Business Context and Reporting Period
Company: StemCells, Inc. (formerly CytoTherapeutics, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2000
The Company has restructured to focus exclusively on stem cell technology, having terminated its former Encapsulated Cell Therapy (ECT) program. Operations were relocated from Rhode Island to Sunnyvale, California. The Company has no product revenues and relies on external financing and investment income.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 2000 | Nine Months Ended Sep 30, 1999 |
|---|---|---|---|
| Revenue | $0 | $0 | $5,021,707 |
| Net Loss | ($2,539,226) | ($4,865,190) | ($10,483,760) |
| Net Loss Per Share (Basic/Diluted) | ($0.13) | ($0.26) | ($0.56) |
| Cash and Cash Equivalents | $7,247,077 | $7,247,077 (End of Period) | $3,688,923 (End of Period) |
| Restricted Investments (Modex) | $27,204,333 | $27,204,333 | $0 |
| Total Assets | $41,631,529 | $41,631,529 | $15,780,999 |
| Total Liabilities | $4,505,278 | $4,505,278 | $12,274,596 |
| Stockholders' Equity | $37,126,251 | $37,126,251 | $3,506,403 |
Cash Flow (Nine Months 2000): Net cash used in operating activities was $8,297,841. Net cash provided by investing activities was $4,208,785 (primarily from Modex share sales and technology sale). Net cash provided by financing activities was $6,576,069 (from stock issuances).
Material Changes vs. Prior Period
- Revenue Elimination: Revenue dropped to zero from $5.0 million in the prior year due to the termination of the AstraZeneca collaborative agreement for ECT in June 1999.
- Expense Reduction: Operating expenses decreased significantly. R&D expenses fell 67% ($5.6 million) and wind-down expenses fell 86% ($3.5 million) compared to the prior nine months, reflecting the completion of the ECT program exit.
- Investment Gain: The Company recorded a one-time gain of $1,427,686 from the sale of Modex Therapeutics Ltd. shares following their IPO.
- Balance Sheet Strength: Total assets increased from $15.8 million to $41.6 million, driven by the fair value of Modex holdings ($27.2 million) and cash raised from financing.
- Liability Resolution: A $5.2 million redeemable stock liability related to Genentech was reclassified to equity in March 2000 following a settlement.
Outlook, Risks, and Management Commentary
- Liquidity: Management expects existing capital resources to fund operations into the first quarter of 2001. The Company has no product revenue and expects to incur substantial losses until commercialization.
- Financing: In August 2000, the Company completed a $4 million financing with Millennium Partners, LP, including an option for an additional $3 million. The Fund exercised $1 million of this option in August 2000.
- Modex Investment Risk: The Company holds 126,193 shares of Modex Therapeutics Ltd. valued at $27.2 million. These shares are subject to a lock-up until December 23, 2000, and are exposed to equity price and foreign currency (Swiss Franc) risk. The value dropped to an estimated $23.1 million by October 31, 2000.
- Facility Obligations: The Company retains obligations for former Rhode Island facilities (lease and debt service) totaling approximately $1.95 million annually. Failure to sublease or sell these assets could materially affect liquidity.
- Subsequent Events: The Company expects to incur a charge of approximately $1.7 million in Q4 2000 related to amendments of stock options for scientific founders. A new exclusive license with NeuroSpheres, Ltd. was signed in October 2000.
Investor Verification Checklist
- Runway: Verify if the $7.2 million cash balance is sufficient to reach the projected Q1 2001 funding milestone given the $8.3 million operating cash burn over nine months.
- Modex Liquidity: Confirm the status of the Modex lock-up expiration (Dec 23, 2000) and the potential discount required to liquidate the position given the limited trading market.
- Facility Exit: Assess progress on subleasing or selling the Rhode Island facilities to eliminate the ~$1.95 million annual obligation.
- Q4 Charges: Monitor the anticipated $1.7 million stock option amendment charge in the fourth quarter.
- Financing Terms: Review the terms of the adjustable warrants issued to Millennium Partners, LP, which could lead to significant dilution depending on future stock prices.