Microbot Medical Inc. (then StemCells, Inc.) — Q2 2016 Form 10-Q
Important identity and period: The filing is by StemCells, Inc., for the quarter and six months ended June 30, 2016. It is not a report under the Microbot Medical name; the company later announced a proposed merger with Microbot Medical Ltd. on August 15, 2016.
Business context and reporting period
StemCells was developing cell-based therapies, including HuCNS-SC neural stem cells. In May 2016, after an interim review indicated the Phase II spinal cord injury Pathway Study failed its futility criteria, the company stopped the study and approved a wind-down of operations. It planned to seek a buyer or other means to monetize intellectual property, study data, cells, and other assets. The company said it would not proceed with its previously planned rights offering.
Financial results and liquidity
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Licensing revenue | $29,311 | $52,475 | $30,131 quarterly; $51,128 six-month |
| Research and development expense | $3.694 million | $8.903 million | $7.239 million quarterly; $13.531 million six-month |
| General and administrative expense | $1.416 million | $6.044 million | $2.064 million quarterly; $4.753 million six-month |
| Wind-down expense | $3.803 million | $3.803 million | None reported |
| Net income (loss) | $2.515 million | $(7.046) million | $(8.462) million quarterly; $(17.812) million six-month |
| Operating cash flow | Not presented quarterly | $(17.635) million | $(16.485) million six-month |
Q2 reported net income was driven by non-operating items rather than ongoing business performance: $8.917 million from conversion of the CIRM loan to a grant, a $5.569 million gain from warrant-liability remeasurement, and a $243,000 gain on loan extinguishment, partly offset by a $3.333 million fixed-asset write-down. The company had only $29,311 of quarterly revenue and an $8.884 million operating loss.
Cash and cash equivalents were $2.449 million at June 30, down from $12.111 million at December 31, 2015. The company reported total assets of $6.325 million, current assets of $4.836 million, current liabilities of $10.475 million, total liabilities of $11.213 million, and a stockholders’ deficit of $4.888 million. It had repaid its Silicon Valley Bank loan by April 2016 and recorded the CIRM balance as grant income; no loan payable remained on the June 30 balance sheet. Warrant liabilities were $591,000.
Six-month financing cash flow was $7.988 million, mainly reflecting net proceeds from the March 2016 offering, partly offset by debt and other repayments. The company reported approximately $900,000 cash as of August 1, 2016. In the six-month period, R&D expense fell 34% year over year, while G&A rose 27%, partly due to former CEO separation costs and legal fees. No meaningful gross-margin measure is presented in the filing.
Material changes, outlook, and risks
- Wind-down and going concern: The company reduced its remaining workforce of about 50 employees and exited its Newark and Sunnyvale facilities effective August 1. Management stated that cash was insufficient for future operations, additional capital or business transactions were necessary, and there was substantial doubt about the company’s ability to continue as a going concern. It warned that bankruptcy could follow if financing could not be obtained.
- Costs and asset sales: The company accrued $3.803 million of wind-down costs, including employee, facilities, and clinical-trial close-out items. It recorded a $3.333 million asset write-down and classified $1.450 million as held for sale. Subsequent to quarter end, it expected about $800,000 from an auction of Newark assets and received $650,000 for Sunnyvale assets. The Newark lease settlement required an $800,000 payment; Sunnyvale’s lease was assigned without a termination fee.
- Proposed Microbot merger: The August 15 agreement contemplated Microbot becoming a StemCells subsidiary. Former Microbot holders were expected to own about 95% of the combined company and existing StemCells holders about 5%, on a fully diluted basis. Closing was conditional on stockholder and other approvals, Nasdaq listing approval, Israeli regulatory approval, and a minimum cash condition, among others. The company highlighted dilution, execution, valuation, closing, and potential liquidation risks if the merger failed.
- Post-quarter financing: On August 15, StemCells issued a $2 million, 5% secured note for merger closing and operating costs. The note was payable upon the earlier of 30 days after merger completion or December 31, 2016, and was secured by intellectual property and certain other assets.
- Listing risk: Nasdaq had notified the company that it did not meet the minimum bid-price and market-value requirements, with compliance periods ending January 10, 2017. The filing said failure to regain compliance could jeopardize the listing and merger.
- Contingencies and accounting: A landlord lawsuit was settled for $800,000 and dismissal with prejudice. Q2 earnings were materially affected by warrant fair-value changes and the CIRM accounting conversion; these items are not equivalent to recurring operating revenue or cash generation.
Most important facts for investors to verify
- Whether the proposed merger closed, and the final ownership, consideration, financing, and listing terms.
- The company’s cash, liabilities, and any distributions or bankruptcy developments after the reported wind-down and $2 million secured note.
- Actual proceeds and final costs from asset sales, facility exits, employee obligations, and the landlord settlement.
- The status and potential dilution from outstanding warrants, including anti-dilution provisions and the large warrant overhang.
- Whether the merger’s minimum-cash, Nasdaq, stockholder, and Israeli regulatory conditions were satisfied.