Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2014 and 2013
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 research, development, and
commercialization of stem cell therapeutics and related technologies.
The accompanying financial data as of June 30, 2014 and for
the three and six months ended June 30, 2014 and 2013 have 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 these rules and regulations. The December 31, 2013 condensed consolidated
balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. 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, 2013.
We have incurred significant operating losses since inception. 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 provide funding for our product development efforts, the acquisition of technologies, businesses and intellectual
property rights, preclinical and clinical testing of our products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, selling, general and administrative
expenses and other working capital requirements. We rely on our cash reserves, proceeds from equity and debt offerings, credit facilities, 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 subsidiaries, including StemCells
California, Inc., Stem Cell Sciences Holdings Ltd, and Stem Cell Sciences (UK) Ltd. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial
statements in conformity with U.S. 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 these estimates.
Significant estimates include the following:
|
|
|
the grant date fair value of stock-based awards recognized as compensation expense (see Note 5, Stock-Based Compensation);
|
|
|
|
the fair value of warrants recorded as a liability (see Note 8, Warrant Liability); and
|
|
|
|
the fair value of goodwill and other intangible assets (see Note 4, Goodwill and Other Intangible Assets).
|
7
Financial Instruments
Cash and Cash Equivalents
Cash
equivalents are money market accounts, money market funds and investments with maturities of 90 days or less from the date of purchase.
Trade and
Other Receivables
Our receivables generally consist of interest income on our financial instruments, revenue from licensing agreements
and grants, and revenue from product sales.
Warrant Liability
We account for our warrants in accordance with U.S. GAAP which defines how freestanding contracts that are indexed to and potentially
settled in a companys own stock should be measured and classified. Authoritative accounting guidance prescribes that only warrants issued by us under contracts that cannot be net-cash settled, and are both indexed to and settled in our common
stock, can be classified as equity. As part of both our November 2008 and November 2009 financings, we issued warrants with five year terms to purchase 1,034,483 and 400,000 shares of our common stock at $23.00 and $15.00 per share,
respectively. The 1,034,483 warrants issued as part of the November 2008 financing, expired unexercised by their own terms in May 2014. As part of our December 2011 financing, we issued Series A Warrants with a five year term to purchase 8,000,000
shares at $1.40 per share and Series B Warrants with a ninety trading day term to purchase 8,000,000 units at $1.25 per unit. Each unit underlying the Series B Warrants consisted of one share of our common stock and one Series A Warrant. In the
first and second quarter of 2012, an aggregate of 2,700,000 Series B Warrants were exercised. For the exercise of these warrants, we issued 2,700,000 shares of our common stock and 2,700,000 Series A Warrants. The remaining 5,300,000 Series B
Warrants expired unexercised by their terms on May 2, 2012. As terms of the warrants issued in 2009 and the Series A warrants do not meet the specific conditions for equity classification, we are required to classify the fair value of these
warrants as a liability, with subsequent changes in fair value to be recorded as income (loss) due to change in fair value of warrant liability. The fair value of the warrants issued in the 2009 financings is determined using the
Black-Scholes-Merton (Black-Scholes) option pricing model and the fair value of the Series A Warrants is determined using a Monte Carlo simulation model (see Note 8, Warrant Liability). The fair value is affected by changes in
inputs to these models including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The use of a Monte Carlo simulation model requires input of additional assumptions including the progress of
our R&D programs and its affect on potential future financings. We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these
warrants to be classified as a liability. The estimated fair value of our warrant liability at June 30, 2014, was approximately $8,526,000.
Goodwill and Other Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. If the assumptions
and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required. We test goodwill for impairment on an annual basis or more
frequently if we believe indicators of impairment exist. Impairment evaluations involve management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that
are used in the evaluations, and it is possible, even likely, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analysis are lower than the original estimates used to
assess the recoverability of these assets, we could incur additional impairment charges in a future period. We completed our annual impairment testing during the fourth quarter of 2013, and determined that there was no impairment of goodwill.
Prior to fiscal year 2001, we capitalized certain patent costs, which are being amortized over the estimated life of the patent and would be
expensed at the time such patents are deemed to have no continuing value. Since 2001, all patent costs are expensed as incurred. License costs are capitalized and amortized over the estimated life of the related license agreement.
Revenue Recognition
We currently
recognize revenue resulting from the licensing and use of our technology and intellectual property, from government grants, from services provided to third parties, and from product sales. 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
8
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 licensing agreements is recognized net of a fixed percentage due to licensors as royalties. Grant revenue from government agencies are funds received to cover specific expenses and 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. Revenue from services to third parties is recognized when we have provided the agreed upon services. Revenue from product sales are recognized when the product is shipped and the order fulfilled.
Stock-Based Compensation
Compensation
expense for stock-based payment awards to employees is based on their grant date fair value as calculated and amortized over their vesting period. See Note 5, Stock-Based Compensation for further information.
We use the Black-Scholes model to calculate the fair value of stock-based awards.
Per Share Data
Basic net income or loss
per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted net income or 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 net loss per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net loss
|
|
$
|
(12,115,224
|
)
|
|
$
|
(5,868,682
|
)
|
|
$
|
(19,735,480
|
)
|
|
$
|
(12,285,129
|
)
|
Weighted average shares outstanding used to compute basic and diluted net income or loss per share
|
|
|
55,711,717
|
|
|
|
39,661,934
|
|
|
|
55,529,818
|
|
|
|
38,966,547
|
|
Basic and diluted net loss per share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.32
|
)
|
The following outstanding potentially dilutive securities were excluded from the computation of diluted net
income or loss per share because the effect would have been anti-dilutive as of June 30:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Options
|
|
|
375,670
|
|
|
|
440,126
|
|
Restricted stock units
|
|
|
3,137,440
|
|
|
|
3,350,616
|
|
Warrants
|
|
|
14,207,426
|
|
|
|
9,894,909
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,720,536
|
|
|
|
13,685,651
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income or loss and other comprehensive income or loss (OCL). OCL includes certain changes in
stockholders equity that are excluded from net income or loss. Specifically, we include in OCL changes in unrealized gains and losses on our marketable securities and unrealized gains and losses on foreign currency translations. Accumulated
other comprehensive income was $362,669, as of June 30, 2014, and accumulated other comprehensive income was $252,101, as of December 31, 2013.
Recent Accounting Pronouncements
In May
2014, the FASB issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the
scope of other standards. The core principle of the guidance is that
9
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. This ASU is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. We do not expect this new guidance will have a material effect on our consolidated
financial statements.
Note 2. Financial Instruments
The following table summarizes the fair value of our cash and cash equivalents held in our current investment portfolio:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Fair Value
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
513,079
|
|
|
$
|
|
|
|
$
|
513,079
|
|
Cash equivalents
|
|
|
17,334,018
|
|
|
|
|
|
|
|
17,334,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
17,847,097
|
|
|
$
|
|
|
|
$
|
17,847,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,355,281
|
|
|
$
|
|
|
|
$
|
1,355,281
|
|
Cash equivalents
|
|
|
29,230,143
|
|
|
|
|
|
|
|
29,230,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
30,585,424
|
|
|
$
|
|
|
|
$
|
30,585,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014, our investments in money market accounts are through a money market fund that invests
in high quality, short-term money market instruments which are classified as cash equivalents in the accompanying Condensed Consolidated Balance Sheet due to their short maturities. The investment seeks to provide the highest possible level of
current income while still maintaining liquidity and preserving capital. From time to time, we carry cash balances in excess of federally insured limits. Our cash balance at June 30, 2014 includes approximately $61,000 held by our U.K.
subsidiary.
Note 3. Fair Value Measurement
Fair value is defined as 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, we are required to apply a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value. The three levels of the fair value hierarchy are:
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 entitys 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. Assets measured at fair value are classified below based on the three fair value hierarchy tiers described above.
Our cash equivalents are classified as Level 1 because they are valued primarily using quoted market prices.
Our bonds payable are classified as Level 2 as they are valued using alternative pricing sources and models utilizing market observable
inputs.
We estimated the fair value of our loan payable using the net present value of the payments discounted at an effective interest
rate. We believe the estimates used to measure the fair value of our loan payable constitute Level 3 inputs.
10
Our liability for warrants issued in our 2011 financing is classified as Level 3 as the liability
is valued using a Monte Carlo simulation model. Some of the significant inputs used to calculate the fair value of warrant liability include our stock price on the valuation date, expected volatility of our common stock as traded on NASDAQ, and
risk-free interest rates that are derived from the yield on U.S. Treasury debt securities, all of which are observable from active markets. However, the use of a Monte Carlo simulation model requires the input of additional subjective assumptions
including managements assumptions regarding the likelihood of a re-pricing of these warrants pursuant to anti-dilution provisions and the progress of our R&D programs and its affect on potential future financings.
The following table presents financial assets and liabilities measured at fair value as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
at Report Date Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active Markets
for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
As of
June 30,
2014
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
421,373
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
421,373
|
|
U.S. Treasury debt obligations
|
|
|
16,912,645
|
|
|
|
|
|
|
|
|
|
|
|
16,912,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
17,334,018
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,334,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds payable
|
|
$
|
|
|
|
$
|
17,917
|
|
|
$
|
|
|
|
$
|
17,917
|
|
Loan payable net of discounts
|
|
|
|
|
|
|
|
|
|
|
11,106,905
|
|
|
|
11,106,905
|
|
Warrant liabilities
|
|
|
|
|
|
|
|
|
|
|
8,525,666
|
|
|
|
8,525,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
|
|
|
$
|
17,917
|
|
|
$
|
19,632,571
|
|
|
$
|
19,650,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 Reconciliation
The following table presents a roll forward for financial assets and liabilities measured at fair value using significant other observable
inputs (Level 2) for 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
Beginning
Balance 12/31/13
$
|
|
|
Settled
$
|
|
|
Level 2
Ending
Balance 06/30/14
$
|
|
Bonds payable
|
|
|
125,000
|
|
|
|
(107,083
|
)
|
|
|
17,917
|
|
Level 3 Reconciliation
The following table presents a roll forward for liabilities measured at fair value using significant unobservable inputs (Level 3) for 2014.
|
|
|
|
|
|
|
Warrant
Liabilities
|
|
Balance at December 31, 2013
|
|
$
|
5,541,809
|
|
Less fair value of warrants exercised
|
|
|
(997,237
|
)
|
Add change in fair value of warrants
|
|
|
3,981,094
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
8,525,666
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
Loan payable net of discounts
|
|
Balance at December 31, 2013
|
|
$
|
12,909,244
|
|
Add loan proceeds
|
|
|
3,820,264
|
|
Add amortization of discount
|
|
|
110,401
|
|
Less repayments of principal
|
|
|
(1,900,374
|
)
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
14,939,535
|
|
|
|
|
|
|
Current portion
|
|
$
|
3,832,630
|
|
Non-current portion
|
|
|
11,106,905
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
14,939,535
|
|
|
|
|
|
|
Note 4. Goodwill and Other Intangible Assets
On April 1, 2009, we acquired the operations of Stem Cell Sciences Plc (SCS) for an aggregate purchase price of
approximately $5,135,000. The acquired operations includes proprietary cell technologies relating to embryonic stem cells, induced pluripotent stem (iPS) cells, and tissue-derived (adult) stem cells; expertise and infrastructure for providing
cell-based assays for drug discovery; a cell culture products business; and an intellectual property portfolio with claims relevant to cell processing, reprogramming and manipulation, as well as to gene targeting and insertion.
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Allocated purchase
Price
|
|
|
Estimated life of
intangible assets
in years
|
|
Net tangible assets
|
|
$
|
36,000
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships and developed technology
|
|
|
1,310,000
|
|
|
|
6 to 9
|
|
In-process research and development
|
|
|
1,340,000
|
|
|
|
N/A
|
|
Trade name
|
|
|
310,000
|
|
|
|
15
|
|
Goodwill
|
|
|
2,139,000
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development assets relate to: 1) the acquisition of certain intellectual property
rights not expected to expire until 2027 related to our program focused on developing genetically engineered rat models of human disease (our Transgenic Rat Program); and 2) the acquisition of certain technology related to the
commercialization of our SC Proven cell culture products and the development and commercialization of cell-based assay platforms for use in drug discovery and development (our Assay Development Program).
At the time of valuation (April 2009), our Transgenic Rat Program was in its nascent stage and our Assay Development Program was expected to
achieve proof of concept by 2012. Neither program was expected to begin generating revenue until 2011-2012. In December 2011, in part because of managements decision to focus on our therapeutic product development programs and not to allocate
time and resources to the assays technology, we determined that we could not predict the future cash flows from the intangible IPR&D asset related to the Assay Development Program. Therefore, at December 31, 2011, we determined that the
intangible asset was impaired and wrote off the approximately $655,000 carrying value of the asset.
Trade name relates to the SC
Proven trademark of our cell culture products which we expect to market for 15 years from the date of acquisition, based on which, we estimated a remaining useful life of 15 years from the valuation date.
The following table presents changes in goodwill:
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
2,139,294
|
|
Foreign currency translation
|
|
|
68,539
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
$
|
2,207,833
|
|
|
|
|
|
|
12
The components of our other intangible assets at June 30, 2014 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Asset Class
|
|
Cost
|
|
|
Additions
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Foreign Currency
Translation
|
|
|
Net Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period
|
|
Customer relationships and developed technology
|
|
$
|
1,310,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(973,783
|
)
|
|
$
|
173,497
|
|
|
$
|
509,714
|
|
|
|
8.0 years
|
|
In-process research and development
|
|
|
1,340,000
|
|
|
|
|
|
|
|
(654,961
|
)
|
|
|
(270,687
|
)
|
|
|
164,644
|
|
|
|
578,996
|
|
|
|
Indefinite
|
|
Trade name
|
|
|
310,000
|
|
|
|
|
|
|
|
|
|
|
|
(119,916
|
)
|
|
|
49,269
|
|
|
|
239,353
|
|
|
|
15.0 years
|
|
Patents
|
|
|
1,243,612
|
|
|
|
|
|
|
|
|
|
|
|
(845,001
|
)
|
|
|
|
|
|
|
398,611
|
|
|
|
16.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
4,203,612
|
|
|
$
|
|
|
|
$
|
(654,961
|
)
|
|
$
|
(2,209,387
|
)
|
|
$
|
387,410
|
|
|
$
|
1,726,674
|
|
|
|
12.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was approximately $76,000 in the second quarter of 2014.
The expected future annual amortization expense for each of the next five years based on current balances of our intangible assets is
approximately as follows:
|
|
|
|
|
For the year ending December 31:
|
|
|
|
2014
|
|
$
|
305,000
|
|
2015
|
|
$
|
305,000
|
|
2016
|
|
$
|
297,000
|
|
2017
|
|
$
|
276,000
|
|
2018
|
|
$
|
194,000
|
|
Note 5. Stock-Based Compensation
We currently grant stock-based compensation under three equity incentive plans (2004, 2006 and 2013 Equity Incentive Plans)
approved by the Companys stockholders and one plan adopted in 2012 pursuant to NASDAQ Listing Rule 5635(c)(4) concerning inducement grants for new employees (our 2012 Commencement Incentive Plan). As of June 30, 2014, we had
10,015,497 shares available to grant under the above mentioned plans. At our annual stockholders meeting held on June 12, 2007, our stockholders approved an amendment to our 2006 Equity Incentive Plan to provide for an annual increase in the
number of shares of common stock available for issuance under the plan each January 1 (beginning January 1, 2008) equal to 4% of the outstanding common shares as of that date. The amendment further provided an aggregate limit of
3,000,000 shares issuable pursuant to incentive stock option awards under the plan. At our annual stockholders meeting held on December 20, 2013, our stockholders approved our 2013 Equity Incentive Plan to grant stock-based compensation of
up to an initial 6,000,000 shares, plus an increase of 4% per year of the outstanding number of shares of our common stock beginning in January 1, 2015. Under the three stockholder-approved plans we may grant incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, 401(k) Plan employer match in form of shares 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. Under our 2012 Commencement Inducement Plan, we may only award options, restricted
stock units and other equity awards to newly hired employees and newly engaged directors, in each case as allowed by NASDAQ listing requirements.
Our stock-based compensation expense for the three and six months ended June 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Research and development expense
|
|
$
|
39,596
|
|
|
$
|
373,652
|
|
|
$
|
225,889
|
|
|
$
|
717,363
|
|
Selling, general and administrative expense
|
|
|
474,064
|
|
|
|
375,989
|
|
|
|
808,877
|
|
|
|
718,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
513,660
|
|
|
$
|
749,641
|
|
|
$
|
1,034,766
|
|
|
$
|
1,436,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014, we had approximately $3,713,000 of total unrecognized compensation expense related
to unvested awards of stock options and restricted stock units granted under our various equity incentive plans that we expect to recognize over a weighted-average vesting period of 3.1 years.
13
Stock Options
Generally, stock options granted to employees have a maximum term of ten years, and vest over a four year period from the date of grant; 25%
vest at the end of one year, and 75% vest monthly over the remaining three-year service period. We may grant options with different vesting terms from time to time. Upon employee termination of service, any unexercised vested option will be
forfeited three months following termination or the expiration of the option, whichever is earlier. Unvested options are forfeited on termination.
A summary of our stock option activity for the three months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of options
|
|
|
Weighted-average
exercise price ($) per share
|
|
Balance at March 31, 2014
|
|
|
381,851
|
|
|
|
18.05
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,181
|
)
|
|
|
9.86
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at June 30, 2014
|
|
|
375,670
|
|
|
|
18.18
|
|
|
|
|
|
|
|
|
|
|
A summary of changes in unvested options for the three months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
|
|
|
Weighted-average
exercise price ($) per share
|
|
|
Weighted-average
grant
date fair value ($) per option
|
|
Unvested options at March 31, 2014
|
|
|
7,592
|
|
|
|
10.27
|
|
|
|
8.26
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(7,376
|
)
|
|
|
10.27
|
|
|
|
8.26
|
|
Cancelled
|
|
|
(209
|
)
|
|
|
10.20
|
|
|
|
8.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options at June 30, 2014
|
|
|
7
|
|
|
|
8.90
|
|
|
|
7.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of options vested was approximately $61,000 in the three months ended June 30,
2014.
Restricted Stock Units
We
have granted restricted stock units (RSUs) to certain employees and members of the Board of Directors which entitle the holders to receive shares of our common stock upon vesting of the RSUs. The fair value of restricted stock units granted is based
upon the market price of the underlying common stock as if it were vested and issued on the date of grant.
A summary of changes in our
restricted stock units for the three months ended June 30, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
|
Weighted-average
grant
date fair value ($) per RSU
|
|
Outstanding restricted stock units at March 31, 2014
|
|
|
3,144,940
|
|
|
|
1.66
|
|
Granted(1)
|
|
|
810,000
|
|
|
|
1.48
|
|
Vested and exercised
|
|
|
(442,500
|
)
|
|
|
2.22
|
|
Cancelled
|
|
|
(375,000
|
)
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock units at June 30, 2014
|
|
|
3,137,440
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These restricted stock units will vest and convert into shares of our common stock over a four year period from the date of grant; one-fourth of the award will vest on each grant date anniversary following the grant.
|
14
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 SARs.
The SARs have
a maximum term of ten years with an exercise price of $20.00, which is equal to the market price of our common stock at the date of grant. The SARs vest 25% on the first anniversary of the grant date and 75% vest monthly over the remaining
three-year service period. All of the outstanding SARs as of June 30, 2014 are fully vested and there were no changes (grants, exercises or forfeitures) in the second quarter of 2014. Compensation expense is based on the fair value of SARs
which is calculated using the Black-Scholes option pricing model. The stock-based compensation expense and liability are re-measured at each reporting date through the earlier of date of settlement or forfeiture of the SARs. For the three months
ended June 30, 2014 and 2013, the re-measured liability and expense for the respective periods related to the SARs were not significant.
The compensation expense related to the SARs recognized for the three months ended June 30, 2014 may not be representative of
compensation expense for future periods and its resulting effect on net loss and net loss per share attributable to common stockholders, 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. We will continue to recognize compensation cost each period, which will be the change in fair value from the previous period through the earlier date of settlement or forfeiture
of the SARs.
Note 6. Loan Payable
Loan Agreement with Silicon Valley Bank
In April 2013, we entered into a Loan Agreement with Silicon Valley Bank (SVB) and received loan proceeds of $9,900,000, net of a $100,000 cash
discount. The loan proceeds will be used for research and development and general corporate purposes. The loan has a three-year term and bears interest at an annual rate of 6%. The loan obligations are secured by a first priority security
interest on substantially all of our assets excluding intellectual property. For the first six months, payments will be interest only followed by repayment of principal and interest over a period of 30 months. There is also a final
$1,000,000 fee payable at the end of the term which is being expensed over the term of the loan using the effective interest method. In conjunction with the Loan Agreement, we issued to SVB a ten year warrant to acquire 293,531 shares of common
stock at an exercise price of $1.7034 per share. The warrant is immediately exercisable and expires in April 2023. We estimated the fair value of the warrant to be approximately $388,000 using the Black-Scholes option pricing model with the
following assumptions:
|
|
|
|
|
Expected life (years)
|
|
|
10
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
Expected volatility
|
|
|
88.1
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
We applied the relative fair value method to allocate the $9,900,000 net proceeds between the loan and
warrant. The approximately $388,000 fair value allocated to the warrant was recorded as an increase to additional paid-in capital and as a discount to loan payable. Approximately $9,512,000 was assigned to the loan and was recorded as the initial
carrying amount of the loan payable, net of discount. The approximately $388,000 fair value of the warrant and the $100,000 cash discount are both being amortized as additional interest expense over the term of the loan using the effective interest
rate method.
We also incurred loan issuance costs of approximately $117,000, which are recorded as deferred financing costs on the
accompanying condensed consolidated balance sheet and are being amortized to interest expense over the term of the Loan Agreement using the effective interest rate method.
The effective interest rate used to amortize the deferred financing costs and the discount (including the fair value of the warrant and the
cash discount), and for the accretion of the final payment, is 9.0%.
Loan Agreement with California Institute for Regenerative
Medicine
In April 2013, we entered into an agreement with the California Institute for Regenerative Medicine (CIRM) under which CIRM
will provide up to approximately $19.3 million to help fund preclinical development and IND-enabling activities of our HuCNS-SC cells for Alzheimers disease. This funding was awarded in September 2012 under CIRMs Disease Team Therapy
Development
15
Award program (RFA 10-05), and the goal of the research is to file an Investigational New Drug application with the U.S. Food and Drug Administration within four years. The funding is in the form
of a forgivable loan, in accordance with mutually agreed upon terms and conditions and CIRM regulations, and is expected to be disbursed periodically by CIRM over the four-year project period subject to a number of preconditions, including the
achievement of certain progress milestones and compliance with certain financial covenants. The loan is unsecured and the term of the loan is ten years and may be extended under certain circumstances. Initially, the loan will bear interest at the
one year LIBOR rate plus two percent and will increase by 1% each year after year five. Interest will accrue with the first disbursement of loan funds, but we will not begin paying interest until year six. Repayment of the principal and any accrued
and unpaid interest will be due and payable at the end of the term. We can prepay the CIRM loan at our election, either in whole or in part at any time and without a prepayment fee. In addition, the loan is forgivable so that our obligation to repay
will be contingent upon the success of our HuCNS-SC cells as a treatment for Alzheimers disease. In July 2013 and January 2014, we received approximately $3.8 million in each month as initial and subsequent disbursement respectively of the
loan provided under the CIRM.
The following table is a summary of the changes in the carrying value of our loan payable for the three
months ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon Valley
Bank Loan
|
|
|
CIRM Loan
|
|
|
Total
|
|
Carrying value of loan payable at March 31, 2014 (current and non-current)
|
|
$
|
8,203,391
|
|
|
$
|
7,640,528
|
|
|
$
|
15,843,919
|
|
Loan proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of principal
|
|
|
(956,035
|
)
|
|
|
|
|
|
|
(956,035
|
)
|
Accretion of discount
|
|
|
51,651
|
|
|
|
|
|
|
|
51,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of loan payable at 6/30/2014 (current and non-current)
|
|
$
|
7,299,007
|
|
|
$
|
7,640,528
|
|
|
$
|
14,939,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of loan payable, current portion
|
|
$
|
3,832,630
|
|
|
$
|
|
|
|
$
|
3,832,630
|
|
Carrying value of loan payable, non-current portion
|
|
|
3,466,377
|
|
|
|
7,640,528
|
|
|
|
11,106,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan payable at June 30, 2014
|
|
$
|
7,299,007
|
|
|
$
|
7,640,528
|
|
|
$
|
14,939,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Commitments and Contingencies
Bonds Payable
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 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. Interest rate for the remaining bond series is 9.5%. The outstanding principal was approximately $18,000 at June 30, 2014 and $125,000 at December 31, 2013. The bonds contain certain restrictive covenants
which limit, among other things, the payment of cash dividends and the sale of the related assets.
Operating leases
We 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.
Operating Leases California
In December 2010, we entered into a commercial lease agreement with BMR-Gateway Boulevard LLC (BMR), as landlord, for office and research space
at BMRs Pacific Research Center in Newark, California. The initial term of the lease is approximately eleven and one-half years and includes escalating rent payments which we recognize as lease operating expense on a straight-line basis. We
will pay approximately $17,869,000 in aggregate as rent over the term of the lease to BMR. Deferred rent for this facility was approximately $1,440,000 as of June 30, 2014, and approximately $1,434,000 as of December 31, 2013.
16
In March 2013, we entered into a commercial lease agreement with Prologis, L.P. (Prologis), as
landlord, for office and research space in Sunnyvale, California. The facility is for operations that support our clinical development activities. The initial term of the lease is ten years and includes escalating rent payments which we recognize as
lease operating expense on a straight-line basis. We will pay approximately $3,497,000 in aggregate rent over the term of the lease. As part of the lease, Prologis provided us financial allowances to build initial tenant improvements, subject to
customary terms and conditions relating to landlord-funded tenant improvements. The tenant improvements are recorded as leasehold improvement assets and amortized over the term of the lease. The financial allowances are treated as a lease incentive
and recorded as deferred rent which is amortized as reductions to lease expense over the lease term. Deferred rent for this facility was approximately $392,000 as of June 30, 2014, and approximately $391,000 as of December 31, 2013.
Operating Leases United Kingdom
In January 2011, we amended the existing lease agreements of our wholly-owned subsidiary, Stem Cell Sciences (U.K.) Ltd, effectively reducing
our leased office and lab space. The lease by its terms was extended to September 30, 2013. In October 2013, we signed a new three-year lease agreement for the leased space and expect to pay rent of approximately GBP 53,000 per annum.
StemCells, Inc. is the guarantor of Stem Cell Sciences (U.K.) Ltd.s obligations under the existing lease. The lease includes an option for early termination of the lease agreement.
With the exception of the operating leases discussed above, we have not entered into any significant 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.
Contingencies
In July 2006, we
filed suit against Neuralstem, Inc. in the Federal District Court for the District of Maryland, alleging that Neuralstems activities violate claims in four of the patents we exclusively licensed from NeuroSpheres Holdings Ltd. and NeuroSpheres
Ltd. (NeuroSpheres), specifically U.S. Patent No. 6,294,346 (claiming the use of human neural stem cells for drug screening), U.S. Patent No. 7,101,709 (claiming the use of human neural stem cells for screening biological agents), 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). 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 Neuralstems 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. In July 2009, the Maryland District Court granted our motion to consolidate these two cases with the
litigation we initiated against Neuralstem in 2006. Fact discovery has concluded in the cases and the first phase of trial is expected to commence in December 2014.
In addition to the actions described above, in April 2008, we filed an opposition to Neuralstems European Patent No. 0 915 968 (methods
of isolating, propagating and differentiating CNS stem cells), because the claimed invention is believed by us to be unpatentable over prior art, including the patents we acquired from NeuroSpheres. In December 2010, the European Patent Office ruled
that all composition claims in Neuralstems 968 European patent were invalid and unpatentable over prior art including several of the NeuroSpheres patents. Neuralstem appealed this decision but recently withdrew its appeal with prejudice.
Note 8. Warrant Liability
We use various option pricing models, such as the Black-Scholes option pricing model and a Monte Carlo simulation model, to
estimate fair value of warrants issued. In using these models, we make certain assumptions about risk-free interest rates, dividend yields, volatility, expected term of the warrants and other assumptions. Risk-free interest rates are derived from
the yield on U.S. Treasury debt securities. Dividend yields are based on our historical dividend payments, which have been zero to date. Volatility is estimated from the historical volatility of our common stock as traded on NASDAQ. The expected
term of the warrants is based on the time to expiration of the warrants from the date of measurement.
17
In November 2008, we sold 1,379,310 units to institutional investors at a price of $14.50 per
unit, for gross proceeds of $20,000,000. The units, each of which consisted of one share of common stock and a warrant to purchase 0.75 shares of common stock at an exercise price of $23.00 per share, were offered as a registered direct offering
under a shelf registration statement previously filed with, and declared effective by, the SEC. We received total proceeds, net of offering expenses and placement agency fees, of approximately $18,637,000. We recorded the fair value of the warrants
to purchase 1,034,483 shares of our common stock as a liability. The fair value of the warrant liability is revalued at the end of each reporting period, with the change in fair value of the warrant liability recorded as a gain or loss in our
condensed consolidated statements of operations. The November 2008 warrants expired unexercised by their own terms in May 2014.
In
November 2009, we sold 1,000,000 units to institutional investors at a price of $12.50 per unit, for gross proceeds of $12,500,000. The units, each of which consisted of one share of common stock and a warrant to purchase 0.40 shares of common stock
at an exercise price of $15.00 per share, were offered as a registered direct offering under a shelf registration statement previously filed with, and declared effective by, the SEC. We received total proceeds, net of offering expenses and placement
agency fees, of approximately $11,985,000. We recorded the fair value of the warrants to purchase 400,000 shares of our common stock as a liability. The fair value of the warrant liability is revalued at the end of each reporting period, with the
change in fair value of the warrant liability recorded as a gain or loss in our condensed consolidated statements of operations. The fair value of the warrants will continue to be classified as a liability until such time as the warrants are
exercised, expire or an amendment of the warrant agreement renders these warrants to be no longer classified as a liability. The fair value of these warrants at March 31, 2014 was not significant.
In December 2011, we raised gross proceeds of $10,000,000 through a public offering of 8,000,000 units and 8,000,000 Series B Warrants.
The combination of units and Series B Warrants were sold at a public offering price of $1.25 per unit. Each Series B Warrant gave the holder the right to purchase one unit at an exercise price of $1.25 per unit and was exercisable until May 2,
2012, the 90th trading day after the date of issuance. Each unit consists of one share of our common stock and one Series A Warrant. Each Series A Warrant gives the holder the right to purchase one share of our common stock at an initial exercise
price of $1.40 per share. The Series A Warrants are immediately exercisable upon issuance and will expire in December 2016. In 2012, an aggregate of 2,700,000 Series B Warrants were exercised. For the exercise of these warrants, we issued
2,700,000 shares of our common stock and 2,700,000 Series A Warrants. The remaining 5,300,000 Series B Warrants expired unexercised by their terms on May 2, 2012. In 2012, 2013 and 2014, an aggregate of 2,198,571, 384,534 and 850,000
Series A Warrants were exercised, respectively. For the exercise of these warrants, in 2012, 2013 and 2014 we issued 2,198,571, 384,534 and 850,000 shares of our common stock and received gross proceeds of approximately $3,078,000, $538,000 and
$1,190,000 respectively. The shares were offered under our shelf registration statement previously filed with, and declared effective by, the SEC.
18
The assumptions used for the Monte Carlo simulation model to value the Series A Warrants at
June 30, 2014 are as follows:
|
|
|
|
|
Risk-free interest rate per year
|
|
|
0.7
|
%
|
Expected volatility per year
|
|
|
78.1
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected life in years
|
|
|
2.5
|
|
The use of a Monte Carlo simulation model requires the input of additional subjective assumptions including
the progress of our R&D programs and its affect on potential future financings.
The following table is a summary of the changes in
fair value of warrant liability for the Series A Warrants for the three-month period ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
Number of
Warrants
|
|
|
Fair value $
|
|
Balance at March 31, 2014
|
|
|
8,116,895
|
|
|
$
|
5,868,433
|
|
Less exercised
|
|
|
(850,000
|
)
|
|
|
(997,237
|
)
|
Changes in fair value
|
|
|
|
|
|
|
3,654,470
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
7,266,895
|
|
|
$
|
8,525,666
|
|
|
|
|
|
|
|
|
|
|
The following table is a summary of our warrant liability as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Number Outstanding
|
|
|
Exercise Price ($)
per share
|
|
|
Fair value $
|
|
Warrants issued in 2009
|
|
|
400,000
|
|
|
|
15.00
|
|
|
|
|
|
Series A Warrants
|
|
|
7,266,895
|
|
|
|
1.40
|
|
|
|
8,525,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,666,895
|
|
|
|
|
|
|
|
8,525,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the warrant liability is revalued at the end of each reporting period, with the change in
fair value of the warrant liability recorded as a gain or loss in our condensed consolidated statements of operations. The fair value of the warrants will continue to be classified as a liability until such time as the warrants are exercised, expire
or an amendment of the warrant agreement renders these warrants to be no longer classified as a liability.
Note 9. Common Stock
In the second quarter of 2014, an aggregate of 850,000 Series A Warrants were exercised. For the exercise of these warrants,
we issued 850,000 shares of our common stock and received gross proceeds of $1,190,000 in July 2014. In addition, 175,750 warrants that were issued as part of a 2013 financing were exercised in the second quarter of 2014. For the exercise of these
warrants, we issued 175,750 shares of our common stock and received gross proceeds of approximately $316,000.
Under a sales agreement
entered into in 2009 and amended in 2012, we have the option to sell up to $30 million of our common stock from time to time, in at-the-market offerings. The sales agent is paid compensation of 2% of gross proceeds pursuant to the terms of the
amended agreement. The sales agreement as amended, has been filed with the SEC. Under the amended sales agreement, in the second quarter of 2014, we sold a total of 193,271 shares of our common stock at an average price per share of $1.47 for gross
proceeds of approximately $285,000. The shares were offered under our shelf registration statement previously filed with, and declared effective by, the SEC.
19
Note 10. Subsequent Events
In July 2014, we raised gross proceeds of $20,000,000 through the sale of 11,299,435 units to two institutional
biotechnology investors, at an offering price of $1.77 per unit. Each unit consists of one share of our common stock and a warrant to purchase 0.85 of a share of our common stock. The warrants are exercisable six months from the date of issuance at
an exercise price of $2.17. The Warrants are non-transferable and will expire thirteen months from the date of issuance. The shares were offered under our shelf registration statement previously filed with, and declared effective by, the SEC.
In July 2014, an aggregate of 330,015 Series A Warrants were exercised. For the exercise of these warrants, we issued 330,015 shares of our
common stock and received gross proceeds of $462,000.
20