Tuesday, September 11, 2012

StemCells, Inc., Discloses How it Will Generate $40 Million in Matching Funds

StemCells, Inc., said yesterday that it will come up with the $40 million needed to match loans from the California stem cell agency through “existing infrastructure and overhead” and will not be issuing stocks or warrants to the agency.

In a statement to shareholders, Martin McGlynn, CEO of the publicly traded firm, discussed the $40 million in loans awarded by agency this summer, including $20 million last week. The stem cell agency's governing board, after it emerged from an executive session on the matter, last Wednesday night adopted a motion requiring the company to demonstrate that it has the matching funds.

CIRM Chairman J.T. Thomas, a Los Angeles bond financier, said that concerns were expressed during the executive session that the agency “would account for such a large part of the assets of the company.” At his suggestion, the board approved the loan on the condition that “it show it has access” to the $20 million in matching funds that company offered during the application process. StemCells, Inc., also offered a $20 million match on another loan approved in July by CIRM.

The latest financial reports from StemCells, Inc., which is based in Newark, Ca., show that it had assets of $17 million as of June 30 and liabilities of $11.6 million. The company reported net income for the second quarter of $833,522 compared to a loss of $4 million for the same period a year ago.

In its filing with the SEC, the company said,
“We have incurred significant operating losses since inception. We expect to incur additional operating losses over the foreseeable future. We have very limited liquidity and capital resources and must obtain significant additional capital and other resources in order to provide funding for our product development efforts....”
In his statement yesterday, McGlynn said the California stem cell agency had “doubled down” on StemCells, Inc., in approving the two loans. He said the company is not concerned about meeting the matching requirements. McGlynn said, 
Martin McGlynn
StemCells, Inc., Photo
“To be clear, we do not interpret the diligence requirement as an obligation to raise a specific amount of money in a particular period of time, and we wish to correct the misstatements made by some uninformed third parties that the ICOC is requiring us to raise $20 million in matching funds. In point of fact, we expect that a substantial amount of our contribution towards these projects will come from existing infrastructure and overhead, salaries for our existing personnel, and other contributions in kind. Furthermore, we will soon be reviewing the budgets for both projects in detail with CIRM staff. Because each disease team budget was prepared on a stand-alone basis, we expect to see significant economies and efficiencies now that the company has in fact been awarded funding for both.”
McGlynn also said,
"Under this particular CIRM program (RFA 10-05), funding for companies will be in the form of unsecured, non-recourse, interest-bearing, term loans, which will be forgivable in the event the funded research fails to result in a commercialized product. On the other hand, should the product be successfully commercialized, CIRM would earn milestone payments depending on how successful the product becomes. Because CIRM shares the downside risk, and could participate handsomely on the upside, the structure makes the loan about as close to 'equity' as one could, without having to dilute existing shareholders in order to gain access to significant amounts of capital.  The company will not issue stock, warrants or other equity to CIRM in connection with these awards. 
"Of course, we realize that CIRM prefers that applicants from industry provide evidence of their ability to secure whatever additional funds may be needed to complete any CIRM-funded project, in this case the filing of an IND for each indication. This is stated in the text of RFA 10-05 itself and was repeated in various comments by CIRM staff during the application process. When making the second award on September 5, the ICOC naturally recognized the sizeable commitment it was making to StemCells, so it instructed CIRM staff to satisfy themselves of the company's ability to access the capital needed to fund the project, namely the Alzheimer's program through to the filing of the IND.”
McGlynn also said firm's bid for another $10 million from CIRM could come in the form of a grant instead of a loan. He said,
"Finally, I can confirm that in June of this year the Company applied for up to $10 million under CIRM's Strategic Partnership I program (RFA 12-05). Unlike the disease team awards under RFA 10-05, if companies are approved for funding under RFA 12-05, they may elect to take such funding in the form of a grant, not a loan. Our application under RFA 12-05 is for a controlled Phase II clinical trial of HuCNS-SC cells in Pelizaeus-Merzbacher disease (PMD), a rare myelination disorder. StemCells completed a Phase I study in PMD in February 2012 and in April announced that all of the patients from that study showed evidence of cell-derived myelination and three of the four patients in the study showed measurable gains in motor and/or cognitive function.”
According to CIRM, the awards in the strategic partner round will be approved either next month or in December. 

StemCells, Inc. stock was trading at $1.85 at the time of this writing. Last week, it rose to $2.43. During the last 12 months, its high was $2.67 and its low was 59 cents.
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