Business Context and Reporting Period
Company: StemCells, Inc. (Note: Request metadata listed "Microbot Medical Inc.", but the filing text identifies the registrant as StemCells, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Business Overview: A biopharmaceutical company focused on the research, development, and commercialization of stem cell therapeutics (specifically HuCNS-SC cells for neurodegenerative disorders) and related technologies for drug discovery. The company has incurred significant operating losses since inception and relies on external financing to fund operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $253,519 | $727,923 |
| Gross Profit | $217,605 | $623,385 |
| Net Loss | $(5,552,256) | $(16,286,678) |
| Net Loss Per Share (Basic & Diluted) | $(0.04) | $(0.13) |
| Cash and Cash Equivalents (Sep 30, 2010) | $24,554,574 | |
| Total Assets (Sep 30, 2010) | $35,959,077 | |
| Total Liabilities (Sep 30, 2010) | $12,643,587 | |
| Stockholders' Equity (Sep 30, 2010) | $23,315,490 |
Key Non-GAAP/Other Items:
- Change in Fair Value of Warrant Liability: Recognized as income of $1,227,585 (Q3) and $5,184,304 (9 months), significantly reducing the reported net loss.
- Wind-down Expenses: $291,168 for the nine months ended Sep 30, 2010, primarily related to the former Rhode Island facility.
- Stock-Based Compensation: $2,987,883 for the nine months ended Sep 30, 2010.
Material Changes vs. Prior Period
- Revenue: Total revenue for the nine months ended Sep 30, 2010, increased 27% to $727,923 from $575,221 in the prior year period. This was driven by a 36% increase in licensing and grant revenue and a 16% increase in product sales, largely due to the consolidation of three quarters of acquired operations (Stem Cell Sciences Plc) in 2010 versus two quarters in 2009.
- Operating Expenses: Total operating expenses increased 3% to $22.3 million for the nine-month period. Research and Development (R&D) expenses rose 6% to $15.1 million, while Selling, General, and Administrative (SG&A) expenses remained relatively flat (up 1%). Wind-down expenses decreased 46% to $291,168.
- Liquidity: Cash and cash equivalents decreased by approximately $14.0 million (36%) from $38.6 million at year-end 2009 to $24.6 million at Sep 30, 2010. Net cash used in operating activities increased to $19.7 million for the nine-month period.
- Warrant Liability: The fair value of the warrant liability decreased significantly from $9.7 million (Dec 31, 2009) to $4.5 million (Sep 30, 2010), resulting in a non-cash gain of over $5 million for the period.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance:
- The company does not expect to be profitable in the next several years and anticipates incurring additional operating losses.
- Management expects R&D expenses to increase as clinical trials for HuCNS-SC cells (for NCL and PMD) and preclinical studies for spinal cord injury and retinal disorders progress.
- Significant additional capital is required to fund product development, clinical trials, and working capital requirements.
Material Risks and Contingencies:
- Nasdaq Delisting Risk: In August 2010, the company was notified that its stock price had been below $1.00 for 30 consecutive days. It has 180 days (until Feb 8, 2011) to regain compliance or face delisting.
- Liquidity Risk: The company has limited liquidity and must obtain significant additional capital. Failure to do so could require delaying or eliminating R&D programs or initiating bankruptcy proceedings.
- Legal Proceedings: Ongoing patent infringement litigation against Neuralstem, Inc. regarding neural stem cell patents. The company has capitalized $750,000 in prepaid royalties to offset litigation costs.
- Wind-Down Obligations: Significant ongoing lease and operating obligations for the former Rhode Island facility, with a reserve of approximately $3.7 million as of Sep 30, 2010.
Unusual Items:
- Settlement Income: Recorded approximately $227,000 in other income from the settlement of claims related to the SCS acquisition, involving the return of escrowed shares.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $24.6 million cash balance against the projected burn rate of ~$19.7 million per nine months to assess the timeline for the next capital raise.
- Nasdaq Compliance: Monitor the stock price to determine if the company will meet the $1.00 minimum bid price requirement by February 2011 to avoid delisting.
- Warrant Liability Volatility: Understand that net income/loss is heavily influenced by the non-cash revaluation of warrant liabilities, which fluctuates with stock price and volatility.
- Rhode Island Facility: Review the assumptions regarding the vacancy rate and sublease income for the Rhode Island facility, as changes here could materially impact the wind-down expense reserve.
- Clinical Trial Progress: Track enrollment and safety data for the ongoing Phase I trials in NCL and PMD, as these are critical for future funding and valuation.