Filed pursuant to Rule 424(b)(2)
Registration Statement No. 333-83992
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 3, 2002)
1,028,038 SHARES
STEMCELLS, INC.
COMMON STOCK
---------------
You should read this prospectus supplement and the related prospectus
carefully before you invest. Both documents contain information you should
consider when making your investment decision.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 2 OF OUR PROSPECTUS DATED JULY 3, 2002 TO READ ABOUT
FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
We are offering 1,028,038 shares of our common stock to an institutional
investor. Under the terms of the purchase agreement between the investor and us,
we negotiated the purchase price for these shares of common stock at an
aggregate price of $1,100,000, or approximately $1.07 per share. On August 22,
2002, the last reported sales price of our common stock on the Nasdaq National
Market was $1.26 per share. We expect this transaction to close shortly
following this filing.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this prospectus supplement is August 23, 2002.
GENERAL.
This prospectus supplement is part of a registration statement that we filed
with the SEC using a "shelf" registration process. Under this shelf process, we
may offer up to 15,000,000 shares of our common stock from time to time in one
or more offerings. This prospectus supplement provides specific information
about the offering of 1,028,038 shares of our common stock under the shelf
registration statement. You should read carefully this prospectus supplement,
the prospectus, and the information that we incorporate by reference into those
documents. In case there are any differences or inconsistencies between this
prospectus supplement the prospectus, and the information incorporated by
reference, you should only rely on the information contained in the document
with the latest date. Please refer to the information and documents listed under
the heading "Where You Can Find More Information" in the prospectus. Since we
filed the last amendment to the registration statement, we have filed with the
SEC the following documents which are incorporated by reference into the
prospectus and this prospectus supplement:
* Report on Form 10-Q/A for the quarter ended March 31, 2002.
* Report on Form 10-K/A for the year ended December 31, 2001.
* Report on Form 10-Q for the quarter ended June 30, 2002.
You should rely only on the information provided or incorporated by
reference in this prospectus supplement and the related prospectus. We have not
authorized anyone else to provide you with different information. You should not
assume that the information in this prospectus supplement is accurate as of any
date other than the date on the front of these documents.
MARKET FOR OUR COMMON STOCK.
On August 22, 2002, the last reported sales price of our common stock on the
Nasdaq National Market was $1.26 per share. Our common stock is traded on the
Nasdaq National Market under the symbol "STEM."
As of August 22, 2002 and before the issuance of the 1,028,038 shares
pursuant to this prospectus supplement, we had 24,739,666 shares of common stock
outstanding.
USE OF PROCEEDS.
The net proceeds to us from this offering will be approximately $1,100,000.
We plan to use the net proceeds for general corporate purposes, including
activities described in the prospectus. Pending those uses, to the extent the
proceeds exceed the amount of cash we estimate we will need for current
expenditures, we will invest the net proceeds in interest-bearing United States
Government securities.
PLAN OF DISTRIBUTION.
The sale of common stock to an institutional investor is being made directly
by us on terms negotiated between the investor and us.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS.
This prospectus supplement and the information incorporated by reference
into this prospectus supplement contains a number of forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. Statements in this document that are not historical
facts are forward-looking statements. Such forward-looking statements include
those relating to:
* potential strategic collaborations with others
* future capital needs and plans for additional funding
* product development plans and marketing strategies
* clinical trial expectations
* projected capital needs and financial performance
* timing and results of regulatory approvals and the effect of government
regulation
* expectations as to competitive conditions
Statements containing terms such as "believes," "plans," "expects,"
"intends," "estimates," "anticipates" and other phrases of similar meaning imply
uncertainty and are also forward-looking statements.
These forward-looking statements involve known or unknown risks and
uncertainties which may cause our actual results in future periods to differ
materially from our current expectations. We make cautionary statements in
certain sections of the prospectus, including under the caption "Risk Factors."
These cautionary statements apply to all forward-looking statements wherever
they appear in this prospectus supplement or the prospectus, or in the materials
incorporated by reference into this prospectus supplement or the prospectus. In
light of these risks, uncertainties and assumptions, the forward-looking
statement discussed in this prospectus supplement, the prospectus or other
documents incorporated by reference might not occur. You should not place undue
reliance on any forward-looking statement.
PROSPECTUS
STEMCELLS, INC.
15,000,000 SHARES OF COMMON STOCK
---------------
We may offer from time to time up to 15,000,000 shares of our common stock.
We will offer the common stock in amounts, at prices, and on terms to be
determined at the time of the offering. We will provide the specific terms of
the offering in supplements to this prospectus. This prospectus may not be used
to offer and sell our common stock unless accompanied by a prospectus
supplement.
Our common stock is listed on the Nasdaq National Market under the symbol
"STEM." The last reported sale price for our common stock on the Nasdaq National
Market on July 1, 2002 was $1.59 per share.
We will provide the specific terms of the offering in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest. This prospectus may not be used to offer and sell our common stock
unless accompanied by a prospectus supplement.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 2.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 3, 2002.
TABLE OF CONTENTS
PAGE
--------
About This Prospectus 1
Executive Office....................... 1
Risk Factors........................... 2
Special Note Regarding Forward-Looking
Information.......................... 8
Use of Proceeds........................ 8
PAGE
--------
Plan of Distribution................... 9
Legal Matters.......................... 12
Experts................................ 12
Where You Can Find More Information.... 12
Incorporation of Documents by
Reference............................ 12
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission under a "shelf" registration process.
Under this shelf process, we may sell any number of shares of common stock in
one or more offerings up to a total number of shares of 15,000,000. Each time we
offer common stock, we will provide a prospectus supplement that will describe
the specific terms of the offering. The prospectus supplement and any pricing
supplement may also add to, update or change the information contained in this
prospectus. Please carefully read this prospectus, the prospectus supplement and
any pricing supplement, in addition to the information contained in the
documents we refer to under the heading "Where You Can Find More Information."
EXECUTIVE OFFICE
Our principal executive office is located at 3155 Porter Drive, Palo Alto,
California 94304 and our telephone number is (650) 475-3100. We maintain a
website on the Internet at WWW.STEMCELLSINC.COM. Our website, and the
information contained therein, is not a part of this prospectus.
1
RISK FACTORS
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
MAKING AN INVESTMENT DECISION REGARDING STEMCELLS, INC. OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED IF ANY
OF THESE RISKS ACTUALLY OCCUR. CONSEQUENTIALLY, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, RESULTING IN THE LOSS OF ALL OR PART OF YOUR INVESTMENT.
OUR TECHNOLOGY IS AT AN EARLY STAGE OF DISCOVERY AND DEVELOPMENT, AND WE MAY
FAIL TO DEVELOP ANY COMMERCIALLY ACCEPTABLE PRODUCTS.
Our stem cell technology is at the early pre-clinical stage for the brain
stem cell and at the discovery phase for the liver and pancreas stem cells and
has not yet led to the development of any product. We may fail to discover the
stem cells we are seeking, to develop any products, to obtain regulatory
approvals, to enter clinical trials, or to commercialize any products. Any
product using stem cell technology may fail to:
- survive and persist in the desired location;
- provide the intended therapeutic benefits;
- properly integrate into existing tissue in the desired manner; or
- achieve therapeutic benefits equal to or better than the standard of
treatment at the time of testing.
In addition, our products may cause undesirable side effects. Results of early
pre-clinical research may not be indicative of the results that will be obtained
in later stages of pre-clinical or clinical research. If regulatory authorities
do not approve our products, or if we fail to maintain regulatory compliance, we
would have limited ability to commercialize our products, and our business and
results of operations would be harmed. Furthermore, because stem cells are a new
form of therapy, the marketplace may not accept any products we may develop.
If we do succeed in developing products, we will face many potential
obstacles such as the need to obtain regulatory approvals, and to develop or
obtain manufacturing, marketing and distribution capabilities. In addition, we
will face substantial additional risks such as product liability.
WE HAVE PAYMENT OBLIGATIONS RESULTING FROM REAL PROPERTY OWNED OR LEASED BY
US IN RHODE ISLAND, WHICH DIVERTS FUNDING FROM OUR STEM CELL RESEARCH AND
DEVELOPMENT.
Prior to our reorganization in 1999 and the consolidation of our business in
California, we carried out our encapsulated cell therapy programs in Lincoln,
Rhode Island, where we also had our administrative offices. Although we have
vacated the Rhode Island facilities, we remain obligated to make lease payments
and payments for operating costs of approximately $1,200,000 per year for our
former science and administrative facility, which we have leased through June
30, 2013, and debt service payments and payments for operating costs of
approximately $1,000,000 per year for our former encapsulated cell therapy pilot
manufacturing facility, which we own. We have currently subleased a portion of
the science and administrative facility, but cannot be sure that we will be able
to do so for the entire duration of our obligation. We are seeking to sublease
the remaining portion of the science and administrative facility. We have
currently subleased the entire pilot manufacturing facility, but may not be able
to sublease or sell the facility in the future once the current sublease
agreements expire. These continuing costs significantly reduce our cash
resources and adversely affect our ability to fund further development of our
stem cell technology.
2
WE MAY NEED BUT FAIL TO OBTAIN PARTNERS TO SUPPORT OUR STEM CELL DEVELOPMENT
EFFORTS AND TO COMMERCIALIZE OUR TECHNOLOGY.
Equity and debt financings alone may not be sufficient to fund the cost of
developing our stem cell technologies, and we may need to rely on our ability to
reach partnering arrangements to provide financial support for our stem cell
discovery and development efforts. In addition, in order to successfully develop
and commercialize our technology, we may need to enter into a wide variety of
arrangements with corporate sponsors, pharmaceutical companies, universities,
research groups and others. While we have engaged, and expect to continue to
engage, in discussions regarding such arrangements, we have not reached any
agreement, and we may fail to obtain any such agreement on terms acceptable to
us. Even if we enter into these arrangements, we may not be able to satisfy our
obligations under them or renew or replace them after their original terms
expire. Furthermore, these arrangements may require us to grant certain rights
to third parties, including exclusive marketing rights to one or more products,
may require us to issue securities to our collaborators or may contain other
terms that are burdensome to us. If any of our collaborators terminates its
relationship with us or fails to perform its obligations in a timely manner, the
development or commercialization of our technology and potential products may be
adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY FAIL TO OBTAIN REVENUES OR
BECOME PROFITABLE.
We expect to continue to incur substantial operating losses in the future in
order to conduct our research and development activities, and, if those
activities are successful, to fund clinical trials and other expenses. These
expenses include the cost of acquiring technology, product testing, acquiring
regulatory approvals, establishing production, marketing, sales and distribution
programs and administrative expenses. We have not earned any revenues from sales
of any product. All of our past revenues have been derived from, and any
revenues we may obtain for the foreseeable future are expected to be derived
from, cooperative agreements, research grants, investments and interest on
invested capital. We currently have no cooperative agreements and we have
received only two research grants for our stem cell technology, and we may not
obtain any such agreements or additional grants in the future or receive any
revenues from them.
IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION WILL BE HARMED.
We own or license a number of patents and pending patent applications
covering human nerve stem cell cultures, central nervous system stem cell
cultures, neuroblast cultures, peripheral nervous system stem cell cultures, and
an animal model for liver failure. Patent protection for products such as those
we propose to develop is highly uncertain and involves complex and continually
evolving factual and legal questions. The governmental authorities that consider
patent applications can deny or significantly reduce the patent coverage
requested in an application before or after issuing the patent. Consequently, we
do not know whether any of our pending applications will result in the issuance
of patents, or if any existing or future patents will provide sufficient
protection or significant commercial advantage or if others will circumvent
these patents. We cannot be certain that we were the first to make the
inventions covered by each of our pending patent applications or that we were
the first to file patent applications for such inventions because patent
applications are secret until patents are issued in the United States or until
the applications are published in foreign countries, and because publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries. Patents may not issue from our pending or future patent
applications or, if issued, may not be of commercial benefit to us, or may not
afford us adequate protection from competing products. In addition, third
parties may challenge our patents or governmental authorities may declare them
invalid. In the event that a third party has also filed a patent application
relating to inventions claimed in our patent applications, we may have to
participate in proceedings to determine priority of invention. This could result
in
3
substantial uncertainties and cost for us, even if the eventual outcome is
favorable to us, and the outcome might not be favorable to us. Even if a patent
issues, a court could decide that the patent was issued invalidly. Further,
patents issue for a limited term and our patents may expire before we utilize
them profitably.
Proprietary trade secrets and unpatented know-how are also important to our
research and development activities. We cannot be certain that others will not
independently develop the same or similar technologies on their own or gain
access to our trade secrets or disclose such technology, or that we will be able
to meaningfully protect our trade secrets and unpatented know-how and keep them
secret. We require our employees, consultants, and significant scientific
collaborators and sponsored researchers to execute confidentiality agreements
upon the commencement of an employment or consulting relationship with us. These
agreements may, however, fail to provide meaningful protection or adequate
remedies for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
IF OTHERS ARE FIRST TO DISCOVER AND PATENT THE STEM CELLS WE ARE SEEKING TO
DISCOVER, WE COULD BE BLOCKED FROM FURTHER WORK ON THOSE STEM CELLS.
Because the first person or entity to discover and obtain a valid patent to
a particular stem or progenitor cell may effectively block all others, it will
be important for us or our collaborators to be the first to discover any stem
cell that we are seeking to discover. Failure to be the first could prevent us
from commercializing all of our research and development affected by that
patent.
IF WE ARE UNABLE TO OBTAIN NECESSARY LICENSES TO THIRD PARTY PATENTS AND
OTHER RIGHTS, WE MAY NOT BE ABLE TO COMMERCIALLY DEVELOP OUR EXPECTED PRODUCTS.
A number of pharmaceutical, biotechnology and other companies, universities
and research institutions have filed patent applications or have received
patents relating to cell therapy, stem cells and other technologies potentially
relevant to or necessary for our expected products. We cannot predict which, if
any, of the applications will issue as patents. If third party patents or patent
applications contain claims infringed by our technology and these claims are
valid, we may be unable to obtain licenses to these patents at a reasonable
cost, if at all, and may also be unable to develop or obtain alternative
technology. If we are unable to obtain such licenses at a reasonable cost, our
business could be significantly harmed.
We have obtained rights from universities and research institutions to
technologies, processes and compounds that we believe may be important to the
development of our products. Licensors may cancel our licenses or convert them
to non-exclusive licenses if we fail to use the relevant technology or otherwise
breach these agreements. Loss of these licenses could expose us to the risks of
third party patents and/or technology. We can give no assurance that any of
these licenses will provide effective protection against our competitors.
WE COMPETE WITH COMPANIES THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic products that address degenerative diseases is
large and competition is intense. For example, while we believe that our neural
stem cells may have application to Parkinson's disease, we have no clinical
program directed toward that disease at this time. More than twenty companies
worldwide, including Merck, Roche, Cephalon, Schering AG, Pharmacia Corp., and
Genzyme have at least one clinical trial for Parkinson's disease in progress at
some phase, and some have more than one. At least seven companies already have
products on the market. We expect competition to increase.
In general, we believe that our most significant competitors will be fully
integrated pharmaceutical companies and more established biotechnology
companies, such as Biogen, Inc. and Genzyme, an Elan
4
Corporation. These companies already produce or are developing treatments for
degenerative diseases that are not stem cell-based, and they have significantly
greater capital resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing than we do.
Many of these potential competitors have significant products approved or in
development that could be competitive with our potential products, and also
operate large, well-funded research and development programs. In addition, we
expect to compete with other companies, some of which are smaller and may be
privately owned, including CellFactors, Diacrin, Geron, Layton Bioscience,
NeuralStem Biopharmaceuticals, NeuroNova, and ReNeuron, and with universities
and other research institutions who are developing treatments for degenerative
diseases that are stem cell-based.
Our competitors may succeed in developing technologies and products that are
more effective than the ones we are developing, or that would render our
technology obsolete or non-competitive.
The relative speed with which we and our competitors can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of a product to market will affect our ability to gather market
acceptance and market share. With respect to clinical testing, competition may
delay progress by limiting the number of clinical investigators and patients
available to test our potential products.
DEVELOPMENT OF OUR TECHNOLOGY IS SUBJECT TO AND RESTRICTED BY EXTENSIVE
GOVERNMENT REGULATION WHICH COULD IMPEDE OUR BUSINESS.
Our research and development efforts, as well as any future clinical trials,
and the manufacturing and marketing of any products we may develop, will be
subject to and restricted by extensive regulation by governmental authorities in
the United States and other countries. The process of obtaining U.S. Food and
Drug Administration and other necessary regulatory approvals is lengthy,
expensive and uncertain. We or our collaborators may fail to obtain the
necessary approvals to commence or continue clinical testing or to manufacture
or market our potential products in reasonable time frames, if at all. In
addition, the U.S. Congress and other legislative bodies may enact regulatory
reforms or restrictions on the development of new therapies that could adversely
affect the regulatory environment in which we operate or the development of any
products we may develop.
We base our research and development on the use of human stem and progenitor
cells obtained from fetal tissue. The federal and state governments and other
jurisdictions impose restrictions on the use of fetal tissue. These restrictions
change from time to time and may become more onerous. Additionally, we may not
be able to identify or develop reliable sources for the cells necessary for our
potential products--that is, sources that follow all state and federal
guidelines for cell procurement. Further, we may not be able to obtain such
cells in the quantity or quality sufficient to satisfy the commercial
requirements of our potential products. As a result, we may be unable to develop
or produce our products in a profitable manner.
Although we do not use embryonic stem cells, government regulation and
threatened regulation of embryonic tissue may lead outstanding researchers to
leave the field of stem cell research, or the country, in order to assure that
their careers will not be impeded by restrictions on their work. Similarly,
these factors may induce the best graduate students to choose other fields less
vulnerable to changes in regulatory oversight, thus exacerbating the risk,
discussed below, that we may not be able to attract and retain the scientific
personnel we need in face of the competition among pharmaceutical, biotechnology
and health care companies, universities and research institutions for what may
become a shrinking class of qualified individuals. In addition, we cannot assure
you that constraints on use of embryonic stem cells will not be extended to use
of fetal stem cells. Moreover, it is possible that concerns regarding research
using embryonic stem cells will impact our ability to attract collaborators and
investors and our stock price.
5
We may apply for status under the Orphan Drug Act for some of our therapies
to gain a seven year period of marketing exclusivity for those therapies. The
U.S. Congress in the past has considered, and in the future again may consider,
legislation that would restrict the extent and duration of the market
exclusivity of an orphan drug. If enacted, such legislation could prevent us
from obtaining some or all of the benefits of the existing statute even if we
were to apply for and be granted orphan drug status with respect to a potential
product.
IF WE LOSE THE SERVICES OF KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL QUALIFIED PERSONNEL, WE MAY HAVE TO DELAY, REDUCE OR ELIMINATE SOME
OR ALL OF OUR RESEARCH AND DEVELOPMENT PROGRAMS.
We are highly dependent on the principal members of our management and
scientific staff and some of our outside consultants, including the members of
our scientific advisory board, our chief executive officer, our vice president
and the directors of our neural stem cell and liver stem cell programs. Although
we have entered into employment agreements with some of these individuals, they
may terminate their agreements at any time. In addition, our operations are
dependent upon our ability to attract and retain additional qualified scientific
and management personnel. We may not be able to attract and retain the personnel
we need on acceptable terms given the competition for experienced personnel
among pharmaceutical, biotechnology and health care companies, universities and
research institutions.
SINCE HEALTH CARE INSURERS AND OTHER ORGANIZATIONS MAY NOT PAY FOR OUR
PRODUCTS OR MAY IMPOSE LIMITS ON REIMBURSEMENTS, OUR ABILITY TO BECOME
PROFITABLE COULD BE REDUCED.
In both domestic and foreign markets, sales of potential products are likely
to depend in part upon the availability and amounts of reimbursement from third
party health care payor organizations, including government agencies, private
health care insurers and other health care payors, such as health maintenance
organizations and self-insured employee plans. There is considerable pressure to
reduce the cost of therapeutic products, and government and other third party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products, and by
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the U.S. Food and Drug Administration has not
granted marketing approval. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. We can give no
assurance that reimbursement will be provided by such payors at all or without
substantial delay, or, if such reimbursement is provided, that the approved
reimbursement amounts will be sufficient to enable us to sell products we
develop on a profitable basis. Changes in reimbursement policy could also
adversely affect the willingness of pharmaceutical companies to collaborate with
us on the development of our stem cell technology.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. We also expect that there will
continue to be a number of federal and state proposals to implement government
control over health care costs. Efforts at health care reform are likely to
continue in future legislative sessions. We do not know what legislative
proposals federal or state governments will adopt or what actions federal, state
or private payers for health care goods and services may take in response to
health care reform proposals or legislation. We cannot predict the effect
government control and other health care reforms may have on our business.
WE HAVE LIMITED LIQUIDITY AND CAPITAL RESOURCES AND MAY NOT OBTAIN THE
SIGNIFICANT CAPITAL RESOURCES WE WILL NEED TO SUSTAIN OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We have limited liquidity and capital resources and must obtain substantial
additional capital to support our research and development programs, for
acquisition of technology and intellectual property rights, and, to the extent
we decide to undertake these activities ourselves, for pre-clinical and clinical
6
testing of our anticipated products, pursuit of regulatory approvals,
establishment of production capabilities, establishment of marketing and sales
capabilities and distribution channels, and general administrative expenses. If
we do not obtain the necessary capital resources, we may have to delay, reduce
or eliminate some or all of our research and development programs or license our
technology or any potential products to third parties rather than
commercializing them ourselves.
If we are unable to draw down on our existing equity line or choose not to
do so, we intend to pursue our needed capital resources through equity and debt
financings, corporate alliances, grants and collaborative research arrangements.
We may fail to obtain the necessary capital resources from any such sources when
needed or on terms acceptable to us. Our ability to complete any such
arrangements successfully will depend upon market conditions and, more
specifically, on continued progress in our research and development efforts. We
are prohibited from entering into other stand-by equity based credit facilities
during the term of the common stock purchase agreement that governs our existing
equity line.
IF OUR COMMON STOCK PRICE DROPS SIGNIFICANTLY, WE MAY BE DELISTED FROM THE
NASDAQ NATIONAL MARKET, WHICH COULD ELIMINATE THE TRADING MARKET FOR OUR COMMON
STOCK.
Our common stock is quoted on the Nasdaq National Market. In order to
continue to be included in the Nasdaq National Market, a company must meet
Nasdaq's maintenance criteria. The maintenance criteria most applicable to us
requires a minimum bid price of $1.00 per share and $5,000,000 market value of
publicly held shares. Additionally, we must maintain either $10 million in
stockholders' equity or $4 million in net tangible assets. After November 1,
2002, the net tangible asset maintenance criterion will no longer apply and we
must satisfy the stockholders' equity maintenance criterion. Stockholders'
equity is composed of three fundamental sources: capital stock, additional
paid-in-capital, and retained earnings. Capital stock represents ownership
interest in the corporation. Additional paid-in-capital represents additional
monies paid into the corporation by investors above the par value of shares
issued. Retained earnings represents income (loss) that the corporation has
accumulated as a result of its day-to-day operating activities. Our
stockholders' equity at the end of 2001 was $13,207,807. Failure to meet these
maintenance criteria may result in the delisting of our common stock from the
Nasdaq National Market. If our common stock were delisted, in order to have our
common stock relisted on the Nasdaq National Market we would be required to meet
the criteria for initial listing, which are more stringent than the maintenance
criteria. Accordingly, we cannot assure you that if we were delisted we would be
able to have our common stock relisted on the Nasdaq National Market.
If our common stock were delisted from the Nasdaq National Market, we would
not be able to draw down any additional funds on our existing equity line, and
we also may be required to pay damages to holders of our common stock under
agreements we previously entered into with them in connection with equity
financings. Finally, if our common stock were removed from listing on the Nasdaq
National Market, it might become more difficult for us to raise funds through
the sale of our common stock or securities convertible into our common stock.
THE SALE AND ISSUANCE OF THE 3% AND 6% CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK WILL HAVE AN IMPACT TO EARNINGS AVAILABLE TO COMMON
STOCKHOLDERS.
Of the proceeds from our sale of the 3% and 6% cumulative convertible
redeemable preferred stock, approximately $3.1 million will be allocated to the
common stock warrants and the conversion feature included with the subscription
agreement, and will be reflected as an increase to additional paid-in capital
and a decrease to the 3% and 6% cumulative convertible redeemable preferred
stock. This $3.1 million will be accreted to the preferred stock over the term
of the redemption period. This accretion, along with the preferred stock
dividend, will increase the net loss (reduce the net income) available to common
stockholders.
7
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would" or similar
words. You should carefully read statements that contain these words because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, results of
operations and financial position.
USE OF PROCEEDS
Unless we inform you otherwise in a prospectus supplement or any pricing
supplement, we expect to use the net proceeds from any and all offerings of the
common stock registered hereunder for general corporate purposes, including
working capital, product development and capital expenditures. A portion of the
net proceeds may also be used for the acquisition of businesses, products and
technologies that are complementary to ours. There are currently no commitments
or agreements with respect to any such material acquisition.
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PLAN OF DISTRIBUTION
We may offer the common stock covered by this prospectus in and outside the
United States by one or more of, or a combination of, the following methods:
- through agents to the public or to investors;
- to underwriters for resale to the public or to investors;
- directly to investors;
- in payment of all or a portion of the purchase price from one or more
acquisitions of companies, businesses or assets complementary to our
existing business; or
- as consideration for rights for us to use third party technologies
pursuant to one or more license, development or other similar agreements.
We will set forth in a prospectus supplement the terms of the offering of
securities, including:
- the name or names of any agents or underwriters;
- the purchase price of the securities being offered and the proceeds we
will receive from the sale;
- any over-allotment options under which underwriters may purchase
additional securities from us;
- any agency fees or underwriting discounts and other items constituting
agents' or underwriters' compensation;
- any initial public offering price;
- any discounts or concessions allowed or reallowed or paid to dealers; and
- any securities exchanges on which such securities may be listed.
SALE THROUGH AGENTS
We may designate agents to solicit purchases for the period of the agent's
appointment or to sell the common stock on a continuing basis. Unless we inform
you otherwise in the applicable prospectus supplement, any agent will agree to
use its reasonable best efforts to solicit purchases for the period of the
agent's appointment.
SALE THROUGH UNDERWRITERS OR DEALERS
If we use underwriters for a sale of the common stock, the underwriters will
acquire the common stock for their own account. The underwriters may resell the
common stock in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. The obligations of the underwriters to purchase the common stock will be
subject to the conditions set forth in the applicable underwriting agreements.
The underwriters will be obligated to purchase all the offered common stock if
they purchase any of the offered common stock. The underwriters may from time to
time change any public offering price and any discounts or concessions allowed
or reallowed or paid to dealers. We may use underwriters with whom we have a
material relationship. We will describe in the prospectus supplement which names
the underwriter the nature of any such relationship.
If we use dealers in the sale of common stock, we will sell the common stock
to the dealers as principals. They may then resell that common stock to the
public at varying prices determined by the dealers at the time of resale. The
dealers participating in any sale of our common stock may be deemed to be
underwriters within the meaning of the Securities Act with respect to any sale
of that common stock.
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COMPENSATION OF UNDERWRITERS, DEALERS AND AGENTS
Underwriters, dealers and agents that participate in the distribution of the
common stock may be underwriters as defined in the Securities Act and any
discounts or commissions they receive from us, as well as any profit on their
resale of the common stock, may be treated as underwriting discounts and
commissions under the Securities Act. We will identify in the applicable
prospectus supplement any underwriters, dealers or agents and will describe
their compensation. We may have agreements with the underwriters, dealers or
agents to indemnify them against specified civil liabilities, including
liabilities under the Securities Act. Underwriters, dealers and agents may
engage in transactions with or perform services for us or our subsidiaries in
the ordinary course of their businesses.
DIRECT SALES
We may sell the common stock directly. In that event, no underwriters or
agents would be involved. We may sell the common stock directly to institutional
investors or others who may be deemed to be underwriters within the meaning of
the Securities Act with respect to any sale of that common stock.
DELAYED DELIVERY CONTRACTS
If we so indicate in a prospectus supplement, we may authorize underwriters,
dealers or agents to solicit offers from selected types of institutions to
purchase common stock from us at the public offering price under delayed
delivery requirements. These contracts would provide for payment and delivery on
a specified date in the future. Institutions with which such contracts may be
made include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and others. The
contracts would be subject only to those conditions described in the prospectus
supplement. The applicable prospectus supplement relating to such contracts will
set forth the price to be paid for common stock under the contracts, the
commission payable for solicitation of the contracts and the date or dates in
the future for delivery of the common stock under the contracts.
STABILIZATION ACTIVITIES
During and after an offering through underwriters, the underwriters may
purchase and sell the common stock in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters may also impose a penalty bid, in which selling concessions allowed
to syndicate members or other broker-dealers for the offered common stock sold
for their account may be reclaimed by the syndicate if the offered common stock
is repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
offered common stock, which may be higher than the price that might otherwise
prevail in the open market. If commenced, these activities may be discontinued
at any time.
PASSIVE MARKET MAKING
Any underwriters who are qualified market makers on the NASDAQ National
Market may engage in passive market making transactions in the common stock on
the Nasdaq National Market in accordance with Rule 103 of Regulation M, during
the business day prior to the pricing of the offering, before the commencement
of offers or sales of the securities. Passive market makers must comply with
applicable volume and price limitations and must be identified as passive market
makers. In general, a passive market maker must display its bid at a price not
in excess of highest independent bid for the security; if all independent bids
are lowered below the passive market maker's bid, however, the passive market
maker's bid then must be lowered when certain purchase limits are exceeded.
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ACQUISITIONS
We may offer the common stock in payment of all or a portion of the purchase
price from one or more acquisitions of companies, businesses or assets
complementary to our existing business. We expect that the terms of acquisitions
in which the common stock would be issued by us would be determined by
negotiations between us and the owners of the companies, businesses or assets we
intend to acquire. It is anticipated that the common stock issued in any such
acquisition would be valued for purposes of the acquisition at a price
reasonably related to the market value of the common stock either at the time of
the execution of the definitive acquisition agreement or at the time of the
consummation of the acquisition.
LICENSE, DEVELOPMENT OR OTHER SIMILAR AGREEMENTS
We may offer the common stock as consideration for rights for us to use
third party technologies pursuant to one or more license, development or other
similar agreements. We expect that the terms of those agreements would be
determined by negotiations between us and the other party or parties to a
particular agreement. The common stock issued as part of any such agreement
would be valued for purposes of the agreement at a price reasonably related to
the market value of the common stock either at the time of the signing of the
agreement, or such other date as the agreement stipulates.
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LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2001, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements are incorporated by reference in reliance on Ernst & Young
LLP's report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information included in the
registration statement and the related exhibits and schedules. You will find
additional information about us and our common stock in the registration
statement. The registration statement and the related exhibits and schedules may
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities of the SEC's Regional Offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of this material may also be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. You can obtain information on the operation of the public
reference facilities by calling 1-800-SEC-0330. The SEC also maintains a site on
the World Wide Web (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the SEC. Statements made in this prospectus
about legal documents may not necessarily be complete and you should read the
documents which are filed as exhibits or schedules to the registration statement
or otherwise filed with the SEC.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose information important to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus, and information that we later file with the SEC
will automatically update and supersede this information. Accordingly, we
incorporate by reference the following documents we filed with the SEC pursuant
to Section 13 of the Securities Exchange Act of 1934:
- our Annual Report on Form 10-K for the year ended December 31, 2001 (filed
March 7, 2002);
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002
(filed May 3, 2002);
- the description of our common stock contained in the registration
statement on Form 8-A filed with the SEC pursuant to Section 12 of the
Securities Exchange Act of 1934 and all amendments thereto and reports
filed for the purpose of updating such description; and
- all documents filed by us with the SEC pursuant to the Securities Exchange
Act of 1934 after the date of this prospectus and before the offering of
common stock is completed (other than portions of such documents described
in paragraphs (i), (k) and (l) of Item 402 of Regulation S-K promulgated
by the SEC).
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These documents are or will be available for inspection or copying at the
locations identified above under the caption "Where You Can Find More
Information." We will provide without charge to each person to whom this
prospectus is delivered, upon written or oral request, a copy of any and all of
the documents that have been incorporated by reference in this prospectus (other
than exhibits to those documents). You should direct requests for documents to:
StemCells, Inc.
3155 Porter Drive
Palo Alto, CA 94304
Attention: Investor Relations
Telephone number: (650) 475-3100
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