e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended: September 30, 2008
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Commission File Number: 0-19871 |
(Exact name of registrant as specified in its charter)
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| DELAWARE
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94-3078125 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
identification No) |
3155 PORTER DRIVE
PALO ALTO, CA 94304
(Address of principal executive offices including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter periods that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yesþ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer o
(Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yeso No þ
At October 30, 2008, there were 81,145,499 shares of Common Stock, $.01 par value, issued and
outstanding.
STEMCELLS, INC.
INDEX
NOTE REGARDING REFERENCES TO OUR COMMON STOCK
Throughout this Form 10-Q, the words “we,” “us,” “our,” and “StemCells” refer to StemCells, Inc.,
including StemCells California, Inc., our wholly-owned subsidiary, and the owner or licensee of
most of our intellectual property. “Common stock” refers to our common stock, $.01 par value.
2
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STEMCELLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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September 30, 2008 |
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December 31, 2007 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
16,170,526 |
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$ |
9,759,169 |
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Marketable securities, current |
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5,175,023 |
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26,696,413 |
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Other receivables |
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122,664 |
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264,631 |
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Note receivable |
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— |
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1,000,000 |
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Prepaid assets |
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590,820 |
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1,032,482 |
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Total current assets |
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22,059,033 |
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38,752,695 |
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Marketable securities, non-current |
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321,936 |
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3,150,971 |
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Property, plant and equipment, net |
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3,379,952 |
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3,905,404 |
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Other assets, non-current |
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2,043,650 |
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1,710,829 |
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Intangible assets, net |
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678,570 |
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762,667 |
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Total assets |
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$ |
28,483,141 |
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$ |
48,282,566 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
1,360,341 |
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$ |
1,813,595 |
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Accrued expenses |
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1,500,038 |
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2,462,252 |
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Accrued wind-down expenses, current |
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1,338,344 |
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1,374,632 |
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Deferred rent, current |
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333,002 |
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290,391 |
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Deferred revenue, current |
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54,065 |
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43,909 |
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Capital lease obligation, current |
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18,430 |
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17,530 |
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Bonds payable, current |
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236,250 |
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136,250 |
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Total current liabilities |
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4,840,470 |
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6,138,559 |
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Capital lease obligation, non-current |
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11,331 |
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25,269 |
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Bonds payable, non-current |
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809,166 |
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1,009,166 |
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Deposits and other long-term liabilities |
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527,804 |
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527,804 |
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Accrued wind-down expenses, non-current |
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4,098,086 |
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4,768,859 |
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Deferred rent, non-current |
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180,429 |
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437,144 |
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Deferred revenue, non-current |
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151,245 |
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163,865 |
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Total liabilities |
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10,618,531 |
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13,070,666 |
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Commitment and contingencies (Note 6) |
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Stockholders’ equity: |
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Common stock, $.01 par value;
250,000,000 shares authorized; issued
and outstanding 81,103,102 at
September 30, 2008 and 80,681,087 at
December 31, 2007 |
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811,030 |
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806,810 |
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Additional paid-in capital |
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267,948,249 |
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264,603,711 |
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Accumulated deficit |
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(248,919,164 |
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(229,914,747 |
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Accumulated other comprehensive loss |
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(1,975,505 |
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(283,874 |
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Total stockholders’ equity |
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17,864,610 |
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35,211,900 |
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Total liabilities and stockholders’ equity |
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$ |
28,483,141 |
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$ |
48,282,566 |
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See Notes to Condensed Consolidated Financial Statements.
3
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Revenue from licensing agreements |
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$ |
12,379 |
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$ |
13,162 |
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$ |
59,561 |
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$ |
26,948 |
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Operating expenses: |
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Research and development |
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4,171,799 |
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5,621,955 |
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13,087,165 |
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14,139,297 |
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General and administrative |
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1,631,580 |
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2,043,275 |
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6,231,629 |
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5,716,480 |
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Wind-down expenses |
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53,636 |
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83,661 |
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381,136 |
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439,471 |
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Total operating expenses |
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5,857,015 |
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7,748,891 |
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19,699,930 |
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20,295,248 |
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Loss from operations |
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(5,844,636 |
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(7,735,729 |
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(19,640,369 |
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(20,268,300 |
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Other income (expense): |
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License and settlement agreement, net |
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— |
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— |
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— |
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550,467 |
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Realized gain on sale of marketable securities |
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— |
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— |
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— |
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717,621 |
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Interest income |
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138,332 |
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617,616 |
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738,107 |
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1,926,753 |
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Interest expense |
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(26,849 |
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(29,405 |
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(84,010 |
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(96,777 |
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Other expense |
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(10,800 |
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(5,985 |
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(18,145 |
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(27,009 |
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Total other income, net |
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100,683 |
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582,226 |
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635,952 |
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3,071,055 |
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Net loss |
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$ |
(5,743,953 |
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$ |
(7,153,503 |
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$ |
(19,004,417 |
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$ |
(17,197,245 |
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Basic and diluted net loss per share |
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$ |
(0.07 |
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$ |
(0.09 |
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$ |
(0.24 |
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$ |
(0.22 |
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Shares used to compute basic and diluted loss per share |
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80,961,150 |
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80,065,667 |
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80,827,141 |
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79,478,537 |
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See Notes to Condensed Consolidated Financial Statements.
4
STEMCELLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Nine months ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(19,004,417 |
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$ |
(17,197,245 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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895,617 |
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869,432 |
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Share-based payment |
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3,021,444 |
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2,276,026 |
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Gain on sale of marketable securities |
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— |
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(717,621 |
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Non-cash income from license and settlement agreement, net |
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— |
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(550,467 |
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Changes in operating assets and liabilities: |
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Accrued interest and other receivables |
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141,967 |
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116,577 |
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Prepaid and other assets, current |
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441,662 |
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98,748 |
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Other assets, non-current |
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(322,821 |
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14,395 |
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Accounts payable and accrued expenses |
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(1,415,468 |
) |
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913,180 |
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Accrued wind-down expenses |
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(707,061 |
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(604,949 |
) |
Deferred revenue |
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(2,464 |
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24,620 |
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Deferred rent |
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(214,104 |
) |
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(170,666 |
) |
Deposits and other long-term liabilities |
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— |
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(81,181 |
) |
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Net cash used in operating activities |
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(17,165,645 |
) |
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(15,009,151 |
) |
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Cash flows from investing activities: |
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Proceeds from maturities of marketable securities, net |
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22,658,794 |
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3,076,691 |
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Purchases of marketable securities, net |
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— |
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(25,746,705 |
) |
Prepayment of advance |
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1,000,000 |
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— |
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Purchases of property, plant and equipment |
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(261,693 |
) |
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(1,260,961 |
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Acquisition of other assets |
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(24,375 |
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(49,375 |
) |
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Net cash provided by (used in) investing activities |
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23,372,726 |
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(23,980,350 |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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194,061 |
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3,545,489 |
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Proceeds from the exercise of stock options |
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123,253 |
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210,273 |
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Proceeds from the exercise of warrants |
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— |
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1,093,750 |
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(Repayment) proceeds of capital lease obligations |
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(13,038 |
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46,994 |
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Repayment of debt obligations |
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(100,000 |
) |
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(173,333 |
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Net cash provided by financing activities |
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204,276 |
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4,723,173 |
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Increase (decrease) in cash and cash equivalents |
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6,411,357 |
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(34,266,328 |
) |
Cash and cash equivalents, beginning of period |
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9,759,169 |
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51,795,529 |
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Cash and cash equivalents, end of period |
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$ |
16,170,526 |
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$ |
17,529,201 |
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Supplemental disclosure of cash flow information: |
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Interest paid |
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$ |
84,010 |
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$ |
96,777 |
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Supplemental schedule of non-cash investing and financing activities: |
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Stock issued for licensing agreement(1) |
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$ |
10,000 |
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$ |
10,000 |
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| (1) |
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Under terms of a license agreement with the California Institute of Technology (Cal Tech),
annual fees of $5,000 were due on each of two patents to which we hold a license from Cal
Tech, payable in cash or common stock at our choice. We elected to pay the fees in stock and
issued 6,924 and 3,865 shares of our common stock in 2008 and 2007 respectively. |
See Notes to Condensed Consolidated Financial Statements.
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007
Note 1. Summary of Significant Accounting Policies
Nature of Business
StemCells, Inc., a Delaware corporation, is a biopharmaceutical company that operates in one
segment, the development of novel cell-based therapeutics designed to treat human diseases and
disorders.
The accompanying financial data as of and for the three and nine months ended September 30,
2008 and 2007 has been prepared by us, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States (U.S. GAAP) have been condensed or omitted pursuant to such rules and
regulations. The December 31, 2007 condensed consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by US GAAP. However, we believe
that the disclosures are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2007.
We expect to incur additional operating losses over the foreseeable future. We have very
limited liquidity and capital resources and must obtain significant additional capital and other
resources in order to sustain our product development efforts, to provide funding for the
acquisition of technologies, businesses and intellectual property rights, preclinical and clinical
testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital
equipment, laboratory and office facilities, establishment of production capabilities, general and
administrative expenses and other working capital requirements. We rely on our cash reserves,
proceeds from equity and debt offerings, proceeds from the transfer or sale of intellectual
property rights, equipment, facilities or investments, government grants and funding from
collaborative arrangements, to fund our operations. If we exhaust our cash reserves and are unable
to obtain adequate financing, we may be unable to meet our operating obligations and we may be
required to initiate bankruptcy proceedings. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the outcome of this
uncertainty.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of StemCells, Inc. and
our wholly-owned subsidiary, StemCells California, Inc. All intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make
judgments, assumptions and estimates that affect the amounts reported in our condensed consolidated
financial statements and accompanying notes. Actual results could differ materially from those
estimates.
Significant estimates include the following:
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The grant date fair value of stock-based awards recognized as compensation expense in
accordance with the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004) Share Based Payment (SFAS 123R). (See Note 4). |
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• |
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Accrued wind-down expenses. (See Note 5). |
Reclassification
Certain reclassifications of prior year amounts have been made to conform to the current year
presentation. Deferred rent of approximately $290,000 has been reclassified from “Deferred rent,
non-current” to “Deferred rent, current” on the condensed consolidated balance sheet as of December
31, 2007 to conform to the current year presentation. The reclassifications had no effect on total
assets, total liabilities, equity, or net loss previously reported.
6
Financial Assets
Cash and Cash Equivalents
We consider money market accounts and investments with a maturity of 90 days or less from the
date of purchase to be cash equivalents.
Marketable Securities
Our existing marketable debt and equity securities are designated as available-for-sale
securities. These securities are carried at fair value (see Note 2, “Financial Assets”), with the
unrealized gains and losses reported as a component of stockholders’ equity. The balance sheet
classification of our marketable debt securities as current or non-current is based on their
maturity dates. Investments with remaining maturities of 365 days or less not classified as cash
equivalents are classified as “Marketable securities, current.” Investments with remaining
maturities greater than 365 days are classified as “Marketable securities, non-current.”
Management determines the appropriate designation of its investments in marketable debt and equity
securities at the time of purchase and reevaluates such designation as of each balance sheet date.
The cost of securities sold is based upon the specific identification method.
If the estimated fair value of a security is below its carrying value, we evaluate whether we
have the intent and ability to retain our investment for a period of time sufficient to allow for
any anticipated recovery to the cost of the investment, and whether evidence indicating that the
cost of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Other-than-temporary declines in estimated fair value of all marketable securities are
charged to “Other income (expense), net.” No such impairment was recognized during the three and
nine months ended September 30, 2008 and 2007.
Other Receivables
Our receivables generally consist of interest income on our financial instruments, revenue
from licensing agreements, and rent from our sub-lease tenants.
Revenue Recognition
We currently recognize revenue resulting from the licensing and use of our technology and
intellectual property. Such licensing agreements may contain multiple elements, such as upfront
fees, payments related to the achievement of particular milestones and royalties. Revenue from
upfront fees for licensing agreements that contain multiple elements are generally deferred and
recognized on a straight-line basis over the term of the agreement. Fees associated with
substantive at risk performance-based milestones are recognized as revenue upon completion of the
scientific or regulatory event specified in the agreement, and royalties received are recognized as
earned. Revenue from collaborative agreements and grants are recognized as earned upon either the
incurring of reimbursable expenses directly related to the particular research plan or the
completion of certain development milestones as defined within the terms of the relevant
collaborative agreement or grant.
Share-Based Payment
We account for share-based payment awards to employees in accordance with SFAS 123R. The
compensation expense we record for these awards is based on their grant date fair value as
calculated and amortized over their vesting period. See Note 4, “Share-Based Payment” for further
information.
We account for stock-based awards granted to non-employees in accordance with SFAS 123 and
Emerging Issues Task Force (EITF) 96-18, Accounting For Equity Instruments That Are Issued To Other
Than Employees For Acquiring, Or In Conjunction With Selling, Goods Or Services, and accordingly,
expense the estimated fair value of such options as calculated using the Black-Scholes-Merton
(Black-Scholes) model. The estimated fair value is re-measured at each reporting date and is
amortized over the remaining vesting period.
7
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per share is computed based
on the weighted-average number of shares of common stock and other dilutive securities. To the
extent these securities are anti-dilutive, they are excluded from the calculation of diluted
earnings per share.
The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations:
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Three months ended |
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Nine months ended |
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September 30, |
|
September 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Net loss |
|
$ |
(5,743,953 |
) |
|
$ |
(7,153,503 |
) |
|
$ |
(19,004,417 |
) |
|
$ |
(17,197,245 |
) |
Weighted average shares outstanding
used to compute basic and diluted
net loss per share |
|
|
80,961,150 |
|
|
|
80,065,667 |
|
|
|
80,827,141 |
|
|
|
79,478,537 |
|
Basic and diluted net loss per share |
|
$ |
(0.07 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.22 |
) |
The following outstanding potentially dilutive common stock equivalents were excluded from the
computation of diluted net loss per share because the effect would have been anti-dilutive as of
September 30:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
Options |
|
|
8,471,887 |
|
|
|
9,033,794 |
|
Restricted stock units |
|
|
1,650,000 |
|
|
|
— |
|
Warrants |
|
|
1,255,000 |
|
|
|
1,355,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,376,887 |
|
|
|
10,388,794 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
Comprehensive loss is comprised of net losses and other comprehensive loss (OCL). OCL includes
certain changes in stockholders’ equity that are excluded from net losses. Specifically, we include
in OCL changes in unrealized gains and losses on our marketable securities. Accumulated other
comprehensive loss was $1,975,505 as of September 30, 2008 and $283,874 as of December 31, 2007.
Comprehensive loss was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net loss |
|
$ |
(5,743,953 |
) |
|
$ |
(7,153,503 |
) |
|
$ |
(19,004,417 |
) |
|
$ |
(17,197,245 |
) |
Net change in
unrealized gains
and losses on
marketable
securities |
|
|
(272,066 |
) |
|
|
(436,331 |
) |
|
|
(1,691,631 |
) |
|
|
(3,620,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(6,016,019 |
) |
|
$ |
(7,589,834 |
) |
|
$ |
(20,696,048 |
) |
|
$ |
(20,817,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We adopted the
provisions of SFAS 157 that became effective in our first quarter of 2008. See Note 3 “Fair Value
Measurement” for further information about the adoption of the required provisions of SFAS 157.
In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of
FASB Statement No. 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). We
are currently evaluating the impact of SFAS 157 on our consolidated financial statements for items
within the scope of FSP 157-2, which will become effective beginning with our first quarter of
2009.
8
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the
application of SFAS 157, in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. This FSP shall be effective upon issuance, including prior periods
for which financial statements have not been issued. Revisions resulting from a change in the
valuation technique or its application shall be accounted for as a change in accounting estimate.
Adoption of FSP 157-3 will not have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159). Under SFAS 159,
a company may choose, at specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
SFAS 159 became effective beginning with our first quarter of 2008. At this time, we have chosen
not to adopt the provisions of SFAS 159 for our existing financial instruments.
In April 2008, the FASB issued FSP No.142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP 142-3 amends paragraph
11(d) of SFAS 142 to require an entity to use its own assumptions about renewal or extension of an
arrangement, adjusted for the entity-specific factors in paragraph 11 of SFAS 142, even when there
is likely to be substantial cost or material modifications. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, with early adoption prohibited. We expect to adopt FSP142-3 on January 1, 2009,
and we do not expect the adoption to have a material effect on our consolidated financial condition
and results of operations.
Note 2. Financial Assets
The following table summarizes our cash, cash equivalents and marketable securities:
| |
|
|
|
|
|
|
|
|
| |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
150,040 |
|
|
$ |
549,544 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
Money market accounts |
|
|
545,726 |
|
|
|
5,079,564 |
|
U.S. Treasury obligations and corporate debt securities (due within 90 days) |
|
|
15,474,760 |
|
|
|
4,130,061 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
16,170,526 |
|
|
|
9,759,169 |
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
Corporate debt securities, current (due within 1 year) |
|
|
5,175,023 |
|
|
|
26,696,413 |
|
Corporate debt securities, non-current (due in 1 to 5 years) |
|
|
— |
|
|
|
1,189,503 |
|
Equity securities, non-current |
|
|
321,936 |
|
|
|
1,961,468 |
|
|
|
|
|
|
|
|
Total marketable securities |
|
|
5,496,959 |
|
|
|
29,847,384 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities, current and
non-current |
|
$ |
21,667,485 |
|
|
$ |
39,606,553 |
|
|
|
|
|
|
|
|
The following table summarizes unrealized gains and losses related to our investments in
marketable securities designated as available-for-sale:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
As of September30, 2008 |
|
|
|
|
| |
|
|
|
|
|
Gross unrealized |
|
|
Gross unrealized |
|
|
Estimated Fair |
|
| |
|
Amortized cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Corporate debt securities |
|
$ |
5,202,766 |
|
|
$ |
2,246 |
|
|
$ |
(29,989 |
) |
|
$ |
5,175,023 |
|
Equity securities |
|
|
2,269,698 |
|
|
|
— |
|
|
|
(1,947,762 |
) |
|
|
321,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
7,472,464 |
|
|
$ |
2,246 |
|
|
$ |
(1,977,751 |
) |
|
$ |
5,496,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
| |
|
|
|
|
|
Gross unrealized |
|
|
Gross unrealized |
|
|
Estimated Fair |
|
| |
|
Amortized cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Corporate debt securities |
|
$ |
27,861,218 |
|
|
$ |
28,246 |
|
|
$ |
(3,548 |
) |
|
$ |
27,885,916 |
|
Equity securities |
|
|
2,269,697 |
|
|
|
— |
|
|
|
(308,229 |
) |
|
|
1,961,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
30,130,915 |
|
|
$ |
28,246 |
|
|
$ |
(311,777 |
) |
|
$ |
29,847,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Gross unrealized gains and losses on cash equivalents were not material at September 30, 2008
and December 31, 2007. Our investments in marketable corporate debt securities consist primarily of
commercial paper, corporate bonds, and asset-backed securities.
Our investment in marketable equity securities consists of shares in ReNeuron Group plc, a
publicly listed UK corporation. In July 2005, we entered into a license and settlement agreement
with ReNeuron Limited, a wholly-owned subsidiary of ReNeuron Group plc, (collectively referred to
as “ReNeuron”). As part of the agreement, we granted ReNeuron a license that allows ReNeuron to
exploit its “c-mycER” conditionally immortalized adult human neural stem cell technology for
therapy and other purposes. In return for the license, we received a 7.5% fully-diluted equity
interest in ReNeuron, subject to certain anti-dilution provisions, and a cross-license to the
exclusive use of ReNeuron’s technology for certain diseases and conditions, including lysosomal
storage diseases, spinal cord injury, cerebral palsy, and multiple sclerosis. The agreement also
provides for full settlement of any potential claims that either we or ReNeuron might have had
against the other in connection with any putative infringement of certain of each party’s patent
rights prior to the effective date of the agreement. In February 2007, we sold 5,275,000 ordinary
shares of ReNeuron for net proceeds of approximately $3,075,000 and we recognized a realized gain
of approximately $716,000. In February 2007, as a consequence of certain anti-dilution provisions
in the agreement, ReNeuron issued us an additional 822,000 shares of common stock net of
approximately 12,000 shares which were transferred to NeuroSpheres Ltd. (NeuroSpheres), a Canadian
corporation from which we have licensed some of the patent rights that are subject to the agreement
with ReNeuron. We recorded approximately $550,000 as other income for the additional shares. We
owned 4,821,924 ordinary shares of ReNeuron at September 30, 2008 and December 31, 2007 and the
fair value of those shares was approximately $322,000 at September 30, 2008 and approximately
$1,961,000 at December 31, 2007.
Changes in the market value of our ReNeuron shares as a result of changes in market price per
share or the exchange rate between the US dollar and the British pound are accounted for under
“other comprehensive loss” if deemed temporary and are not recorded as “other income (expense),
net” until the shares are disposed of and a gain or loss realized.
Note 3. Fair Value Measurement
Effective January 1, 2008, we adopted SFAS 157, except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FSP SFAS 157-2. SFAS 157 clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 — Directly or indirectly observable inputs other than in Level 1, that include
quoted prices for similar assets or liabilities in active markets or quoted prices for
identical or similar assets or liabilities in markets that are not active.
Level 3 — Unobservable inputs which are supported by little or no market activity that
reflects the reporting entity’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
In accordance with SFAS 157, we measure our financial assets and liabilities at fair value.
Our cash equivalents and marketable securities are primarily classified within Level 1 or Level 2.
This is because our cash equivalents and marketable securities are valued primarily using quoted
market prices or alternative pricing sources and models utilizing market observable inputs. We
currently do not have any Level 3 financial assets or liabilities.
10
The following table presents assets and liabilities measured at fair value:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value measurement |
|
|
|
|
| |
|
at reporting date using |
|
|
|
|
| |
|
Quoted Prices |
|
|
|
|
|
|
|
| |
|
in Active Markets for |
|
|
Significant Other |
|
|
As of |
|
| |
|
Identical Assets |
|
|
Observable Inputs |
|
|
September 30, |
|
| |
|
(Level 1) |
|
|
(Level 2) |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
545,726 |
|
|
$ |
— |
|
|
$ |
545,726 |
|
U.S. Treasury obligations |
|
|
15,474,760 |
|
|
|
— |
|
|
|
15,474,760 |
|
Marketable Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
321,936 |
|
|
|
— |
|
|
|
321,936 |
|
Corporate bonds |
|
|
— |
|
|
|
2,779,553 |
|
|
|
2,779,553 |
|
Asset-Backed securities |
|
|
— |
|
|
|
2,395,470 |
|
|
|
2,395,470 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,342,422 |
|
|
$ |
5,175,023 |
|
|
$ |
21,517,445 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Bond obligation |
|
$ |
— |
|
|
$ |
1,045,416 |
|
|
$ |
1,045,416 |
|
|
|
|
|
|
|
|
|
|
|
Note 4. Share-Based Payment
We currently grant stock-based awards under three equity incentive plans. We had 15,227,244
shares authorized under the three plans as of September 30, 2008. Under these plans we may grant
incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, and performance-based shares to our employees, directors and consultants,
at prices determined by our Board of Directors. Incentive stock options may only be granted to
employees under these plans with a grant price not less than the fair market value on the date of
grant.
Our compensation expense for stock options and restricted stock units issued from our equity
incentive plans for the three and nine months ended September 30 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Nine months ended |
| |
|
September 30, |
|
September 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
|
Research and development expense |
|
$ |
473,828 |
|
|
$ |
418,764 |
|
|
$ |
1,430,157 |
|
|
$ |
986,366 |
|
General and administrative expense |
|
|
465,351 |
|
|
|
385,285 |
|
|
|
1,443,788 |
|
|
|
1,080,205 |
|
| |
|
|
Total employee stock based compensation expense and effect on net loss |
|
$ |
939,179 |
|
|
$ |
804,049 |
|
|
$ |
2,873,945 |
|
|
$ |
2,066,571 |
|
| |
|
|
Effect on basic and diluted net loss per common share |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
| |
|
|
As of September 30, 2008, we have approximately $5,570,000 of total unrecognized compensation
expense related to unvested options and restricted stock units granted under our various
stock-based plans that we expect to recognize over a weighted-average vesting period of 2.3 years.
Incentive Stock Options
Generally, stock options granted to employees have a maximum term of ten years, and vest over
a four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly
over the remaining three years. We may grant options with different vesting terms from time to
time. Upon employee termination of service, any unexercised vested option will be forfeited three
months following termination or the expiration of the option, whichever is earlier. Unvested
options are forfeited on termination.
A summary of our stock option activity for the three months ended September 30, 2008 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
| |
|
Number of options |
|
exercise price |
Outstanding options at June 30, 2008 |
|
|
8,629,392 |
|
|
$ |
2.36 |
|
Granted |
|
|
210,000 |
|
|
$ |
1.12 |
|
Exercised |
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
(367,505 |
) |
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
|
Outstanding options at September
30, 2008 |
|
|
8,471,887 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
11
The estimated weighted-average fair value per share of options granted in the three months
ended September 30, 2008 was approximately $0.93. The fair value of options granted is estimated as
of the date of grant using the Black-Scholes option pricing model, which requires certain
assumptions as of the date of grant. The weighted-average assumptions used as of September 30 were
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
Nine months ended |
| |
|
September 30, |
|
September 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Expected life (years)(1) |
|
|
7.71 |
|
|
|
6.25 |
|
|
|
7.22 |
|
|
|
6.25 |
|
Risk-free interest rate(2) |
|
|
3.56 |
% |
|
|
4.28 |
% |
|
|
3.32 |
% |
|
|
4.39 |
% |
Expected volatility(3) |
|
|
93.78 |
% |
|
|
93.35 |
% |
|
|
93.81 |
% |
|
|
95.49 |
% |
Expected dividend yield(4) |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
| (1) |
|
The expected term represents the period during which our stock-based awards are expected to
be outstanding. In 2008 we estimated this amount based on historical experience of similar
awards, giving consideration to the contractual terms of the awards, vesting requirements, and
expectation of future employee behavior, including post-vesting terminations. In 2007 the
expected term is equal to the average of the contractual life of the stock option and its
vesting period as of the date of grant. |
| |
| (2) |
|
The risk-free interest rate is based on U.S. Treasury debt securities with maturities close
to the expected term of the option as of the date of grant. |
| |
| (3) |
|
Expected volatility is based on historical volatility over the most recent historical period
equal to the length of the expected term of the option as of the date of grant. |
| |
| (4) |
|
We have not historically issued any dividends and we do not expect to in the foreseeable
future. |
At the end of each reporting period, we estimate forfeiture rates based on our historical
experience within separate groups of employees and adjust the share-based payment expense
accordingly.
A summary of changes in unvested options for the three months ended September 30, 2008 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
|
| |
|
|
|
|
|
grant |
|
| |
|
Number of options |
|
|
date fair value |
|
Unvested options at June 30, 2008 |
|
|
3,656,252 |
|
|
$ |
1.95 |
|
Granted |
|
|
210,000 |
|
|
$ |
0.93 |
|
Vested |
|
|
(672,085 |
) |
|
$ |
1.91 |
|
Cancelled |
|
|
(276,550 |
) |
|
$ |
1.91 |
|
|
|
|
|
|
|
|
Unvested options at September 30, 2008 |
|
|
2,917,617 |
|
|
$ |
1.89 |
|
|
|
|
|
|
|
|
|
The estimated fair value of options vested was approximately $1,284,000 for the three months
ended September 30, 2008.
Restricted Stock Units
In March 2008, we granted restricted stock units to certain employees that entitle the holders
to receive shares of our common stock upon vesting. These restricted stock units vest over a
three-year period from the date of grant: one-third of the award will vest on each grant date
anniversary over the following three years. The fair value of restricted stock units granted are
based upon the market price of the underlying common stock as if it were vested and issued on the
date of grant.
12
A summary of our restricted stock unit activity for the three months ended September 30, 2008
is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-average |
|
| |
|
Number of RSUs |
|
|
grant date fair value |
|
Outstanding RSUs at June 30, 2008 |
|
|
1,650,000 |
|
|
$ |
1.26 |
|
Granted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Outstanding RSUs at September 30, 2008 |
|
|
1,650,000 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
RSUs exercisable at September 30, 2008 |
|
|
— |
|
|
|
— |
|
Stock Appreciation Rights
In July 2006, we granted cash-settled Stock Appreciation Rights (SARs) to certain employees
that give the holder the right, upon exercise, to the difference between the price per share of our
common stock at the time of exercise and the exercise price of the SAR. The exercise price of the
SAR is equal to the market price of our common stock at the date of grant. The SARs vest over a
four year period from the date of grant; 25% vest at the end of one year, and 75% vest monthly over
the remaining three years. Compensation expense is based on the fair value of SARs, which is
calculated using the Black-Scholes option pricing model. The share-based payment expense and
liability are re-measured at each reporting date through the date of settlement.
A summary of the changes in SARs for the three months ended September 30, 2008 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
average exercise |
| |
|
Number of SARs |
|
price |
Outstanding at June 30, 2008 |
|
|
1,430,849 |
|
|
$ |
2.00 |
|
Granted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
Cancelled |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Outstanding SARs at September 30, 2008 |
|
|
1,430,849 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
SARs exercisable at September 30, 2008 |
|
|
775,043 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008, we re-measured the compensation expense and
liability related to the SARs and recorded compensation expense of approximately $25,000. The total
compensation expense related to SARs was approximately $76,000 for the three months ended September
30, 2007.
At September 30, 2008, approximately $241,000 of unrecognized compensation expense related to
SARs is expected to be recognized over a weighted average vesting period of approximately 1.0 year.
The resulting effect on net loss and net loss per share attributable to common stockholders is not
likely to be representative of the effects in future periods, due to changes in the fair value
calculation which is dependent on the stock price, volatility, interest and forfeiture rates,
additional grants and subsequent periods of vesting.
13
Note 5. Wind-down Expenses
In October 1999, we relocated to California from Rhode Island and established a wind-down
reserve for the estimated lease payments and operating costs of the scientific and administrative
facility in Rhode Island. Even though we intend to dispose of the facility at the earliest possible
time, we cannot determine with certainty a fixed date by which such disposal will occur. In light
of this uncertainty, we periodically re-evaluate and adjust the reserve. We consider various
factors such as our lease payments through to the end of the lease, operating expenses, the current
real estate market in Rhode Island, and estimated subtenant income based on actual and projected
occupancy.
The summary of the changes to our wind-down reserve for the three month periods ended March
31, 2008, June 30, 2008 and September 30, 3008; the nine month period ended September 30, 2008 and
for the year ended December 31, 2007 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
January to |
|
|
April to |
|
|
July to |
|
|
January to |
|
|
January to |
|
| |
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
Accrued wind-down reserve at beginning of period |
|
$ |
4,875,000 |
|
|
$ |
4,704,000 |
|
|
$ |
4,583,000 |
|
|
$ |
4,875,000 |
|
|
$ |
5,512,000 |
|
Less actual expenses recorded against estimated
reserve during the period |
|
|
(331,000 |
) |
|
|
(288,000 |
) |
|
|
(316,000 |
) |
|
|
(935,000 |
) |
|
|
(1,420,000 |
) |
Additional expense recorded to revise estimated
reserve at period-end |
|
|
160,000 |
|
|
|
167,000 |
|
|
|
54,000 |
|
|
|
381,000 |
|
|
|
783,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised reserve at period-end |
|
|
4,704,000 |
|
|
|
4,583,000 |
|
|
|
4,321,000 |
|
|
|
4,321,000 |
|
|
|
4,875,000 |
|
Add deferred rent at period-end |
|
|
1,218,000 |
|
|
|
1,166,000 |
|
|
|
1,115,000 |
|
|
|
1,115,000 |
|
|
|
1,268,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses at period-end
(current and non-current) |
|
$ |
5,922,000 |
|
|
$ |
5,749,000 |
|
|
$ |
5,436,000 |
|
|
$ |
5,436,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued wind-down expenses, current |
|
$ |
1,383,000 |
|
|
$ |
1,379,000 |
|
|
$ |
1,338,000 |
|
|
$ |
1,338,000 |
|
|
$ |
1,374,000 |
|
Accrued wind-down expenses, non-current |
|
|
4,539,000 |
|
|
|
4,370,000 |
|
|
|
4,098,000 |
|
|
|
4,098,000 |
|
|
|
4,769,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued wind-down expenses |
|
$ |
5,922,000 |
|
|
$ |
5,749,000 |
|
|
$ |
5,436,000 |
|
|
$ |
5,436,000 |
|
|
$ |
6,143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Note 6. Commitments and Contingencies
Leases
Capital leases
We entered into direct financing transactions with the State of Rhode Island and received
proceeds from the issuance of industrial revenue bonds totaling $5,000,000 to finance the
construction of our pilot manufacturing facility in Rhode Island. The related lease agreements are
structured such that lease payments fully fund all semiannual interest payments and annual
principal payments through maturity in August 2014. The interest rate for the remaining bond series
is 9.5%. The bond contains certain restrictive covenants which limit, among other things, the
payment of cash dividends and the sale of the related assets. The outstanding principal was
approximately $1,045,000 at September 30, 2008 and $1,145,000 at December 31, 2007.
Operating leases
We entered into a fifteen-year lease agreement for a scientific and administrative facility in
Rhode Island in connection with a sale and leaseback arrangement in 1997. The lease term expires
June 30, 2013. The lease contains escalating rent payments, which we recognize as operating lease
expense on a straight-line basis. Deferred rent expense for this facility was approximately
$1,115,000 at September 30, 2008 and $1,268,000 at December 31, 2007, and is included as part of
the wind-down accrual on our condensed consolidated balance sheet.
We entered into and amended a lease agreement for an approximately 68,000 square foot facility
located at the Stanford Research Park in Palo Alto, California. The facility includes space for
laboratories, offices, and a GMP (Good Manufacturing Practices) suite. GMP facilities can be used
to manufacture materials for clinical trials. The lease term expires March 31, 2010. Under the
terms of the agreement we are required to provide a letter of credit for a total of approximately
$778,000, which serves as a security deposit for the duration of the lease term. The letter of
credit issued by our financial institution is collateralized by a certificate of deposit for the
same amount, which is reflected as restricted cash in other assets, non-current on our condensed
consolidated balance sheets. The lease contains escalating rent payments, which we recognize as
operating lease expense on a straight-line basis. Deferred rent for this facility was approximately
$513,000 at September 30, 2008 and $728,000 at December 31, 2007, and is reflected as deferred rent
on our condensed consolidated balance sheet. At September 30, 2008, we had a space-sharing
agreement covering approximately 10,451 square feet of this facility. We receive base payments plus
a proportionate share of the operating expenses based on square footage over the term of the
agreement.
Indemnification Agreement
On July 9, 2008, we amended our 1997 and 2000 license agreements with NeuroSpheres.
NeuroSpheres is the holder of certain patents exclusively licensed by us, including the six patents
that are the basis of our patent infringement suits against Neuralstem. As part of the amendment,
we agreed to pay all reasonable litigation costs, expenses and attorney’s fees incurred by
NeuroSpheres in the declaratory judgment suit between us and Neuralstem. In return, we are
entitled to off-set all litigation costs incurred in that suit against amounts that would otherwise
be owed under the license agreements, such as annual maintenance fees, milestones and royalty
payments. At this time, we cannot estimate the likely total costs of our pending litigation with
Neuralstem, given the unpredictable nature of such proceedings, or the total amount we may
ultimately owe under the NeuroSpheres license agreements. However, the ability to apply the
offsets will run for the entire term of each license agreement. For these reasons, we have chosen
to approximate the potential value of the offset receivable by assuming that all litigation charges
actually incurred in the declaratory judgment action will ultimately be offset against royalties
owed. Based on actual costs and other relevant factors, management will reevaluate this assumption
on a quarterly basis.
Note 7. Subsequent Events
On October 2, 2008, we were awarded a $305,000 grant from the National Institute of Diabetes
and Digestive and Kidney Diseases to research and develop a potential cell-based therapeutic for
liver disease arising from infection by the hepatitis C virus (HCV). The award is a Phase I grant
under the Small Business Innovation Research (SBIR) Program of the National Institutes of Health.
Should the objectives of the research funded by this grant be met, we anticipate applying for Phase
II and additional funding under the SBIR Program.
15
Contingencies
In July 2006, we filed suit against Neuralstem, Inc. in the Federal District Court for the
District of Maryland, alleging that Neuralstem’s activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres. Neuralstem has filed a motion for dismissal or summary
judgment in the alternative, citing Title 35, Section 271(e)(1) of the United States Code, which
says that it is not an act of patent infringement to make, use or sell a patented invention “solely
for uses reasonably related to the development and submission of information” to the FDA.
Neuralstem argues that because it does not have any therapeutic products on the market yet, the
activities complained of fall within the protection of Section 271(e)(1) — that is, basically,
that the suit is premature. This issue will be decided after discovery is complete. Subsequent to
filing its motion to dismiss, in December 2006, Neuralstem petitioned the U.S. Patent and Trademark
Office (PTO) to reexamine two of the patents in our infringement action against Neuralstem, namely
U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug screening) and U.S.
Patent No. 7,101,709 (claiming the use of human neural stem cells for screening biological agents).
In April 2007, Neuralstem petitioned the PTO to reexamine the remaining two patents in the suit,
namely U.S. Patent No. 5,851,832 (claiming methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural stem cells). These
requests were granted by the PTO and, in June 2007, the parties voluntarily agreed to stay the
pending litigation while the PTO considers these reexamination requests. In October 2007,
Neuralstem petitioned the PTO to reexamine a fifth patent, namely U.S. Patent No. 6,103,530, which
claims a culture medium for proliferating mammalian neural stem cells. In April 2008, the PTO
upheld the ‘832 and ‘872 patents, as amended, and issued Notices of Intent to Issue an Ex Parte
Reexamination Certificate for both. In August 2008, the PTO upheld the ‘530 patent, as amended,
and issued a Notice of Intent to Issue an Ex Parte Reexamination Certificate. The remaining two
patents are still under review by the PTO.
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstem’s activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the ‘505 and ‘418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. In August
2008, the California court transferred our lawsuit against Neuralstem to Maryland for resolution on
the merits. We anticipate that the Maryland District Court will consolidate these actions in some
manner prior to trial.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act that involve substantial risks and
uncertainties. Such statements include, without limitation, all statements as to expectation or
belief and statements as to our future results of operations; the progress of our research, product
development and clinical programs; the need for, and timing of, additional capital and capital
expenditures; partnering prospects; costs of manufacture of products; the protection of, and the
need for, additional intellectual property rights; effects of regulations; the need for additional
facilities; and potential market opportunities. Our actual results may vary materially from those
contained in such forward-looking statements because of risks to which we are subject, including
uncertainty as to whether the U.S. Food and Drug Administration (FDA) or other regulatory
authorities will permit us to proceed with clinical testing of proposed products despite the novel
and unproven nature of our technologies; the risk that our initial clinical trial and any other
clinical trials or studies could be substantially delayed beyond their expected dates or cause us
to incur substantial unanticipated costs; uncertainties in our ability to obtain the capital
resources needed to continue our current research and development operations and to conduct the
research, preclinical development and clinical trials necessary for regulatory approvals; the
uncertainty regarding our ability to obtain a corporate partner or partners, if needed, to support
the development and commercialization of our potential cell-based therapeutics products; the
uncertainty regarding the outcome of our Phase I clinical trial in NCL and any other clinical
trials or studies we may conduct in the future; the uncertainty regarding the validity and
enforceability of our issued patents; the risk that we may not be able to manufacture additional
master and working cell banks when needed; the uncertainty whether any products that may be
generated in our cell-based therapeutics programs will prove clinically safe and effective; the
uncertainty whether we will achieve revenue from product sales or become profitable; uncertainties
regarding our obligations with respect to our former encapsulated cell therapy facilities in Rhode
Island; obsolescence of our technologies; competition from third parties; intellectual property
rights of third parties; litigation risks; and other risks to which we are subject. All
forward-looking statements attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements and risk factors set forth in “Risk Factors” in Part II, Item 1A of this report and
Part I, Item 1A included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
16
Overview
The Company
Our research and development (R&D) programs are focused on identifying and developing
potential cell-based therapeutics which can either restore or support organ function. Since we
relocated our corporate headquarters and research laboratories to California in 1999, our R&D
efforts have primarily been directed at refining our methods for identifying, isolating, culturing,
and purifying the human neural stem cell (our HuCNS-SC cell population) and the human liver
engrafting cells (our hLEC cell population) and developing these as potential cell-based
therapeutics for the central nervous system (CNS) and the liver, respectively. In our CNS Program,
we are in clinical development with our HuCNS-SC® product candidate. We have completed
enrollment and dosing in a six-patient Phase I clinical trial of HuCNS-SC cells as an investigative
treatment for infantile and late infantile neuronal ceroid lipofuscinosis (NCL), a fatal
neurodegenerative disease often referred to as Batten disease. We expect this trial to be completed
in January 2009. We are also continuing research and preclinical development work for the use of
neural stem cells to treat other indications in the CNS field; and our goal is to initiate clinical
trials of HuCNS-SC for a spinal cord indication, a myelin disorder in the brain, and a degenerative
retinal disorder. In our Liver Program, we are in preclinical development with our human liver
engrafting cells and are exploring their applicability as a cellular therapy to restore function to
liver tissue by replacing dysfunctional or damaged cells. Our goal is to initiate a clinical study
of our hLEC cells with the first indication anticipated to be a liver-based metabolic disorder.
For a brief description of our significant research and development programs see Overview “Research
and Development Programs” in the Business Section of Part I, Item 1 included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2007. We have also conducted research on
several other cell types and in other areas, which could lead to other possible product candidates,
process improvements or further research activities.
We have not derived any revenue or cash flows from the sale or commercialization of any
products except for license revenue for certain of our patented cells and media for use in
research. As a result, we have incurred annual operating losses since inception and expect to incur
substantial operating losses in the future. Therefore, we are dependent upon external financing
from equity and debt offerings, federal and state grants, and revenue from collaborative research
arrangements with corporate sponsors to finance our operations. We have no such collaborative
research arrangements at this time. External financing in the current financial environment may be
particularly difficult, and there can be no assurance that such financing or partnering revenue
will be available when needed or on terms acceptable to us.
Before we can derive revenue or cash inflows from the commercialization of any of our product
candidates, we will need to: (i) conduct substantial in vitro testing and characterization of our
proprietary cell types, (ii) undertake preclinical and clinical testing for specific disease
indications, (iii) develop, validate and scale-up manufacturing processes to produce these
cell-based therapeutics, and (iv) pursue required regulatory approvals. These steps are risky,
expensive and time consuming.
Overall, we expect our R&D expenses to be substantial and to increase for the foreseeable
future as we continue the development and clinical investigation of our current and future product
candidates. However, expenditures on R&D programs are subject to many uncertainties, including
whether we develop our product candidates with a partner or independently. We cannot forecast with
any degree of certainty which of our current product candidates will be subject to future
collaboration, when such collaboration agreements will be secured, if at all, and to what degree
such arrangements would affect our development plans and capital requirements. In addition, there
are numerous factors associated with the successful commercialization of any of our cell-based
therapeutics, including future trial design and regulatory requirements, many of which cannot be
determined with accuracy at this time given the stage of our development and the novel nature of
stem cell technologies. The regulatory pathways, both in the United States and internationally, are
complex and fluid given the novel and, in general, clinically unproven nature of stem cell
technologies. At this time, due to such uncertainties and inherent risks, we cannot estimate in a
meaningful way the duration of, or the costs to complete, our R&D programs or whether, when or to
what extent we will generate revenues or cash inflows from the commercialization and sale of any of
our product candidates. While we are currently focused on advancing each of our product development
programs, our future R&D expenses will depend on the determinations we make as to the scientific
and clinical prospects of each product candidate, as well as our ongoing assessment of the
regulatory requirements and each product candidate’s commercial potential.
17
Given the early stage of development of our product candidates, any estimates of when we may
be able to commercialize one or more of these products would not be meaningful. Moreover, any
estimate of the time and investment required to develop potential products based upon our
proprietary HuCNS-SC and hLEC technologies will change depending on the ultimate approach or
approaches we take to pursue them, the results of preclinical and clinical studies, and the content
and timing of decisions made by the FDA and other regulatory authorities. For example, we cannot
predict with any degree of certainty when the necessary regulatory and other approvals to initiate
any of the various trials we are planning will be obtained, if at all. There can be no assurance
that we will be able to develop any product successfully, or that we will be able to recover our
development costs, whether upon commercialization of a developed product or otherwise. We cannot
provide assurance that any of these programs will result in products that can be marketed or
marketed profitably. If certain of our development-stage programs do not result in commercially
viable products, our results of operations could be materially adversely affected.
Significant Events
In July 2008, at our Annual Meeting of Stockholders, our stockholders approved an increase
to our authorized capital by an additional 125,000,000 shares of common stock, increasing the
number of authorized shares of capital stock from 126,000,000 total shares to 251,000,000 total
shares. We subsequently amended our restated certificate of incorporation to designate an
additional 125,000,000 shares of common stock, bringing the total number of authorized shares of
common stock to 250,000,000. These securities may be used to raise additional capital to fund the
company’s working capital and other corporate needs, for future acquisitions of assets, programs or
businesses, and for other corporate purposes.
In September 2008, Stewart Craig, Ph.D., joined the Company as Senior Vice President,
Development and Operations. Dr. Craig is responsible for process design and engineering, GMP
manufacturing operations, regulatory affairs, quality assurance, facilities and supply chain
management. Dr. Craig has over 25 years of experience in the biotechnology sector, the last 15 of
which have been in the cell therapy field. Dr. Craig was most recently Vice President and Chief
Technology Officer of Progenitor Cell Therapy, LLC (PCT), a contract provider of GMP cell
processing and development services. Prior to joining PCT, Dr. Craig was chief operating officer
of Xcyte Therapies, Inc., a publicly traded cell-based immunotherapy company. Dr. Craig has also
held senior management positions with the stem cell companies Osiris Therapeutics, Inc. and
SyStemix, Inc.
In October 2008, we were awarded a $305,000 grant from the National Institute of Diabetes
and Digestive and Kidney Diseases to research and develop a potential cell-based therapeutic for
liver disease arising from infection by the hepatitis C virus (HCV). Hepatitis C is a global
health challenge, with approximately 170 million people affected worldwide and an estimated three
million new infections each year. The virus targets liver cells and is a leading cause of
end-stage liver disease. The grant will fund work over the next year to investigate whether our
proprietary human liver engrafting cells (hLEC) can be made resistant to infection by the hepatitis
C virus. This award is a Phase I grant under the Small Business Innovation Research (SBIR) Program
of the National Institutes of Health. Should the objectives of the research funded by this grant
be met, we anticipate applying for Phase II and additional funding under the SBIR Program.
In October 2008, we announced preclinical results which show that our
proprietary HuCNS-SC® product candidate (purified human neural stem cells)
can protect the retina from progressive degeneration. Retinal degeneration leads to
loss of vision in diseases such as age-related macular degeneration and retinitis
pigmentosa. In this study, our HuCNS-SC cells were transplanted into the Royal College
of Surgeons (RCS) rat, a well established animal model of retinal degeneration, and were
shown to have survived the transplant and engrafted, and the eyes transplanted with the
cells showed preservation of photoreceptors and stabilization of visual function.
Critical Accounting Policies and the Use of Estimates
The accompanying discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements and the related disclosures, which
have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these condensed consolidated financial statements requires management to
make estimates, assumptions, and judgments that affect the reported amounts in our condensed
consolidated financial statements and accompanying notes. These estimates form the basis for making
judgments about the carrying values of assets and liabilities. We base our estimates and judgments
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances, and we have established internal controls related to the preparation of these
estimates. Actual results and the timing of the results could differ materially from these
estimates.
Share-Based Payment
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards 123 (revised
2004), Share-Based Payment, (SFAS 123R). SFAS 123R requires us to recognize expense related to the
fair value of our share-based payment awards, including employee stock options. Under the
provisions of SFAS 123R, employee share-based payment is estimated at the date of grant based on
the award’s fair value using the Black-Scholes-Merton (Black-Scholes) option-pricing model and is
recognized as expense ratably over
18
the requisite service period. The Black-Scholes option-pricing model requires the use of
certain assumptions, the most significant of which are our estimates of the expected volatility of
the market price of our stock and the expected term of the award. Our estimate of the expected
volatility is based on historical volatility. The expected term represents the period during which
our stock-based awards are expected to be outstanding. From January 1, 2006 to December 31, 2007,
and in accordance with Staff Accounting Bulletin 107, Share-Based Payment (SAB 107), the expected
term was equal to the average of the contractual life of the stock option and its vesting period as
of the date of grant (the simplified method). In December 2007, the SEC issued Staff Accounting
Bulletin 110, Share-Based Payment (SAB 110), extending the availability of SAB 107 beyond its
original deadline of December 31, 2007. The extension is available for companies under specified
conditions that include a lack of sufficient historical exercise data related to their stock based
awards. Effective January 1, 2008, in accordance with SAB 110, we no longer use the simplified
method and estimate the expected term based on historical experience of similar awards, giving
consideration to the contractual terms of the awards, vesting requirements, and expectation of
future employee behavior, including post-vesting terminations. The change of method in estimating
the expected term did not have a material impact on our condensed consolidated financial
statements.
As required under SFAS 123R, we review our valuation assumptions at each grant date and, as a
result, our assumptions in future periods may change. As of September 30, 2008, total compensation
cost related to unvested stock-based awards not yet recognized was approximately $5,570,000, which
is expected to be recognized as expense over a weighted-average period of 2.3 years. See also Note
4, “Share-Based Payment,” in the notes to condensed consolidated financial statements of Part I,
Item 1 of this Form 10-Q for further information.
Wind-down expenses
In connection with exiting our research and manufacturing operations in Lincoln, Rhode Island,
and the relocation of our corporate headquarters and remaining research laboratories to California
in October 1999, we provided a reserve for our estimate of the exit cost obligation in accordance
with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring). The reserve reflects
estimates of the ongoing costs of our former scientific and administrative facility in Lincoln,
which we hold on a lease that terminates on June 30, 2013. We are seeking to sublease, assign,
sell, or otherwise divest ourselves of our interest in the facility at the earliest possible time,
but we cannot determine with certainty a fixed date by which such events will occur, if at all.
In determining the facility exit cost reserve amount, we are required to consider our lease
payments through to the end of the lease term and estimate other relevant factors such as facility
operating expenses, real estate market conditions in Rhode Island for similar facilities, occupancy
rates, and sublease rental rates projected over the course of the leasehold. We re-evaluate the
estimate each quarter, taking account of changes, if any, in each underlying factor. The process is
inherently subjective because it involves projections over time — from the date of the estimate
through the end of the lease — and it is not possible to determine any of the factors, except the
lease payments, with certainty over that period.
Management forms its best estimate on a quarterly basis, after considering actual sublease
activity, reports from our broker/realtor about current and predicted real estate market conditions
in Rhode Island, the likelihood of new subleases in the foreseeable future for the specific
facility and significant changes in the actual or projected operating expenses of the property. We
discount the projected net outflow over the term of the leasehold to arrive at the present value,
and adjust the reserve to that figure. The estimated vacancy rate for the facility is an important
assumption in determining the reserve because changes in this assumption have the greatest effect
on estimated sublease income. In addition, the vacancy rate estimate is the variable most subject
to change, while at the same time it involves the greatest judgment and uncertainty due to the
absence of highly predictive information concerning the future of the local economy and future
demand for specialized laboratory and office space in that area. The average vacancy rate of the
facility over the last five years (2003 through 2007) was approximately 73%, varying from 66% to
89%. As of September 30, 2008, based on current information available to management, the vacancy
rate is projected to be approximately 78% for 2008 and 2009, and approximately 70% from 2010
through the end of the lease. These estimates are based on actual occupancy as of September 30,
2008, predicted lead time for acquiring new subtenants, historical vacancy rates for the area, and
assessments by our broker/realtor of future real estate market conditions. If the assumed vacancy
rate for 2009 to the end of the lease had been 5% higher or lower at September 30, 2008, then the
reserve would have increased or decreased by approximately $180,000. Similarly, a 5% increase or
decrease in the operating expenses for the facility from 2009 on would have increased or decreased
the reserve by approximately $102,000, and a 5% increase or decrease in the assumed average rental
charge per square foot would have increased or decreased the reserve by approximately $55,000.
Management does not wait for specific events to change its estimate, but instead uses its best
efforts to anticipate them on a quarterly
basis. See Note 5 “Wind-down expenses,” in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.
19
Results of Operations
Our results of operations have varied significantly from year to year and quarter to quarter
and may vary significantly in the future due to the occurrence of material recurring and
nonrecurring events, including without limitation the receipt and payment of recurring and
nonrecurring licensing payments, the initiation or termination of research collaborations,
unpredictable or unanticipated manufacturing and supply costs, developments in on-going patent
protection and litigation, the on-going expenses to lease and maintain our Rhode Island facilities,
and the increasing costs associated with operating our California facility.
Revenue
Revenue for the three months and nine months ended September 30, 2008, as compared with the
same periods in 2007, is summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended, |
|
|
|
|
|
|
|
|
|
|
Nine months ended, |
|
|
|
|
| |
|
September 30 |
|
|
Change in 2008 versus 2007 |
|
|
September 30 |
|
|
Change in 2008 versus 2007 |
|
| |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
agreements |
|
$ |
12,379 |
|
|
$ |
13,162 |
|
|
$ |
(783 |
) |
|
|
(6 |
)% |
|
$ |
59,561 |
|
|
$ |
26,948 |
|
|
$ |
32,613 |
|
|
|
121 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenue for the nine months ended September 30, 2008 from the comparable
period in 2007 was primarily attributable to increased licensing fees from existing licensing
agreements. Licensing revenue for the third quarter of 2008 as compared to the third quarter of
2007 was relatively flat.
Operating Expenses
Operating expenses for the three and nine month periods ended September 30, 2008, as compared
with the same periods in 2007, are summarized in the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended, |
|
|
Change in 2008 versus |
|
|
Nine months ended, |
|
|
Change in 2008 versus |
|
| |
|
September 30 |
|
|
2007 |
|
|
September 30 |
|
|
2007 |
|
| |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development |
|
$ |
4,171,799 |
|
|
$ |
5,621,955 |
|
|
$ |
(1,450,156 |
) |
|
|
(26 |
)% |
|
$ |
13,087,165 |
|
|
$ |
14,139,297 |
|
|
$ |
(1,052,132 |
) |
|
|
(7 |
)% |
General & administrative |
|
|
1,631,580 |
|
|
|
2,043,275 |
|
|
|
(411,695 |
) |
|
|
(20 |
)% |
|
|
6,231,629 |
|
|
|
5,716,480 |
|
|
|
515,149 |
|
|
|
9 |
% |
Wind-down expenses |
|
|
53,636 |
|
|
|
83,661 |
|
|
|
(30,025 |
) |
|
|
(36 |
)% |
|
|
381,136 |
|
|
|
439,471 |
|
|
|
(58,335 |
) |
|
|
(13 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
5,857,015 |
|
|
$ |
7,748,891 |
|
|
$ |
(1,891,876 |
) |
|
|
(24 |
)% |
|
$ |
19,699,930 |
|
|
$ |
20,295,248 |
|
|
$ |
(595,318 |
) |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
Our R&D expenses consist primarily of salaries and related personnel expenses; costs
associated with clinical trials and regulatory submissions; costs associated with preclinical
activities such as toxicology studies; certain patent-related costs such as licensing;
facilities-related costs such as depreciation; and lab equipment and supplies. Clinical trial
expenses include payments to vendors such as clinical research organizations, contract
manufacturers, clinical trial sites, laboratories for testing clinical samples, and consultants.
Cumulative R&D costs incurred since we refocused our activities on developing cell-based
therapeutics (fiscal years 2000 through the nine months ended 2008) were approximately $88 million.
Over this period, the majority of these cumulative costs were related to: (i) characterization of
our proprietary HuCNS-SC cell, (ii) expenditures for toxicology and other preclinical studies,
preparation and submission of our Investigational New Drug (IND) application for our Phase I trial
for NCL to the FDA, and obtaining FDA clearance; and (iii) expenditures in connection with our
HuCNS-SC Phase I clinical trial.
We use and manage our R&D resources, including our employees and facilities, across various
projects rather than on a project-by-project basis for the following reasons. The allocations of
time and resources change as the needs and priorities of individual projects and programs change,
and many of our researchers are assigned to more than one project at any given time. Furthermore,
we are
20
exploring multiple possible uses for each of our proprietary cell types, so much of our R&D
effort is complementary to and supportive of each of these projects. Lastly, much of our R&D effort
is focused on manufacturing processes, which can result in process improvements useful across cell
types. We also use external service providers to assist in the conduct of our clinical trials, to
manufacture certain of our product candidates and to provide various other R&D related products and
services. Many of these costs and expenses are complementary to and supportive of each of our
programs. Because we do not have a development collaborator for any of our product programs, we are
currently responsible for all costs incurred with respect to our product candidates.
R&D expenses totaled approximately $4,172,000 in the third quarter of 2008 compared with
$5,622,000 in the third quarter of 2007, and $13,087,000 for the nine month period ended September
30, 2008 compared with $14,139,000 for the nine month period ended September 30, 2007.
Third quarter ended September 30, 2008 versus third quarter ended September 30, 2007. R&D
expenses decreased by approximately $1,450,000, or 26%, in the third quarter of 2008 from the third
quarter of 2007. The decrease was primarily attributable to a decrease in external services of
approximately $1,358,000, including costs related to manufacturing and testing of our cells and
the enrollment and dosing of patients. The decrease in external services was due mainly to the
completed enrollment and dosing of our six-patient Phase I clinical trial in January 2008. The
decrease in R&D expenses, was also attributable to a net decrease in other operating expenses,
primarily attributable to personnel and business travel. At September 30, 2008, we had 43
full-time employees working in research and development and laboratory support services as compared
to 49 at September 30, 2007.
Nine month period ended September 30, 2008 versus nine month period ended September 30, 2007.
R&D expenses decreased by approximately $1,052,000, or 7%, for the nine month period ended
September 30, 2008 from the comparable period in 2007. The decrease was primarily attributable to a
decrease in external services of approximately $1,986,000, including costs related to manufacturing
and testing of our cells and the enrollment and dosing of patients. The decrease in clinical
external services was due mainly to the completed enrollment and dosing of our six-patient Phase I
clinical trial in January 2008. The decrease was also attributable to a decrease in business travel
expenses of approximately $177,000. These decreased expenses were partially offset by an increase
in other operating expenses primarily attributable to (i) an increase in personnel costs of
approximately $592,000 to support expanded operations in cell processing and our product
development programs, and (ii) an increase in other operating expenses of approximately $519,000,
primarily attributable to supplies. For the nine month period ended September 30, 2008, we had an
average weighted headcount of 45 full-time employees working in research and development and
laboratory support services as compared to an average weighted head count of 41 full-time employees
in the comparable period of 2007.
General and Administrative Expenses
General and Administrative (G&A) expenses totaled approximately $1,632,000 in the third
quarter of 2008 compared with $2,043,000 in the third quarter of 2007, and $6,232,000 for the
nine-month period ended September 30, 2008 compared with $5,716,000 for the nine-month period
ended September 30, 2007.
Third quarter ended September 30, 2008 versus third quarter ended September 30, 2007. G&A
expenses decreased by approximately $412,000, or 20%, in the third quarter of 2008 from the third
quarter of 2007. The decrease was primarily attributable to (i) a decrease in external services of
approximately $486,000, primarily due to a decrease in legal fees and external consultants, and
(ii) a decrease in net other operating expenses of approximately $21,000. These decreased expenses
were partially offset by an increase in personnel costs of approximately $95,000, primarily due to
an increase in headcount and share-based payment expense.
Nine-month period ended September 30, 2008 versus nine month period ended September 30, 2007.
G&A expenses increased by approximately $515,000, or 9%, for the nine-month period ended September
30, 2008 from the nine-month period ended September 30, 2007. The increase was primarily
attributable to an increase in personnel costs of approximately $193,000, due to an increase in
headcount and an increase in share-based payment expense. In addition, operating expenses for our
vacant pilot manufacturing facility in Rhode Island increased approximately $454,000 for the nine
month period in 2008 to the comparable period in 2007, primarily attributable to the loss of tenant
income to offset operating expenses. These increased expenses were partially offset by a decrease
in external fees of $95,000, including legal and recruiting fees, and a decrease in other operating
expenses of approximately $37,000.
21
Wind-down Expenses
In 1999, in connection with exiting our former research facility in Rhode Island, we created a
reserve for the estimated lease payments and operating expenses related to it. The reserve has been
re-evaluated and adjusted based on assumptions relevant to real estate market conditions and the
estimated time until we could either fully sublease, assign or sell our remaining interests in the
property. The reserve was approximately $6,143,000 at December 31, 2007. Payments net of subtenant
income of approximately $316,000 for the third quarter and $935,000 for the nine months ended
September 30, 2008 were recorded against this reserve. At September 30, 2008, we re-evaluated the
estimate and adjusted the reserve to approximately $5,436,000 by recording in aggregate, additional
wind-down expenses of approximately $54,000 in the third quarter of 2008, for a total of
approximately $381,000 for the nine months ended September 30, 2008. Payments recorded against the
reserve were approximately $344,000 in the third quarter and $1,067,000 for the nine months ended
September 30, 2007 and additional expenses recorded to adjust the reserve were approximately
$83,000 in the third quarter and $439,000 for the nine months ended September 30, 2007. Expenses
for this facility will fluctuate based on changes in tenant occupancy rates and other operating
expenses related to the lease. Even though it is our intent to sublease, assign, sell, or otherwise
divest ourselves of our interests in the facility at the earliest possible time, we cannot
determine with certainty a fixed date by which such events will occur. In light of this
uncertainty, based on estimates, we will periodically re-evaluate and adjust the reserve, as
necessary. See Note 5 “Wind-down expenses,” in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.
Other Income
Other income totaled approximately $101,000 in the third quarter of 2008 compared with
$582,000 of 2007, and $636,000 for the nine months ended 2008 compared with $3,071,000 for the nine
months ended 2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended, |
|
|
Change in 2008 versus |
|
|
Nine months ended, |
|
|
Change in 2008 versus |
|
| |
|
September 30 |
|
|
2007 |
|
|
September 30 |
|
|
2007 |
|
| |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Other income
(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and
settlement
agreement, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
% |
|
|
$ |
— |
|
|
$ |
550,467 |
|
|
$ |
(550,467 |
) |
|
|
* |
|
Gain on sale of
marketable
securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
717,621 |
|
|
|
(717,621 |
) |
|
|
* |
|
Interest income |
|
|
138,332 |
|
|
|
617,616 |
|
|
|
(479,284 |
) |
|
|
(78 |
)% |
|
|
738,107 |
|
|
|
1,926,753 |
|
|
|
(1,188,646 |
) |
|
|
(62 |
)% |
Interest expense |
|
|
(26,849 |
) |
|
|
(29,405 |
) |
|
|
2,556 |
|
|
|
(9 |
)% |
|
|
(84,010 |
) |
|
|
(96,777 |
) |
|
|
12,767 |
|
|
|
(13 |
)% |
Other expense, net |
|
|
(10,800 |
) |
|
|
(5,985 |
) |
|
|
(4,815 |
) |
|
|
80 |
% |
|
|
(18,145 |
) |
|
|
(27,009 |
) |
|
|
8,864 |
|
|
|
(33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
100,683 |
|
|
$ |
582,226 |
|
|
$ |
(481,543 |
) |
|
|
(83 |
)% |
|
$ |
635,952 |
|
|
$ |
3,071,055 |
|
|
$ |
(2,435,103 |
) |
|
|
(79 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Calculation is not meaningful. |
License and Settlement Agreement
In July 2005, we entered into an agreement with ReNeuron Limited, a wholly-owned subsidiary of
ReNeuron Group plc, a listed UK corporation (collectively referred to as “ReNeuron”). As part of
the agreement, we granted ReNeuron a license that allows ReNeuron to exploit their “c-mycER”
conditionally immortalized adult human neural stem cell technology for therapy and other purposes.
We received a 7.5% fully-diluted equity interest in ReNeuron, subject to certain anti-dilution
provisions, and a cross-license to the exclusive use of ReNeuron’s technology for certain diseases
and conditions, including lysosomal storage diseases, spinal cord injury, cerebral palsy, and
multiple sclerosis. The agreement also provides for full settlement of any potential claims that
either we or ReNeuron might have had against the other in connection with any putative infringement
of certain of each party’s patent rights prior to the effective date of the agreement.
Other income from the license and settlement agreement totaled approximately $550,000 for the
nine months ended 2007, which was the fair value of the ReNeuron shares we received under such
agreement, net of legal fees
and the value of the shares that were transferred to NeuroSpheres, a Canadian corporation from
which we have licensed some of the patent rights that are the subject of the
22
agreement with ReNeuron. See Note 2 “Financial Assets,” in the notes to condensed consolidated
financial statements of Part I, Item 1 of this Form 10-Q for further information regarding this
transaction.
Gain on Sale of Marketable Equity Securities
The gain on sale of marketable equity securities of approximately $716,000 for the nine months
ended 2007 was attributable to sales of ReNeuron shares. See Note 2 “Financial Assets,” in the
notes to condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for
further information on this transaction.
Interest Income
Interest income for the three months ended September 30, 2008, decreased by approximately
$479,000, or 78%, compared to the similar period in 2007. For the nine months ended September 30,
2008, interest income decreased by approximately $1,189,000, or 62%, compared to the similar period
in 2007. The decreases in 2008 were primarily due to a lower average yield and lower average
investment balances. See “Cash Used in Investing Activities,” in Liquidity and Capital Resources
below for further information.
Interest Expense
Interest expense for the three months ended September 30, 2008, decreased by approximately
$3,000, or 9%, compared to the similar period in 2007. For the nine months ended September 30,
2008, interest expense decreased by approximately 13,000, or 13%, compared to the similar period in
2007. The decreases were primarily attributable to lower outstanding debt and capital lease
balances. See Note 6 “Commitment and Contingencies,” in the notes to condensed consolidated
financial statements of Part I, Item 1 of this Form 10-Q for further information.
Liquidity and Capital Resources
Since our inception, we have financed our operations through the sale of common and preferred
stock, the issuance of long-term debt and capitalized lease obligations, revenue from collaborative
agreements, research grants, license fees, and interest income. We have very limited liquidity and
capital resources and must obtain significant additional capital and other resources in order to
sustain our product development efforts, to provide funding for the acquisition of technologies,
businesses and intellectual property rights, preclinical and clinical testing of our anticipated
products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office
facilities, establishment of production capabilities, general and administrative expenses and other
working capital requirements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change in |
|
|
| |
|
|
|
|
|
|
|
|
|
2008 |
|
|
| |
|
September 30, |
|
December 31, |
|
Versus 2007 |
|
|
| |
|
2008 |
|
2007 |
|
$ |
|
% |
Cash, cash equivalents and marketable debt securities |
|
$ |
21,345,548 |
|
|
$ |
37,645,085 |
|
|
$ |
(16,299,537 |
) |
|
|
(43 |
)% |
Total cash, cash equivalents and marketable debt securities were approximately $21,346,000 at
September 30, 2008, compared with approximately $37,645,000 at December 31, 2007. The decrease in
our cash, cash equivalents and marketable debt securities of approximately 43%, or $16,299,000,
from December 31, 2007 to September 30, 2008 was primarily attributable to cash used in operating
activities.
In summary, our cash flows were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Change in |
|
| |
|
Nine months ended |
|
|
2008 |
|
| |
|
September 30, |
|
|
Versus 2007 |
|
| |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
Net cash used in operating activities |
|
$ |
(17,165,645 |
) |
|
$ |
(15,009,151 |
) |
|
$ |
(2,156,494 |
) |
|
|
14 |
% |
Net cash provided by (used in )
investing activities |
|
$ |
23,372,726 |
|
|
$ |
(23,980,350 |
) |
|
$ |
47,353,076 |
|
|
|
(197 |
)% |
Net cash provided by financing activities |
|
$ |
204,276 |
|
|
$ |
4,723,173 |
|
|
$ |
(4,518,897 |
) |
|
|
(96 |
)% |
23
Net Cash Used in Operating Activities
Net cash used in operating activities is primarily driven by increases in our net loss.
However, operating cash flows differ from net loss as a result of non-cash charges or differences
in the timing of cash flows and expense recognition.
In our operating activities we used approximately $17,166,000 in cash for the nine months
ended 2008, compared with $15,009,000 for the same period in 2007. The increase in cash used in
operating activities in 2008 as compared to 2007 was primarily attributable to the continued
expansion of our operations in cell processing and our product development programs, including
increases in headcount and headcount related expenses and external services.
Net Cash Provided by (Used in) Investing Activities
The increase from 2007 to 2008 of approximately $47,353,000 for net cash provided by investing
activities was primarily attributable to the maturity of marketable debt securities held to
maturity, which were used to fund operating activities for the nine months ended 2008. In the nine
months ended September 30, 2007, we invested approximately $25,747,000 in net purchases of
marketable debt securities as compared to net proceeds of approximately $22,659,000 from the
maturity of marketable debt securities for the similar period in 2008. Also, in April 2008,
Progenitor Cell Therapy, LLC prepaid a $1.0 million loan that we had advanced to them in connection
with discussions about the possible acquisition of PCT.
In February 2007, we sold 5,275,000 ordinary shares of ReNeuron for net proceeds of
approximately $3,075,000.
Net Cash Provided by Financing Activities
The decrease from 2007 to 2008 of approximately $4,519,000 for net cash provided by financing
activities was primarily attributable to the following financing transactions for the nine months
ended 2007: (i) the sale of approximately 1,217,000 shares of our common stock at an average price
of $3.13 per share for net proceeds (i.e, net of equity expense) of approximately $3,545,000, sold
under a sales agreement with Cantor Fitzgerald & Co. (Cantor), and (ii) on April 26, 2007, a
warrant issued as part of a June 16, 2004 financing arrangement, was exercised to purchase an
aggregate of 575,658 shares of our common stock at $1.90 per share for net proceeds of
approximately $1,094,000. The sales agreement with Cantor permits us to sell up to 10,000,000
shares of registered common stock, from time to time, under a shelf registration statement filed
with the SEC. In 2008, under the sales agreement with Cantor, we sold 205,600 shares of our common
stock at an average price of $1.26 per share for net proceeds (net of equity expenses) of
approximately $194,000.
On June 25, 2008 we filed with the SEC a universal shelf registration statement, declared
effective July 18, 2008, which permits us to issue up to $100 million worth of registered debt and
equity securities. Under this effective shelf registration, we have the flexibility to issue
registered securities, from time to time, in one or more separate offerings or other transactions
with the size, price and terms to be determined at the time of issuance. Registered securities
issued using this shelf may be used to raise additional capital to fund our working capital and
other corporate needs, for future acquisitions of assets, programs or businesses, and for other
corporate purposes. In July 2008, we deregistered the remaining unissued shares (approximately $59
million worth of common stock) available under the shelf registration statement we had filed in
October 2005. The 2005 shelf permitted the issuance of up to $100 million of registered shares of
common stock.
Listed below are key financing transactions entered into by us in the last three years:
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In August and September 2008, we sold a total of 205,600 shares of our common stock
pursuant to the sales agreement we entered into with Cantor at an average price per share of
$1.26 for gross proceeds of approximately $259,000. Cantor is paid compensation equal to
5.0% of the gross proceeds pursuant to the terms of the agreement. |
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• |
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In April 2007, a warrant issued as part of a June 16, 2004 financing arrangement, was
exercised to purchase an aggregate of 575,658 shares of our common stock at $1.90 per share.
We issued 575,658 shares of our common stock and received proceeds of approximately
$1,094,000. |
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• |
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In January, April and October 2007, under the sales agreement with Cantor, we sold a
total of 1,807,000 shares of our common stock at an average price per share of $2.84 for
gross proceeds of approximately $5,133,000. |
24
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In April 2006, we sold 11,750,820 shares of our common stock to a limited number of
institutional investors at a price of $3.05 per share, for gross proceeds of approximately
$35,840,000. The shares were offered as a registered direct offering under an effective
shelf registration statement previously filed with and declared effective by the Securities
and Exchange Commission. We received total proceeds, net of offering expenses and placement
agency fees, of approximately $33,422,000. No warrants were issued as part of this financing
transaction. |
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• |
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In March 2006, a warrant issued as part of a June 16, 2004 financing arrangement was
exercised to purchase an aggregate of 526,400 shares of our common stock at $1.89 per share.
We issued 526,400 shares of our common stock and received proceeds of approximately
$995,000. |
We have incurred significant operating losses and negative cash flows since inception. We have
not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain
profitability in the future. We do not expect to be profitable in the next several years, but
rather expect to incur additional operating losses. We have limited liquidity and capital resources
and must obtain significant additional capital resources in order to sustain our product
development efforts, for acquisition of technologies and intellectual property rights, for
preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals,
acquisition of capital equipment, laboratory and office facilities, establishment of production
capabilities, for general and administrative expenses and other working capital requirements. We
rely on cash balances and proceeds from equity and debt offerings, proceeds from the transfer or
sale of our intellectual property rights, equipment, facilities or investments, and government
grants and funding from collaborative arrangements, if obtainable, to fund our operations.
We intend to pursue opportunities to obtain additional financing in the future through equity
and debt financings, grants and collaborative research arrangements. On December 29, 2006, we filed
a Prospectus Supplement announcing the entry of a sales agreement with Cantor under which up to 10
million shares may be sold from time to time under the shelf registration statement (discussed
above), of which approximately 8 million shares remain available at September 30, 2008. The source,
timing and availability of any future financing will depend principally upon market conditions,
interest rates and, more specifically, on our progress in our exploratory, preclinical and future
clinical development programs. Funding may not be available when needed — at all, or on terms
acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back
or eliminate some or all of our research and product development programs, planned clinical trials,
and/or our capital expenditures or to license our potential products or technologies to third
parties.
Commitments
See Note 6, “Commitments and Contingencies” in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.
Off-Balance Sheet Arrangements
We have certain contractual arrangements that create potential risk for us and are not
recognized in our condensed consolidated balance sheets. Discussed below are those off-balance
sheet arrangements that have, or are reasonably likely to have, a material current or future effect
on our financial condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Operating Leases
We lease various real properties under operating leases that generally require us to pay
taxes, insurance, maintenance, and minimum lease payments. Some of our leases have options to
renew.
We entered into and amended a lease agreement for an approximately 68,000 square foot facility
located at the Stanford Research Park in Palo Alto, California. At September 30, 2008, we had a
space-sharing agreement covering approximately 10,451 square feet of this facility. We receive base
payments plus a proportionate share of the operating expenses based on square footage over the term
of the agreement. We expect to receive, in aggregate, approximately $144,000 as part of the
space-sharing agreement, inclusive of estimated operating expenses, for the remainder of 2008. As a
result of the above transactions, our estimated net cash outlay for rent and estimated operating
expenses will be approximately $770,000 for the remainder of 2008.
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We continue to have outstanding obligations in regard to our former facilities in Lincoln,
Rhode Island. In 1997, we had entered into a fifteen-year lease for a scientific and administrative
facility (the SAF) in a sale and leaseback arrangement. The lease includes escalating rent
payments. We expect to pay approximately $293,000 in operating lease payments and estimated
operating expenses of approximately $137,000, before receipt of sub-tenant income, for the
remainder of 2008. We expect to receive, in aggregate, approximately $80,000 in sub-tenant rent and
operating expense for the remainder of 2008. As a result of the above transactions, our estimated
cash outlay net of sub-tenant rent for the SAF will be approximately $350,000 for the remainder of
2008.
With the exception of leases discussed above, we have not entered into any off balance sheet
financial arrangements and have not established any special purpose entities. We have not
guaranteed any debts or commitments of other entities or entered into any options on non-financial
assets.
Contractual Obligations
During the nine months ended September 30, 2008, we believe that there have been no
significant changes in our payments due under contractual obligations, as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2007.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We adopted the
provisions of SFAS 157 that became effective January 1, 2008. See Note 3 “Fair Value Measurement,”
in the notes to condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for
further information about the adoption of the required provisions of SFAS 157.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
Statement No. 157 (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial
assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). We are currently
evaluating the impact of SFAS 157 on our consolidated financial statements for items within the
scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active. FSP 157-3 clarifies the application of SFAS
157, in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not
active. This FSP shall be effective upon issuance, including prior periods for which financial
statements have not been issued. Revisions resulting from a change in the valuation technique or
its application shall be accounted for as a change in accounting estimate. Adoption of FSP 157-3
will not have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities—Including an amendment of FASB Statement No. 115 (SFAS 159). Under SFAS 159,
a company may choose, at specified election dates, to measure eligible items at fair value and
report unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
SFAS 159 became effective beginning with our first quarter of 2008. At this time, we have chosen
not to adopt the provisions of SFAS 159 for our existing financial instruments.
In April 2008, the FASB issued FSP No.142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). FSP 142-3 amends paragraph
11(d) of SFAS 142 to require an entity to use its own assumptions about renewal or extension of an
arrangement, adjusted for the entity-specific factors in paragraph 11 of SFAS 142, even when there
is likely to be substantial cost or material modifications. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, with early adoption prohibited. We expect to adopt FSP142-3 on January 1, 2009,
and we do not expect the adoption to have a material effect on our consolidated financial condition
and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks at September 30, 2008 have not changed materially from those discussed in
Item 7A of our Form 10-K for the year ended December 31, 2007 on file with the U.S. Securities and
Exchange Commission.
See also Note 2, “Financial Assets,” in the notes to condensed consolidated financial
statements in Part I, Item 1 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
In response to the requirement of the Sarbanes-Oxley Act of 2002, as of the end of the period
covered by this report, our chief executive officer and chief financial officer, along with other
members of management, reviewed the effectiveness of the design and operation of our disclosure
controls and procedures. Such controls and procedures are designed to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including the chief executive officer
and the chief financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, the chief executive officer and chief financial officer have
concluded that the Company’s disclosure controls and procedures are effective.
During the most recent quarter, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, these controls of the Company.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2006, we filed suit against Neuralstem, Inc., in the Federal District Court for the
District of Maryland, alleging that Neuralstem’s activities violate claims in four of the patents
we exclusively licensed from NeuroSpheres. Neuralstem has filed a motion for dismissal or summary
judgment in the alternative, citing Title 35, Section 271(e)(1) of the United States Code, which
says that it is not an act of patent infringement to make, use or sell a patented invention “solely
for uses reasonably related to the development and submission of information” to the FDA.
Neuralstem argues that because it does not have any therapeutic products on the market yet, the
activities complained of fall within the protection of Section 271(e)(1) — that is, basically,
that the suit is premature. This issue will be decided after discovery is complete. Subsequent to
filing its motion to dismiss, in December 2006, Neuralstem petitioned the U.S. Patent and Trademark
Office (PTO) to reexamine two of the patents in our infringement action against Neuralstem, namely
U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug screening) and U.S.
Patent No. 7,101,709 (claiming the use of human neural stem cells for screening biological agents).
In April 2007, Neuralstem petitioned the PTO to reexamine the remaining two patents in the suit,
namely U.S. Patent No. 5,851,832 (claiming methods for proliferating human neural stem cells) and
U.S. Patent No. 6,497,872 (claiming methods for transplanting human neural stem cells). These
requests were granted by the PTO and, in June 2007, the parties voluntarily agreed to stay the
pending litigation while the PTO considers these reexamination requests. In October 2007,
Neuralstem petitioned the PTO to reexamine a fifth patent, namely U.S. Patent No. 6,103,530, which
claims a culture medium for proliferating mammalian neural stem cells. In April 2008, the PTO
upheld the ‘832 and ‘872 patents, as amended, and issued Notices of Intent to Issue an Ex Parte
Reexamination Certificate for both. In August 2008, the PTO upheld the ‘530 patent, as amended,
and issued a Notice of Intent to Issue an Ex Parte Reexamination Certificate. The remaining two
patents are still under review by the PTO.
In May 2008, we filed a second patent infringement suit against Neuralstem and its two
founders, Karl Johe and Richard Garr. In this suit, which we filed in the Federal District Court
for the Northern District of California, we allege that Neuralstem’s activities infringe claims in
two patents we exclusively license from NeuroSpheres, specifically U.S. Patent No. 7,361,505
(claiming composition of matter of human neural stem cells derived from any source material) and
U.S. Patent No. 7,115,418 (claiming methods for proliferating human neural stem cells). In
addition, we allege various state law causes of action against Neuralstem arising out of its
repeated derogatory statements to the public about our patent portfolio. Also in May 2008,
Neuralstem filed suit against us and NeuroSpheres in the Federal District Court for the District of
Maryland seeking a declaratory judgment that the ‘505 and ‘418 patents are either invalid or are
not infringed by Neuralstem and that Neuralstem has not violated California state law. In August
2008, the California court transferred our lawsuit against Neuralstem to Maryland for resolution on
the merits. We anticipate that the Maryland District Court will consolidate these actions in some
manner prior to trial.
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ITEM 1A. RISK FACTORS
This quarterly report on Form 10-Q contains forward looking statements that involve risks and
uncertainties. Our business, operating results, financial performance, and share price may be
materially adversely affected by a number of factors, including but not limited to the following
risk factors, any one of which could cause actual results to vary materially from anticipated
results or from those expressed in any forward-looking statements made by us in this quarterly
report on Form 10-Q or in other reports, press releases or other statements issued from time to
time. Additional factors that may cause such a difference are set forth elsewhere in this quarterly
report on Form 10-Q.
Risks Related to our Business
Any adverse development relating to our HuCNS-SC product candidate, such as a significant clinical
trial failure, could substantially depress our stock price and prevent us from raising additional
capital.
At present our ability to progress as a company is significantly dependent on a single product
candidate, our HuCNS-SC cells (purified human neural stem cells), and on a single early stage
clinical trial, our Phase I clinical trial for neuronal ceroid lipofuscinosis (NCL, also often
referred to as Batten disease). Any clinical, regulatory or other development that significantly
delays or prevents us from completing this trial, any material safety issue or adverse side effect
to any study participant in this trial, or the failure of this trial to show the results expected
would likely depress our stock price significantly and could prevent us from raising the
substantial additional capital we will need to further develop our cellular technologies. Moreover,
any material adverse occurrence in our first clinical trial for Batten disease could substantially
impair our ability to initiate clinical trials to test our HuCNS-SC cells in patients with spinal
cord injuries, myelin disorders or other potential indications. This, in turn, could adversely
impact our ability to raise additional capital and pursue our planned research and development
efforts in both our CNS and liver programs.
We have limited capital resources and we may not obtain the significant additional capital needed
to sustain our research and development efforts.
We have limited liquidity and capital resources and must obtain significant additional capital
resources in order to sustain our product development efforts, acquire businesses, technologies and
intellectual property rights which may be important to our business, continue preclinical and
clinical testing of our investigative products, pursue regulatory approvals, acquire capital
equipment, laboratory and office facilities, establish production capabilities, maintain and
enforce our intellectual property portfolio, and support our general and administrative expenses
and other working capital requirements. We rely on cash reserves and proceeds from equity and debt
offerings, proceeds from the transfer, license, lease, or sale of our intellectual property rights,
equipment, facilities, or investments, and government grants and funding from collaborative
arrangements, if obtainable, to fund our operations.
We intend to pursue opportunities for additional fundraising in the future through equity or
debt financings, corporate alliances or combinations, grants or collaborative research
arrangements, or any combination of these. However, external financing in the current financial
environment may be particularly difficult, and the source, timing and availability of any future
fundraising will depend principally upon market conditions, interest rates and, more specifically,
on progress in our research, preclinical and clinical development programs. Funding may not be
available when needed — at all or on terms acceptable to us. While we actively manage our programs
and resources in order to conserve cash between fundraising opportunities, we believe we will need
to secure additional capital in order to conduct our operations beyond 2009. If we exhaust our
cash reserves and are unable to realize adequate additional fundraising, we may be unable to meet
operating obligations and be required to initiate bankruptcy proceedings or delay, scale back or
eliminate some or all of our research and product development programs.
Our product development programs are based on novel technologies and are inherently risky.
We are subject to the risks of failure inherent in the development of products based on new
technologies. The novel nature of these therapies creates significant challenges in regard to
product development and optimization, manufacturing, government regulation, third party
reimbursement, and market acceptance. For example, the pathway to regulatory approval for
cell-based therapies, including our product candidates, may be more complex and lengthy than the
pathway for conventional drugs. These challenges may prevent us from developing and commercializing
products on a timely or profitable basis or at all.
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Our technology is at an early stage of discovery and development, and we may fail to develop any
commercially acceptable or profitable products.
We have incurred significant operating losses and negative cash flows since inception. We have
not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain
profitability in the future. We have yet to develop any products that have been approved for
marketing, and we do not expect to become profitable within the next several years, but rather
expect to incur additional and increasing operating losses. Before commercializing any medical
product, we will need to obtain regulatory approval from the FDA or from equivalent foreign
agencies after conducting extensive preclinical studies and clinical trials that demonstrate that
the product candidate is safe and effective. Except for the NCL trial currently being conducted at
Oregon Health & Science University (OHSU), we have had no experience conducting human clinical
trials. We expect that none of our cell-based therapeutic product candidates will be commercially
available for several years, if at all.
While the FDA has permitted us to initiate our Phase I clinical trial of our proprietary
HuCNS-SC product candidate in NCL, and the Institutional Review Board of OHSU has approved the
protocol and we have completed dosing the six patients planned for the trial, there can be no
assurance that the trial will be completed or result in a successful outcome. We may elect to delay
or discontinue other studies or clinical trials based on unfavorable results. Any product developed
from, or based on, cellular technologies may fail to:
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survive and persist in the desired location; |
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provide the intended therapeutic benefit; |
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engraft into existing tissue in the desired manner; or |
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achieve therapeutic benefits equal to, or better than, the standard of treatment at the
time of testing. |
In addition, our products may cause undesirable side effects. Results of preclinical research
in animals may not be indicative of future clinical results in humans.
Ultimately if regulatory authorities do not approve our products or if we fail to maintain
regulatory compliance, we would be unable to commercialize our products, and our business and
results of operations would be harmed. Even if we do succeed in developing products, we will face
many potential obstacles such as the need to develop or obtain manufacturing, marketing and
distribution capabilities. Furthermore, because transplantation of cells is a new form of therapy,
the marketplace may not accept any products we may develop.
Moreover, because our cell-based therapeutic products will be derived from tissue of
individuals other than the patient (that is, they will be “non-self” or “allogeneic” transplant
products), patients will likely require the use of immunosuppressive drugs. While immunosuppression
is now standard in connection with allogeneic transplants of various kinds, such as heart or liver
transplants, long-term maintenance on immunosuppressive drugs can result in complications such as
infection, cancer, cardiovascular disease, and renal dysfunction. An immunosuppression regimen is
currently being used with our therapeutic product candidate in our Phase I clinical trial for NCL.
Our success will depend in large part on our ability to develop and commercialize products that
treat diseases other than neuronal ceroid lipofuscinosis (Batten disease).
Although we have initially focused on evaluating our neural stem cell product for the
treatment of infantile and late infantile NCL (Batten disease), this disease is rare and the market
for treating this disease is small. Accordingly, even if we obtain marketing approval for our
HuCNS-SC product candidate for infantile and late infantile NCL, in order to achieve profitability,
we will likely need to obtain approval to treat additional diseases that present more significant
market opportunities.
Acquisitions of companies, businesses or technologies may substantially dilute our stockholders and
increase our operating losses.
We may make acquisitions of businesses, technologies or intellectual property rights or
otherwise modify our business model in ways we believe to be necessary, useful or complementary to
our current product development efforts and cell-based therapeutics business. Any such acquisition
or change in business activities may require assimilation of the operations, products or product
candidates and
29
personnel of the acquired business and the training and integration of its employees, and
could substantially increase our operating costs, without any offsetting increase in revenue.
Acquisitions may not provide the intended technological, scientific or business benefits and could
disrupt our operations and divert our limited resources and management’s attention from our current
operations, which could harm our existing product development efforts. We would likely issue equity
securities to pay for any future acquisitions. The issuance of equity securities for an acquisition
could be substantially dilutive to our stockholders. In addition, our results of operations may
suffer because of acquisition-related costs or the post-acquisition costs of funding the
development of an acquired technology or product candidates or operation of the acquired business,
or due to amortization or impairment costs for acquired goodwill and other intangible assets. Any
investment made in, or funds advanced to, a potential acquisition target could also significantly
adversely affect our results of operation and could further reduce our limited capital resources.
Any acquisition or action taken in anticipation of a potential acquisition or other change in
business activities could substantially depress the price of our stock.
We have payment obligations resulting from real property owned or leased by us in Rhode Island,
which diverts funding from our cell-based therapeutics research and development.
Prior to our reorganization in 1999 and the consolidation of our business in California, we
carried out our former encapsulated cell therapy programs in Lincoln, Rhode Island, where we also
had our administrative offices. Although we have vacated the Rhode Island facilities, we remain
obligated to make lease payments and payments for operating costs for our former science and
administrative facility, which we have leased through June 30, 2013. These costs, before sub-tenant
rental income, amounted to approximately $1,523,000 in 2007; our rent payments will increase over
the term of the lease, and our operating costs may increase as well. In addition to these costs of
our former science and administrative facility, we are obligated to make debt service payments and
payments for operating costs of approximately $400,000 per year for our former encapsulated cell
therapy pilot manufacturing facility, which we own. We have currently subleased a portion of the
science and administrative facility, and we are seeking to sublease the remaining portion, but we
cannot be sure that we will be able to keep any part of the facility subleased for the duration of
our obligation. We are currently seeking to sublease the pilot manufacturing facility, but may not
be able to sublease or sell the facility in the future. These continuing costs significantly reduce
our cash resources and adversely affect our ability to fund further development of our cellular
technologies. In addition, changes in real estate market conditions and assumptions regarding the
length of time it may take us to either fully sublease, assign or sell our remaining interest in
the our former research facility in Rhode Island may have a significant impact on and cause large
variations in our quarter to quarter results of operations. In 1999, in connection with exiting our
former research facility in Rhode Island, we created a reserve for the estimated lease payments and
operating expenses related to it. The reserve is periodically re-evaluated and adjusted based on
assumptions relevant to real estate market conditions and the estimated time until we can either,
fully sublease, assign or sell our remaining interests in the property. At December 31, 2007, the
reserve was $6,143,000. For the year 2007, we incurred $1,420,000 in operating expenses net of
sub-tenant income for this facility. Expenses for this facility will fluctuate based on changes in
tenant occupancy rates and other operating expenses related to the lease. Even though it is our
intent to sublease, assign, sell, or otherwise divest ourselves of our interests in the facility at
the earliest possible time, we cannot determine with certainty a fixed date by which such events
will occur. In light of this uncertainty, based on estimates, we will periodically re-evaluate and
adjust the reserve, as necessary, and we may make significant adverse adjustments to the reserve in
the future.
We may be unable to obtain partners to support our cell-based therapeutic product development
efforts when needed to commercialize our technologies.
Equity and debt financings alone may not be sufficient to fund the cost of developing our
cellular technologies, and we may need to rely on partnering or other arrangements to provide
financial support for our cellular discovery and development efforts. In addition, in order to
successfully develop and commercialize our technologies, we may need to enter into various
arrangements with corporate sponsors, pharmaceutical companies, universities, research groups, and
others. While we have engaged, and expect to continue to engage, in discussions regarding such
arrangements, we have not reached any agreement, and we may fail to obtain any such agreement on
terms acceptable to us. Even if we enter into such arrangements, we may not be able to satisfy our
obligations under them or renew or replace them after their original terms expire. Furthermore,
these arrangements may require us to grant rights to third parties, such as exclusive marketing
rights to one or more products, may require us to issue securities to our collaborators and may
contain other terms that are burdensome to us or result in a decrease in our stock price.
30
If we are unable to protect our patents and proprietary rights, our business, financial condition
and results of operations may be materially harmed.
We either own or exclusively license a number of patents and pending patent applications
related to various stem and progenitor cells,
including human neural stem cell cultures, as well as methods of deriving and using them. The
process of obtaining patent protection for products such as those we propose to develop is highly
uncertain and involves complex and continually evolving factual and legal questions. The
governmental authorities that consider patent applications can deny or significantly reduce the
patent coverage requested in an application either before or after issuing the patent. For example,
under the procedures of the European Patent Office, third parties may oppose our issued European
patents during the relevant opposition period. These proceedings and oppositions could result in
substantial uncertainties and cost for us, even if the eventual outcome is favorable to us, and the
outcome might not be favorable to us. In the United States, third parties may seek to invalidate
issued patents through a U.S. PTO reexamination process or through the courts. In addition, changes
to the laws protecting intellectual property rights could adversely impact the perceived or actual
value of our Company. Consequently, we do not know whether any of our pending applications will
result in the issuance of patents, whether any of our issued patents will be invalidated or
restricted, whether any existing or future patents will provide sufficient protection or
significant commercial advantage, or whether others will circumvent these patents, whether or not
lawfully. In addition, our patents may not afford us adequate protection from competing products.
Moreover, because patents issue for a limited term, our patents may expire before we can
commercialize a product covered by the issued patent claims or before we can utilize the patents
profitably. Some of our most important patents begin to expire in 2015.
If we learn of third parties who infringe our patent rights, we may decide to initiate legal
proceedings to enforce these rights. Patent litigation is inherently unpredictable and highly risky
and may result in unanticipated challenges to the validity or enforceability of our intellectual
property, which could result in the loss of these rights. Litigation proceedings are also very
costly and the parties we bring actions against may have significantly greater financial resources
than our own. We may not prevail in these proceedings.
Proprietary trade secrets and unpatented know-how are also important to our research and
development activities. We cannot be certain that others will not independently develop the same or
similar technologies on their own or gain access to our trade secrets or disclose such technology
or that we will be able to meaningfully protect our trade secrets and unpatented know-how. We
require our employees, consultants and significant scientific collaborators and sponsored
researchers to execute confidentiality agreements upon the commencement of an employment or
consulting relationship with us. These agreements may, however, fail to provide meaningful
protection or adequate remedies for us in the event of unauthorized use, transfer or disclosure of
such information or technology.
If we are unable to obtain necessary licenses to third-party patents and other rights, we may not
be able to commercially develop our expected products.
A number of pharmaceutical, biotechnology and other companies, universities and research
institutions have filed patent applications or have received patents relating to cell therapy, stem
and progenitor cells and other technologies potentially relevant to, or necessary for, our expected
products. We cannot predict which, if any, of these applications will issue as patents or how many
of these issued patents will be found valid and enforceable. There may also be existing issued
patents which we are currently unaware of which would be infringed by the commercialization of one
or more of our product candidates. If so, we may be prevented from commercializing these products
unless the third party is willing to grant a license to us. We may be unable to obtain licenses to
the relevant patents at a reasonable cost, if at all, and may also be unable to develop or obtain
alternative non-infringing technology. If we are unable to obtain such licenses or develop
non-infringing technology at a reasonable cost, our business could be significantly harmed. Also,
any infringement lawsuits commenced against us may result in significant costs, divert our
management’s attention and result in an award against us for substantial damages, or potentially
prevent us from continuing certain operations.
We are aware of intellectual property rights held by third parties that relate to products or
technologies we are developing. For example, some aspects of our cell-based therapeutic product
candidates involve the use of growth factors, antibodies and other reagents that may, in certain
cases, be the subject of third party rights. Before we commercialize any product using these growth
factors, antibodies or reagents, we may need to obtain license rights from third parties or use
alternative growth factors, antibodies and reagents that are not then the subject of third party
patent rights. We currently believe that the commercialization of our products as currently planned
will not infringe these third party rights, or, alternatively, that we will be able to obtain
necessary licenses or otherwise use alternative non-infringing technology. However, third parties
may nonetheless bring suit against us claiming infringement. If we are unable to prove that our
technology does not infringe their patents, or if we are unable to obtain necessary licenses or
otherwise use alternative non-infringing technology, we may not be able to commercialize any
products.
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We have obtained rights from companies, universities and research institutions to
technologies, processes and compounds that we believe may be important to the development of our
products. These licensors, however, may cancel our licenses or convert them to non-exclusive
licenses if we fail to use the relevant technology or otherwise breach these agreements. Loss of
these licenses could
expose us to the risk that our technology infringes the rights of third parties. We can give
no assurance that any of these licenses will provide effective protection against our competitors.
We compete with companies that have significant advantages over us.
The market for therapeutic products to treat diseases of, or injuries to, the central nervous
system (CNS) is large and competition is intense. The majority of the products currently on the
market or in development are small molecule pharmaceutical compounds, and many pharmaceutical
companies have made significant commitments to the CNS field. We believe cellular therapies, if
proven safe and effective, will have unique properties that will make them desirable over small
molecule drugs, none of which currently replace damaged tissue. However, any cell-based therapeutic
to treat diseases of, or injuries to, the CNS is likely to face intense competition from the small
molecule sector, biologics, as well as medical devices. We expect to compete with a host of
companies, some of which are privately owned and some of which have resources far greater than
ours.
In the liver field, there are no broad-based therapies for the treatment of liver disease at
present. The primary therapy is liver transplantation, which is limited by the availability of
matched donor organs. Liver-assist devices, when and if they become available, could also be used
to help patients while they await suitably matched organs for transplantation. Liver
transplantation may remain the standard of care even if we successfully develop a cellular therapy.
In addition, new therapies may become available before we successfully develop a cell-based therapy
for liver disease.
Development of our technologies is subject to, and restricted by, extensive government regulation,
which could impede our business.
Our research and development efforts, as well as any future clinical trials, and the
manufacturing and marketing of any products we may develop, will be subject to, and restricted by,
extensive regulation by governmental authorities in the United States and other countries. The
process of obtaining FDA and other necessary regulatory approvals is lengthy, expensive and
uncertain. We or our collaborators may fail to obtain the necessary approvals to commence or
continue clinical testing or to manufacture or market our potential products in reasonable time
frames, if at all. In addition, the U.S. Congress and other legislative bodies may enact regulatory
reforms or restrictions on the development of new therapies that could adversely affect the
regulatory environment in which we operate or the development of any products we may develop.
We base our research and development on the use of human stem and progenitor cells obtained
from human tissue, including fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue, including those incorporated in
federal Good Tissue Practice, or cGTP, regulations. These regulatory and other constraints could
prevent us from obtaining cells and other components of our products in the quantity or quality
needed for their development or commercialization. These restrictions change from time to time and
may become more onerous. Additionally, we may not be able to identify or develop reliable sources
for the cells necessary for our potential products — that is, sources that follow all state and
federal guidelines for cell procurement. Certain components used to manufacture our stem and
progenitor cell product candidates will need to be manufactured in compliance with the FDA’s Good
Manufacturing Practices, or cGMP. Accordingly, we will need to enter into supply agreements with
companies that manufacture these components to cGMP standards.
We are dependent on the services of key personnel.
We are highly dependent on the principal members of our management and scientific staff and
some of our outside consultants, including the members of our scientific advisory board, our chief
executive officer, our vice presidents, and the heads of key departments or functions within the
company. Although we have entered into employment agreements with some of these individuals, they
may terminate their agreements at any time. In addition, our operations are dependent upon our
ability to attract and retain additional qualified scientific and management personnel. We may not
be able to attract and retain the personnel we need on acceptable terms given the competition for
experienced personnel among pharmaceutical, biotechnology and health care companies, universities
and research institutions.
Our activities involve hazardous materials and experimental animal testing; improper handling of
these animals and materials by our employees or agents could expose us to significant legal and
financial penalties.
Our research and development activities involve the controlled use of test animals as well as
hazardous chemicals and potentially hazardous biological materials such as human tissue. Their use
subjects us to environmental and safety laws and regulations such as
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those governing laboratory procedures, exposure to blood-borne pathogens, use of laboratory
animals, and the handling of biohazardous materials. Compliance with current or future laws and
regulations may be expensive and the cost of compliance could adversely affect us.
Although we believe that our safety procedures for using, handling, storing, and disposing of
hazardous and potentially hazardous materials comply with the standards prescribed by California
and federal regulations, the risk of accidental contamination or injury from these materials cannot
be eliminated. In the event of such an accident or of any violation of these or future laws and
regulations, state or federal authorities could curtail our use of these materials; we could be
liable for any civil damages that result, the cost of which could be substantial; and we could be
subjected to substantial fines or penalties. In addition, any failure by us to control the use,
disposal, removal, or storage, or to adequately restrict the discharge, or to assist in the
cleanup, of hazardous chemicals or hazardous, infectious or toxic substances could subject us to
significant liability. Any such liability could exceed our resources and could have a material
adverse effect on our business, financial condition and results of operations. Moreover, an
accident could damage our research and manufacturing facilities and operations and result in
serious adverse effects on our business.
The development, manufacturing and commercialization of cell-based therapeutic products expose us
to product liability claims, which could lead to substantial liability.
By developing and, ultimately, commercializing medical products, we are exposed to the risk of
product liability claims. Product liability claims against us could result in substantial
litigation costs and damage awards against us. We have obtained liability insurance that covers our
clinical trials, and we will need to increase our insurance coverage if and when we begin
commercializing products. We may not be able to obtain insurance on acceptable terms, if at all,
and the policy limits on our insurance policies may be insufficient to cover our liability.
The manufacture of cell-based therapeutic products is novel, highly regulated, critical to our
business, and dependent upon specialized key materials.
The proliferation and manufacture of cell-based therapeutic products are complicated and
difficult processes, dependent upon substantial know-how and subject to the need for continual
process improvements to be competitive. Our manufacturing experience is limited and the
technologies are comparatively new. In addition, our ability to scale-up manufacturing to satisfy
the various requirements of our planned clinical trials, such as GTP, GMP and release testing
requirements, is uncertain. Manufacturing disruptions may occur and despite efforts to regulate
and control all aspects of manufacturing, the potential for human or system failure remains.
Manufacturing irregularities or lapses in quality control could have a serious adverse effect on
our reputation and business, which could cause a significant loss of stockholder value. Many of the
materials that we use to prepare our cell-based products are highly specialized, complex and
available from only a limited number of suppliers or derived from a biological origin. At present,
some of our material requirements are single sourced, and the loss of one or more of these sources
may adversely affect our business if we are unable to obtain alternatives or alternative sources at
all or upon terms that are acceptable to us.
Because health care insurers and other organizations may not pay for our products or may impose
limits on reimbursements, our ability to become profitable could be adversely affected.
In both domestic and foreign markets, sales of potential products are likely to depend in part
upon the availability and amounts of reimbursement from third-party health care payor
organizations, including government agencies, private health care insurers and other health care
payors, such as health maintenance organizations and self-insured employee plans. There is
considerable pressure to reduce the cost of therapeutic products. Government and other third party
payors are increasingly attempting to contain health care costs by limiting both coverage and the
level of reimbursement for new therapeutic products and by refusing, in some cases, to provide any
coverage for uses of approved products for disease indications for which the FDA or other relevant
authority has not granted marketing approval. Moreover, in some cases, government and other third
party payors have refused to provide reimbursement for uses of approved products for disease
indications for which the FDA or other relevant authority has granted marketing approval.
Significant uncertainty exists as to the reimbursement status of newly approved health care
products or novel therapies such as ours. Even if we obtain regulatory approval to market our
products, we can give no assurance that reimbursement will be provided by such payors at all or
without substantial delay or, if such reimbursement is provided, that the approved reimbursement
amounts will be sufficient to enable us to sell products we develop on a profitable basis. Changes
in reimbursement policies could also adversely affect the willingness of pharmaceutical companies
to collaborate with us on the development of our cellular technologies. In certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to government control. We also
expect that there will continue to be a number of
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federal and state proposals to implement government control over health care costs. Efforts to
change regulatory and reimbursement standards are likely to continue in future legislative
sessions. We do not know what legislative proposals federal or state governments will adopt or what
actions federal, state or private payors for health care goods and services may take in response to
such proposals or legislation. We cannot predict the effect of government control and health care
reimbursement practices on our business.
Ethical and other concerns surrounding the use of stem or progenitor-based cell therapy may
negatively affect regulatory approval or public perception of our product candidates, which could
reduce demand for our products or depress our stock price.
The use of stem cells for research and therapy has been the subject of debate regarding
related ethical, legal and social issues. Although these concerns have mainly been directed to the
use of embryonic stem cells, which we do not use, the distinction between embryonic and
non-embryonic stem cells is frequently overlooked; moreover, our use of human stem or progenitor
cells from fetal sources might raise these or similar concerns. Negative public attitudes toward
stem cell therapy could result in greater governmental regulation of stem cell therapies, which
could harm our business. For example, concerns regarding such possible regulation could impact our
ability to attract collaborators and investors. Also, existing regulatory constraints on the use of
embryonic stem cells may in the future be extended to use of fetal stem cells, and these
constraints might prohibit or restrict us from conducting research or from commercializing
products. Existing and potential U.S. government regulation of embryonic tissue may lead
researchers to leave the field of stem cell research or the country altogether, in order to assure
that their careers will not be impeded by restrictions on their work. Similarly, these factors may
induce graduate students to choose other fields less vulnerable to changes in regulatory oversight,
thus exacerbating the risk that we may not be able to attract and retain the scientific personnel
we need in face of the competition among pharmaceutical, biotechnology and health care companies,
universities and research institutions for what may become a shrinking class of qualified
individuals.
Our corporate documents and Delaware law contain provisions that could make it difficult for us to
be acquired in a transaction that might be beneficial to our stockholders.
Our board of directors has the authority to issue shares of preferred stock and to fix the
rights, preferences, privileges, and restrictions of these shares without stockholder approval.
These provisions in our corporate documents, along with certain provisions under Delaware law, may
make it more difficult for a third party to acquire us or discourage a third party from attempting
to acquire us, even if the acquisition might be beneficial to our stockholders.
Risks Related to the Securities Market
Our stock price has been, and will likely continue to be, highly volatile, which may negatively
affect our ability to obtain additional financing in the future.
The market price per share of our common stock has been and is likely to continue to be highly
volatile due to the risks and uncertainties described in this section of this Quarterly Report on
Form 10-Q, as well as other factors, including:
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our ability to develop and test our technologies; |
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our ability to patent or obtain licenses to necessary technologies; |
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conditions and publicity regarding the industry in which we operate, as well as the
specific areas our product candidates seek to address; |
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competition in our industry; |
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economic and other external factors or other disasters or crises; |
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price and volume fluctuations in the stock market at large that are unrelated to our
operating performance; and |
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comments by securities analysts, or our failure to meet market expectations. |
Over the two-year period ended September 30, 2008, the trading price of our common stock as
reported on the Nasdaq Global Market
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ranged from a high of $3.63 to a low of $1.00. As a result of this volatility, your investment
in our stock is subject to substantial risk. Furthermore, the volatility of our stock price could
negatively impact our ability to raise capital or acquire businesses or technologies.
We are contractually obligated to issue shares in the future, diluting the interest of current
stockholders.
As of September 30, 2008, there were outstanding warrants to purchase 1,255,000 shares of our
common stock, at a weighted average exercise price of $1.90 per share. Also as of September 30,
2008, there were outstanding options to purchase 8,471,887 shares of our common stock, at a
weighted average exercise price of $2.33 per share, and 1,650,000 restricted stock units. Moreover,
we expect to issue additional options to purchase shares of our common stock to compensate
employees, consultants and directors, and may issue additional shares to raise capital, to acquire
other companies or technologies, to pay for services, or for other corporate purposes. Any such
issuances will have the effect of diluting the interest of current stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information about our Annual Meeting of Stockholders, which was held on July 22, 2008, was
disclosed in our quarterly report for the quarter ended June 30, 2008,on Form 10-Q, under Part II,
Item 4.
ITEM 5. OTHER INFORMATION
On July 9, 2008, we amended our 1997 and 2000 license agreements with NeuroSpheres.
NeuroSpheres is the holder of certain patents exclusively licensed by us, including the six patents
that are the basis of our patent infringement suits against Neuralstem. As part of the amendment,
we agreed to pay all reasonable litigation costs, expenses and attorney’s fees incurred by
NeuroSpheres in the declaratory judgment suit between us and Neuralstem. In return, we are
entitled to off-set all litigation costs incurred in that suit against amounts that would otherwise
be owed under the license agreements, such as annual maintenance fees, milestones and royalty
payments.
ITEM 6. EXHIBITS
Exhibit 10.1 — Indemnification Agreement, dated July 9, 2008, by and between registrant and
NeuroSpheres Holdings, LTD
Exhibit 31.1 — Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 — Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002
Exhibit 32.1 — Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 — Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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STEMCELLS, INC.
(name of Registrant)
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| October 31, 2008 |
/s/ Rodney K. B. Young
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Rodney K. B. Young |
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Chief Financial Officer |
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Exhibit Index
Exhibit 10.1 — Indemnification Agreement, dated July 9, 2008, by and between registrant and NeuroSpheres Holdings, LTD
Exhibit 31.1 — Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 — Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 — Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 — Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002