If we are unable to obtain such
licenses at a reasonable cost, it may
35
be adversely affected. There can be no assurance that we will not be obliged to
defend itself in court against allegations of infringement of third party
patents. Patent litigation is very expensive and could consume substantial
resources and create significant uncertainties. An adverse outcome in such a
suit could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require us to cease using
such technology.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that it believes may be important to the
development of its products. These agreements typically require us to pay
license fees, meet certain diligence obligations and, upon commercial
introduction of certain products, pay royalties. These include exclusive license
agreements with NeuroSpheres, The Scripps Institute, the California Institute of
Technology and the Oregon Health Sciences University to certain patents and
know-how regarding present and certain future developments in neural and
pancreatic stem cells. Our licenses may be canceled or converted to
non-exclusive licenses if we fail to use the relevant technology or we breach
our agreements. Loss of such licenses could expose us to the risks of third
party patents and/or technology. There can be no assurance that any of these
licenses will provide effective protection against our competitors.
COMPETITION
The targeted disease states for our initial products in some instances
currently have no effective long-term therapies. However, we do expect that our
initial products will have to compete with a variety of therapeutic products and
procedures. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat neurodegenerative and liver diseases, diabetes
and other diseases for which our technologies may be applicable. Many
pharmaceutical and biotechnology companies are investigating new drugs and
therapeutic approaches for the same purposes, which may achieve new efficacy
profiles, extend the therapeutic window for such products, alter the prognosis
of these diseases, or prevent their onset. We believe that our products, when
successfully developed, will compete with these products principally on the
basis of improved and extended efficacy and safety and their overall economic
benefit to the health care system. The market for therapeutic products that
address degenerative diseases is large, and competition is intense. We expect
competition to increase. We believe that our most significant competitors will
be fully integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also be significant competitors, particularly
through collaborative arrangements with large pharmaceutical or biotechnology
companies. Many of these competitors have significant products approved or in
development that could be competitive with our potential products.
Competition for our stem and progenitor cell products may be in the form of
existing and new drugs, other forms of cell transplantation, ablative and
simulative procedures, and gene therapy. We believe that some of our competitors
are also trying to develop stem and progenitor cell-based technologies. We
expect that all of these products will compete with our potential stem and
progenitor cell products based on efficacy, safety, cost and intellectual
property positions.
We may also face competition from companies that have filed patent
applications relating to the use of genetically modified cells to treat disease,
disorder or injury. We may be required to seek licenses from these competitors
in order to commercialize certain of our proposed products.
Once our products are developed and receive regulatory approval, they must
then compete for market acceptance and market share. For certain of our
potential products, an important success factor will be the timing of market
introduction of competitive products. This is a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
36
While we believe that the primary competitive factors will be product
efficacy, safety, and the timing and scope of regulatory approvals, other
factors include, in certain instances, obtaining marketing exclusivity under the
Orphan Drug Act, availability of supply, marketing and sales capability,
reimbursement coverage, price, and patent and technology position.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated thereunder, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a number
of years and involves significant uncertainty combined with the expenditure of
substantial resources. In addition, the federal, state, and other jurisdictions
have restrictions on the use of fetal tissue.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS CONSIDERATIONS
----------------------------------------- --------------------------------------------------
1. Preclinical laboratory and animal Preclinical tests include laboratory evaluation of
tests the product and animal studies in specific disease
models to assess the potential safety and efficacy
of the product and our formulation as well as the
quality and consistency of the manufacturing
process.
2. Submission to the FDA of an The results of the preclinical tests are submitted
application for an Investigational New to the FDA as part of an IND, and the IND becomes
Drug Exemption, or IND, which must become effective 30 days following its receipt by the
effective before U.S. human clinical FDA, as long as there are no questions, requests
trials may commence for delay or objections from the FDA.
37
STEPS CONSIDERATIONS
----------------------------------------- --------------------------------------------------
Clinical trials involve the evaluation of the
product in healthy volunteers or, as may be the
case with our potential products, in a small
3. Adequate and well-controlled human number of patients under the supervision of a
clinical trials to establish the safety qualified physician. Clinical trials are conducted
and efficacy of the product in accordance with protocols that detail the
objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be
evaluated. Any product administered in a U.S.
clinical trial must be manufactured in accordance
with clinical Good Manufacturing Practices, or
cGMP, determined by the FDA. Each protocol is
submitted to the FDA as part of the IND. The
protocol for each clinical study must be approved
by an independent Institutional Review Board, or
IRB, at the institution at which the study is
conducted and the informed consent of all
participants must be obtained. The IRB will
consider, among other things, the existing
information on the product, ethical factors, the
safety of human subjects, the potential benefits
of the therapy and the possible liability of the
institution.
Clinical development is traditionally conducted in
three sequential phases, which may overlap:
- In Phase I, products are typically
introduced into healthy human subjects or
into selected patient populations to test
for adverse reactions, dosage tolerance,
absorption and distribution, metabolism,
excretion and clinical pharmacology.
- Phase II involves studies in a limited
patient population to (i) determine the
efficacy of the product for specific
targeted indications and populations,
(ii) determine optimal dosage and dosage
tolerance and (iii) identify possible
adverse effects and safety risks. When a
dose is chosen and a candidate product is
found to be effective and to have an
acceptable safety profile in Phase II
evaluations, Phase III trials begin.
- Phase III trials are undertaken to
conclusively demonstrate clinical
efficacy and to test further for safety
within an expanded patient population,
generally at multiple study sites.
The FDA continually reviews the clinical trial
plans and results and may suggest changes or may
require discontinuance of the trials at any time
if significant safety issues arise.
38
STEPS CONSIDERATIONS
----------------------------------------- --------------------------------------------------
4. Submission to the FDA of marketing The results of the preclinical studies and
authorization applications clinical studies are submitted to the FDA in the
form of marketing approval authorization
applications.
5. FDA approval of the application(s) The testing and approval process will require
prior to any commercial sale or shipment substantial time, effort and expense. The time for
of the drug. Biologic product approval is affected by a number of factors,
manufacturing establishments located in including relative risks and benefits demonstrated
certain states also may be subject to in clinical trials, the availability of
separate regulatory and licensing alternative treatments and the severity of the
requirement disease. Additional animal studies or clinical
trials may be requested during the FDA review
period which might add to that time.
After FDA approval for the initial indications and requisite approval of the
manufacturing facility, further clinical trials may be required to gain approval
for the use of the product for additional indications. The FDA may also require
unusual or restrictive post-marketing testing and surveillance to monitor for
adverse effects, which could involve significant expense, or may elect to grant
only conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirement. Even after product licensure approval, the
manufacturer must comply with cGMP on a continuing basis, and what constitutes
cGMP may change as the state of the art of manufacturing changes. Domestic
manufacturing facilities are subject to regular FDA inspections for cGMP
compliance which are normally held at least every two years. Foreign
manufacturing facilities are subject to periodic FDA inspections or inspections
by the foreign regulatory authorities with reciprocal inspection agreements with
the FDA. Domestic manufacturing facilities may also be subject to inspection by
foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for treatments for diseases or conditions that affect more than 200,000
individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. We
may apply for orphan drug status for certain of our therapies. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity in the United States for
that product for the orphan indication. While the marketing exclusivity of an
orphan drug would prevent other sponsors from obtaining approval of the same
compound for the same indication, it would not prevent other types of products
from being approved for the same use including, in some cases, slight variations
on the originally designated orphan product.
PROPOSED FDA REGULATIONS
Proposed regulations of the FDA and other governmental agencies would place
restrictions, including disclosure requirements, on researchers who have a
financial interest in the outcome of their research. Under the proposed
regulations, the FDA could also apply heightened scrutiny to, or exclude the
results of, studies conducted by such researchers when reviewing applications to
the FDA, which
39
contain such research. Certain of our collaborators have stock options or other
equity interests in us that could subject such collaborators and us to the
proposed regulations.
Our research and development is based on the use of human stem and
progenitor cells. The FDA has published a "Proposed Approach to Regulation of
Cellular and Tissue-Based Products" which relates to the use of human cells. We
cannot now determine the effects of that approach or what regulatory actions
might be taken from it. Restrictions exist on the testing or use of cells,
whether human or non-human.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations which govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
REIMBURSEMENT AND HEALTH CARE COST CONTROL
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty often exists as to the
reimbursement status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
EMPLOYEES
As of May 23, 2001, we had 28 full-time employees, eight of whom have Ph.D.
degrees. The equivalent of 21 full-time employees work in research and
development and laboratory support services. A number of our employees have held
positions with other biotechnology or pharmaceutical companies or have worked in
university research programs. No employees are covered by collective bargaining
agreements. We believe our relationships with our employees are good.
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.
40
These consulting agreements specify the compensation to be paid to the
consultant and require that all information about our products and technology be
kept confidential. All of the Scientific Advisory Board members are employed by
employers other than us and may have commitments to or consulting or advising
agreements with other entities that limit their availability to us. The
Scientific Advisory Board members have generally agreed, however, for so long as
they serve as consultants to us, not to provide any services to any other
entities that would conflict with the services the member provides to us.
Members of the Scientific Advisory Board offer consultation on specific issues
encountered by us as well as general advice on the directions of appropriate
scientific inquiry for us. In addition, Scientific Advisory Board members assist
us in assessing the appropriateness of moving our projects to more advanced
stages. The following persons are members of our Scientific Advisory Board:
- Irving L. Weissman, M.D., is the Karel and Avice Beekhuis Professor of
Cancer Biology, Professor of Pathology and Professor of Developmental
Biology at Stanford University. Dr. Weissman was a cofounder of
SyStemix, Inc., and Chairman of its Scientific Advisory Board. He has
served on the Scientific Advisory Boards of Amgen Inc., DNAX and T-Cell
Sciences, Inc. Dr. Weissman is Chairman of the Scientific Advisory Board
of StemCells.
- David J. Anderson, Ph.D., is Professor of Biology, California Institute of
Technology, Pasadena, California and Investigator, Howard Hughes Medical
Institute.
- Fred H. Gage, Ph.D., is Professor, Laboratory of Genetics, The Salk
Institute for Biological Studies, La Jolla, California and Adjunct
Professor, Department of Neurosciences, University of California, San
Diego, California.
PROPERTIES
Our current research laboratories and administrative offices are located in
a leased 40,000 square foot facility, located in the Stanford Research Park in
Palo Alto, California, which includes vivarium space as well as laboratories,
offices, and a GMP (Good Manufacturing Practices) suite, signifying that the
facility can be used to manufacture materials for clinical trials.
We continue to lease the following facilities in Lincoln, Rhode Island
obtained in connection with our former encapsulated cell technology: our former
research laboratory and corporate headquarters building which contains 65,000
square feet of wet labs, specialty research areas and administrative offices
held on a fifteen-year lease agreement, as well as a 21,000 square-foot pilot
manufacturing facility and a 3,000 square-foot cell processing facility financed
by bonds issued by the Rhode Island Industrial Facilities Corporation. In
February 2001, we subleased the 3,000 square foot facility and approximately
one-third of the 65,000 square foot facility. We are actively seeking to
sublease, assign or sell our remaining interests in these properties.
LEGAL PROCEEDINGS
We are not currently party to any legal actions.
41
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age as of December 31, 2000, and
position of each of our executive officers, key members of management, and
directors.
NAME AGE POSITION
---- -------- ------------------------------------------
John J. Schwartz, Ph.D.................... 67 Director, Chairman of the Board
Martin M. McGlynn......................... 54 Director, President and Chief Executive
Officer
Mark J. Levin............................. 50 Director
Roger M. Perlmutter M.D., Ph.D............ 48 Director
Irving L. Weissman, M.D................... 61 Director
Ann Tsukamoto, Ph.D....................... 48 Vice President, Scientific Operations
Ronnda Bartel, Ph.D....................... 42 Vice President, Scientific Development
------------------------
- JOHN J. SCHWARTZ, PH.D., was elected to the board of directors in
December 1998 and was elected Chairman of the board at the same time. He was
formerly Senior Vice President and General Counsel of SyStemix, Inc. from 1993
to 1995, and then President and Chief Executive Officer of SyStemix, Inc. from
1995 to 1997. Dr. Schwartz is currently President of Quantum Strategies
Management Company, a registered investment advisor located in Atherton,
California. Prior to his positions at SyStemix, he served as Assistant
Professor and a Vice President and General Counsel at Stanford University in
California. Dr. Schwartz graduated from Harvard Law School in 1958 and
received his Ph.D. in physics from the University of Rochester in 1966.
- MARTIN M. MCGLYNN joined us on January 15, 2001 when he was appointed
President and Chief Executive Officer of us and our wholly-owned subsidiary,
StemCells California, Inc. From 1994 until he joined us, Mr. McGlynn was
President and Chief Executive Officer of Pharmadigm, Inc., a privately held
company in Salt Lake City, Utah, engaged in research and development in the
fields of inflammation and genetic immunization. Mr. McGlynn received a
bachelor of commerce degree from University College, Dublin, Ireland in 1968,
a diploma in industrial engineering from the Irish Institute of Industrial
Engineering in 1970, and a diploma in production planning from the University
of Birmingham, England in 1971.
- MARK J. LEVIN is a founder and has served as a director since our inception.
From inception until January 1990 and from May 1990 until February 1991,
Mr. Levin served as our President and acting Chief Executive Officer. From
November 1991 until March 1992, he served as Chief Executive Officer of
Tularik, Inc., a biotechnology company. From August 1991 until August 1993,
Mr. Levin was Chief Executive Officer and a director of Focal, Inc., a
biomedical company. Mr. Levin is currently the Chairman of the Board and Chief
Executive Officer of Millennium Pharmaceuticals, Inc., a biotechnology
company. Mr. Levin is also currently on the Board of Directors of
Tularik, Inc.
- ROGER M. PERLMUTTER, M.D., PH.D., was elected to the board of directors in
December 2000. Dr. Perlmutter is Executive Vice President, Research and
Development, of Amgen, Inc., a position he has held since January 2001. Prior
to joining Amgen, Dr. Perlmutter was Executive Vice President, Worldwide Basic
Research and Preclinical Development, Merck Research Laboratories, a division
of Merck & Co., Inc., a position he held since August 1999. He joined Merck in
February 1997 as Senior Vice President, Merck Research Laboratories, from
February 1997 to December 1998 and as Executive Vice President from
February 1999 to July 1999. Prior to joining Merck, Dr. Perlmutter was a
professor in the Departments of Immunology, Biochemistry and Medicine at the
University of Washington from January 1991 to January 1997 and served as
chairman of the Department of Immunology at the University of Washington from
May 1989 to January 1997. He also was an Investigator at the Howard Hughes
Medical Institute from July 1984 to
42
February 1997. Dr Perlmutter has been a member of the board of directors of
The Irvington Institute for Immunological Research since 1997 and of the
Institute for Systems Biology since 1999. He also serves as President of the
Merck Genome Research Institute, a position he has held since March 2000.
- IRVING L. WEISSMAN, M.D., has served as a director since September 1997. He
has been a consultant to us since September 1997. He is the Karel and Avice
Beekhuis Professor of Cancer Biology, Professor of Pathology and Professor of
Developmental Biology at Stanford University. Stanford has employed
Dr. Weissman since July 1967, and he has been a Faculty member since
January 1969. He has been a full professor of pathology since September 1987,
and also of developmental biology since July 1989. Since October 1990,
Dr. Weissman has also served as a professor of biology (by courtesy). He has
been Chairman of the Stanford University Immunology Program since 1986.
Dr. Weissman was a cofounder of SyStemix, Inc., and Chairman of its Scientific
Advisory Board. He has served on the Scientific Advisory Boards of
Amgen Inc., DNAX and T-Cell Sciences, Inc. Dr. Weissman is a member of the
National Academy of Sciences and also serves as Chairman of our Scientific
Advisory Board. He also serves as Chief Executive Officer and a member of the
Board of Managers of Celtrans, LLC.
- ANN TSUKAMOTO, PH.D., joined us in November 1997 as Senior Director,
Scientific Operations, and was appointed Vice President, Scientific Operations
in June 1998. From 1989 until she joined us, Dr. Tsukamoto was employed at
SyStemix, Inc., where she served in various research capacities before
transitioning to the position of Director of Clinical Science. At
SyStemix, Inc., Dr. Tsukamoto assisted in the launch of its clinical research
program for the hematopoietic stem cell. She received her Ph.D. degree from
the University of California, Los Angeles and did postdoctoral research with
Dr. Harold Varmus at the University of California, San Francisco.
Dr. Tsukamoto is an inventor on six issued U.S. Patents related to the human
hematopoietic stem cell. As of March 5, 2001, Dr. Tsukamoto became a member of
the Board of Directors for the Society of Regenerative Medicine and Stem Cell
Biology.
- RONNDA BARTEL, PH.D., joined us in July 1998, as Senior Director, Cell
Development, and was appointed Vice President, Scientific Development in
April 2000. From 1995 until her employment with us, Dr. Bartel was Senior
Principal Scientist at Advanced Tissue Sciences Inc., responsible for
research, development, and manufacturing of tissue engineered human cell based
products. Dr. Bartel was awarded her Ph.D. degree in biochemistry from the
University of Kansas, Lawrence and did postdoctoral work with Dr. John
Voorhees at the University of Michigan, Ann Arbor.
BOARD COMPOSITION
Our certificate of incorporation and by-laws provide for the classification
of the board of directors into three classes, as nearly equal in number as
possible, with the term of office of one class expiring each year. There are no
family relationships between any of our directors or executive officers. Our
executive officers are elected by, and serve at the discretion of, the board of
directors.
DIRECTOR COMPENSATION
We currently pay no additional remuneration to Mr. McGlynn, our president
and chief executive officer, for his service as a director.
One of our non-employee directors, Dr. Weissman, also serves us as a
compensated consultant. See "Related Party Transactions--Compensation Paid to
Dr. Weissman."
We have adopted the following methodology for compensating our directors:
upon election or appointment to an initial term on the board, we will grant a
director an option to purchase 20,000 shares at fair market value, which option
will vest ratably over 3 years. On the third anniversary date,
43
each re-elected director will be granted an additional option to purchase 15,000
shares at fair market value, which option will vest ratably over 3 years. In
addition, each director will receive a retainer of $18,000 annually and the
Chairman of the board of directors will receive a retainer of $35,000 annually,
each payable in options to purchase our common stock at $.25 per share.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has an audit committee and a compensation and stock
option committee. The board may also establish other committees to assist in the
discharge of its responsibilities.
The audit committee oversees our financial reporting process on behalf of
the board of directors, makes recommendations to the board regarding the
independent auditors to be nominated for election by the stockholders, reviews
the independence of such auditors, approves the scope of their annual audit
activities, reviews their audit results, assures that our financial reporting is
of high quality, and reviews the interim financial statements with our
management and the independent auditors prior to the filing of our Quarterly
Report on Form 10-Q. Dr. Schwartz and Dr. Perlmutter make up the audit
committee.
The duties of the compensation and stock option committee are to make
recommendations to the board and our management concerning salaries in general,
determine executive compensation, and approve incentive compensation. The
compensation and stock option committee is currently comprised of Mr. Levin and
Dr. Schwartz.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following non-employee directors served on the compensation and stock
option committee in 2000: Mr. Levin and Dr. Schwartz. In 1989, 1990 and 1991,
Mr. Levin was one of our executive officers.
We entered into a consulting services agreement with Dr. Schwartz on
July 27, 1998, as amended December 19, 1998, for strategic business advice and
counseling services, including assistance in the negotiation and consummation of
strategic collaboration transactions specified by us. Dr. Schwartz was elected
to the Board of Directors on December 19, 1998 and became a member of the
compensation and stock option committee on that date. During the fiscal year
ended December 31, 1999, we made payments to Dr. Schwartz under the consulting
services agreement and the letter agreement dated December 19, 1998 and amended
as of July 1, 1999, under which he served as a Director and Chairman of the
Board. See "Related Party Transactions." Both the consulting services agreement
and the letter agreement were terminated as of March 31, 2001.
We believe the terms of these agreements were no less favorable to us than
could have been obtained from unaffiliated third parties.
44
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our Chief
Executive Officers during the fiscal years ended December 31, 2000, 1999 and
1998 and the two other most highly compensated executive officers who served in
such capacities during the fiscal year ended December 31, 2000. There were no
other persons serving as executive officers at the end of such fiscal year.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
-------------------------------------------------- -------- --------- --------- ---------- ------------
GEORGE W. DUNBAR, JR. ............................ 2000 186,538 50,000 36,031 --
Acting President and Chief Executive Officer(1) 1999 48,000
RICHARD M. ROSE M.D. ............................. 2000 309,632 -- -- --
Chief Executive Officer(2) 1999 279,974 -- -- 4,667(3)
1998 286,553 -- 150,000(4) 11,330(5)
ANN TSUKAMOTO, PH.D. ............................. 2000 159,054 -- -- 4,783(6)
VP, Scientific Operations
RONNDA BARTEL, PH.D. ............................. 2000 129,668 -- -- 3,245(7)
VP, Scientific Development
--------------------------
(1) Mr. Dunbar became Acting President and Chief Executive Officer effective as
of February 1, 2000, and resigned from that position effective as of
January 15, 2001.
(2) Dr. Rose became Chief Executive Officer on September 26, 1997. Dr. Rose
resigned as a director and officer of the company and its wholly owned
subsidiary effective as of January 31, 2000.
(3) Represents the personal portion of the use of a company vehicle, as well as
$5,000 of fair market value of our matching contributions of common stock to
Dr. Rose's account in the company's 401(k) Plan.
(4) Represents the regrant of an option in the original amount of 200,000 shares
which was reduced to 150,000 shares as a result of the employee equity
incentive repricing plan approved by the Board of Directors on
July 10,1998.
(5) Represents $4,666.56 of fair market value of the company matching
contributions of common stock to Dr. Rose's account in our 401(k) Plan.
(6) Represents $4,783 of fair market value of the company matching contributions
of common stock to Dr. Tsukamoto.
(7) Represents $3,245 of fair market value of the company matching contributions
of common stock to Dr. Bartel.
OPTION GRANTS IN LAST YEAR
The following table provides information on option grants in 2000 to
Mr. Dunbar, the only named executive officer to be granted options in 2000.
45
OPTION GRANTS IN LAST YEAR
POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF AT ASSUMED ANNUAL RATES OF
UNDERLYING TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME (# OF SHARES) 2000(1) ($/SHARE)(2) DATE 0%($) 5%($) 10%($)
---- ------------- ------------- ------------ ---------- -------- -------- --------
George W. Dunbar, Jr....... 73,000(3) 22% 1.094 10/15/01 271,998 307,120 345,580
12,031(3) 4% 4.156 10/15/01 13,162 19,467 26,371
------------------------
(1) We granted options covering 330,031 shares of common stock to employees in
the fiscal year ended December 31, 2000.
(2) The exercise price may be paid by delivery of already-owned shares and tax
withholding obligations related to exercise may be paid by offset of the
underlying shares, subject to certain conditions.
(3) As of December 31, 2000, options for 85,031 shares were fully vested.
OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table provides information about option exercises in 2000 by
the named executive officers and the value of such officers' unexercised options
on December 31, 2000.
AGGREGATED OPTION EXERCISES IN 2000 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Richard M. Rose, M.D...... 156,250 865,328 -- 93,750 -- --
George W. Dunbar, Jr...... 42,000 209,160 24,031 -- 11,248 --
Ann Tsukamoto, Ph.D....... -- -- 78,082 33,168 29,638 35,161
Ronnda Bartel, Ph.D....... -- -- 19,270 33,230 24,814 43,058
------------------------
(1) Value is based on the difference between the aggregate option exercise price
and the fair market value as of December 31, 2000. The fair market value of
the common stock is based on the closing price of the our common stock on
December 29, 2000 (the last trading day of 2000) on the Nasdaq National
Market, which was $2.50.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Martin McGlynn joined the company as President and Chief Executive Officer
on January 15, 2001. Under the terms of an agreement between Mr. McGlynn and us,
Mr. McGlynn is entitled to an annual base salary of $275,000 per year,
reviewable annually by the board of directors, and a bonus, in the board's sole
discretion, of up to 25% of his base salary. Mr. McGlynn was granted an option
to purchase 400,000 shares of common stock with an exercise price equal to the
fair market value of the common stock on the date of his employment. One-fourth
of these options will vest on the first anniversary of his employment and the
remaining three-fourths will vest in equal monthly installments during his
second through fourth years of employment. The board may, in its sole
discretion, grant Mr. McGlynn a bonus option to purchase up to an additional
25,000 shares. The vesting under the option is subject to acceleration in the
event of certain changes of control. We also agreed to pay Mr. McGlynn a $50,000
relocation bonus and reimburse him for relocation expenses. Our agreement with
Mr. McGlynn provides that if his employment is terminated by us without cause or
by
46
Mr. McGlynn for good reason, he will be entitled to severance payments equal to
one year's base salary and he will receive healthcare benefits under our plans
for one year after termination. If Mr. McGlynn's employment is terminated as a
result of his disability, he will receive up to six months' base salary. If we
terminate Mr. McGlynn's employment for cause or if he resigns without good
reason, he will not be entitled to any severance or other benefits.
STOCK PLANS AND RELATED TRANSACTIONS
In April 2001, our board of directors adopted the 2001 Equity Incentive
Plan, subject to stockholder approval.
The purpose of the Plan is to advance our interests by enhancing our ability
to attract and retain executive officers, employees, directors and other persons
or entities providing services to us who are in a position to make significant
contributions to our success, and to reward participants for such contributions,
through ownership of shares of our common stock. The Plan is intended to
accomplish these goals by enabling us to grant awards in the form of options,
stock appreciation rights, restricted stock, unrestricted stock or deferred
stock, or performance awards, loans or supplemental grants or combinations
thereof, all as more fully described below. The Plan will be the successor to
both our 1992 Equity Incentive Plan and our 1992 Stock Option Plan for
Non-Employee Directors. No awards may be made under either of the 1992 plans
after February 12, 2002.
The Plan will be administered by our board of directors. Under the Plan, the
board may grant stock options, stock appreciation rights, restricted stock,
unrestricted stock, deferred stock, and performance awards (in cash or stock),
or combinations thereof, and may waive the terms and conditions of any award. A
total of 3,000,000 shares of common stock may be issued under the Plan.
Employees, including executive officers, directors and other persons or entities
providing services to us or its subsidiaries who are in a position to make a
significant contribution to our success are eligible to receive awards under the
Plan.
The exercise price of an incentive stock option ("ISO") granted under the
Plan or an option intended to qualify as performance-based compensation under
Section 162(m) of the Code shall not be less than 100% of the fair market value
of the stock at the time of grant. The board determines the exercise price of a
non-ISO granted under the Plan. No stock options may be granted under the Plan
after March 28, 2011, but stock options previously granted may extend beyond
that date. The exercise price may be paid in cash or by check. Subject to
certain additional limitations, the board may also permit the exercise price to
be paid by tendering shares of stock, by delivery of a promissory note, by
delivery to us of an undertaking by a broker to deliver promptly sufficient
funds to pay the exercise price, or a combination of the foregoing.
Stock appreciation rights ("SARs") may be granted either alone or in tandem
with stock option grants. Each SAR entitles the holder on exercise to receive an
amount in cash or stock or a combination thereof (such form to be determined by
the board) determined in whole or in part by reference to appreciation in the
fair market value of a share of Stock. SARs may be based solely on appreciation
in the fair market value of stock or on a comparison of such appreciation with
some other measure of market growth.
The Plan provides for awards of nontransferable shares of restricted stock
subject to forfeiture, as well as unrestricted shares of stock. Shares of
restricted stock may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the end of the applicable period and the
satisfaction of any other conditions or restrictions established by the board.
Except as the Plan may otherwise specifically provide, if a participant ceases
to be an employee or ceases to continue the consulting or other similar
relationship engaged in by such participant with us for any reason other than
death during the restricted period, then the restricted stock must be offered to
us for purchase for the amount of cash paid for the restricted stock, or
forfeited to us if no cash was paid. The Plan also
47
provides for deferred grants entitling the recipient to receive shares of stock
in the future at such times and on such conditions as the board may specify.
The Plan provides for performance awards entitling the recipient to receive
without payment cash or stock or a combination thereof following the attainment
of performance goals determined by the board. In the case of any performance
award intended to qualify for the performance-based remuneration exception
described in Section 162(m) of the Code, the board will in writing pre-establish
specific performance goals that are based upon any one or more operational,
result or event-specific goals.
The Plan provides that the board has full authority to decide whether to
make a loan to a participant in connection with the purchase of stock under an
award or with the payment of any applicable income tax recognized as a result of
an award. The Plan also provides that, in connection with any award, the board
may provide for and grant a cash award with certain limitations as to the amount
of the supplemental grant.
Except as otherwise provided by the board, if a participant dies, options
and SARs exercisable immediately prior to death may be exercised by the
participant's executor, administrator or transferee during a period of one year
following such death (or for the remainder of their original term, if less).
Options and SARs not exercisable at a participant's death terminate. In the case
of termination for reasons other than death, options and SARs remain
exercisable, to the extent they were exercisable immediately prior to
termination, for three months (or for the remainder of their original term, if
less); provided that if in the Board's judgment the reason for the award
holder's termination casts discredit on us sufficient to justify immediate
termination of the award, then such award will immediately terminate.
In the case of certain mergers, consolidations or other transactions in
which we are acquired or is liquidated and there is a surviving or acquiring
corporation, the Plan permits the board to arrange for the assumption of awards
outstanding under the Plan or the grant to participants of replacement awards by
that corporation. All outstanding awards not assumed by the surviving or
acquiring corporation shall become exercisable immediately prior to the
consummation of such merger, consolidation or other transaction and upon such
consummation all outstanding awards that have not been assumed or replaced will
terminate.
The board may amend the Plan or any outstanding award at any time, provided
that no such amendment will, without the approval of our stockholders,
effectuate a change for which shareholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under Section 422 of the Code
or for the award of performance-based compensation under Section 162(m) of the
Code.
The future benefits or amounts that would be received under the Plan by the
executive officers and the non-executive officer employees are discretionary and
are therefore not determinable at this time.
The 2001 Equity Incentive Plan will become effective as of May 31, 2001,
provided that it is approved by the stockholders at our annual meeting.
48
RELATED PARTY TRANSACTIONS
COMPENSATION PAID TO DR. SCHWARTZ
Dr. Schwartz, a member and Chairman of the board of directors, was retained
in July 1998 under a consulting services agreement to serve as a consultant to
us rendering strategic business advice and counseling services, including
assistance in the negotiation and consummation of strategic collaboration
transactions specified by us. The consulting services agreement provided for
compensation to Dr. Schwartz in the amount of $50,000 in cash for services
rendered during the period of September 27, 1997 through July 26, 1998, plus a
fully vested option to purchase 20,000 shares of our common stock at $1.281, the
fair market value of our common stock at the time of the grant. For services
rendered during the term of the consulting services agreement, Dr. Schwartz was
entitled to total cash compensation of $120,000, an option to purchase 76,000
shares of our common stock with an exercise price equal to the closing bid price
for the shares on July 27, 1998, and an option to purchase 48,000 shares of our
common stock at the then current fair market value of our common stock on
July 27, 1999, vesting at a rate of 2,000 shares per month. In addition, the
consulting services agreement provided that in the event that, at a time when
Dr. Schwartz was not a member of the board of directors but the consulting
services agreement was still in effect, Dr. Schwartz materially participated in
the negotiation and consummation of a strategic collaboration transaction
specified by us, he would have been be entitled to receive additional
compensation equal to 3% of the transaction consideration, payable half in cash
and half in the form of an option or warrant to purchase shares of our common
stock at $.20 per share, the number of shares being calculated based on the fair
market value of our common stock ten days prior to the first public announcement
of the consummation of, the execution of a letter of intent for, or the
existence of discussions concerning the collaboration transaction. There have
been no such strategic collaboration transactions that would have given rise to
additional compensation.
On December 19, 1998, Dr. Schwartz became a member of the board of directors
and its Chairman and his compensation for services in this capacity was provided
for under the terms of a letter agreement, which also incorporated certain
compensation provided for under the consulting services agreement. Under the
letter agreement, as amended July 1, 1999, Dr. Schwartz in his capacity as
Chairman was entitled to receive $132,000 in cash per year, plus $1,500 per
board or committee meeting and $500 per telephonic meeting. He also received an
option to acquire 40,000 shares of our common stock under the 1992 Equity
Incentive Plan, with an exercise price equal to the fair market value on the
date of the grant. The time requirement for his position was set at thirty
business days per quarter. Dr. Schwartz canceled both the letter agreement and
the consulting services agreement as of March 31, 2001. He currently continues
to serve in his position as Chairman and member of the board of directors under
the terms of the compensation policy recently approved by the directors. See
"Management--Director Compensation."
COMPENSATION PAID TO DR. WEISSMAN
Dr. Weissman, a member of the board of directors, was retained in
September 1997 to serve as a consultant to us. Pursuant to his consulting
agreement, Dr. Weissman has agreed to provide consulting services to us and
serve on our Scientific Advisory Board. We agreed to pay Dr. Weissman $50,000
per year for his services and granted him an option to purchase 500,000 shares
of common stock for $5.25 per share, of which 31,250 shares vested at the date
of grant. Originally, the remainder of the option would have vested upon the
occurrence of certain milestones related to our stem cell research program and
in the event of certain changes of control. We agreed to amend the option on
October 27, 2000 so that the shares would become exercisable over eight years
from the original grant date or in the event of certain changes of control. We
recorded compensation expense of $823,759 during the fourth quarter of 2000 as a
result of this change in the vested portion of the option. The deferred
compensation
49
expense associated with the unvested portion of the grants was recorded as
$669,116. We plan to revalue the options using the Black-Scholes method on a
quarterly basis and recognize additional compensation expense accordingly. We
also agreed in September 1997 to nominate Dr. Weissman for a position on the
board of directors. Dr. Weissman's consulting agreement contains
confidentiality, noncompetition, and assignment of invention provisions and is
for a term of fifteen years, subject to earlier termination by us for cause or
frustration of purpose and earlier termination by Dr. Weissman for good reason.
Dr. Weissman initially received no compensation as a member of the board of
directors or for attending meetings of the board or its committees or meetings
of our Scientific Advisory Board, but was reimbursed for reasonable expenses he
incurred in attending such meetings. In October 2000, we agreed with
Dr. Weissman that we would pay him the same compensation paid to other members
of the board. See "Management--Director Compensation."
PREFERRED STOCK ISSUED TO DR. WEISSMAN AND MR. LEVIN
In April 2000, we sold 750 shares of our 6% cumulative convertible preferred
stock plus a warrant to purchase 37,500 shares of our common stock at $6.58 per
share to each of Dr. Weissman and Mr. Levin, each a director, for $750,000, for
a total of $1,500,000, on terms more favorable to us than we were able to obtain
from outside investors. The face value of the shares is convertible at the
option of the holder into common stock at $3.77 per share. The holders of the
preferred stock have liquidation rights equal to their original investments plus
accrued but unpaid dividends. Any unconverted preferred stock will be converted
into common stock on April 13, 2002. The warrants expire on April 13, 2005.
50
PRINCIPAL STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
our capital stock as of April 30, 2001 for:
- each person or group of affiliated persons known by us to own beneficially
more than 5% of the outstanding shares of common stock and 6% cumulative
convertible preferred stock;
- each director and named executive officer; and
- all directors and executive officers as a group.
The address for each listed director and officer is c/o StemCells, Inc.,
3155 Porter Drive, Palo Alto, CA 94304.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed to be outstanding shares of capital stock subject to
options or warrants held by that person that are currently exercisable or will
become exercisable within 60 days of April 30, 2001, but we have not deemed
these shares to be outstanding for computing the percentage ownership of any
other person. To our knowledge, except as set forth in the footnotes below, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock and 6% cumulative convertible
preferred stock shown as beneficially owned by that stockholder. Beneficial
ownership percentage is based on 21,458,211 shares of our common stock and 1,500
shares of our 6% cumulative convertible preferred stock outstanding on
March 31, 2001.
PERCENTAGE PERCENTAGE
SHARES OF OF CLASS OF SHARES OF OF CLASS OF
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------------- ------------------ ------------------ ------------------ ------------------
Mark J. Levin............... 190,300(2) * 750 50%
Martin M. McGlynn........... -- -- -- --
Roger Perlmutter, M.D.,
Ph.D...................... 3,519(3) * -- --
John J. Schwartz, Ph.D...... 194,917(4) * -- --
Irving Weissman, M.D........ 133,685(5) * 750 50%
All directors and executive
officers as a group (7
persons).................. 653,749(6) 3.0% 1,500 100%
Millennium Partners, LP..... 2,883,462(7) 11.8% -- --
--------------------------
* Less than one percent.
(1) The address of all such persons, except Millenium Partners, LP, is c/o the
Company, 3155 Porter Drive, Palo Alto, California 94304. The address of
Millenium Partners, LP is 551 Fifth Avenue, New York, New York 10176.
(2) Includes 41,296 shares of common stock issuable upon exercise of stock
options and a warrant to purchase 37,500 shares.
(3) All shares issuable upon exercise of stock options.
(4) Includes 194,917 shares issuable upon exercise of stock options.
(5) Includes 38,234 shares issuable upon exercise of stock options and 44,660
shares issuable upon exercise of warrants. Includes 50,791 shares owned by
trusts for the benefit of Dr. Weissman's children as to which he disclaims
beneficial ownership.
(6) Includes options to purchase 387,780 shares and warrants to purchase 185,129
shares.
(7) Includes 743,956 shares issuable upon the exercise of warrants. Includes
461,894 shares issuable upon exercise of an option granted on August 3, 2000
to purchase up to $2 million of our common stock based upon the minimum
exercise price of the option and approximately 50,808 shares issuable upon
the exercise of warrants issuable upon exercise of the option. Information
on Millennium's beneficial ownership is based on a Schedule 13G filed by
Millennium on February 27, 2001.
51
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
As of March 31, 2001, the total amount of our authorized capital stock
consisted of 45,000,000 shares of common stock, $.01 par value per share, and
1,000,000 shares of authorized preferred stock, $.01 par value per share, 2,626
of which has been designated as 6% cumulative preferred stock, to be issued from
time to time in one or more series, with such designations, powers, preferences,
rights, qualifications, limitations and restrictions as our board of directors
may determine. As of March 31, 2001, we had outstanding 21,458,211 shares of
common stock and 1,500 shares of 6% cumulative convertible preferred stock.
As of March 31, 2001, we had 287 stockholders of record with respect to our
common stock, and we had outstanding options and warrants to purchase 3,461,105
shares of our common stock, of which 871,386 were currently exercisable. The
following summary of provisions of our capital stock describes all material
provisions of, but does not purport to be complete and is subject to, and
qualified in its entirety by, our restated certificate of incorporation and our
amended and restated by-laws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable law.
COMMON STOCK
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be, validly
issued, fully paid and nonassessable. Holders of our common stock are entitled
to any and all dividends as such dividends are declared by the board of
directors. This right is not cumulative, and no right shall accrue to holders of
common stock by reason of the fact that dividends on said shares were not
declared in any prior period. The shares of common stock are not convertible and
the holders thereof have no preemptive or subscription rights to purchase any of
our securities. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to an amount equal to $1.00 per share,
subject to the rights of the holders of the preferred stock. After payment to
the holders of the common stock of the full preferential amounts due to them,
the holders of common stock have the right to share equally in the distribution
of the entire remaining assets of the company legally available for
distribution, subject to the rights of the holders of the preferred stock. Each
outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders, such voting rights to be counted together
with all other shares of capital stock having voting powers and not as a
separate class, except as otherwise required by law.
Our common stock is traded on the Nasdaq National Market under the symbol
"STEM."
PREFERRED STOCK
Our board of directors may from time to time direct the issuance of shares
of preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Shares of preferred stock of
any one series shall be identical with each other in all respects except as to
the dates from which dividends shall accrue and/or cumulate. In the event of any
liquidation, dissolution or winding up of the company, the holders of
undesignated preferred stock of each series are entitled to receive an amount
fixed by our restated certificate of incorporation or by the resolution(s) of
the board of directors providing for the issuance of such series.
The board of directors designated 2,626 shares, $.01 par value per share, as
6% cumulative convertible preferred stock, 1,500 shares of which are issued and
outstanding. The holders of these preferred shares are entitled to receive
cumulative dividends at a per share rate of 6% of the liquidation preference of
each share, per annum accruing daily and compounding quarterly, with
52
priority over payment of any dividend on common stock or any other class or
series of equity security of the company. In the event of any liquidation,
dissolution or winding up of the company, the holders of the 6% cumulative
convertible preferred stock are entitled to receive in preference to holders of
any other class or series of equity securities, an amount equal to $1,000 per
share plus (i) dividends added to the liquidation preference, (ii) all accrued
but unpaid dividends and (iii) all "Monthly Delay Payments" under a registration
rights agreement, dated April 13, 2000, by and between us and Irving Weissman
and Mark Levin. The 6% cumulative convertible preferred stock was issued
pursuant to a securities purchase agreement, dated April 13, 2000, by and
between us and Irving Weissman and Mark Levin. Each holder of the 6% cumulative
convertible preferred stock has at any time the right to convert any or all 6%
cumulative convertible preferred stock held by such holder into fully paid,
validly issued and nonassessable shares of common stock, $.01 par value per
share, at which point the rights of the holders of converted 6% cumulative
convertible preferred stock shall be treated as having become the owners of such
common stock. The affirmative vote of a majority in interest of the outstanding
6% cumulative convertible preferred stock is required for (i) any amendment,
modification or repeal of the Certificate of Designations, Certificate of
Incorporation or by-laws that may amend or change or adversely affect any of the
rights or preference of the 6% cumulative convertible preferred stock; provided,
however, that the holders of 6% cumulative convertible preferred stock who are
affiliates of the company shall not participate in such votes, and such shares
shall be deemed not to be outstanding for purposes of such votes. We have no
current intention to issue any more of our unissued, authorized shares of
undesignated preferred stock. However, the issuance of any shares of
undesignated preferred stock in the future could adversely affect the rights of
the holders of common stock.
WARRANTS
As of March 31, 2001, we had outstanding warrants to purchase 918,956 shares
of common stock at a weighted average exercise price of $1.75 per share, subject
to customary antidilution adjustment. The warrants were issued at various times
since April 13, 2000 to eight different parties as described below.
As of April 13, 2000, we issued to each of Irving Weissman and Mark Levin,
each a director, a warrant in connection with a Securities Purchase Agreement
dated as of April 13, 2000. Each warrant is to purchase 37,500 shares of our
common stock at an exercise price of $6.58125 per share. Each warrant is
exercisable, in whole or in part, at any time on or after April 13, 2000 and on
or prior to April 13, 2005. The exercise price is subject to adjustment for
subdivisions, combinations, stock dividends, reorganizations and various other
issuances. We may, at any time during the term of the warrant, reduce the
exercise price to any amount for any period of time deemed appropriate by our
board of directors. See "Related Party Transactions--Preferred Stock Issued to
Dr. Weissman and Mr. Levin."
We issued a warrant to Millennium Partners L.P. on August 3, 2000, which may
entitle them to receive additional shares of common stock on eight dates
beginning six months from that date and every three months thereafter. On
August 30, 2000 we issued a second warrant to Millennium which may entitle them
to receive additional shares of common stock on eight dates beginning six months
from August 30, 2000 and every three months thereafter. On November 1, 2000, we
agreed with Millennium to cancel the adjustable warrant issued on August 30,
2000 and to decrease the number of shares for which the adjustable warrant
issued on August 3, 2000 may be exercisable. The number of additional shares
Millennium will be entitled to receive on each date will be based on the number
of shares of common stock Millennium continues to hold on each date and the
market price of our common stock over a period prior to each date. We will have
the right, under certain circumstances, to limit the number of additional shares
by purchasing part of the entitlement from Millennium. The remaining warrant is
exercisable, in whole or in part, at any time on or prior to 30 days after the
last date which may entitle Millennium to receive additional shares. This
warrant is subject to adjustment
53
for subdivisions, combinations, stock dividends, reorganizations and various
other issuances of common stock. On January 27, 2001, Millennium's August 3,
2000 adjustable warrant became exercisable for 463,369 shares of our common
stock, and Millennium purchased all of those shares for $4,634 on March 30,
2001. On April 27, 2001, the adjustable warrant became exercisable for an
additional 622,469 shares of our common stock, and the warrant has not been
exercised with respect to those shares.
Millennium also received a warrant on August 3, 2000 to purchase up to
101,587 shares of common stock at $4.725 per share, which is callable by us at
$7.875 per underlying share. On August 30, 2000 we issued an additional warrant
to purchase up to 19,900 shares of common stock at $6.03 per share which is
callable by us at $10.05 per underlying share. Millennium has an option to
purchase up to $2 million of our common stock on or prior to August 3, 2001. If
it exercises all or part of this option, it will receive an additional callable
warrant. Each callable warrant is exercisable, in whole or in part, at any time
on or after the issuance date and on or prior to the fifth year anniversary of
the issuance date. The exercise price and number of shares are subject to
adjustment for subdivisions, combinations, stock dividends, reorganizations and
various other issuances.
On August 3, 2000 we issued a warrant to the May Davis Group and four of its
affiliates to purchase up to 100,000 shares of common stock at $5.0375 per
share. The warrant is exercisable, in whole or in part, at any time on or after
the issuance date and on or prior to the fifth year anniversary of the issuance
date. The exercise price and number of shares are subject to adjustment for
subdivisions, combinations, stock dividends, reorganizations and various other
issuances.
On May 10, 2001, in connection with our execution of a common stock purchase
agreement with Sativum Investments Limited, we issued three three-year warrants
to purchase an aggregate of 350,000 shares of our common stock at $2.38 per
share to Sativum (250,000 shares), Pacific Crest Securities Inc. (75,000 shares)
and Granite Financial Group, Inc. (25,000 shares). The shares underlying these
warrants are being registered for sale by the registration statement of which
this prospectus forms a part. The exercise price and number of shares are
subject to adjustment for subdivisions, combinations, stock dividends and
reorganizations.
PROVISIONS OF DELAWARE LAW GOVERNING BUSINESS COMBINATIONS
We are subject to the "business combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless:
- the transaction is approved by the board of directors prior to the date
the "interested stockholder" obtained such status;
- upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of a corporation's voting stock or within
54
three years did own 15% or more of a corporation's voting stock. The statute
could prohibit or delay mergers or other takeover or change in control attempts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe L.P.
COMMON STOCK PURCHASE AGREEMENT
On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited, a British Virgin Islands corporation, for the
future issuance and purchase of shares of our common stock. This common stock
purchase agreement establishes what is sometimes termed an equity line.
In general, under the equity line, Sativum has committed to provide us up to
$30 million as we request it over a 30-month period in return for newly issued
common stock. Once every 22 trading days on the Nasdaq National Market, we may
request a drawdown. The amount we can draw down at each request must be at least
$100,000. The maximum amount we can actually draw down for each request is also
limited to 6% of the weighted average price of our common stock for the 60
calendar days prior to the date of our request multiplied by the total trading
volume of our common stock for the 60 calendar days prior to our request. We are
under no obligation to issue any shares to Sativum or to request a drawdown
during any period.
Each 20-day trading period following a drawdown request is divided into two
10 trading day settlement periods. We are entitled to receive funds and must
deliver shares to Sativum on the 12th day and the 22nd day following the
delivery of a drawdown notice. Our requested drawdown amount will be reduced by
1/20 for each day during the 20 trading day period that the volume-weighted
average stock price falls below a threshold price set by us or for each day on
which trading of our shares on Nasdaq is suspended or the registration statement
of which this prospectus forms a part is suspended. We then use the formulas in
the common stock purchase agreement to determine the number of shares that we
will issue to Sativum in return for the actual drawdown amount. The formulas for
determining the actual drawdown amounts, the number of shares that we issue to
Sativum and the price per share paid by Sativum are described in detail
beginning on page 56. The aggregate total of all drawdowns under the equity line
cannot exceed $30,000,000.
The price per share dollar amount that Sativum pays for our common stock for
each drawdown includes a 6% discount to the average daily market price of our
common stock for each day during the 20 day trading period after our drawdown
request, weighted by trading volume during each such trading day. The actual
drawdown amount will be reduced by a fee, equal to 3% of net proceeds, payable
to the placement agent, Pacific Crest Securities, Inc., which introduced Sativum
to us. Pacific Crest has agreed to contribute one-third of each of its drawdown
fees to Granite Financial Group, Inc.
We are required to comply with Nasdaq's issuer designation requirements. One
of those requirements prevents us from issuing, pursuant to the common stock
purchase agreement, more than 3,922,606 shares, or 19.9% of our outstanding
common stock on May 10, 2001 minus the shares underlying the warrants, unless
and until we receive the approval of our stockholders. If necessary, we will
seek stockholder approval at or prior to our 2002 or 2003 annual meeting of
stockholders in case we opt to issue shares of common stock pursuant to the
common stock purchase agreement in excess of that amount. Additionally, the
common stock purchase agreement does not permit us to draw funds if the issuance
of shares of common stock to Sativum pursuant to the drawdown would exceed 9.9%
of our outstanding common stock held by Sativum on the drawdown exercise date.
In such cases, we will not be permitted to issue the shares otherwise issuable
pursuant to the drawdown that exceed that amount of shares, and Sativum will not
be obligated to purchase those shares. Shares sold by Sativum
55
from time to time will reduce its beneficial ownership of our common stock and
accordingly permit us to sell additional shares to Sativum under the common
stock purchase agreement.
We are prohibited by the common stock purchase agreement from entering into
any other stand-by equity based credit facilities during the term of the common
stock purchase agreement. We are not prohibited, however, from entering into
other equity or debt financing arrangements.
In connection with the common stock purchase agreement, we issued to Sativum
at the initial closing a warrant certificate to purchase up to 250,000 shares of
our common stock. The warrant expires on May 10, 2004. The exercise price of the
warrant is $2.3805. Simultaneous with the issuance of the warrant to Sativum, we
issued a warrant to Pacific Crest for the purchase of up to 75,000 shares of our
common stock and to Granite Financial Group, Inc. for the purchase of up to
25,000 shares of our common stock, on the same terms as Sativum's warrant. The
shares underlying these warrants are being registered by the registration
statement of which this prospectus forms a part.
THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES
We may request a drawdown by faxing to Sativum a drawdown notice, stating
the amount of the drawdown that we wish to exercise and the minimum threshold
price at which we are willing to sell the shares.
DOLLAR AMOUNT OF THE DRAWDOWN
No drawdown can be less than $100,000 or more than 6% of the weighted
average price of our common stock for the sixty calendar days prior to the date
of our request, multiplied by the total trading volume of our common stock for
the 60 calendar days prior to our request. A sample calculation of the maximum
drawdown amount is described on page 57.
The actual dollar amount of the drawdown will be reduced by 1/20 for every
day during the 20 trading days after our drawdown request that:
- the volume weighted average price is less than the minimum threshold price
we designate;
- the common stock is suspended for more than three hours, in the aggregate,
or if any trading day is shortened because of a public holiday; or
- if sales of previously drawn down shares pursuant to the registration
statement of which this prospectus is a part are suspended by us because
of certain potentially material events for more than three hours, in the
aggregate.
If any of the above three conditions is met for one or more trading days
during the 20 trading day period, the actual dollar amount of our drawdown will
be lower than we requested in our notice. The volume weighted average price of
any trading day during a pricing period that meets any of the conditions above
will have no effect on the pricing of the shares purchased with respect to the
other days during that pricing period.
NUMBER OF SHARES
The volume-weighted average price of our shares on each of the 20 trading
days immediately following the drawdown notice, except for days excluded in any
of the three bullets above, is used to determine the number of shares that we
will issue in return for the money provided by Sativum. We will not know the
number of shares we will be issuing in a drawdown at the time of delivery of our
drawdown notice. If our stock price falls during the 20 trading days after the
notice, the number of shares will proportionately rise, except that we will not
be required to issue shares below the threshold price that we will have set in
the notice.
56
The number of shares of common stock that we will issue with respect to each
trading day during a drawdown will be determined by the following formula:
- 1/20th of the dollar amount contained in our drawdown notice divided by
- 94% of the volume-weighted average price of our common stock for that day.
The 94% reflects Sativum's 6% discount. The sum of these 20 daily calculations
produces the number of common shares that we will issue, unless trading one or
more days is excluded as explained above, in which case that day is ignored in
the calculation.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of a single drawdown and the
number of shares we would issue to Sativum in connection with that drawdown
based on the assumptions noted in the discussion below.
SAMPLE MAXIMUM DRAWDOWN AMOUNT CALCULATION
For purposes of this example, suppose that we provide a drawdown notice to
Sativum, and that we set the threshold price at $1.90 per share based on the
volume weighted average price before applying the 6% discount. Suppose further
that the total trading volume for the 60 calendar days prior to our drawdown
notice is 5,335,700 shares and that the average of the volume-weighted average
daily prices of our common stock for the 60 calendar days prior to the notice is
$2.18. Using these hypothetical numbers, which by way of example only are the
actual volume and price numbers for our common stock for the 60 calendar days
ended May 18, 2001, the maximum amount of the drawdown is as follows:
- the total trading volume for the 60 calendar days prior to our drawdown
notice, 5,335,700, multiplied by
- the average of the volume-weighted average daily prices of our common
stock for the 60 calendar days prior to the drawdown notice, $2.18,
multiplied by
- 6%
equals $697,910.
The maximum amount we can request in a drawdown notice under the formula and
using these hypothetical numbers, is therefore capped at $697,910.
SAMPLE CALCULATION OF NUMBER OF SHARES
Assuming we requested the maximum drawdown amount reflected by the
hypothetical numbers above, and assuming that the volume-weighted average daily
prices for our common stock for the twenty trading days following our drawdown
notice as set forth in the table below, the number of shares to be issued based
on any trading day during the drawdown period can be calculated as follows:
- 1/20 of the requested drawdown amount of $697,910 divided by
- 94% of the volume-weighted average daily price.
For example, for the fourth trading day in the example in the table below,
the calculation is as follows: 1/20 of $697,910 is $34,895. Divide $34,895 by
94% of the volume-weighted average daily price for that day of $1.90 per share,
to get 19,538 shares. Perform this share calculation for each of the 20
measuring days during the drawdown period, excluding any days on which the
volume-weighted average daily price is below the $1.90 threshold price, or on
which trading of our common stock or the
57
effectiveness of the registration statement of which this prospectus forms a
part is suspended. Add the results to determine the number of shares to be
issued.
After excluding the first three days of the period because they are below
the threshold price, the actual dollar amount of our drawdown in this example
would be $593,223, $244,268 of which would be settled on day 12 for the first
settlement period, and $348,955 of which would be settled on day 22 for the
second settlement period. The total number of shares that we would issue to
Sativum for this drawdown request would be 264,445 shares, so long as those
shares, together with all other shares held by Sativum, do not exceed 9.9% of
our then outstanding common stock. Of these total shares issued with respect to
this hypothetical drawdown, 128,612 shares would be issued on day 12 for the
first settlement period and 135,833 shares would be issued on day 22 for the
second settlement period. Sativum would pay an average of $2.24 per share for
these shares.
HYPOTHETICAL DRAWDOWN PRICING PERIOD(1)
VOLUME WEIGHTED
AVERAGE PRICE DAILY INVESTMENT
TRADING DAY (VWAP) 94% OF VWAP AMOUNT NUMBER OF SHARES SOLD
--------------------- ---------------------- ---------------------- ---------------------- ----------------------
1 $1.87 $1.76 (2) (2)
2 $1.84 $1.73 (2) (2)
3 $1.82 $1.71 (2) (2)
4 $1.90 $1.79 $34,895 19,538
5 $1.92 $1.81 $34,895 19,316
6 $1.94 $1.83 $34,895 19,114
7 $1.94 $1.82 $34,895 19,136
8 $2.11 $1.99 $34,895 17,567
9 $2.11 $1.98 $34,895 17,624
10 $2.28 $2.14 $34,895 16,317
11 $2.31 $2.17 $34,895 16,046
12 $2.42 $2.27 $34,895 15,352
13 $2.96 $2.78 $34,895 12,551
14 $2.77 $2.60 $34,895 13,399
15 $2.64 $2.48 $34,895 14,075
16 $2.52 $2.37 $34,895 14,735
17 $2.91 $2.73 $34,895 12,762
18 $2.87 $2.69 $34,895 12,948
19 $3.02 $2.84 $34,895 12,298
20 $3.18 $2.99 $34,895 11,667
---------------------- ----------------------
Total $593,223 264,445
(1) We have used the volume-weighted average share prices of our common stock
during the twenty trading days ended May 18, 2001 for illustrative purposes
only. Our use of these numbers should not be interpreted as a forecast of
share prices, an indicator of the prices at which we may choose to utilize
the equity line or the expected or historical volatility of our common
stock, whether during or outside a drawdown period. Due to rounding,
division of the figures in the above table may not exactly equal the shares
presented.
(2) Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical drawdown notice.
We would receive the amount of our adjusted drawdown, $593,223, less an
aggregate 3% cash fee paid to the placement agent, Pacific Crest, of $17,797,
for net proceeds to us of approximately $575,426. Pacific Crest would contribute
one-third, or $5,932, of this hypothetical placement fee to
58
Granite. The delivery of the requisite number of shares and payment of the
drawdown will take place electronically and, if we choose, through an escrow
agent, Epstein, Becker & Green, P.C. of New York.
NECESSARY CONDITIONS BEFORE SATIVUM IS OBLIGATED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Sativum is obligated to
purchase any common shares following a drawdown request:
- a registration statement for the resale of the shares by Sativum must be
declared effective by the Securities and Exchange Commission and must
remain effective and available as of the drawdown settlement date;
- trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the Nasdaq National Market, nor
shall minimum prices have been established on securities whose trades are
reported on the Nasdaq National Market;
- we must not have merged or consolidated with or into another company or
transferred all or substantially all of our assets to another company,
unless the acquiring company has agreed to honor the common stock purchase
agreement;
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the common stock purchase agreement; and
- no event which is materially adverse to our business, operations,
properties or financial condition shall have occurred.
A further condition is that we may not issue more than 19.9% of our common
shares issued and outstanding on May 10, 2001 pursuant to the common stock
purchase agreement on the associated warrants, without our first obtaining
approval from our stockholders for the excess issuance. In addition, the common
stock purchase agreement provides that Sativum is not permitted to purchase
shares of our common stock pursuant to a drawdown to the extent that the
purchase of those shares would result in Sativum's beneficially owning more than
9.9% of our common stock following the purchase. Accordingly, each drawdown will
be limited to an amount that will cause Sativum's beneficial ownership as of the
date of the purchase to exceed 9.9%. However, shares sold by Sativum from time
to time will reduce its beneficial ownership of our common stock and accordingly
permit us to sell additional shares to Sativum under the common stock purchase
agreement.
COSTS OF CLOSING THE TRANSACTION
At the initial closing of the transaction on May 10, 2001, we paid $25,000
to cover the fees and expenses of Sativum's counsel. We owe Sativum an
additional $25,000 prior to June 23, 2001 to cover additional non-accountable
fees and expenses. Pacific Crest Securities, Inc. also received a $25,000
placement fee. Pacific Crest is not obligated to purchase any of our shares
pursuant to the common stock purchase agreement.
LIQUIDATED DAMAGES
We will be required to pay liquidated damages to Sativum if we fail to
deliver shares within 5 trading days after a settlement date. We will also be
required to pay liquidated damages to Sativum if the effectiveness of this
registration statement is suspended during, or within 5 days after, a drawdown
pricing period. In the latter case, we will be required to compensate Sativum
for any net decline in the price of our shares greater than 20% following the
suspension to the extent Sativum sold shares at the reduced price within 5 days
after the end of the suspension period.
59
TERMINATION OF THE COMMON STOCK PURCHASE AGREEMENT
The equity line established by the common stock purchase agreement will
terminate 30 months from the effective date of the registration statement of
which this prospectus forms a part. The equity line shall also terminate if we
file for protection from creditors, if our common stock is delisted from The
Nasdaq National Market and not promptly relisted on Nasdaq, Nasdaq SmallCap
Market, the American Stock Exchange or the New York Stock Exchange. We may
terminate the agreement if Sativum fails to perform its obligations to purchase
shares with respect to a drawdown.
INDEMNIFICATION OF SATIVUM AND PACIFIC CREST
Sativum is entitled to customary indemnification from us for any losses or
liabilities suffered by it as a result of material misstatements or omissions
from the common stock purchase agreement, registration statement and this
prospectus as supplemented from time to time, except as they relate to
information supplied by Sativum to us for inclusion in the registration
statement and prospectus. Pacific Crest is also entitled to customary
indemnification from us from any losses or liabilities suffered by it in
connection with its role as placement agent.
SELLING STOCKHOLDERS
OVERVIEW
Shares of our common stock registered for resale under this prospectus
constitute 48.2% of our issued and outstanding common shares as of March 31,
2001. However, the common stock purchase agreement provides that we may not sell
more than 4,272,606 shares of common stock, or 19.9% of our issued and
outstanding common stock as of May 10, 2001, the date of the common stock
purchase agreement, unless and until we receive the approval of our stockholders
as required pursuant to Nasdaq's issuer designation requirements. The number of
shares we are registering is based in part on our good faith estimate of the
maximum number of shares we may issue to Sativum under the common stock purchase
agreement. We are under no obligation to issue any shares to Sativum under the
common stock purchase agreement. Accordingly, the number of shares we are
registering for issuance under the common stock purchase agreement may be higher
than the number we actually issue under the common stock purchase agreement.
SATIVUM INVESTMENTS LIMITED
Sativum Investments Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Sativum's principal
offices are located at Harbour House, 2nd Floor, Road Town, Tortolla, British
Virgin Islands. Investment decisions for Sativum are made by its board of
directors. Sativum has informed us that it does not currently own any of our
securities as of the date of this prospectus. Other than its obligation to
purchase common shares under the common stock purchase agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
Sativum is prohibited by the common stock purchase agreement from engaging in
short sales of our common stock, as defined in applicable securities
regulations. There are no business relationships between Sativum and us other
than as contemplated by the common stock purchase agreement.
PACIFIC CREST SECURITIES, INC. AND GRANITE FINANCIAL GROUP, INC.
Pacific Crest Securities, Inc., a registered broker-dealer, has acted as
placement agent in connection with the equity line. Pacific Crest introduced us
to Sativum and assisted us with structuring the equity line with Sativum.
Pacific Crest's duties as placement agent were undertaken on a reasonable best
efforts basis only. It made no commitment to purchase shares from us and did not
ensure us of the successful placement of any securities.
60
Other than the warrant to purchase 75,000 shares of common stock granted to
Pacific Crest as a placement fee, Pacific Crest has informed us that it does not
currently own any of our securities. Other than the warrant to purchase 25,000
shares of common stock, Granite Financial Group, Inc., also a placement agent
and a registered broker-dealer, has informed us that it does not currently own
any of our securities.
Sativum, Pacific Crest and Granite have not held any positions as officers
or had material relationships with us or any of our affiliates within the past
three years other than as a result of the ownership of our common stock. If, in
the future, any of their relationships with us changes, we will amend or
supplement this prospectus to update this disclosure.
61
PLAN OF DISTRIBUTION
GENERAL
Sativum Investments, Limited, is offering the common shares for its account
as statutory underwriter, and not for our account. We will not receive any
proceeds from the sale of common shares by Sativum. Sativum may be offering for
sale up to 10,000,000 common shares pursuant to this prospectus which it may
acquire pursuant to the terms of the stock purchase agreement more fully
described under the section of this prospectus entitled "The Common Stock
Purchase Agreement." Sativum is a statutory underwriter within the meaning of
the Securities Act of 1933 in connection with such sales of common shares and
will be acting as an underwriter in its resales of the common shares under this
prospectus. Sativum has, prior to any sales, agreed not to effect any offers or
sales of the common shares in any manner other than as specified in the
prospectus and not to purchase or induce others to purchase common shares in
violation of any applicable state and federal securities laws, rules and
regulations and the rules and regulations of The Nasdaq National Market. Sativum
has agreed not to engage in short sales of our common stock, as defined in
applicable securities regulations, during the term of the common stock purchase
agreement. We will pay the costs of registering the shares under this
prospectus, including legal fees.
To permit Sativum to resell the shares of common stock issued to it under
the stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Sativum that we will prepare
and file such amendments and supplements to the registration statement and the
prospectus as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated thereunder, to keep it effective so long as
any of the shares are "registrable securities," as defined in our registration
rights agreement with Sativum. Registrable securities include all shares sold to
Sativum pursuant to the common stock purchase agreement that:
- have not been sold pursuant to the registration statement of which this
prospectus forms a part;
- have not been sold pursuant to Rule 144 under the Securities Act;
- have not been otherwise transferred to persons who may trade the shares
without restriction under the Securities Act, as evidenced by share
certificates not bearing a restrictive legend; or
- may not be sold, in the opinion of our counsel, without restriction under
the Securities Act.
Shares of common stock offered through this prospectus may be sold from time
to time by Sativum. Shares of common stock issuable upon exercise of the
warrants issued as of the date of the common stock purchase agreement to
Sativum, Pacific Crest Securities, Inc. and Granite Financial Group, Inc. or
their transferees, may also be sold through this prospectus. We will supplement
this prospectus to disclose the names of any transferees of warrant shares that
intend to offer common stock through this prospectus.
Sales may be made on the Nasdaq National Market, on the over-the-counter
market or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in negotiated private transactions, or in a
combination of these methods. Sativum will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. We
have been informed by Sativum and Pacific Crest that there are no existing
arrangements between either of them and any stockholder, broker, dealer,
underwriter or agent relating to the distribution of this prospectus. Sativum is
an underwriter in connection with resales of its shares.
The common shares may be sold in one or more of the following manners:
- a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer for its account under this prospectus; or
- ordinary brokerage transactions and transactions in which the broker
solicits purchases.
62
In effecting sales, brokers or dealers engaged by Sativum, Pacific Crest or
Granite may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the shares
of common stock by Sativum, Pacific Crest or Granite. Brokers or dealers may
receive commissions, discounts or other concessions from the selling
stockholders in amounts to be negotiated immediately prior to the sale. The
compensation to a particular broker-dealer may be in excess of customary
commissions. Profits on any resale of the shares of common stock as a principal
by such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from Sativum, Pacific Crest and Granite, if they act as agent for
the purchaser of such shares of common stock, from such purchaser.
Broker-dealers who acquire common shares as principal may thereafter resell
such shares of common stock from time to time in transactions, which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above, in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such shares of
common stock commissions computed as described above. Brokers or dealers who
acquire common shares as principal and any other participating brokers or
dealers may be deemed to be underwriters in connection with resales of the
shares of common stock.
In addition, any shares of common stock covered by this prospectus which
qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than
pursuant to this prospectus. However, since Sativum is an underwriter, Rule 144
of the Securities Act is not available to Sativum to sell its shares. We will
not receive any of the proceeds from the sale of these shares of common stock,
although we have paid the expenses of preparing this prospectus and the related
registration statement of which it is a part and are required to reimburse
Sativum $50,000 for its legal and administrative costs.
Sativum, Pacific Crest and Granite are subject to the applicable provisions
of the Exchange Act, including without limitation Rule 10b-5 thereunder. Under
applicable rules and regulations under the Exchange Act, any person engaged in a
distribution of the shares of common stock may not simultaneously purchase such
securities for a period beginning when such person becomes a distribution
participant and ending upon such person's completion of participation in a
distribution. In addition, in connection with the transactions in the shares of
common stock, Sativum, Pacific Crest and Granite will be subject to applicable
provisions of the Exchange Act and the rules and regulations under that Act,
including, without limitation, the rules set forth above. These restrictions may
affect the marketability of the shares of common stock.
Sativum, Pacific Crest and Granite will pay all commissions and its own
expenses, if any, associated with the sale of the shares of common stock, other
than the expenses associated with preparing this prospectus and the registration
statement of which it is a part.
UNDERWRITING COMPENSATION AND EXPENSES
The underwriting compensation for Sativum will depend on the amount of
financing that we are able to obtain under the stock purchase agreement, up to a
maximum of $1,914,894 if we are able to obtain the entire $30,000,000 in
financing. Sativum will purchase shares under the stock purchase agreement at a
price equal to 94% of the volume-weighted average daily price of our common
stock reported on the Nasdaq National Market for each day in the pricing period
with respect to each drawdown request.
At the time of the initial closing under the common stock purchase
agreement, we also issued to Sativum a warrant to purchase 250,000 shares of our
common stock at an exercise price of $2.38 per share. The warrant expires May
10, 2004.
63
In addition, we are obligated to pay Pacific Crest, as compensation for its
services as Sativum's placement agent, a cash fee equal to 3% of the net
proceeds received from Sativum under the common stock purchase agreement for
draw downs under the equity line. The compensation to Pacific Crest will depend
on the amount of financing that we obtain under the common stock purchase
agreement, up to a maximum of $900,000 if we obtain the entire $30,000,000 in
financing. Pacific Crest has agreed to contribute one-third of all drawdown fees
to Granite Financial Group, Inc. We also issued to Pacific Crest a warrant to
purchase 75,000 shares of our common stock and to Granite a warrant to purchase
25,000 shares of our common stock. Each warrant has an exercise price of $2.38
per share and expires May 10, 2004.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Sativum to enable it to sell the common
stock it purchases under the common stock purchase agreement. In connection with
any such registration, we will have no obligation:
- to assist or cooperate with Sativum in the offering or disposition of such
shares;
- to indemnify or hold harmless the holders of any such shares, other than
Sativum, or any underwriter designated by such holders;
- to obtain a commitment from an underwriter relative to the sale of any
such shares; or
- to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine a
method of disposition for such shares or to otherwise include such shares within
the confines of any registered offering other than the registration statement of
which this prospectus is a part.
We will use commercially reasonable efforts to file, during any period
during which we are required to do so under our registration rights agreement
with Sativum, one or more post-effective amendments to the registration
statement of which this prospectus is a part to describe any material
information with respect to the plan of distribution not previously disclosed in
this prospectus or any material change to such information in this prospectus.
This obligation may include, to the extent required under the Securities Act of
1933, that a supplemental prospectus be filed, disclosing
- the name of any broker-dealers;
- the number of common shares involved;
- the price at which the common shares are to be sold;
- the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
- that broker-dealers did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus, as
supplemented; and
- any other facts material to the transaction.
Our registration rights agreement with Sativum permits us to restrict the
resale of the shares Sativum has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Sativum during any pricing period or the five consecutive business days after a
pricing period and our stock price declines during the restricted period, we are
required to pay to Sativum cash to compensate Sativum for its inability to sell
shares during the restricted period. The amount we would be required to pay
would be the difference between the average daily volume weighed average price
of the common stock during the pricing period and the price at which the shares
were eventually sold, provided the sales are made within 5 business days of the
end of the restricted period and the difference in price is greater than 20% of
the average purchase price paid by Sativum during the relevant pricing period.
64
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 1999, and for each of the three
years in the period ended December 31, 2000, as set forth in their report. We
have included these financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
65
STEMCELLS, INC. (FORMERLY CYTOTHERAPEUTICS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 2000 and 1999... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Redeemable Common
Stock and Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets at March 31, 2001
(unaudited)............................................... F-27
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and March 31, 2000
(unaudited)............................................... F-28
Condensed Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000 (unaudited)....... F-29
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-30
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
StemCells, Inc.
We have audited the accompanying consolidated balance sheets of
StemCells, Inc. (formerly CytoTherapeutics, Inc.) as of December 31, 2000 and
1999, and the related consolidated statements of operations, changes in
redeemable common stock and stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
StemCells, Inc. at December 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for the beneficial conversion of preferred
shares.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 23, 2001
F-2
STEMCELLS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,068,947 $ 4,760,064
Short-term restricted investments......................... 16,356,334 --
Accrued interest receivable............................... 16,725 42,212
Technology sale receivable................................ -- 3,000,000
Debt service fund......................................... -- 609,905
Other current assets...................................... 524,509 558,674
------------- -------------
Total current assets........................................ 22,966,515 8,970,855
Property held for sale...................................... 3,203,491 3,203,491
Property, plant and equipment, net.......................... 1,451,061 1,747,885
Other assets, net........................................... 2,173,912 1,858,768
------------- -------------
Total assets................................................ $ 29,794,979 $ 15,780,999
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 526,191 $ 631,315
Accrued expenses.......................................... 837,358 970,546
Accrued wind-down costs................................... 1,780,579 1,634,522
Current maturities of capital lease obligations........... 332,083 324,167
------------- -------------
Total current liabilities................................... 3,476,211 3,560,550
Capital lease obligations, less current maturities.......... 2,605,000 2,937,083
Deposits.................................................... 26,000 26,000
Deferred rent............................................... 705,746 502,353
Commitments
Redeemable common stock, $.01 par value; 524,337 shares
issued and outstanding at December 31, 1999, none at
December 31, 2000......................................... -- 5,248,610
Stockholders' equity:
Convertible Preferred Stock, $.01 par value; 1,000,000
shares authorized, 2,626 designated as 6% Cumulative
Convertible Preferred Stock 1,500 shares issued and
outstanding at December 31, 2000, none at December 31,
1999.................................................... 1,500,000 --
Common stock, $.01 par value; 45,000,000 shares
authorized; 20,956,887 and 18,635,565 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 209,569 186,355
Additional paid-in capital................................ 138,150,067 123,917,758
Accumulated deficit....................................... (130,498,187) (119,372,710)
Accumulated other comprehensive income.................... 16,356,334 --
Deferred compensation..................................... (2,735,761) (1,225,000)
------------- -------------
Total stockholders' equity.................................. 22,982,022 3,506,403
------------- -------------
Total liabilities and stockholders' equity.................. $ 29,794,979 $ 15,780,999
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenue from collaborative and licensing
agreements........................................ $ 74,300 $ 5,021,707 $ 8,803,163
Operating expenses:
Research and development.......................... 5,979,007 9,984,027 17,658,530
General and administrative........................ 3,361,231 4,927,303 4,602,758
Encapsulated Cell Therapy wind-down and corporate
relocation...................................... 3,327,360 6,047,806 --
------------ ------------ ------------
12,667,598 20,959,136 22,261,288
------------ ------------ ------------
Loss from operations................................ (12,593,298) (15,937,429) (13,458,125)
Other income (expense):
Interest income................................... 303,746 564,006 1,253,781
Interest expense.................................. (272,513) (335,203) (472,400)
Gain on sale of Investment........................ 1,427,686 -- --
Other income...................................... 8,902 -- 48,914
------------ ------------ ------------
1,467,821 228,803 830,295
------------ ------------ ------------
Net loss............................................ $(11,125,477) $(15,708,626) $(12,627,830)
Deemed dividend to preferred shareholders........... (265,000) -- --
------------ ------------ ------------
Net loss applicable to common shareholders before a
cumulative effect of a change in accounting
principle......................................... $(11,390,477) $(15,708,626) $(12,627,830)
Cumulative effect of a change in accounting
principle due to deemed dividend.................. $ (216,000) $ -- $ --
------------ ------------ ------------
Net loss applicable to common shareholders.......... $(11,606,477) $(15,708,626) $ 12,627,830)
============ ============ ============
Basic and diluted net loss per share applicable to
common shareholders before cumulative effect...... $ (.57) $ (.84) $ (.69)
Cumulative effect of a change in accounting
principle......................................... $ (.01) -- --
------------ ------------ ------------
Basic and diluted net loss per share applicable to
common shareholders............................... $ (.58) $ (.84) $ (.69)
Shares used in computing basic and diluted net loss
per share......................................... 20,067,760 18,705,838 18,290,548
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- --------------
Balances, December 31, 1997........ 557,754 $5,583,110 17,526,220 $175,262 $121,472,844 $ (91,036,254) $(8,877)
Issuance of common stock under the
stock purchase plan.............. -- -- 43,542 436 83,622
Common stock issued pursuant to
employee benefit plan............ -- -- 84,812 848 143,025 -- --
Issuance of common
stock--StemCells................. -- -- 101,320 1,013 505,587 -- --
Redeemable common stock lapses..... (33,417) (334,500) 33,417 334 334,166 -- --
Exercise of stock options.......... -- -- 11,012 110 1,254 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 321,108 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 3,679
Net loss........................... -- -- -- -- -- (12,627,830) --
Comprehensive loss.................
------- ---------- ---------- -------- ------------ ------------- -------
Balances, December 31, 1998........ 524,337 5,248,610 17,800,323 178,003 122,861,606 (103,664,084) (5,198)
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1997........ $(1,702,820) $ 28,900,155
Issuance of common stock under the
stock purchase plan.............. 84,058
Common stock issued pursuant to
employee benefit plan............ -- 143,873
Issuance of common
stock--StemCells................. -- 506,600
Redeemable common stock lapses..... -- 334,500
Exercise of stock options.......... -- 1,364
Deferred compensation--amortization
and cancellations................ 229,901 551,009
Change in unrealized losses on
marketable securities............ -- 3,679
Net loss........................... -- (12,627,830)
------------
Comprehensive loss................. (12,624,151)
----------- ------------
Balances, December 31, 1998........ (1,472,919) 17,897,408
F-5
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL OTHER
--------------------- --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS)
-------- ---------- ---------- -------- ------------ ------------- --------------
Balances, December 31, 1998........ 524,337 $5,248,610 17,800,323 $178,003 $122,861,606 $(103,664,084) $(5,198)
Issuance of common stock........... -- -- 196,213 $ 1,962 $ 318,221 -- --
Issuance of common stock under the
stock purchase plan.............. -- -- 57,398 574 41,619
Common stock issued pursuant to
employee benefit plan............ -- -- 90,798 908 102,502 -- --
Exercise of stock options.......... -- -- 490,833 4,908 513,534 -- --
Deferred compensation--amortization
and cancellations................ -- -- -- -- 80,276 -- --
Change in unrealized losses on
marketable securities............ -- -- -- -- -- -- 5,198
Net loss........................... -- -- -- -- -- (15,708,626) --
Comprehensive loss.................
------- ---------- ---------- -------- ------------ ------------- -------
Balances, December 31, 1999........ 524,337 5,248,610 18,635,565 186,355 123,917,758 (119,372,710) --
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------- -------------
Balances, December 31, 1998........ $(1,472,919) $ 17,897,408
Issuance of common stock........... -- $ 320,183
Issuance of common stock under the
stock purchase plan.............. 42,193
Common stock issued pursuant to
employee benefit plan............ -- 103,410
Exercise of stock options.......... -- 518,442
Deferred compensation--amortization
and cancellations................ 247,919 328,195
Change in unrealized losses on
marketable securities............ -- 5,198
Net loss........................... -- (15,708,626)
Comprehensive loss................. (15,703,428)
----------- ------------
Balances, December 31, 1999........ (1,225,000) 3,506,403
F-6
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (CONTINUED)
REDEEMABLE
COMMON
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ----------- -------- ---------- ---------- -------- ------------
Balances, December 31, 1999... 524,337 $ 5,248,610 -- -- 18,635,565 $186,355 $123,917,758
Issuance of common stock to
Millennium Partners LP,
net of issuance costs of
$598,563.................. -- -- -- -- 1,104,435 $ 11,044 $ 4,390,393
Issuance of common stock
related to license
agreements.................. -- -- -- -- 77,800 $ 778 $ 364,222
Common stock issued pursuant
to employee benefit plan.... -- -- -- -- 6,672 $ 68 $ 27,112
Exercise of employee stock
options................... -- -- -- -- 608,078 $ 6,081 $ 651,828
Redeemable common stock
conversion.................. (524,337) $(5,248,610) -- -- 524,337 $ 5,243 $ 5,243,367
Issuance of preferred stock... -- -- 1,500 $1,500,000 -- -- --
Deferred
compensation--amortization
and cancellations........... -- -- -- -- -- -- $ 3,555,387
Unrealized gain on short-term
restricted investments...... -- -- -- -- -- -- --
Net loss...................... -- -- -- -- -- -- --
Comprehensive Income........
-------- ----------- ----- ---------- ---------- -------- ------------
Balances, December 31, 2000... -- -- 1,500 $1,500,000 20,956,887 $209,569 $138,150,067
======== =========== ===== ========== ========== ======== ============
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE DEFERRED STOCKHOLDERS'
DEFICIT INCOME (LOSS) COMPENSATION EQUITY
------------- -------------- ------------- -------------
Balances, December 31, 1999... $(119,372,710) $ -- $(1,225,000) $ 3,506,403
Issuance of common stock to
Millennium Partners LP,
net of issuance costs of
$598,563.................. -- -- -- $ 4,401,437
Issuance of common stock
related to license
agreements.................. -- -- -- $ 365,000
Common stock issued pursuant
to employee benefit plan.... -- -- -- $ 27,180
Exercise of employee stock
options................... -- -- -- $ 657,909
Redeemable common stock
conversion.................. -- -- -- $ 5,248,610
Issuance of preferred stock... -- -- -- $ 1,500,000
Deferred
compensation--amortization
and cancellations........... -- -- $(1,510,760) $ 2,044,627
Unrealized gain on short-term
restricted investments...... -- $16,356,334 -- $ 16,356,334
Net loss...................... $ (11,125,477) -- -- $(11,125,477)
------------
Comprehensive Income........ $ 5,230,858
------------- ----------- ----------- ------------
Balances, December 31, 2000... $(130,498,187) $16,356,334 $(2,735,761) $ 22,982,022
============= =========== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
STEMCELLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(11,125,477) $(15,708,626) $(12,627,830)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 738,593 1,717,975 2,244,146
Acquired research and development....................... -- -- 551,009
Amortization of deferred compensation................... 2,044,627 328,195 --
Fair market adjustment for property held for sale....... 300,000
Other non-cash charges.................................. 320,183 410,173
Gain on investment...................................... (1,427,686) -- --
Loss on sale of property, plant and equipment........... -- 1,117,286 --
Loss on sale of intangibles............................. -- 440,486 --
Changes in operating assets and liabilities:
Accrued interest receivable........................... 25,488 164,397 346,577
Technology receivable................................. 3,000,000 -- --
Other current assets.................................. 315,213 283,000 (265,665)
Accounts payable and accrued expenses................. (92,255) 1,344,142 (2,378,613)
Deferred rent......................................... 203,393 279,680 --
Deferred revenue...................................... -- (2,500,000) 2,483,856
------------ ------------ ------------
Net cash used in operating activities....................... (6,318,104) (11,913,282) (9,236,347)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Investments........................... 1,427,686 -- --
Purchases of marketable securities.......................... (4,397,676) (18,982,387)
Proceeds from sales of marketable securities................ 13,923,813 22,573,625
Purchases of property, plant and equipment.................. (151,212) (192,747) (2,153,525)
Proceeds on sale of fixed assets............................ -- 746,448 --
Acquisition of other assets................................. (886,751) (558,311) (400,219)
Disposal of other assets.................................... -- 440,486 --
------------ ------------ ------------
Net cash provided by investing activities................... 389,723 9,962,013 1,037,494
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 4,401,437 145,603 227,931
Proceeds from the exercise of stock options................. 685,089 518,442 1,364
Common stock issued for agreements.......................... 365,000 -- --
Proceeds from issuance of preferred stock................... 1,500,000 -- --
Proceeds from debt financings............................... -- -- 1,259,300
Change in debt service fund................................. 609,905 -- --
Repayments of debt and lease obligations.................... (324,167) (1,817,500) (1,366,655)
------------ ------------ ------------
Net cash provided by (used in) financing activities......... 7,237,264 (1,153,455) 121,940
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 1,308,883 (3,104,724) (8,076,913)
Cash and cash equivalents at beginning of year.............. 4,760,064 7,864,788 15,941,701
------------ ------------ ------------
Cash and cash equivalents at end of the year................ $ 6,068,947 $ 4,760,064 $ 7,864,788
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 272,513 $ 335,203 $ 444,047
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. NATURE OF BUSINESS
StemCells, Inc. (the "Company") is a biopharmaceutical company that operates
in one segment, engaged in the development of novel stem cell therapies designed
to treat human diseases and disorders. On May 23, 2000, the Company's name was
changed to Stem Cells, Inc. from CytoTherapeutics, Inc. by vote of the
shareholders at the Annual Meeting.
As of December 31, 2000, the Company had cash and cash equivalents of
approximately $6.1 million and a restricted short-term equity investment of
approximately $16.4 million in Modex Therapeutics, a Swiss Biotherapeutics
company. Since inception, the Company has incurred annual losses and negative
cash flows from operations and has an accumulated deficit of approximately
$130.5 million at December 31, 2000. The Company has not derived any revenues
from the sale of any products, and does not expect to receive revenues from
product sales for at least several years. As a result, the Company is dependent
upon external financing from equity and debt offerings and revenues from
collaborative research arrangements with corporate sponsors to finance its
operations. There are no such collaborative research arrangements at this time
and there can be no assurance that such financing or partnering revenues will be
available when needed or on terms acceptable to the Company.
As noted above, the Company has a restricted investment in Modex
Therapeutics, a Swiss Biotherapeutics company with a fair market value of
approximately $16.4 million at December 31, 2000. On January 9, 2001, the
Company sold 22,616 shares of Modex common stock for total proceeds of
approximately $2.5 million. The Company is restricted from selling any of the
remaining 103,577 shares until April 12, 2001. The value of the Company's
holdings is subject to market risk and foreign currency fluctuation and could
decrease significantly. The Company is currently in discussions with Modex to
sell the remaining shares during 2001. If the Company decided to sell the Modex
shares, due to relatively small trading volume in Modex shares and the
relatively large size of the Company holdings, or other factors, the Company may
not be able to sell its Modex shares at their market value or at all, and the
Company may have to sell these shares at a significant discount to the market
price.
If the Company is unable to obtain the necessary proceeds from the sale of
Modex shares, significant reductions in spending and the delay or cancellation
of planned activities may be necessary. In such event, the Company intends to
implement expense reduction plans in a timely manner to enable the Company to
meet its operating cash requirements through December 31, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
StemCells California, Inc., a wholly owned subsidiary. Significant intercompany
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States, that requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
F-9
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents include funds held in investments with original maturities
of three months or less when purchased. The Company's policy regarding selection
of investments, pending their use, is to ensure safety, liquidity, and capital
preservation while obtaining a reasonable rate of return.
The Company determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company classifies such holdings as available-for-sale securities, which are
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). The only component of other comprehensive income
(loss) is unrealized gains and losses on our available-for-sale securities.
Comprehensive income (loss) has been disclosed in the statement of changes in
redeemable common stock and stockholders' Equity.
PROPERTY, PLANT AND EQUIPMENT
As a result of the Company's decision to exit the encapsulated cell
technology and relocate its corporate headquarters to Sunnyvale, California,
certain property considered by management to no longer be necessary has been
made available for sale or lease. The aggregate carrying value of such property
has been reviewed by management, subject to appraisal and adjusted downward to
estimated market value.
Property, plant and equipment, including that held under capital lease
obligations, is stated at cost and depreciated using the straight-line method
over the estimated life of the respective asset, or the lease term if shorter,
as follows:
Building and improvements................................... 3 - 15 years
Machinery and equipment..................................... 3 - 10 years
Furniture and fixtures...................................... 3 - 10 years
PATENT AND LICENSE COSTS
The Company capitalizes certain patent costs related to patent applications.
Accumulated costs are amortized over the estimated economic life of the patents,
not to exceed 17 years, using the straight-line method, commencing at the time
the patent is issued. Costs related to patent applications are charged to
expense at the time such patents are deemed to have no continuing value. At
December 31, 2000 and 1999, total costs capitalized were $638,000 and $718,000
and the related accumulated amortization were $9,000 and $9,000, respectively.
Patent expense totaled $305,000, $539,000, and $3,000 in 2000, 1999 and 1998,
respectively.
In December 1999 the Company sold its Encapsulated Cell Technology ("ECT")
to Neurotech, S.A. for an initial payment of $3,000,000, which was paid in 2000,
royalties on future product sales, and a portion of certain Neurotech revenues
from third parties in return for the assignment to Neurotech
F-10
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of intellectual property assets relating to ECT. In addition, the Company
retained certain non-exclusive rights to use ECT in combination with its
proprietary stem cell technology and in the field of vaccines for prevention and
treatment of infectious diseases. The patent portfolio that was sold had a net
book value of $3,180,000. In year 2000 the Company received $74,300 representing
a portion of revenues received by Neurotech from third parties.
STOCK BASED COMPENSATION
The Company grants qualified stock options for a fixed number of shares to
employees with an exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and,
accordingly, recognizes no compensation expense for qualified stock option
grants.
For certain non-qualified stock options granted to non-employees, the
Company accounts for these grants in accordance with FAS No. 123--ACCOUNTING FOR
STOCK-BASED COMPENSATION AND EITF96-18--ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES, and accordingly, recognizes as consulting expenses
the estimated fair value of such options as calculated using the Black-Scholes
valuation model, and is remeasured during the vesting period. Fair value is
determined using methodologies allowable by FAS No. 123. The cost is amortized
over the vesting period of each option or the recipient's contractual
arrangement, if shorter.
LONG LIVED ASSETS
The Company routinely evaluates the carrying value of its long-lived assets.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that assets may be impaired and the
undiscounted cash flows estimated to be generated by the assets are less than
the carrying amount of those assets. If an impairment exists, the charge to
operations is measured as the excess of the carrying amount over the fair value
of the assets.
INCOME TAXES
The liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and income tax bases of assets and liabilities as well as net
operating loss carry forwards and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse. Deferred
tax assets may be reduced by a valuation allowance to reflect the uncertainty
associated with their ultimate realization.
REVENUE RECOGNITION
Revenues from collaborative agreements are recognized as earned upon either
the incurring of reimbursable expenses directly related to the particular
research plan or the completion of certain development milestones as defined
within the terms of the collaborative agreement. Payments received in advance of
research performed are designated as deferred revenue. StemCells recognizes
non-refundable upfront license fees and certain other related fees on a
straight-line basis over the development period. Fees associated with
substantive at risk, performance milestones are recognized as revenue upon their
completion, as defined in the respective agreements.
F-11
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." The Company is required to adopt SFAS 133 effective
January 1, 2001. Because the Company does we does not hold any derivative
instruments and does not engage in hedging activities, management does not
believe the adoption of SFAS 133 will have an impact on our financial position
or results of operations.
In November 2000, the FASB issued Emerging Issues Task Force Issue No.
00-27, "Application of EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments" ("EITF 00-27") which is
effective retroactively to September 1999 for all such instruments. EITF 00-27
clarifies the accounting for instruments with beneficial conversion features or
contingently adjustable conversion ratios. According to the new accounting
principle, the beneficial conversion features should be calculated by first
allocating the proceeds received from the financing among the convertible
instrument and the detachable warrants and then, measuring the beneficial
conversion feature between the stated conversion price of the convertible
instrument and the effective conversion price based on the allocated proceeds.
Previously, the beneficial conversion feature calculation was based on the
difference between the stated conversion price of the convertible instrument and
the fair value of the Company's stock price on the closing date of the
financing. As a result of the new accounting principle, the Company modified the
calculation of the beneficial conversion features associated with its 6%
cumulative convertible preferred stock.
The Company has presented the effect of adopting the new accounting
principle as a cumulative effect of a change in accounting principle as allowed
for in EITF 00-27. Accordingly, the Company has recognized an additional
$216,000 of deemed dividend on preferred stock.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less shares subject to repurchase. The Company has excluded outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are anti-dilutive for
all applicable periods presented.
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
Until mid-1999, the Company engaged in research and development in
encapsulated cell therapy technology, including a pain control program funded by
AstraZeneca Group plc. The results from the
F-12
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
85-patient double-blind, placebo-controlled trial of our encapsulated bovine
cell implant for the treatment of severe, chronic pain in cancer patients did
not, however, meet the criteria AstraZeneca had established for continuing
trials for the therapy, and in June 1999 AstraZeneca terminated the
collaboration, as allowed under the terms of the original collaborative
agreement signed in 1995.
As a result of termination, management determined in July 1999 to
restructure its research operations to abandon all further encapsulated cell
technology research and concentrate its resources on the research and
development of its proprietary platform of stem cell technologies.
The Company wound down its research and manufacturing operations in Lincoln,
Rhode Island, and relocated its remaining research and development activities,
and its corporate headquarters, to the facilities of its wholly owned
subsidiary, StemCells California, Inc., in Sunnyvale, California, in
October 1999. The Company terminated legal, professional and consulting
contractual arrangements in support of ECT research. The Company had used these
legal, professional and consulting contractual arrangements to meet regulatory
requirements in support of its research work, to support contractual
arrangements with clinical sites, to provide assistance at clinical sites in
administrating therapy and documenting activities, and to assist in compliance
with FDA and other regulations regarding its clinical trials. ECT related patent
law work was also terminated. The Company also engaged professional consultants
in connection with the determination to exit its ECT activities and restructure
its operations, which concluded with the exit from ECT activities and relocation
of its corporate headquarters to California. The Company reduced its workforce
by approximately 58 employees who had been focused on ECT programs and 10
administrative employees. As a result, the Company sold excess furniture and
equipment in December 1999 and is seeking to sublease the science and
administrative facility and to sell the pilot manufacturing facility.
Wind-down expenses totaled $3,327,360 and $6,047,806, for the year ended
December 31, 2000 and 1999, respectively. No such expenses were incurred in
1998. These expenses relate to the wind-down of our encapsulated cell technology
research and other Rhode Island operations and the transfer of the corporate
headquarters to Sunnyvale, California. Expenses for the year 2000, includes an
accrual for the estimated lease and facility costs related to the facilities in
Rhode Island through 2001. Expenses for the year 1999 also includes an accrual
for the estimate of the costs of settlement of a 1989 funding agreement with the
Rhode Island Partnership for Science and Technology ("RIPSAT").
At December 31, 1999, the Company's $1.6 million wind-down reserve included
approximately $1.2 million for the RIPSAT settlement and approximately
$0.4 million for Rhode Island facility for the estimated lease payments and
operating costs of the Rhode Island facilities through an expected disposal date
of June 30, 2000. In 2000 the Company settled with RIPSAT, paid $1.2 million and
paid 0.4 million related to Rhode Island facilities. The Company did not sublet
the Rhode Island facilities in 2000 and therefore made a change in estimate to
accrue additional expenses of $3.3 million to cover operating lease payments,
utilities, taxes, insurance, maintenance, interest and other non-employee
expenses through 2001. At December 31, 2000 the remaining wind-down reserve
totaled $1.7 million.
F-13
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
A description of wind-down expenses, including the amounts and periods of
recognition, are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
Employee severance costs.................... $1,554,000
Impairment losses(1):
Fixed assets.............................. 800,000
ECT patents............................... 260,000
----------
1,060,000
Rhode Island facilities carrying costs(2):
Corporate headquarters.................... 702,000 $3,327,000
PILOT MANUFACTURING PLANT................. 562,000
----------
1,264,000 3,327,000
EMPLOYEE OUTPLACEMENT....................... 200,000
RIPSAT settlement(3)........................ 1,172,000
Loss on sale of assets(4):
Fixed assets.............................. 318,000
ECT patents............................... 180,000
----------
498,000
Write-down of pilot plant(5)................ 300,000
----------
$6,048,000 $3,327,000
========== ==========
------------------------
(1) Management's estimate of the fixed asset impairment was derived from
communications with an outside auction house. The patent impairment loss was
based on preliminary negotiations with parties interested in acquiring the
patents.
(2) Facilities carrying costs include operating lease payments, utilities,
property taxes, insurance, maintenance, interest and other non-employee
related expenses necessary to maintaining these facilities through the
expected date of disposition (December 31, 2001)
(3) The Company originally received funding from the Rhode Island Partnership
for Science and Technology (RIPSAT) for purposes of conducting ECT
activities conditioned upon maintaining the operation within the state.
RIPSAT claimed that the Company's decision to exit ECT activities and close
the Rhode Island operation was in violation of the funding arrangement and
that the Company was obligated to return a portion of the funding proceeds.
Although the Company disputed these claims, during the fourth quarter of
1999, management determined it was in the best interest of the Company to
settle the issue.
(4) The Company held an auction to sell all ECT fixed assets. Proceeds from that
sale resulted in a loss, which was related to machinery and equipment
($292,000), and furniture and fixtures ($26,000).
(5) The write-down of the pilot plant was based on an independent property
appraisal.
F-14
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
3. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT PROGRAM
(CONTINUED)
Property held for sale at December 31, 2000 and 1999, consisted of
$3.2 million relating to the Company's pilot plant facility located in Lincoln,
Rhode Island. The company suspended depreciation of these assets in 1999. The
balance reflected the $300,000 write-down included as part of the additional
wind-down expenses recognized in accordance with Financial Accounting Standards
Board Statement 121, which requires that long-lived assets be reviewed for
impairment whenever events or circumstances indicate that the carrying value of
the asset may not be recoverable. There were no such assets at December 31,
1998.
4. STEMCELLS CALIFORNIA, INC.
In September 1997, a merger of a wholly owned subsidiary of the company and
StemCells California, Inc. was completed. As part of the acquisition of
StemCells, Richard M. Rose, M.D., became President, Chief Executive Officer and
director of the Company and Dr. Irving Weissman became a director of the
Company. Upon consummation of the merger, the Company entered into consulting
arrangements with the principal scientific founders of StemCells: Dr. Irving
Weissman, Dr. Fred H. Gage and Dr. David Anderson. Additionally, in connection
with the merger, the Company was granted an option by the former shareholders of
StemCells to repurchase 500,000 of the Company's shares of Common Stock
exchanged for StemCells shares, upon the occurrence of certain events. To
attract and retain Drs. Rose, Weissman, Gage and Anderson, and to expedite the
progress of the Company's stem cell program, the Company awarded these
individuals options to acquire a total of approximately 1.6 million shares of
the Company's common stock, at an exercise price of $5.25 per share, the quoted
market price at the grant date. The Company also designated a pool of 400,000
options to be granted to persons in a position to make a significant
contribution to the success of the stem cell program. Under the original grants,
approximately 100,000 of these options were exercisable immediately on the date
of grant, 1,031,000 of these options would vest and become exercisable only upon
the achievement of specified milestones related to the Company's stem cell
development program and the remaining 468,750 options would vest over eight
years. In connection with the 468,750 options issued to a non-employee,
Dr. Anderson, the Company recorded deferred compensation of $1,750,000, the fair
value of such options at the date of grant, which will be amortized over an
eight-year period. The fair value was determined using the Black-Scholes method.
Effective October 31, 2000, the Company agreed with Drs. Weissman and Gage
to revise their 468,750 milestone-vesting stock options to time-based vesting,
on the same schedule as Dr. Anderson's option. Under each of the revised
options, 168,750 shares vested immediately, and the remaining 300,000 shares
will vest at 50,000 per year on September 25, until September 25, 2005, when the
final 100,000 shares will vest. The exercise price remains $5.25 per share. The
Company recorded $1,647,000 as compensation expense for the fair market value of
the vested portion of such options in an amount determined using the
Black-Scholes method. The deferred compensation expense associated with the
unvested portion of the grants was determined to be approximately $1,338,000. As
part of the revision of the options, Drs. Weissman and Gage relinquished all
rights under an agreement. These individuals had the right to license the
non-brain stem cell technology in exchange for a payment to the Company equal to
all prior funding for such research plus royalty payments. We plan to revalue
the options using the Black-Scholes method on a quarterly basis and recognize
additional compensation expense accordingly.
F-15
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
5. INVESTMENTS
In October 1997, the Company completed a series of transactions, which
resulted in the establishment of its previously 50%-owned Swiss subsidiary,
Modex Therapeutics, Ltd., (Modex) as an independent company.
In April 1998, Modex completed an additional equity offering, in which the
Company did not participate. This resulted in a reduction in the Company's
ownership to less than 20% ownership; therefore, the Company accounted for this
investment under the cost method from that date.
At December 31, 2000 the Company owned 126,193 shares of Modex. Modex
completed an initial public offering of shares on the Swiss Exchange on
June 23, 2000. Accordingly, with an established market value, the investment is
recorded as available-for-sale at a fair market value of $16,356,334 as at
December 31, 2000. The unrealized gain was reported as other comprehensive
income in the statement of stockholders' equity.
The pre-existing royalty-bearing Cross License Agreement between the Company
and Modex was assigned by the Company to Neurotech S.A., a privately held French
company, as part of the sale of the intellectual property assets related to the
Company's encapsulated cell therapy technology to Neurotech. Under the terms of
the sale to Neurotech, the Company will receive a portion of revenues Neurotech
receives from Modex under the Cross License Agreement.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Building and improvements............................ $ 703,095 $ 665,890
Machinery and equipment.............................. 1,766,448 1,691,136
Furniture and fixtures............................... 188,736 219,260
---------- ----------
2,658,279 2,576,286
Less accumulated depreciation and amortization....... (1,207,218) (828,401)
---------- ----------
$1,451,061 $1,747,885
========== ==========
Depreciation expense was $451,000, $1,436,000, and $1,720,000 for the years
ending December 31, 2000, 1999 and 1998, respectively.
As part of restructuring our operations, sale of our encapsulated cell
technology ("ECT"), and relocation of our corporate headquarters to Sunnyvale,
California, we identified fixed assets associated with the ECT or otherwise no
longer needed. In December of 1999, we disposed of these excess fixed assets,
realizing proceeds of approximately $746,000. These assets had a net book value
of approximately $1,063,000 after a write-down of 800,000, which was based on an
estimate of expected sale proceeds.
Certain property, plant and equipment have been acquired under capital lease
obligations. These assets totaled $5,827,000 at December 31, 2000 and 1999,
respectively, with related accumulated amortization of $2,747,000 at
December 31, 2000 and 1999, respectively. As a result of the Company's
F-16
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
decision to exit ECT and relocate to Sunnyvale, California, this property has
been classified as held for sale.
7. OTHER ASSETS
Other assets are as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Patents, net......................................... $ 629,203 $ 708,823
License agreements, net.............................. 669,000 282,750
Security deposit--building lease..................... 750,000 750,000
Deposit--other....................................... 16,321 --
Deferred financing costs, net........................ 109,388 117,195
---------- ----------
$2,173,912 $1,858,768
========== ==========
At December 31, 2000 and 1999, accumulated amortization was $1,140,000 and
$857,000, respectively, for patents and license agreements.
8. ACCRUED EXPENSES
Accrued expenses are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
External services....................................... $219,051 $ 97,439
Employee compensation................................... 109,007 306,342
Collaborative research.................................. -- 222,140
Other................................................... 509,300 344,625
-------- --------
$837,358 $970,546
======== ========
9. LEASES
The Company has undertaken direct financing transactions with the State of
Rhode Island and received proceeds from the issuance of industrial revenue bonds
totaling $5,000,000 to finance the construction of its pilot manufacturing
facility. The related leases are structured such that lease payments will fully
fund all semiannual interest payments and annual principal payments through
maturity in August 2014. Fixed interest rates vary with the respective bonds'
maturities, ranging from 5.1% to 9.5%. The bonds contain certain restrictive
covenants which limit, among other things, the payment of cash dividends and the
sale of the related assets. In addition, the Company was required to maintain a
debt service reserve until December 1999. On March 3, 2000 the Company entered
into a settlement agreement with RIPSAT, the Rhode Island Industrial
Recreational Building Authority ("IRBA") and the Rhode Island Industrial
Facilities Corporation ("RIIFC"). The Company agreed to pay RIPSAT $1,172,000 in
full satisfaction of all obligations of the Company to RIPSAT under the
F-17
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
9. LEASES (CONTINUED)
Funding Agreement dated as of June 22, 1989. On execution and delivery of this
Agreement, IRBA agreed to return to the Company the full amount of the Company's
debt serve reserve ("Reserve Funds") of approximately $610,000 of principal and
interest, relating to the bonds the Company has with IRBA and RIIFC. In order to
avoid the loss of interest on the Reserve Funds due to early termination of
certain investments, the parties agreed that the Company would render a net
payment to RIPSAT in the amount of approximately $562,000.
The Company entered into a fifteen-year lease for a laboratory facility in
connection with a sale and leaseback arrangement in 1997. The lease has a rent
escalation clause and accordingly, the Company is recognizing rent expense on a
straight line basis. At December 31, 2000, the Company has $705,746 in deferred
rent expense.
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto, CA. The
new facility includes vivarium space, laboratories, offices, and a GMP (Good
Manufacturing Practices) suite. GMP facilities can be used to manufacture
materials for clinical trials. The rent will average approximately
$3.15 million per year over the term of the lease.
As of December 31, 2000, future minimum lease payments under operating and
capital leases and principal payments on equipment loans are as follows:
CAPITAL OPERATING SUBLEASE
LEASES LEASES INCOME
---------- ----------- ----------
2001.................................... $ 589,217 $ 3,584,061 $ 295,854
2002.................................... 519,719 2,392,988 400,658
2003.................................... 436,909 4,568,274 395,676
2004.................................... 425,713 4,677,197 416,507
2005.................................... 412,587 4,789,388 437,338
Thereafter.............................. 2,311,577 8,797,417 130,761
---------- ----------- ----------
Total minimum lease payments............ 4,695,722 $28,809,325 $2,076,794
========== ===========
Less amounts representing interest...... 1,758,639
Present value of minimum lease
payments.............................. 2,937,083
Less current maturities................. 332,083
----------
Capitalized lease obligations, less
current maturities.................... $2,605,000
==========
Rent expense for the years ended December 31, 2000, 1999 and 1998, was
$1,111,000, $947,000 and $1,052,000, respectively.
10. STOCKHOLDERS' EQUITY
SALE OF COMMON STOCK
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). StemCells received
$3 million of the purchase price at the
F-18
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
closing and received the remaining $1 million upon effectiveness of a
registration statement covering the shares owned by the Fund. The Fund purchased
the Company's common stock and warrants at $4.33 per share. As set forth in an
adjustable warrant issued to the Fund on the closing date, the Fund may be
entitled to receive additional shares of common stock on eight dates beginning
six months from the closing and every three months thereafter. The adjustable
warrant may be exercised at any time prior to the thirtieth day after the last
of such dates. The number of additional shares the Fund may be entitled to on
each date will be based on the number of shares of common stock the Fund
continues to hold on each date and the market price of the Company's common
stock over a period prior to each date. The exercise price per share under the
adjustable warrant is $0.01. Such warrants provide the Fund with the opportunity
to acquire additional common shares at a nominal value if the value of the
common stock that the Fund holds decreases. The Company will have the right,
under certain circumstances, to cap the number of additional shares by
purchasing part of the entitlement from the Fund at a purchase price based on
the market price of such shares. No portion of the sale proceeds was assigned to
the adjustable warrants, as the ultimate number of shares issuable upon exercise
of the warrants was not determinable and the net impact on the Company's equity
from any such allocation of proceeds would have been zero. The Fund also
received a five-year warrant to purchase up to 101,587 shares of common stock at
$4.725 per share. This warrant is callable at any time by StemCells at
$7.875 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $376,888, which was treated as a credit to paid in
capital in stockholders' equity. The Company accounts for the sale of the stock
and warrants or the exercise of warrants by adding that portion of the proceeds
equal to the par value of the new shares to common stock and the balance,
including the value of the warrants, to paid in capital. In addition, any
repurchase of the shares or warrants by the Company would also be accounted for
through paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the Fund, the
Company granted the Fund an option to purchase up to an additional $3 million of
its common stock and a callable warrant and an adjustable warrant. The Fund can
exercise this option in whole or in part at any time prior to August 3, 2001.
The price per share of common stock to be issued upon exercise of the option
will be based on the average market price of the common stock for a five-day
period prior to the date on which the option is exercised. On August 23, 2000,
the Fund exercised $1,000,000 of its option to purchase additional common stock.
The Fund paid $750,000 of the purchase price in connection with the closing on
August 30, 2000, and the Fund paid the remaining $250,000 upon effectiveness of
a registration statement covering the shares owned by the Fund. The Fund
purchased the Company's common stock at $5.53 per share, which amount was based
upon the average market price of the common stock for the five-day period prior
to August 23, 2000. An adjustable warrant similar to the one issued on
August 3, 2000 was issued to the Fund on August 30, 2000, but was cancelled on
November 1, 2000 by agreement of the Company and the Fund. The Fund also
received a five -year warrant to purchase up to 19,900 shares of common stock at
$6.03 per share. This warrant is callable by the Company at any time at
$10.05 per underlying share. The calculated value of this callable warrant using
the Black-Scholes method is $139,897, which the Company accounted for as a
credit to paid in capital.
The adjustable warrant contains provisions regarding the adjustment or
replacement of the warrants in the event of stock splits, mergers, tender offers
and other similar events. The adjustable
F-19
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
warrant also limits the number of shares that can be beneficially owned by the
Fund to 9.99% of the total number of outstanding shares of Common Stock.
REDEEMABLE COMMON STOCK
In November 1996, the Company signed certain collaborative development and
licensing agreements with Genentech, Inc, including one under which Genentech
purchased 829,171 shares of redeemable common stock for $8.3 million to fund
development of products to treat Parkinson's disease. The Agreement also
provided that Genentech had the right, at its discretion, to terminate the
Parkinson's program at specified milestones in the program, and that if the
program were terminated, Genentech had the right to require the Company to
repurchase from Genentech the shares of the Company's common stock having a
value equal to the amount by which the $8.3 million exceeded the expenses
incurred by the Company in connection with such studies by more than
$1 million, based upon the share price paid by Genentech. Accordingly, the
common stock is classified as redeemable common stock until such time as the
related funds are expended. At December 31, 1998, $3,051,000 had been spent on
the collaboration with Genentech and, accordingly, the Company has reclassified
those common shares and related value to stockholders' equity. On May 21, 1998,
Genentech exercised its right to terminate the collaboration and negotiations
ensued with respect to the amount of redeemable common stock to be redeemed in
accordance with the agreement and the method of such redemption. In March 2000,
the Company reached a settlement of this matter with Genentech. Under the
settlement agreement, Genentech released the Company from any obligation to
redeem any shares of the Company's Common Stock held by Genentech. Accordingly,
the Company reclassified the amount currently recorded as Redeemable Common
Stock ($5,248,000) to Stockholders' Equity in March 2000. The Company and
Genentech also agreed that all of the agreements between them were terminated
and that neither had any claim to the intellectual property of the other.
STOCK ISSUED FOR TECHNOLOGY LICENSES
Under a 1997 License Agreement with NeuroSpheres, Ltd., the Company obtained
an exclusive patent license in the field of transplantation. The Company entered
into an additional license agreement with NeuroSpheres as of October 31, 2000,
under which the Company obtained an exclusive license in the field of
non-transplant uses, such as drug discovery and drug testing, so that together
the licenses are exclusive for all uses of the technology. The Company made
up-front payments to NeuroSpheres of 65,000 shares of its common stock and
$50,000, and will make additional cash payments when milestones are achieved in
the non-transplant field, or in any products employing NeuroSpheres patents for
generating cells of the blood and immune system from neural stem cells.
The Company also entered into license agreements with the California
Institute of Technology and issued 12,800 shares of common stock upon execution
of the license agreements. The Company must pay an additional $10,000 upon the
issuance of the patent licensed under the relevant agreement
COMMON STOCK ISSUED
In 1998, the Company entered into an agreement with a Company advisor, under
which the advisor prepared a strategic and business overview and provided
related implementation support for the Company. The advisor agreed to accept
cash and the Company's common stock as partial payment for its services. In
1999, the Company issued the $187,500 of common stock due to the advisor.
F-20
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
SALE OF 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
On April 13, 2000 the Company issued 1,500 shares of 6% cumulative
convertible preferred stock plus a warrant for 75,000 shares of our common stock
to two members of its Board of Directors for $1.500,000 on terms more favorable
to the Company than it was then able to obtain from outside investors. The
shares are convertible at the option of the holders into common stock at $3.77
per share (based on the face value of the preferred shares). The conversion
price may be below the trading market price of the stock at the time of
conversion. The Company has valued the beneficial conversion feature reflecting
the April 13, 2000 commitment date and the most beneficial per share discount
available to the preferred shareholders. Such value was $481,000 and is treated
as a deemed dividend as of the commitment date. The holders of the preferred
stock have liquidation rights equal to their original investment plus accrued
but unpaid dividends.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has adopted several stock plans that provide for the issuance of
incentive and nonqualified stock options, performance awards and stock
appreciation rights, at prices to be determined by the Board of Directors, as
well as the purchase of Common Stock under an employee stock purchase plan at a
discount to the market price. In the case of incentive stock options, such price
will not be less than the fair market value on the date of grant. Options
generally vest ratably over four years and are exercisable for ten years from
the date of grant or within three months of termination. At December 31, 2000,
the Company had reserved 3,828,371 shares of common stock for the exercise of
stock options.
The following table presents the combined activity of the Company's stock
option plans (exclusive of the plans noted below) for the years ended
December 31:
2000 1999 1998
-------------------------- -------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- ---------- --------------
Outstanding at January 1....... 939,335 $2.65 1,654,126 $3.62 2,446,573 $7.48
Granted........................ 2,485,090 4.08 536,078 1.08 1,174,118 1.70
Exercised...................... (540,927) 1.015 (604,362) 1.50 (11,012) .12
Canceled....................... (166,532) 4.77 (646,507) 5.31 (1,955,553) 7.08
--------- ------ --------- ----- ---------- -----
Outstanding at December 31..... 2,716,966 4.32 939,335 $2.65 1,654,126 $3.62
========= ====== ========= ===== ========== =====
Options exercisable at
December 31.................. 731,523 $4.01 594,216 $3.44 1,108,936 $4.33
========= ====== ========= ===== ========== =====
In addition to the options noted above, in conjunction with the StemCells
California merger, StemCells California options originally issued under a prior
StemCells California options plan were exchanged for options to purchase 250,344
shares of the Company's common stock at $.01 per share; 96,750 of these options
vest and become exercisable only upon achievement of specified milestones, and
the remaining 78,210 options vest over three years from the date of grant.
Additionally, the Company adopted the 1997 StemCells, Inc. StemCells California
Research Stock Option Plan (the StemCells California Research Plan) whereby an
additional 2,000,000 shares of Common Stock have
F-21
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
been reserved. During 1997, the Company awarded options under the StemCells
Research Plan to purchase 1.6 million shares of the Company's common stock to
the Chief Executive Officer and scientific founders of StemCells at an exercise
price of $5.25 per share; approximately 100,000 of these options were
exercisable immediately, 1,031,000 of these options vest and become exercisable
only upon achievement of specified milestones and the remaining 469,000 options
vest over eight years. For the year 2000 the options have been incorporated into
the number of options granted so as to be reflected in the total of options
outstanding as of December 31, 2000
FAS 123 DISCLOSURES
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("FAS 123") and accounts for its stock option plans in accordance with the
provisions of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YRS.) PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
Less than $5.00........................... 944,216 8.68 $ 2.063 370,023 $ 1.53
$5.01 - $10.00............................ 1,691,750 6.87 5.26 280,500 5.27
Greater than $10.00....................... 81,000 1.30 11.03 81,000 11.03
--------- -------
2,716,966 731,523
========= =======
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share amounts for 2000, 1999, and 1998, as if the
compensation cost for the option plans and the stock purchase plan had been
determined based on the fair value at the grant date for grants in 2000, 1999,
and 1998, consistent with the provisions of FAS 123:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
Net loss............. $(11,125,477) $(12,160,752) $(15,708,626) $(15,764,569) $(12,627,830) $(14,919,389)
Net loss per share... $ (.58) $ (.62) $ (.84) $ (.84) $ (.69) $ (.82)
The weighted average fair value per share of options granted during 2000,
1999 and 1998 was $4.13, $.82 and $3.40, respectively. The fair value of options
and shares issued pursuant to the stock
F-22
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. STOCKHOLDERS' EQUITY (CONTINUED)
purchase plan at the date of grant were estimated using the Black-Scholes model
with the following weighted average assumptions:
OPTIONS STOCK PURCHASE PLAN
------------------------------------ ---------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Expected life (years)................ 5 5 5 N/A .5 .5
Interest rate........................ 6.5% 5.5% 5.2% N/A 5.0% 4.6%
Volatility........................... 167.8 96.7% 63.5% N/A 96.7% 63.5%
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future. On August 04, 1999
the board suspended the 1992 Employee Stock Purchase Plan.
The effects on pro forma net loss and net loss per share of expensing the
estimated fair value of stock options and shares issued pursuant to the stock
purchase plan are not necessarily representative of the effects on reporting the
results of operations for future years. As required by FAS 123, the Company has
used the Black-Scholes model for option valuation, which method may not
accurately value the options described.
STOCK WARRANTS
The Company issued warrants to purchase 8,952 shares of common stock in
conjunction with the StemCells California merger, warrants to purchase 31,545
shares in conjunction with various equipment leasing agreements, and warrants to
purchase 434,500 shares in connection with a public offering of common stock in
April 1995. All of these expired at various dates in 2000.
COMMON STOCK RESERVED
The Company has the following shares of common stock reserved for the
exercise of options, warrants and other contingent issuances of common stock.
Shares reserved for exercise of stock options............... 3,828,371
Shares reserved for warrants................................ 2,292,625
StemCell option conversions................................. 250,344
---------
Total....................................................... 6,371,340
=========
11. RESEARCH AGREEMENTS
In November 1997, StemCells California, Inc., a wholly owned subsidiary of
the Company, signed a Research Funding and Option Agreement with The Scripps
Research Institute ("Scripps") relating to certain stem cell research. Under the
terms of the Agreement, StemCells agreed to fund research in the total amount of
approximately $931,000 at Scripps over a period of three years. StemCells paid
Scripps approximately $307,000 in 1998, $309,000 in 1999, and $225,739 in 2000.
In addition, the Company agreed to issue to Scripps 4,837 shares of the
Company's common stock and a stock option to purchase 9,674 shares of the
Company's Common Stock with an exercise price of $.01 per share
F-23
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
11. RESEARCH AGREEMENTS (CONTINUED)
upon the achievement of specified milestones. Under the Agreement, StemCells has
an option for an exclusive license to the inventions resulting from the
sponsored research, subject to the payment of royalties and certain other
amounts, and is obligated to make payments totaling $425,000 for achievement of
certain milestones.
In March 1995, the Company signed a collaborative research and development
agreement with AstraZeneca for the development and marketing of certain
encapsulated-cell products to treat pain. AstraZeneca made an initial,
nonrefundable payment of $5,000,000, included in revenue from collaborative
agreements in 1995, a milestone payment of $3,000,000 in 1997 and was to remit
up to an additional $13,000,000 subject to achievement of certain development
milestones. Under the agreement, the Company was obligated to conduct certain
research and development pursuant to a four-year research plan agreed upon by
the parties. Over the term of the research plan, the Company originally expected
to receive annual payments of $5 million to $7 million from AstraZeneca, which
was to approximate the research and development costs incurred by the Company
under the plan. Subject to the successful development of such products and
obtaining necessary regulatory approvals, AstraZeneca was obligated to conduct
all clinical trials of products arising from the collaboration and to seek
approval for their sale and use. AstraZeneca had the exclusive worldwide right
to market products covered by the agreement. Until the later of either the
expiration of all patents included in the licensed technology or a specified
fixed term, the Company was entitled to a royalty on the worldwide net sales of
such products in return for the marketing license granted to AstraZeneca and the
Company's obligation to manufacture and supply products. AstraZeneca had the
right to terminate the original agreement beginning April 1, 1998. On June 24,
1999, AstraZeneca informed the Company of the results of AstraZeneca's analysis
of the double-blind, placebo-controlled trial of the Company's encapsulated
bovine cell implant for the treatment of severe, chronic pain in cancer
patients. AstraZeneca determined that, based on criteria it established, the
results from the 85-patient trial did not meet the minimum statistical
significance for efficacy established as a basis for continuing worldwide trials
for the therapy. AstraZeneca therefore indicated that it did not intend to
continue the trials of the bovine cell-containing implant therapy and executed
its right to terminate the agreement. The Company has no additional funding
obligations with AstraZeneca.
The Company has entered into other collaborative research agreements whereby
the Company funds specific research programs. Pursuant to such agreements, the
Company is typically granted rights to the related intellectual property or an
option to obtain such rights on terms to be agreed, in exchange for research
funding and specified royalties on any resulting product revenue. The Company's
principal academic collaborations had been with Brown University and
Dr. Aebischer and Centre Hospitalier Universitaire Vaudois in Switzerland.
However, with the termination of the Company's encapsulated cell technology
program and its new focus on the stem cell field, its principal academic
collaborations are now with Scripps Institute and the Oregon Health Science
University. Research and development expenses incurred under these
collaborations amounted to approximately $314,000, $868,000, and $1,259,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The Company has
no other significant collaborative research funding obligations.
F-24
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
12. INCOME TAXES
Due to net losses incurred by the Company in each year since inception, no
provision for income taxes has been recorded. At December 31, 2000, the Company
had tax net operating loss carry forwards of $110,000,000 and research and
development tax credit carry forwards of $4,100,000, which expire in the years
2004 through 2020. Utilization of the Company's net operating loss may be
subject to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
before utilization.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Deferred tax assets:
Capitalized research and development costs..... $ 6,000,000 $ 4,331,000
Net operating losses........................... 44,000,000 38,478,000
Research and development credits............... 4,260,000 4,035,000
Other.......................................... 1,020,000 928,000
------------ ------------
55,280,000 47,772,000
Deferred tax liabilities:
Unrealized gain on investment.................. (6,543,000) --
Patents........................................ (127,000) (246,000)
Valuation allowance............................ (48,610,000) (47,526,000)
------------ ------------
Net deferred tax assets.......................... $ -- $ --
============ ============
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $6,272,000 during 1999, and $5,459,000 during 1998.
13. EMPLOYEE RETIREMENT PLAN
The Company has a qualified defined contribution plan covering substantially
all employees. Participants are allowed to contribute a fixed percentage of
their annual compensation to the plan and the Company may match a percentage of
that contribution. The Company matches 50% of employee contributions, up to 6%
of employee compensation, with the Company's common stock. The related expense
was $33,000, $103,000, and $146,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
14. SUBSEQUENT EVENTS (UNAUDITED)
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto,
California. The new facility includes animal space, laboratories, offices, and a
GMP (Good Manufacturing Practices) suite. GMP facilities can be used to
manufacture materials for clinical trials. The rent will average approximately
$3.15 million per year over the term of the lease. The Company continues to
lease the facilities in Lincoln, Rhode Island
F-25
STEMCELLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
obtained in connection with its former encapsulated cell technology, but has now
succeeded in subleasing parts of those facilities: the 3,000 square-foot cell
processing facility and approximately one-third of its former scientific and
administrative facility ("SAF"). The Company continues to seek to sublet the
remainder of the approximately 65,000 square foot SAF and the 21,000 square-foot
pilot manufacturing facility, or to assign or sell its interests in these
properties. There can be no assurance however, that we will be able to dispose
of these properties in a reasonable time, if at all.
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH's Small Business Innovation Research (SBIR) office. The
grant, which will support joint work with virologist Dr. Jeffrey Glenn at
Stanford University, is aimed at characterizing the human cells that can be
infected by human hepatitis viruses and to develop a small animal model using
the cells that are most infectable by these viruses to develop screening assays
and identify novel drug for the disease.
On January 9, 2001, the Company sold 22,616 Modex shares for a net price of
182.00 Swiss francs per share, which converts to $112.76 per share, for total
proceeds of $2,550,000. In connection with this sale, the Company agreed not to
resell any more of its Modex shares until April 12, 2001. On March 07, 2001 the
market price of Modex stock was 145.00 Swiss francs which converts to $84.31
using exchange rates on that date, which represents an estimated fair market
value of $8,732,797 for the remaining shares. If the Company were to seek to
liquidate all or part of the remaining 103,577 Modex shares, the proceeds would
depend on the share price and foreign currency exchange rates at the time of
conversion.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000:
Net revenue............................ $ -- $ -- $ -- $ 74
Operating expenses..................... 1,799 1,939 2,553 6,378
Net Loss............................... (1,794) (532) (2,539) (6,260)
Basic and diluted net loss per share
applicable to common shareholders
before cumulative effect............. $ (0.09) $ (0.04) $ (0.13) $ (0.30)
Cumulative effect of a change in
accounting principle(1).............. -- -- -- $ (0.01)
Net loss per share applicable to common
shareholders......................... $ (0.09) $ (0.04) $ (0.13) $ (0.31)
1999:
Net revenue............................ $ 2,501 $ 2,521 $ -- $ --
Operating expenses..................... 4,562 4,454 6,690 5,253
Net Loss............................... (1,932) (1,840) (6,711) (5,226)
Basic and diluted net loss per share... $ (0.10) $ (0.10) $ (0.36) $ (0.27)
F-26
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001
--------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,499,158
Short-term restricted investments......................... 8,412,650
Accrued interest receivable............................... 9,706
Prepaid rent.............................................. 909,415
Other current assets...................................... 473,696
-------------
Total current assets.................................. 14,304,625
Property held for sale.................................... 3,203,491
Property, plant and equipment, net........................ 1,442,089
Other assets net.......................................... 2,556,457
-------------
Total assets................................................ $ 21,506,661
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 237,856
Accrued expenses.......................................... 785,064
Accrued wind-down costs................................... 1,380,947
Current maturities of capitalized lease obligations....... 333,333
-------------
Total current liabilities................................... 2,737,200
Capitalized lease obligations, less current maturities...... 2,521,250
Deposits.................................................... 26,000
Deferred rent............................................... 760,508
Stockholders' equity
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized, 2,626 designated as 6% Cumulative
Convertible Preferred Stock 1,500 shares issued and
outstanding at March 31, 2000........................... 1,500,000
Common stock, $.01 par value; 45,000,000 shares
authorized; 21,458,211 shares issued and outstanding at
March 31, 2001.......................................... 214,612
Additional paid in capital................................ 137,608,696
Accumulated deficit....................................... (130,229,646)
Accumulated other comprehensive income.................... 8,412,650
Deferred compensation..................................... (2,044,609)
-------------
Total stockholders' equity............................ 15,461,703
-------------
Total liabilities and stockholders' equity............ $ 21,506,661
=============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-27
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
Revenue from grants......................................... $ 100,000 $ --
Operating expenses:
Research and development.................................. 1,644,257 906,632
General and administrative................................ 996,862 657,714
Wind-down expenses........................................ -- 234,386
----------- -----------
2,641,119 1,798,732
----------- -----------
Loss from operations........................................ (2,541,119) (1,798,732)
Other income (expense):
Investment income......................................... 79,041 73,332
Interest expense.......................................... -- (68,858)
Gain on sale of investments............................... 2,550,230 --
Other income.............................................. 180,389 --
----------- -----------
Total other income, net..................................... 2,809,660 4,474
----------- -----------
Net income (loss)........................................... $ 268,541 $(1,794,258)
=========== ===========
Basic Earnings Per Share
Net income (loss) per share............................... $ 0.01 $ (0.09)
Shares - basic net income (loss) per share................ 20,989,127 19,329,517
Diluted Earnings Per Share
Net income (loss) per share............................... $ 0.01 $ (0.09)
Shares - diluted income per share......................... 22,405,358 19,329,517
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-28
STEMCELLS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss)......................................... $ 268,541 ($1,794,258)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization........................... 142,554 204,449
Gain on sale of investments............................. (2,550,230) --
Compensation expense relating to the grant of stock
options............................................... 128,220 43,750
Net changes in operating assets and liabilities......... (1,812,084) (1,776,812)
----------- -----------
Net cash used in operating activities..................... (3,822,999) (3,322,870)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments......................... 2,550,230 --
Purchase of property, plant and equipment................. (114,734) (7,542)
Acquisition of other assets............................... (126,391) --
Proceeds from sales of technology......................... -- 2,800,000
----------- -----------
Net cash provided by investing activities................. 2,309,105 2,792,458
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options and
warrants................................................ 26,605 352,557
Principal payments under capitalized lease obligations.... (82,500) (80,000)
----------- -----------
Net cash provided by (used by) financing activities....... (55,895) 272,557
----------- -----------
Net decrease in cash and cash equivalents................... (1,569,789) (257,855)
Cash and cash equivalents, beginning of period.............. 6,068,947 4,760,064
----------- -----------
Cash and cash equivalents, end of period.................... $ 4,499,158 $ 4,502,209
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 64,460 $ 68,858
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
F-29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001 AND 2000
NOTE 1. BASIS OF PRESENTATION
On May 23, 2000, the company's name was changed to Stem Cells, Inc. from
CytoTherapeutics, Inc. by vote of the shareholders at the Annual Meeting. The
accompanying, unaudited, condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
presented. Results of operations for the three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required for complete financial statements in accordance with
accounting principles generally accepted in the United States. For the complete
financial statements, refer to the audited financial statements and footnotes
thereto as of December 31, 2000, included on form 10-K as amended.
NOTE 2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted average of common and diluted
equivalent stock options and warrants outstanding during the period. We excluded
all stock options and warrants from the calculation of diluted loss per common
share for the period ended March 31, 2000, because these securities are
antidilutive during that period.
NOTE 3. COMPREHENSIVE LOSS
The only component of other comprehensive loss is unrealized gains and
losses on available for sale securities. For the three months ended March 31,
2001 and 2000, total comprehensive loss was $7,675,143 and $1,794,258
respectively.
NOTE 4. WIND-DOWN OF ENCAPSULATED CELL TECHNOLOGY RESEARCH AND DEVELOPMENT
PROGRAM
As previously reported, in 1999 the Company restructured its operations to
abandon all further encapsulated cell technology research and concentrate its
resources on the research and development of its proprietary platform of stem
cell technologies. The Company relocated its remaining research and development
activities and its corporate headquarters to California, and has been seeking to
dispose of its former science and administrative and pilot manufacturing
facilities in Rhode Island. In December 2000, the company had a reserve of
$1,780,000 related to the carrying costs for the Rhode Island facilities through
2001. On February 2001, the Company subleased portions of the facilities and are
actively seeking to sublease, assign or sell our remaining interests in the
properties. However, there can be no assurance that the Company will be able to
dispose of these facilities in a reasonable time, if at all. At March 31,2001
the reserve was $1,381,000.
RESERVE AS AT 12/31/2000 PAYMENTS RESERVE AS AT 03/31/01
------------------------ -------- ----------------------
$1,780,579 $399,632 $1,380,947
F-30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 5. INVESTMENTS
At March 31, 2001, the Company owned 103,577 shares of Modex Therapeutics
Ltd. ("Modex"), a Swiss biotechnology company traded on the Swiss Exchange. On
January 9, 2001, the Company sold 22,616 Modex shares for a net price of 182.00
Swiss francs per share, which converts to $112.76 per share, for total proceeds
of $2,550,000. In connection with this sale, the Company agreed not to resell
any more of its Modex shares until April 12, 2001. Accordingly, with an
established market value, the investment is recorded as available-for-sale at an
estimated fair market value. On March 31, 2001 the market price of Modex stock
was 141.00 Swiss francs, or $81.22 using exchange rates on that date, which
represented an estimated fair market value of $8,412,650 for the remaining
shares. The unrealized gain was reported in other comprehensive income. The
Company liquidated the remaining 103,577 Modex shares on April 30, 2001 for
$5,232,168 net of commissions and other fees. See note 9.
NOTE 6. SALE OF SECURITIES
On August 3, 2000, the Company completed a $4 million common stock financing
transaction with Millennium Partners, LP (the "Fund"). The Fund purchased the
Company's common stock at $4.33 per share. As set forth in an adjustable warrant
issued to the Fund on the closing date, the Fund may be entitled to receive
additional shares of common stock on eight dates beginning six months from the
closing and every three months thereafter. The adjustable warrant may be
exercised at any time prior to the thirtieth day after the last of such dates.
On the first adjustment date, January 27, 2001, the Fund became entitled to
463,369 additional shares, and it has exercised its warrant as to such shares.
The number of additional shares the Fund may be entitled to on each date will be
based on the number of shares of common stock the Fund continues to hold on each
date and the market price of the Company's common stock over a period prior to
each date. The exercise price per share under the adjustable warrant is $.01.
The Company will have the right, under certain circumstances, to cap the number
of additional shares by purchasing part of the entitlement from the Fund at a
purchase price based on the market price of such shares. The Fund also received
a five-year warrant to purchase up to 101,587 shares of common stock at $4.725
per share. This warrant is callable at any time by StemCells at $7.875 per
underlying share. The calculated value of this callable warrant using the
Black-Scholes method is $376,888, which the Company accounts for as stock
issuance cost that has no impact on stockholders' equity. The Company has
accounted for the sale of the stock and warrants by adding that portion of the
proceeds equal to the par value of the new shares to common stock and the
balance, including the value of the warrants, to additional paid in capital. In
addition, any repurchase of the shares by the Company would also be accounted
for through additional paid in capital.
In the Purchase Agreement governing the August 3, 2000 sale to the Fund, the
Company granted the Fund an option to purchase up to an additional $3 million of
its common stock and a callable warrant and an adjustable warrant. The Fund can
exercise this option in whole or in part at any time prior to August 3, 2001.
The price per share of common stock to be issued upon exercise of the option
will be based on the average market price of the common stock for a five-day
period prior to the date on which the option is exercised. On August 23, 2000,
the Fund exercised $1,000,000 of its option to purchase additional common stock.
The Fund purchased the Company's common stock at $5.53 per share, which amount
was based upon the average market price of the common stock for the five-day
period prior to August 23, 2000. An adjustable warrant similar to the one issued
on August 3, 2000 was issued to the Fund on August 30, 2000, but was cancelled
on November 1, 2000 by agreement of the Company and the Fund. The Fund also
received a five -year warrant to purchase up to 19,900 shares of common stock at
$6.03 per share. This warrant is callable by the Company at any time at $10.05
per
F-31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 6. SALE OF SECURITIES (CONTINUED)
underlying share. The calculated value of this callable warrant using the
Black-Scholes method is $139,897, which the Company accounts for as stock
issuance cost that has no impact on stockholders' equity.
The adjustable warrant contains provisions regarding the adjustment or
replacement of the warrants in the event of stock splits, mergers, tender offers
and other similar events. The adjustable warrant also limits the number of
shares that can be beneficially owned by the Fund to 9.99% of the total number
of outstanding shares of Common Stock.
NOTE 7. LEASES
As of February 1, 2001, the Company entered into a 5-year lease for a 40,000
square foot facility located in the Stanford Research Park in Palo Alto,
California. The new facility includes animal space, laboratories, offices, and a
GMP (Good Manufacturing Practices) suite. GMP facilities can be used to
manufacture materials for clinical trials. The rent will average approximately
$3.2 million per year over the term of the lease. The company paid $1.2 million
upfront related to this new lease. Approximately $909,000 of this payment has
been recorded as prepaid rent and is being amortized over seven months. The
Company continues to lease the facilities in Lincoln, Rhode Island obtained in
connection with its former encapsulated cell technology, but has now succeeded
in subleasing parts of those facilities: the 3,000 square-foot cell processing
facility and approximately one-third of its former scientific and administrative
facility ("SAF"). The Company continues to seek to sublet the remainder of the
approximately 65,000 square foot SAF and the 21,000 square-foot pilot
manufacturing facility, or to assign or sell its interests in these properties.
There can be no assurance however, that we will be able to dispose of these
properties in a reasonable time, if at all.
NOTE 8. GRANT
In February 2001, the Company was awarded a two-year, $300,000 per year
grant from the NIH's Small Business Innovation Research (SBIR) office. The
grant, which will support joint work with virologist Dr. Jeffrey Glenn at
Stanford University, is aimed at characterizing the human cells that can be
infected by human hepatitis viruses and to develop a small animal model using
the cells that are most infectable by these viruses to develop screening assays
and identify novel drug for the disease. The company received and recognized as
revenue $100,000 from a prior SBIR grant relating to the neural program.
NOTE 9. SUBSEQUENT EVENTS
On April 30, 2001, StemCells sold its remaining 103,577 shares of Modex
Therapeutics at 87.3 Swiss francs per share, or $50.51 per share at the exchange
rate on that date, for total proceeds of $5,232,168 net of commissions and other
fees. In addition, on April 30, 2001, in consideration for $300,000 received
from Modex and the assistance of Modex in executing the sale of StemCells
holding of Modex shares, StemCells agreed to assign to Modex the rights
concerning future payments under the Asset Purchase and License Agreement
between StemCells, Inc. and Neurotech SA, by which Neurotech SA purchased the
Company's former encapsulated cell therapy technology.
F-32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 2001 AND 2000
NOTE 9. SUBSEQUENT EVENTS (CONTINUED)
On April 27, 2001, the Company reached an agreement to terminate as of May
15, 2001, without cost, its lease on part of its former Sunnyvale headquarters.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"). The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. As the
Company had no derivative instruments and does not currently engage in hedging
activities, the adoption of Statement No. 133 on January 1, 2001 had no impact
on StemCells results, operations or financial statement.
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee.
SEC registration fee........................................ $ 7,979
Printing and engraving expenses............................. $ *
Legal fees and expenses..................................... $ *
Accounting fees and expenses................................ $ *
Blue sky fees and expenses.................................. $ *
Transfer agent and registrar fees........................... $ *
Miscellaneous............................................... $ *
-------
Total....................................................... $ *
=======
------------------------
* To be supplied in an amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, other than
an action by or in the right of the corporation, by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the corporation's request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. The power to indemnify applies to actions brought by or in the right
of the corporation as well, but only to the extent of expenses, including
attorneys' fees but excluding judgments, fines and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the defense or
settlement of the action or suit and with the further limitation that in these
actions no indemnification shall be made in the event of any adjudication of
negligence or misconduct in the performance of his duties to the corporation,
unless a court believes that in light of all the circumstances indemnification
should apply.
Section Ten of our Restated Certificate of Incorporation provides that we
shall, to the maximum extent legally permitted, indemnify and upon request
advance expenses to each person who is or was a party or is threatened to be
made a party to any threatened, pending or completed action, suit proceeding, or
claim (civil, criminal, administrative or investigative) by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Company, or is or was serving, or has agreed to serve, at the request of the
Company, as a director, officer, partner, employee, agent or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprises, provided, however, that the Company is not required to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. The
indemnification provided for in Section Ten is expressly not exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement or vote of directors
II-1
or stockholders or otherwise, and shall inure to the benefit of the heirs and
legal representatives of such persons.
Section 145(g) of the Delaware General Corporation Law provides that the
Company shall have the power to purchase and maintain insurance on behalf of its
officers, directors, employees and agents, against any liability asserted
against and incurred by such persons in any such capacity.
We have obtained insurance covering our directors and officers against
certain liabilities.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a corporation may eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provisions shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Pursuant to the Delaware General Corporation Law, Section Nine of the
Company's Restated Certificate of Incorporation eliminates a director's personal
liability for monetary damages for breach of fiduciary duty as a director,
except in circumstances involving a breach of the director's duty of loyalty to
StemCells, Inc. or its shareholders, acts or omissions not in good faith,
intentional misconduct, knowing violations of the law, self-dealing or the
unlawful payment of dividends or repurchase of stock.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a) and (c) below,
Section 4(2) of a the Securities Act or Regulation D promulgated thereunder
relative to sales by an issuer not involving a public offering; and (ii) in the
case of the transactions (b) below, Section 3(b) of the Securities Act and
Rule 701 promulgated thereunder relative to sales pursuant to certain
compensatory benefits plans.
(a) On April 13, 2000, the Registrant sold 1,500 shares of 6% cumulative
convertible preferred stock plus warrants for a total of 75,000 shares of the
Registrant's common stock to two members of its Board of Directors for
$1,500,000, on terms more favorable than it was then able to obtain from outside
investors. The sale was made in reliance on Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The shares of preferred stock are
convertible at the option of the holders into common stock at $3.77 per share
(based on the face value of the shares). The holders of the preferred stock have
liquidation rights equal to their original investments plus accrued but unpaid
dividends. Any unconverted preferred stock is converted, at the applicable
conversion price, on April 13, 2002. The warrants, which are exercisable at
$6.58 per share, expire on April 13, 2005.
On August 3, 2000, the Registrant completed a $4 million common stock
financing transaction with Millennium Partners, LP, or the Fund. The sale was
made in reliance on Rule 506 of Regulation D promulgated under the Securities
Act of 1933, as amended. The Registrant received $3 million of the purchase
price at the closing and received the remaining $1 million upon effectiveness of
a registration statement covering the shares owned by the Fund. The Fund
purchased the Registrant's common stock at $4.33 per share. The Fund may be
entitled, pursuant to an adjustable warrant issued in connection with the sale
of common stock to the Fund, to receive additional shares of common stock on
eight dates beginning six months from the closing and every three months
thereafter. The number of additional shares the Fund may be entitled to on each
date will be based on the number of shares of
II-2
common stock the Fund continues to hold on each date and the market price of the
Registrant's common stock over a period prior to each date. The Registrant will
have the right, under certain circumstances, to cap the number of additional
shares by purchasing part of the entitlement from the Fund. On January 27, 2001,
Millennium's August 3, 2000 adjustable warrant became exercisable for 463,369
shares of our common stock, and Millennium purchased all of those shares for
$4,634 on March 30, 2001. On April 27, 2001, the adjustable warrant became
exercisable for an additional 622,469 shares of our common stock, and the
warrant has not been exercised with respect to those shares. The Fund also
received a warrant to purchase up to 101,587 shares of common stock at $4.725
per share. This warrant is callable by the Registrant at $7.875 per underlying
share.
The Fund also has the option for twelve months to purchase up to $3 million
of additional common stock. On August 23, 2000, the Fund exercised $1,000,000 of
that option to purchase Registrant's common stock at $5.53 per share. The
Registrant received $750,000 of the purchase price in connection with the
closing on August 30, 2000 and received the remaining $250,000 upon
effectiveness of a registration statement covering the shares owned by the Fund.
At the closing on August 30, 2000, the Fund also received an adjustable warrant
similar to the one issued on August 3, 2000. This adjustable warrant was
canceled by agreement of the Registrant and the Fund on November 1, 2000. The
Fund also received a five year warrant to purchase up to 19,900 shares of the
Registrant's common stock at $6.03 per share. This warrant is callable by the
Registrant at any time at $10.05 per underlying share.
We entered into a license agreement with NeuroSpheres, Ltd. on October 30,
2000 expanding our rights to the intellectual property covered by the license
agreement. See "Business--License Agreements and Sponsored Research
Agreements--Neurospheres, Ltd." Under that license agreement, on October 30,
2000, we issued 65,000 shares of our common stock to NeuroSpheres and we agreed
to file a registration statement covering the resale of those shares by
NeuroSpheres.
(b) On May 25, 2000 we issued 2,800 shares of unregistered Rule 144 common
stock to the California Institute of Technology.
(c) On May 10, 2001, we entered into a common stock purchase agreement with
Sativum Investments Limited, for the potential future issuance and sale of up to
$30,000,000 million of our common stock, subject to restrictions and other
obligations that are described throughout this prospectus. We, at our sole
discretion, may draw down on this facility, sometimes termed an equity line,
from time to time, and Sativum is obligated to purchase shares of our common
stock at a 6% discount to a volume weighted average market price over the 20
trading days following the drawdown notice. Our volume weighted average market
price is calculated by adding the total dollars traded in every transaction in a
given trading day and dividing that number by the total number of shares traded
during that trading day. We are limited with respect to how often we can
exercise a drawdown and the amount of each drawdown.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
II-3
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
4.3X Warrant to Purchase Common Stock--Mark Angelo.
4.4X Warrant to Purchase Common Stock--Robert Farrell.
4.5X Warrant to Purchase Common Stock--Joseph Donahue.
4.6X Warrant to Purchase Common Stock--Hunter Singer.
4.7X Warrant to Purchase Common Stock--May Davis.
4.8X Common Stock Purchase Warrant.
4.9X Callable Warrant.
4.10 Registration Rights Agreement dated as of May 10, 2001
between the Company and Sativum Investments Limited.
4.11 Warrant, dated May 10, 2001, to Purchase Common Stock issued
to Sativum Investments Limited.
4.12 Warrant, dated May 10, 2001, to Purchase Common Stock issued
to Pacific Crest Securities, Inc.
4.13 Warrant dated May 10, 2001, to Purchase Common Stock issued
to Granite Financial Group, Inc.
5.1 Form of Opinion of Ropes & Gray.
10.1* Amendment to Registration Rights dated as of February 14,
1992 among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement dated April 23, 1991
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement dated as of March 16, 1994 between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement dated as of September 30, 1994 between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation dated as
of September 15, 1994.
II-4
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement dated as of November 21, 1997 by and between
Hub RI Properties Trust, as Landlord, and CytoTherapeutics,
Inc., as Tenant.
10.24!! CTI individual stockholders option agreement dated as of
July 10, 1996 among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement dated of July 10, 1996 between
the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement dated as of October 22, 1996 between The
First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger dated as of August 13, 1997
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement dated as of September 25, 1997 between
Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan").
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement dated as of September 25, 1997 between
Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998 between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement dated as of July 27, 1998, as
amended December 19, 1998 between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement dated as of December 19, 1998 between John
J. Schwartz and the Registrant.
10.42Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement dated as of October 27, 1998 between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement dated as of November 20, 1998 between The
Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement dated as of
December 29, 1999 between Neurotech S.A. and the Registrant.
II-5
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.46** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.47** License Agreement dated as of June 1999 between The Scripps
Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement dated as of July 31,
2000 between StemCells, Inc. and investors.
10.49X Subscription Agreement dated as of July 31, 2000 between
StemCells, Inc. and Millennium Partners, L.P.
10.50 Common Stock Purchase Agreement dated as of May 10, 2001
between the Company and Sativum Investments Limited.
10.51 Esrow Agreement dated as of May 10, 2001 among the Company,
Sativum Investments Limited and Epstein, Becker & Green,
P.C.
10.52XX License Agreement, dated as of October 30, 2000, between the
Company and Neuro Spheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the Company
and Martin McGlynn.
10.54XX Lease, dated February 1, 2001, between the Board of Trustees
of Stanford University and the Company.
21.1X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ropes & Gray (included in the form of opinion
filed as Exhibit 5.1).
24.1 Power of Attorney pursuant to which amendments to this
registration statement may be filed (contained on page II-9
hereto).
99.2XX Side Letter, dated March 17, 2001 between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement,
dated October 30, 2000.
------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 333-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 333-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 333-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 333-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
II-6
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000.
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
XX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 and filed on April 2, 2001.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is
II-7
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) To file a post-effective amendment to the Registration Statement to
include any financial statements required by section 10(a)(3) of the
Securities Act.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California, on the 25th day of May, 2001.
STEMCELLS, INC.
BY: /S/ MARTIN M. MCGLYNN
-----------------------------------------
Martin M. McGlynn
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby constitutes
and appoints Iris Brest, George Koshy and Martin M. McGlynn, each with full
power of substitution, his true and lawful attorney-in-fact and agent with full
power to him to sign for him and in his name in the capacities indicated below
any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same, with exhibits thereto, and other
documents in connection therewith, and he hereby ratifies and confirms his
signature as it may be signed by said attorney to any and all such amendments.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 25, 2001.
SIGNATURE TITLE
--------- -----
Martin M. McGlynn,
President, Chief Executive Officer
/s/ MARTIN M. MCGLYNN (Principal Executive Officer), Director
-------------------------------------------
George Koshy,
Controller and Acting Chief Financial
Officer (Principal Financial Officer and
/s/ GEORGE KOSHY Principal Accounting Officer)
-------------------------------------------
Mark J. Levin
/s/ MARK J. LEVIN Director
-------------------------------------------
Roger M. Perlmutter, M.D., Ph.D.
/s/ ROGER M. PERLMUTTER Director
-------------------------------------------
John J. Schwartz, Ph. D.
/s/ JOHN J. SCHWARTZ Director
-------------------------------------------
Irving Weissman, M.D.
/s/ IRVING WEISSMAN Director
-------------------------------------------
II-9
EXHIBIT INDEX
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
3.1* Restated Certificate of Incorporation of the Registrant.
3.2++ Amended and Restated By-Laws of the Registrant.
4.1* Specimen Common Stock Certificate.
4.2++++ Form of Warrant Certificate issued to a certain purchaser of
the Registrant's Common Stock in April 1995.
4.3X Warrant to Purchase Common Stock--Mark Angelo.
4.4X Warrant to Purchase Common Stock--Robert Farrell.
4.5X Warrant to Purchase Common Stock--Joseph Donahue.
4.6X Warrant to Purchase Common Stock--Hunter Singer.
4.7X Warrant to Purchase Common Stock--May Davis.
4.8X Common Stock Purchase Warrant.
4.9X Callable Warrant.
4.10 Registration Rights Agreement, dated as of May 10, 2001,
between the Company and Sativum Investments Limited.
4.11 Stock Purchase Warrant, dated May 10, 2001, issued to
Sativum Investments Limited.
4.12 Stock Purchase Warrant, dated May 10, 2001, issued to
Pacific Crest Securities, Inc.
4.13 Stock Purchase Warrant, dated May 10, 2001, issued to
Granite Financial Group, Inc.
5.1 Opinion of Ropes & Gray.
10.1* Amendment to Registration Rights, dated as of February 14,
1992, among the Registrant and certain of its stockholders.
10.2* Form of at-will Employment Agreement between the Registrant
and most of its employees.
10.3* Form of Agreement for Consulting Services between the
Registrant and members of its Scientific Advisory Board.
10.4* Form of Nondisclosure Agreement between the Registrant and
its Contractors.
10.5* Master Lease and Warrant Agreement, dated April 23, 1991,
between the Registrant and PacifiCorp Credit, Inc.
10.6* 1988 Stock Option Plan.
10.7* 1992 Equity Incentive Plan.
10.8* 1992 Stock Option Plan for Non-Employee Directors.
10.9**!!!! 1992 Employee Stock Purchase Plan.
10.12++ Research Agreement, dated as of March 16, 1994, between
NeuroSpheres, Ltd. and Registrant.
10.13++ Term Loan Agreement, dated as of September 30, 1994, between
The First National Bank of Boston and Registrant.
10.14++ Lease Agreement between the Registrant and Rhode Island
Industrial Facilities Corporation, dated as of August 1,
1992.
10.15++ First Amendment to Lease Agreement between Registrant and
The Rhode Island Industrial Facilities Corporation, dated as
of September 15, 1994.
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.17**++++ Development, Marketing and License Agreement, dated as of
March 30, 1995 between Registrant and Astra AB.
10.18++++ Form of Unit Purchase Agreement to be executed by the
purchasers of the Common Stock and Warrants offered in April
1995.
10.19+++ Form of Common Stock Purchase Agreement to be executed among
the Registrant and certain purchasers of the Registrant's
Common Stock.
10.22### Lease Agreement, dated as of November 21, 1997, by and
between Hub RI Properties Trust, as Landlord, and
CytoTherapeutics, Inc., as Tenant.
10.24!! CTI individual stockholders option agreement, dated as of
July 10, 1996, among the Company and the individuals listed
therein.
10.25!! CTI Valoria option agreement, dated of July 10, 1996,
between the Company and the Societe Financiere Valoria SA.
10.26!!! Term Loan Agreement, dated as of October 22, 1996, between
The First National Bank of Boston and the Registrant.
10.27*** Agreement and Plan of Merger, dated as of August 13, 1997,
among StemCells, Inc., the Registrant and CTI Acquisition
Corp.
10.28*** Consulting Agreement, dated as of September 25, 1997,
between Dr. Irving Weissman and the Registrant.
10.29### Letter Agreement among each of Dr. Irving Weissman and Dr.
Fred H. Gage and the Registrant.
10.32**** StemCells, Inc. 1996 Stock Option Plan.
10.33**** 1997 StemCells Research Stock Option Plan (the "1997 Plan").
10.34**** Form of Performance-Based Incentive Option Agreement issued
under the 1997 Plan.
10.35### Employment Agreement, dated as of September 25, 1997,
between Dr. Richard M. Rose and the Registrant.
10.38[*] Rights Agreement, dated as of July 27, 1998, between Bank
Boston, N.A. as Rights Agent and the Registrant.
10.40Section** Consulting Services Agreement, dated as of July 27, 1998, as
amended December 19, 1998, between Dr. John J. Schwartz and
the Registrant.
10.41Section** Letter Agreement, dated as of December 19, 1998, between
John J. Schwartz and the Registrant.
10.42Section** License Agreement, dated as of October 27, 1998, between The
Scripps Research Institute and the Registrant.
10.43Section** License Agreement, dated as of October 27, 1998, between The
Scripps Research Institute and the Registrant.
10.44Section** License Agreement, dated as of November 20, 1998, between
The Scripps Research Institute and the Registrant.
10.45SectionSection** Purchase Agreement and License Agreement, dated as of
December 29, 1999, between Neurotech S.A. and the
Registrant.
10.46** License Agreement, dated as of June 1999, between The
Scripps Research Institute and the Registrant.
10.47** License Agreement, dated as of June 1999, between The
Scripps Research Institute and the Registrant.
10.48X Form of Registration Rights Agreement, dated as of July 31,
2000, between StemCells, Inc. and investors.
NUMBER DESCRIPTION
--------------------- ------------------------------------------------------------
10.49X Subscription Agreement, dated as of July 31, 2000, between
StemCells, Inc. and Millennium Partners, L.P.
10.50 Common Stock Purchase Agreement, dated as of May 10, 2001,
between the Company and Sativum Investments Limited.
10.51 Esrow Agreement, dated as of May 10, 2001, among the
Company, Sativum Investments Limited and Epstein Becker &
Green, P.C.
10.52XX License Agreement, dated as of October 30, 2000, between the
Company and Neuro Spheres Ltd.
10.53XX Letter Agreement, dated January 2, 2001, between the Company
and Martin McGlynn.
10.54XX Lease, dated February 1, 2001, between the Board of Trustees
of Stanford University and the Company.
21.1X Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Ropes & Gray (included in the opinion filed as
Exhibit 5.1).
24.1 Power of Attorney pursuant to which amendments to this
registration statement may be filed (contained on page II-9
hereto).
99.2XX Side Letter, dated March 17, 2001 between the Company and
Oleh S. Hnatiuk regarding NeuroSpheres License Agreement,
dated October 30, 2000.
------------------------
++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-85494.
+++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-3, File No. 33-97272.
++++ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-1, File No. 33-91228.
* Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, Registration Statement on Form S-1, File
No. 33-45739.
# Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
fiscal year ended December 31, 1992 and filed March 30, 1993.
** Confidential treatment requested as to certain portions. The term
"confidential treatment" and the mark "**" as used throughout the
indicated Exhibits mean that material has been omitted and separately
filed with the Commission.
## Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 and filed on May 14, 1994.
+ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and filed on March 30, 1994.
! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
!! Previously filed with the Commission as an Exhibit to and incorporated by
reference to, the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed on March 31, 1997.
!!!! Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
*** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 and filed on November 14, 1997.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference to, the Registrant's Registration Statement on
Form S-8, File No. 333-37313.
### Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1997 and filed on March 30, 1998.
[*] Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's current report on Form 8-K filed
on August 3, 1998.
Section Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1998 and filed on
March 31, 1999.
SectionSection Previously filed with the Commission as an Exhibit to, and
incorporated herein by reference to, the Registrant's current report on
Form 8-K on January 14, 2000
X Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Registration Statement on Form
S-1, File No. 333-45496.
XX Previously filed with the Commission as an Exhibit to, and incorporated
herein by reference to, the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 and filed on April 2, 2001.