Microbot Medical Inc. quarterly report, Q2 FY2011

Filing identity and reporting period

Important issuer mismatch: The supplied filing is StemCells, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. It is not a filing by Microbot Medical Inc.; verify the issuer before relying on this summary.

StemCells described itself as a biopharmaceutical company developing stem-cell therapeutics and research tools. Its lead HuCNS-SC cell candidate was in clinical development; it had not established product revenue from therapeutic candidates.

Financial performance and liquidity

• Product sales increased 155% in Q2 to $184,840 and 77% for the half to $334,215, attributed to higher volumes and new SC Proven products. Licensing and grant revenue fell 71% in Q2 and 57% for the half as grant-funded projects ended.
• R&D expense rose 4% in Q2 to $5.05 million and 7% for the half to $10.58 million. SG&A declined 8% in Q2 and 14% for the half. Gross profit decreased 17% in Q2 and 14% for the half.
• Net loss improved year over year, but operating loss remained broadly flat. Other income included noncash gains from remeasuring warrant liabilities of $3.02 million in Q2 and $4.80 million for the half; these materially reduced reported net loss.
• Cash and cash equivalents were $6.53 million at June 30, versus $19.71 million at December 31, 2010. Current marketable securities were $9.12 million, bringing cash, cash equivalents and marketable securities to about $15.66 million.
• Six-month operating cash use was $13.13 million, compared with $13.75 million in 2010. Investing cash use was $9.04 million, mainly reflecting net purchases of short-term debt securities; financing provided $9.01 million, principally from the January stock offering.
• Total liabilities were $9.46 million; bonds payable were $613,750, including current and non-current amounts. The filing also reported $18.17 million of operating-lease payments in its contractual-obligations schedule and $18.96 million of total contractual cash obligations, including leases, capital lease and bonds.

Material changes and developments

• In May 2011, the company eliminated 20 U.S. positions, described as a 30% workforce reduction. It estimated annual expense savings of about $2.3 million and recorded approximately $260,000 of severance-related charges in Q2.
• In January, it raised approximately $9.4 million net through a registered sale of 1 million shares. A further 28,086 shares were sold under a sales agreement in Q2 for about $157,000 gross.
• In July, after quarter-end, the company effected a 1-for-10 reverse stock split and reduced authorized common shares to 75 million. It subsequently reported regaining NASDAQ minimum-bid-price compliance.
• The company relocated its headquarters and U.S. research operations to Newark, California in July. Its new lease covers approximately 43,000 square feet for an initial term of about 11.5 years, with stated aggregate rent of approximately $14.9 million.
• It sold its remaining ReNeuron shares in Q2 for net proceeds of approximately $158,000 and recognized an $83,750 gain.

Outlook, risks, contingencies and unusual items

• Management expected further operating losses and substantial R&D spending, and stated it did not expect profitability in the next several years. It said additional capital was required and warned that unavailable financing could force program reductions, delayed trials, licensing of assets, or bankruptcy proceedings.
• The company reported no current collaborative research arrangements. Future financing availability and terms were uncertain; approximately $60 million remained available under its universal shelf registration as of August 2, 2011.
• Clinical and development updates included initiation of a Swiss Phase I/II spinal-cord-injury trial in April 2011; completion of PMD Phase I patient accrual in February, with data expected in early 2012; and termination of the NCL Phase Ib trial in April for lack of patient accrual. The company planned an IND submission for an age-related macular degeneration trial in late 2011.
• Management cited clinical, regulatory, manufacturing, intellectual-property, competition, financing and commercialization uncertainties. It also noted ongoing Neuralstem patent litigation, with trial anticipated in 2012, and an appeal of a European patent ruling.
• The Rhode Island facility wind-down reserve was approximately $2.77 million at June 30. Its lease expires in June 2013; the company estimated 2011 net cash outlay for the facility of about $1.43 million after subtenant income. Reserve estimates depend on uncertain vacancy, rent and operating-cost assumptions.
• Warrant-liability fair-value changes are sensitive to share price and valuation assumptions; the resulting income is not equivalent to operating cash generation. The filing stated market risks had not materially changed and disclosure controls were effective.

Investor verification priorities

1. Confirm the filing issuer and period: this document is for StemCells, Inc., not Microbot Medical Inc.
2. Assess cash runway using cash plus marketable securities, operating cash burn, upcoming lease and wind-down payments, and the timing and availability of additional financing.
3. Separate operating performance from warrant remeasurement gains when evaluating the reported improvement in net loss.
4. Verify progress, safety and regulatory status of the clinical programs, especially the spinal-cord-injury and PMD trials and the planned macular-degeneration program.
5. Review dilution and potential share overhang from equity financing, warrants and equity awards, accounting for the July reverse split.
6. Track the Rhode Island reserve and lease obligations, the long-term Newark lease, and the outcome and costs of the Neuralstem litigation.