Microbot Medical Inc. (then StemCells, Inc.) — 2016 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 3, 2016. The filing is by StemCells, Inc., before the proposed merger and name change to Microbot Medical Inc.
Business context and reporting period
StemCells was a biopharmaceutical company developing stem-cell therapies. In May 2016, it stopped its Phase II Pathway spinal-cord-injury study after an interim review found the data did not justify continuing, and its board approved winding down operations. By August 1, the company had laid off approximately 50 employees and exited its California facilities. It reported four employees as of the filing date and was evaluating a sale or other monetization of intellectual property and assets.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Licensing revenue | $32,762 | $37,030 | $85,237 | $88,158 |
| Operating expenses | $1.913 million | $10.025 million | $20.663 million | $28.309 million |
| Operating loss | $(1.880) million | $(9.988) million | $(20.578) million | $(28.221) million |
| Net loss | $(4.248) million | $(9.643) million | $(11.294) million | $(27.455) million |
| Net loss per share | $(0.30) | $(1.07) | $(0.95) | $(3.62) |
Revenue was limited to licensing agreements; the filing does not provide a meaningful gross-margin figure. The lower reported losses year over year reflect the cessation of R&D and, for the nine-month period, substantial nonrecurring income items—not profitable operations.
- Cash and cash equivalents: $2.079 million at September 30, down from $12.111 million at December 31, 2015. Management reported approximately $2.4 million at October 15.
- Cash flow: Nine-month cash used in operations was $24.488 million, compared with $23.750 million in 2015. Investing activities provided $1.453 million, mainly from asset sales; financing activities provided $13.003 million.
- Balance sheet: Total assets were $2.144 million and total liabilities $4.266 million, leaving a $2.122 million stockholders’ deficit. Current assets of $2.106 million were below current liabilities of $3.471 million.
- Debt: A $2.0 million secured note issued to Alpha Capital in August carried 5% interest and was due on the earlier of 30 days after merger completion or December 31, 2016. It was secured by intellectual property and certain other assets. The prior Silicon Valley Bank loan had been repaid in April.
Material changes and unusual items
- R&D expense was zero in Q3 2016 versus $7.720 million a year earlier; nine-month R&D expense fell 58% to $8.903 million as programs were wound down. Nine-month G&A rose 13% to $7.954 million, including costs related to a former CEO’s separation and accelerated equity vesting.
- Nine-month results included $8.917 million of CIRM loan principal converted to grant income and a $243,000 gain on extinguishment of accrued interest; a $3.333 million fixed-asset write-down; and $3.806 million of wind-down expenses.
- Q3 other income included a $1.876 million vendor-settlement discount and an $18,888 asset-sale gain, but was more than offset by a $4.250 million warrant-liability remeasurement loss. The warrant liability was $652,000 at quarter-end; its fair-value changes are noncash and can make reported earnings volatile.
- The company sold facility assets for approximately $1.469 million. It settled a landlord lawsuit with an $800,000 payment and forfeited a $333,000 security deposit; the case was dismissed.
- Shares outstanding were 16,259,598 at October 20. The company completed a 1-for-12 reverse split in May and issued shares through financings and warrant exercises, creating significant dilution.
Outlook, risks and contingencies
No operating or financial guidance was provided. Management said it had insufficient funds to cover future operations and needed additional financing or a business transaction. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern; absent adequate financing, it might be unable to meet obligations and could enter bankruptcy. A liquidation could yield no distribution to stockholders.
The August 2016 merger agreement with private medical-device company Microbot Medical Ltd. remained subject to stockholder, Nasdaq-listing, Israeli regulatory and other customary conditions. Former Microbot holders were expected to own approximately 95% of the combined company and existing StemCells holders approximately 5%, on a fully diluted basis. If the merger failed, the $2 million note would become due under its terms, and the company could lose access to the associated interim financing. The company also faced a Nasdaq market-value-of-listed-securities deficiency, with a January 10, 2017 deadline to regain compliance; it had regained compliance with the separate $1 minimum bid-price requirement in August.
Most important facts for investors to verify
- Whether the merger closed, its final exchange ratio and dilution, and whether all listing and regulatory conditions were satisfied.
- Cash availability, obligations and financing after September 30, including repayment or extension of the secured note and the company’s going-concern status.
- Any subsequent asset or intellectual-property sale proceeds, remaining wind-down liabilities, and potential liquidation value.
- Nasdaq market-value compliance and any reverse split or other listing actions.
- Warrant terms, exercises and remaining potential dilution; distinguish noncash warrant remeasurement and one-time gains from recurring operating performance.