Business context and reporting period
The supplied filing is StemCells, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed March 14, 2012; it is not a Microbot Medical filing. The company was developing stem-cell therapeutics and selling research products. Its lead therapeutic candidate, HuCNS-SC, was in clinical development, while its liver-cell program remained preclinical.
The filing includes unaudited quarterly data, but is an annual report rather than a standalone fourth-quarter filing. Financial figures below are in U.S. dollars.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $1.221 million | $1.427 million |
| Gross profit | $1.006 million | $1.259 million |
| Research and development expense | $19.938 million | $21.019 million |
| Operating loss | $28.076 million | $29.360 million |
| Net loss | $21.329 million | $25.244 million |
| Net loss per share | $1.50 | $2.05 |
| Cash used in operating activities | $22.058 million | $24.520 million |
- Product-sales revenue rose 33% to $663,000; licensing and grant revenue fell 40% to $558,000. Total revenue declined 14%.
- Reported gross margin was approximately 82% of revenue; product-sales gross margin was approximately 68%. These ratios are calculated from reported amounts.
- Net loss improved despite the continuing operating loss, principally because of a $6.612 million noncash gain from revaluing warrant liabilities. The filing’s reported earnings therefore include a material valuation item.
- At year-end, cash and cash equivalents were $13.311 million and current marketable securities were $3.281 million, totaling $16.592 million in cash and highly liquid investments. Current assets were $17.388 million and current liabilities $5.653 million.
- Reported debt was modest: bonds payable totaled $523,000 at carrying value and capital lease obligations were $18,000. Separately, warrant liabilities were $6.042 million. Operating lease commitments totaled $19.858 million, excluding sublease income.
- Fourth-quarter 2011 revenue was $541,000 and net loss was $7.212 million, compared with $700,000 revenue and a $8.957 million net loss in fourth-quarter 2010.
Material changes and notable developments
- Research and development expense fell 5% and selling, general and administrative expense fell 12%, primarily reflecting workforce reductions and cost reductions in U.K. operations; clinical-trial and retinal preclinical costs increased.
- Licensing and grant revenue decreased, mainly because 2010 included a milestone payment of approximately $438,000 and higher grant revenue. Product revenue increased following new SC Proven products and higher sales volumes.
- The company raised approximately $19.8 million net from common-stock issuance in 2011, including a January equity sale and a December offering of units and warrants. Shares outstanding increased to 22.4 million at year-end; substantial additional warrant dilution was possible.
- A 1-for-10 reverse stock split took effect in July 2011. Share and per-share figures in the filing are adjusted for the split.
- The company recorded a $655,000 impairment charge in 2011, writing off an in-process research and development asset associated with assay technology after prioritizing therapeutic programs.
Outlook, risks and contingencies
- The filing gives no formal revenue or earnings guidance. Management expected substantial operating losses to continue, did not expect profitability for several years, and anticipated substantial research and development spending.
- Management said additional capital was necessary to sustain development and that existing resources might not fund operations beyond the next 12 months. The company warned that unavailable financing could force it to delay, scale back, or stop programs and could impair its ability to meet obligations.
- Clinical progress remained uncertain. The PMD Phase I trial was completed in February 2012, with final data expected in late March; interim MRI findings were described as consistent with early myelin development. The spinal-cord-injury Phase I/II trial had completed its first cohort, and the FDA had authorized a Phase I/II dry AMD trial in January 2012. These were early-stage findings and authorizations, not evidence of marketing approval or established efficacy.
- Key risks include dependence on HuCNS-SC and early clinical trials, regulatory and manufacturing uncertainty, reliance on external financing, potential dilution, reimbursement and market-acceptance uncertainty, intellectual-property disputes, and costs associated with former Rhode Island facilities.
- Patent litigation with Neuralstem was ongoing; discovery continued and a trial was anticipated in late 2012 or early 2013. Neuralstem had appealed a European patent decision adverse to its composition claims.
- The company reported effective disclosure controls and internal control over financial reporting. Its auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm issuer identity: this filing is for StemCells, Inc., not Microbot Medical, and covers the year ended December 31, 2011.
- Review the complete audited statements and subsequent financing activity, including the exercise of 750,000 Series B warrants for approximately $938,000 gross proceeds by March 2, 2012.
- Assess cash runway against operating cash use, lease obligations, and management’s warning about financing needs; verify the status and terms of any later capital raises.
- Check current warrant counts, exercise terms, and potential dilution, including the December 2011 Series A and Series B warrants.
- Verify subsequent clinical-trial results, regulatory developments, and the status and potential impact of the Neuralstem litigation.