mdsm_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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(Mark
One)
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[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended: September 30, 2008
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Or
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[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to
_____________
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Commission
File Number: 333-100137
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Medistem
Inc.
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(Exact
name of small business issuer as specified in its
charter)
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Nevada
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86-1047317
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|
(State
or other jurisdiction of incorporation
or
organization)
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(I.R.S.
Employer Identification No.)
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2223
West Pecos Road, Suite 6
Chandler, AZ
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85224
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(Address
of principal executive offices)
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(Zip
Code)
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(877)
372-7836
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(Issuer's
telephone number)
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(Former
name, former address and former fiscal year, if changed since last
report)
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer [ ]
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Accelerated
filer
[ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes [ ] No
[X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 4,920,833 as of November 1,
2008.
MEDISTEM
INC.
Table
of Contents
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Page
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1
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2
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2
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3
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4
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5
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10
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17
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17
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17
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17
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17
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17
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18
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18
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18
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18
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19
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PART I – FINANCIAL INFORMATION
Forward-Looking
Information
The
statements contained in this Quarterly Report on Form 10-Q that are not
historical fact are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995), within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The forward-looking statements contained
herein are based on current expectations that involve a number of risks and
uncertainties. These statements can be identified by the use of forward-looking
terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,”
“plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. The Company wishes to caution the reader that
these forward-looking statements that are not historical facts are only
predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of assumptions underlying the Company’s
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report. These forward-looking statements are based on current expectations
and the Company assumes no obligation to update this information. Therefore, the
actual experience of the Company and the results achieved during the period
covered by any particular projections or forward-looking statements may differ
substantially from those projected. Consequently, the inclusion of projections
and other forward-looking statements should not be regarded as a representation
by the Company or any other person that these estimates and projections will be
realized, and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
Factors
and risks that could affect our results and achievements and cause them to
differ materially from those contained in the forward-looking statements include
(a) certain factors identified throughout this report, (b) factors identified in
the section in our Form 10-K for the year ended December 31, 2007, entitled Part
II, Item 7, “Management's Discussion and Analysis of Financial Condition and
Results of Operation – Certain Factors That May Affect Future Operating
Results,” and (c) other factors that we currently are unable to identify or
quantify, but that may exist in the future. Such factors may affect
generally the Company’s business, results of operations, and financial
position.
Item
1. Financial
Statements.
|
Medistem
Inc.
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|
|
|
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|
(unaudited)
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September
30,
|
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December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
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Assets
|
|
|
|
|
|
|
|
|
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Cash
and equivalents
|
|
$ |
694,003 |
|
|
$ |
179,451 |
|
|
Restricted
cash
|
|
|
- |
|
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|
31,000 |
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Royalties
receivable
|
|
|
400,000 |
|
|
|
225,597 |
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Prepaid
expenses and other current assets
|
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|
29,331 |
|
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|
52,421 |
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Total
current assets
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|
1,123,334 |
|
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|
488,469 |
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Property
and equipment, net
|
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|
16,076 |
|
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|
24,307 |
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Intangible
assets
|
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|
3,566 |
|
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|
3,566 |
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Other
amounts due from licensee
|
|
|
- |
|
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|
695,127 |
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Total
assets
|
|
$ |
1,142,976 |
|
|
$ |
1,211,469 |
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Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
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Accounts
payable
|
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$ |
2,576 |
|
|
$ |
16,523 |
|
|
Accrued
expenses
|
|
|
11,710 |
|
|
|
19,652 |
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Due
to affiliate
|
|
|
- |
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21,100 |
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Withholding
taxes payable
|
|
|
- |
|
|
|
33,840 |
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Other
liabilities
|
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|
35,103 |
|
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|
78,032 |
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|
Total
current liabilities
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49,389 |
|
|
|
169,147 |
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Total
liabilities
|
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|
49,389 |
|
|
|
169,147 |
|
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|
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Stockholders'
equity:
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Series
A convertible preferred stock, $0.0001 par value,
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no
stated interest rate or dividend preference, liquidation
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preference
of $0.35 per share or $1,800,000 aggregate,
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200,000,000
shares authorized, 4,571,429 shares issued
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and
outstanding, convertible into 182,859 shares of
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457 |
|
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|
457 |
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common
stock
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Common
stock, $0.0001 par value, 300,000,000 shares
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authorized,
4,795,118 and 5,341,118 shares issued
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|
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and
outstanding in 2008 and 2007(1)
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|
480 |
|
|
|
534 |
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Paid-in
capital
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|
11,380,208 |
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10,273,076 |
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Accumulated
deficit
|
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(10,287,558 |
) |
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(9,231,745 |
) |
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Total
stockholders' equity
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1,093,587 |
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|
1,042,322 |
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Total
liabilities and stockholders' equity
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$ |
1,142,976 |
|
|
$ |
1,211,469 |
|
(1) Number
of shares outstanding at December 31, 2007 has been adjusted to reflect the
1-for-25 reverse stock split described in Note 1.
See
accompanying notes to unaudited financial statements.
|
Medistem
Inc.
|
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(unaudited)
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Three
Months Ended September 30,
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Nine
Months Ended September 30,
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2008
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2007(1)
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2008
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2007(1)
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Revenues
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$ |
122,079 |
|
|
$ |
648,052 |
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$ |
653,224 |
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$ |
1,596,210 |
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Cost
of services
|
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|
(17,377 |
) |
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|
370,161 |
|
|
|
191,131 |
|
|
|
1,117,025 |
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Gross
profit
|
|
|
139,456 |
|
|
|
277,891 |
|
|
|
462,093 |
|
|
|
479,185 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Research
and development
|
|
|
91,631 |
|
|
|
56,642 |
|
|
|
225,414 |
|
|
|
580,287 |
|
|
Professional
fees
|
|
|
45,626 |
|
|
|
146,458 |
|
|
|
153,284 |
|
|
|
322,809 |
|
|
General
and administrative
|
|
|
252,841 |
|
|
|
457,388 |
|
|
|
1,159,624 |
|
|
|
1,614,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
390,098 |
|
|
|
660,488 |
|
|
|
1,538,322 |
|
|
|
2,517,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating
loss
|
|
|
(250,642 |
) |
|
|
(382,597 |
) |
|
|
(1,076,230 |
) |
|
|
(2,038,584 |
) |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(176 |
) |
|
|
(296 |
) |
|
|
(420 |
) |
|
|
(527 |
) |
|
Interest
income
|
|
|
434 |
|
|
|
5,786 |
|
|
|
1,830 |
|
|
|
20,591 |
|
|
Other
income (expense)
|
|
|
27,095 |
|
|
|
(3,260 |
) |
|
|
19,057 |
|
|
|
(10,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
27,353 |
|
|
|
2,230 |
|
|
|
20,466 |
|
|
|
9,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(223,289 |
) |
|
|
(380,367 |
) |
|
|
(1,055,763 |
) |
|
|
(2,028,962 |
) |
|
Income
tax provision
|
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
Net
loss
|
|
$ |
(223,339 |
) |
|
$ |
(380,417 |
) |
|
$ |
(1,055,813 |
) |
|
$ |
(2,029,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.04 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
Diluted
|
|
$ |
(0.04 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,174,770 |
|
|
|
5,161,733 |
|
|
|
5,285,264 |
|
|
|
5,125,396 |
|
|
Diluted
|
|
|
5,174,770 |
|
|
|
5,161,733 |
|
|
|
5,285,264 |
|
|
|
5,125,396 |
|
(1) Includes
consolidation of licensee, ICM, which was subsequently deconsolidated at
December 31, 2007
(2) Amounts
for 2007 have been adjusted to reflect the 1-for-25 reverse stock split
described in Note 1
See
accompanying notes to unaudited financial statements.
|
Medistem
Inc.
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
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|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,055,813 |
) |
|
$ |
(2,029,012 |
) |
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,484 |
|
|
|
112,673 |
|
|
Bad
debt expense
|
|
|
- |
|
|
|
3,500 |
|
|
Non-cash
R&D expenditures
|
|
|
- |
|
|
|
320,000 |
|
|
Non-cash
loss on settlement with vendor
|
|
|
- |
|
|
|
192,900 |
|
|
Non-cash
gain on settlement of liability
|
|
|
(28,628 |
) |
|
|
- |
|
|
Loss
on disposal of assets
|
|
|
747 |
|
|
|
6,520 |
|
|
Issuance
of common stock for services
|
|
|
6,105 |
|
|
|
- |
|
|
Stock-based
compensation
|
|
|
905,322 |
|
|
|
1,012,199 |
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
31,000 |
|
|
|
- |
|
|
Accounts
receivable
|
|
|
- |
|
|
|
(27,000 |
) |
|
Royalties
receivable
|
|
|
31,776 |
|
|
|
- |
|
|
Other
current assets
|
|
|
23,090 |
|
|
|
(5,213 |
) |
|
Other
assets
|
|
|
- |
|
|
|
11,901 |
|
|
Accounts
payable
|
|
|
(13,947 |
) |
|
|
30,322 |
|
|
Accrued
expenses
|
|
|
(7,942 |
) |
|
|
82,504 |
|
|
Due
to affiliates
|
|
|
(21,100 |
) |
|
|
(9,900 |
) |
|
Withholding
tax payable
|
|
|
60,483 |
|
|
|
- |
|
|
Other
liabilities
|
|
|
(3,676 |
) |
|
|
9,358 |
|
|
Deferred
revenue
|
|
|
- |
|
|
|
(6,500 |
) |
|
Net
cash used in operating activities
|
|
|
(65,099 |
) |
|
|
(295,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Cash
received in connection with license modification
|
|
|
600,000 |
|
|
|
- |
|
|
Advances
to licensee
|
|
|
(20,349 |
) |
|
|
- |
|
|
Proceeds
from sale of fixed assets
|
|
|
- |
|
|
|
10,000 |
|
|
Purchases
of equipment
|
|
|
- |
|
|
|
(198,193 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
579,651 |
|
|
|
(188,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and equivalents
|
|
|
514,552 |
|
|
|
(483,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents, beginning of period
|
|
|
179,451 |
|
|
|
986,009 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents, end of period
|
|
$ |
694,003 |
|
|
$ |
502,068 |
|
(1) Includes
consolidation of licensee, ICM, which was subsequently deconsolidated at
December 31, 2007.
See
accompanying notes to unaudited financial statements.
Note 1: Background and Basis of
Presentation
Medistem
Inc., formerly Medistem Laboratories, Inc., (“Medistem” or the Company) is an
adult stem cell biotechnology company that discovers, develops, and
commercializes adult stem cell products that address serious medical
conditions. The company’s primary focus is entry to clinical trials
of its novel “universal donor” stem cell, the Endometrial Regenerative Cell
(“ERC”), with its initial product candidates aimed at the treatment of critical
limb ischemia and ischemic heart disease.
Prior to
December 31, 2007, the Institute for Cellular Medicine in Costa Rica (“ICM”), a
licensee of Medistem technology, met the qualifications for consolidation
under Financial Accounting Standards Board (“FASB”) Interpretation
No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 41” as amended December 2003 (“FIN No. 46”). Effective December
31, 2007, the license agreement was modified such that the licensee no longer
met the requirements for consolidation. No historical periods have
been restated. However, the statements of operations included herein
include the financial results of ICM through December 31, 2007, the “trigger”
date of de-consolidation.
The
accompanying unaudited financial statements as of September 30, 2008 and for the
three and nine months ended September 30, 2008 and 2007, respectively, have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for audited
financial statements. In the opinion of Medistem’s management, the interim
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The footnote disclosures related to the interim financial information
included herein are also unaudited. Such financial information should be read in
conjunction with the consolidated financial statements and related notes thereto
as of December 31, 2007 and for the year then ended included in Medistem’s
annual report on Form 10-K for the fiscal year ended December 31,
2007.
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reporting period. Significant estimates and assumptions have been used by
management in conjunction with the estimated useful lives of fixed assets and
the computation of stock-based compensation. Actual results
could differ from these estimates.
On July
10, 2008, the holder of a majority of the outstanding common stock of the
Company approved an amendment to the Company’s Articles of Incorporation to
change the Company’s name to “Medistem Inc.” The Company’s Board of
Directors and majority stockholder approved the name change in order to avoid
confusion with respect to its business activities. Also on July 10,
2008, the holder of a majority of the Company’s outstanding common stock
approved an amendment to the Company’s Articles of Incorporation to effect a
1-for-25 reverse split of its common stock. The Company filed a
Certificate of Amendment to the Articles of Incorporation with the Nevada
Secretary of State on July 14, 2008, to effect the amendments described above.
The effective date of the name change and reverse stock split was August
11, 2008.
All 2007
share and per share amounts have been restated to reflect the effects of the
1-for-25 reverse stock split.
Note
2: Going Concern and Operations
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred losses and
operational cash outflows since inception, and has a limited history of
revenues. The future of the Company is dependent upon future profitable
operations and the development of new business opportunities. Management
currently intends to raise additional funds via a combination of equity and/or
debt offerings in order to finance the Company’s operations until it achieves
profitability.
These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. These financial statements do not include any adjustments that
might arise from this uncertainty.
Note
3: Other Liabilities
During
August 2008, the Company negotiated the settlement of certain accrued
registration rights penalties owed to two shareholders related to equity
offerings that took place in 2005 and 2006. In connection with these
settlements, the Company paid cash of $12,500 and issued 8,500 shares of common
stock (valued at $10,625 on the date of settlement) and recognized a gain of
$28,628 representing the difference between the consideration paid and the
amounts previously accrued. This gain is reflected as other income
(expense) in the accompanying statements of operations for the three and nine
months ended September 30, 2008. As of September 30, 2008, the
balance of registration rights penalties owed was $35,103.
Note
4: Stock Based Compensation
The
Company utilizes restricted stock, stock options and warrants to compensate
employees, officers, directors and consultants. Total stock based compensation
expense (including options, warrants and restricted stock) was $107,581 and
$905,322 for the three and nine months ended September 30, 2008, respectively,
and $298,606 and $1,012,199 for the three and nine months ended September 30,
2007, respectively.
During
July 2008, the Company issued warrants to acquire 10,000 shares of common stock
to a third party in exchange for legal services. The aggregate value
of this award was $8,800 which was immediately expensed as the award was fully
vested on grant date.
During
March 2008, the Company issued an aggregate of 398,000 stock options to
employees, officers, directors and consultants. The aggregate value
of such awards was $613,288 (excluding estimated forfeitures), which is being
amortized on a straight-line basis over the vesting period. Of the
aggregate number of shares, 209,000 vested immediately, 179,000 will vest on
December 31, 2008, and 10,000 will vest one year from the date of
grant.
The fair
value of each stock option and warrant grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following range of
assumptions:
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
113 |
% |
|
|
44 |
% |
|
|
113%
- 118 |
% |
|
|
44%
- 52 |
% |
|
Expected
life (years)
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
2.5
- 2.7 |
|
|
|
2.5
- 6.0 |
|
|
Risk-free
rate of return
|
|
|
2.9 |
% |
|
|
4.1 |
% |
|
|
2.2%
- 2.9 |
% |
|
|
4.1%
- 4.8 |
% |
|
Forfeiture
rate(1)
|
|
|
0 |
% |
|
|
10 |
% |
|
|
10 |
% |
|
|
10 |
% |
(1) Shares
that immediately vest on grant date have a forfeiture rate of 0%
During
periods prior to 2008, the Company utilized an average of the volatility of
selected representative peer companies as it did not have sufficient trading
history for its common stock. During the first quarter of 2008, it
determined that it then had sufficient trading history to utilize the volatility
of its common stock in its Black-Scholes computations.
A summary
of stock option transactions follows:
|
|
|
Number
of Shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Weighted-
Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value (In-The-Money) Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
543,440 |
|
|
$ |
10.50 |
|
|
|
|
|
|
|
|
Grants
|
|
|
398,000 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(24,000 |
) |
|
$ |
2.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
|
917,440 |
|
|
$ |
7.15 |
|
|
|
6.2 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at September 30, 2008
|
|
|
634,840 |
|
|
$ |
8.19 |
|
|
|
6.4 |
|
|
$ |
- |
|
The
following summarizes Medistem’s outstanding options and their respective
exercise prices:
|
Exercise
Price
|
|
|
Number
of Shares
|
|
| |
|
|
|
|
| $ |
1.00
- $2.00 |
|
|
|
120,040 |
|
| $ |
2.01
- $5.00 |
|
|
|
352,160 |
|
| $ |
5.01
- $10.00 |
|
|
|
51,240 |
|
| $ |
>
10.00 |
|
|
|
394,000 |
|
The
following is a summary of warrant activity:
|
|
|
Number
of Shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value (In-The-Money) Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
503,429 |
|
|
$ |
13.75 |
|
|
|
|
|
|
|
|
Grants
|
|
|
10,000 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(18,667 |
) |
|
$ |
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
|
494,762 |
|
|
$ |
13.89 |
|
|
|
2.3 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at September 30, 2008
|
|
|
494,762 |
|
|
$ |
13.89 |
|
|
|
2.3 |
|
|
$ |
- |
|
The
following summarizes Medistem’s outstanding warrants and their respective
exercise prices:
|
Exercise
Price
|
|
|
Number
of Shares
|
|
| |
|
|
|
|
| $ |
1.38
- $3.00 |
|
|
|
19,333 |
|
| $ |
3.01
- $7.00 |
|
|
|
64,000 |
|
| $ |
7.01
- $12.50 |
|
|
|
205,714 |
|
| $ |
>
12.50 |
|
|
|
205,714 |
|
Medistem
has an aggregate of $155,648 of unrecognized stock compensation expense (net of
estimated forfeitures) related to options, warrants and restricted stock awards
granted through September 30, 2008 that will be recognized over their respective
vesting periods.
Note
5: Stockholder’s Equity
On August
31, 2008, the Company issued 8,500 shares of common stock to an existing
shareholder in connection with the settlements described in Note 3.
On
September 8, 2008, the Company issued 5,500 shares of common stock valued at
$6,105 to a vendor in exchange for information technology
services. As all shares were vested on grant date, the value of the
grant was immediately expensed.
On
September 2, 2008, the Company re-acquired 560,000 shares of its common stock in
connection with the license modification described in Note 6. All
such shares were retired during the three months ended September 30,
2008.
.
Note
6: Licensing Activities
On
September 2, 2008, the Company modified its existing license agreement with ICM
to provide for immediate liquidity and to reduce our dependence on revenue
streams beyond our control. Under the modified agreement, the Company
will receive $1,000,000 cash and the return of 560,000 shares of our common
stock (valued at $700,000 based on the closing price on the date of the
transaction). As of September 30, 2008, the Company had received $600,000 cash
and the 560,000 shares of common stock. The remaining $400,000 will
be repaid over a period of eight months. In exchange, the territory
of the license agreement was expanded, the Company will no longer receive an
ongoing royalty stream from ICM, and all existing loans and royalties due from
ICM were satisfied. The value of the consideration received exceeded the value
of existing amounts due by $885,026. As ICM is controlled by the Company’s
Chairman and majority stockholder, and given the amount of the Company’s stock
used as consideration in the transaction, the Company did not recognize this
excess as a gain in the accompanying statement of operations but instead has
reflected this as a capital contribution.
On March
20, 2008, the Company entered into a licensing agreement with a third party for
the exclusive use of certain Medistem technologies and know-how in the countries
of India, Malaysia, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives, Bhutan,
Afghanistan, Indonesia and Thailand. In exchange for the grant of the
exclusive license, the Company received cash, a non-controlling equity interest
in the licensee and a license to use and commercialize all of the third parties’
current and future stem cell technologies. At September 30, all
amounts have been collected under this license agreement. The Company
evaluated the revenue recognition related to the contract under the provisions
of Staff Accounting Bulletin No. 101 (“SAB 101”). Under the
requirements of SAB 101, the Company determined that the cash component of the
contract met the qualifications for revenue recognition. The Company
recognized $250,000 in royalty revenue during the three months ended March 31,
2008 associated with this agreement. The Company did not recognize
any revenue associated with both the equity interest in the licensee and the
rights to commercialize current and future technologies as such items did not
meet the criteria for recognition under SAB 101.
Note
7: Net Loss Per Share
Net loss
per share is calculated using the weighted average number of shares of common
stock outstanding during the period. As Medistem incurred a net loss
in all periods presented, the following dilutive securities were excluded from
the calculation of earnings per share as the effects were
anti-dilutive:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
917,440 |
|
|
|
543,400 |
|
|
Unvested
restricted stock
|
|
|
- |
|
|
|
149,000 |
|
|
Warrants
|
|
|
494,762 |
|
|
|
503,429 |
|
|
Series
A convertible preferred stock
|
|
|
182,859 |
|
|
|
205,714 |
|
|
|
|
|
1,595,061 |
|
|
|
1,401,543 |
|
Note
8: Related Party Transactions
During
the three and nine months ended September 30, 2008, the Company recognized net
revenues of $122,079 and $403,224 from its royalty agreement with ICM, an entity
controlled by the Company’s Chairman of the Board, President and majority
shareholder. In connection with the license modification described in
Note 6, all amounts previously owed by ICM were settled. As of
September 30, 2008, the Company is owed $400,000 in accordance with the terms of
the license modification. The $400,000 is a short term financing
arrangement with payment of $50,000 per month.
In
connection with the licensing agreement for the use of Medistem technologies in
India and Asia described in Note 6, the third party licensee also entered into a
separate contractual arrangement with ICM, an entity controlled by the Company’s
Chairman of the Board and majority shareholder, to provide training and
technical support that could not otherwise be provided by Medistem.
During
the nine months ended September 30, 2008, the Company paid an aggregate of
$7,990 to Rivers & Moorehead PLLC, an entity controlled by the Company’s
Chief Financial Officer, for Sarbanes-Oxley related consulting
services.
Note
9: Commitments and Contingencies
Medistem
is from time to time involved in legal proceedings arising from the normal
course of business. There are no pending or threatened legal
proceedings as of September 30, 2008.
Note
10: Risks and Uncertainties
A
substantial portion of the Company’s revenues have historically been derived
from licensing activities conducted outside the United States and such revenues
have been subject to various political, economic, and other risks and
uncertainties inherent in the countries in which the licensees operate. With the
license modification that occurred during the three months ended September 30,
2008, the Company is no longer exposed to such risks.
Note
11: Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No 160, “Noncontrolling Interests in
Consolidated Financial Statements; an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The effect of adopting SFAS
160 is not expected to have a material impact on the Company’s financial
statements.
Note
12: Subsequent Event
On
October 16, 2008, the Company issued 125,715 shares of common stock in
connection with the conversion of 3,142,857 shares of Series A convertible
preferred stock.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis provides information that management believes
is relevant for an assessment and understanding of our results of operations and
financial condition. The following selected financial information is
derived from our historical financial statements and should be read in
conjunction with such financial statements and notes thereto set forth elsewhere
herein and the “Forward-Looking Statements” explanation included
herein. This information should also be read in conjunction with our
audited historical consolidated financial statements which are included in our
Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities
and Exchange Commission on March 10, 2008.
Overview
Founded
in 2005, Medistem Inc. is a U.S. based biotechnology company focused on the
development and commercialization of adult stem cell-based technologies used in
the treatment of inflammatory and degenerative diseases.
Our
primary focus is commercialization of our novel stem cell type, termed the
“endometrial regenerative cell” (“ERC”), whose discovery won the 2007
Publication of the Year Award in Medicine from BioMed Central, a publisher of
more than 200 peer reviewed journals. Sourced from menstrual blood,
these cells originate in the endometrium where they are believed to have one
vital function: to make new blood vessels (angiogenesis). Stimulation
of this process is believed to offer hope for patients with circulatory
disorders in which certain tissues are lacking oxygen because of restricted
blood flow.
Our
initial product candidates are aimed at the treatment of critical limb ischemia
(1.1 million people in the USA) and ischemic heart disease (18.5 million people
in the USA). These are conditions for which we believe currently
approved therapies are insufficient.
The
ability of stem cells to produce blood vessels is widely known and at least four
other companies are in preclinical or clinical trials using stem cells for
critical limb ischemia. However, such therapies either consist of
painful invasive procedures (such as bone marrow extraction) or utilize a source
of stem cells (placental or umbilical cord blood) that is expensive to
manufacture and requires immunologic matching. The unique nature of
ERC cells and their ample supply provide competitive advantages to other stem
cell types for the treatment of these conditions.
Together
with our management, researchers from Scripps Research Institute, University of
Western Ontario and Indiana University have assisted in the characterization of
Medistem’s cells and the development of written protocols for initiating FDA
approved clinical trials. We plan to submit our Investigational New
Drug Application (IND) with the FDA in late 2008.
Our
management has significant experience in discovering cellular based therapeutics
and translating these into commercial opportunities, and is experienced at
developing intellectual property positions and navigating the FDA approval
process. We have developed an extensive collaborator network of
leading scientists from world-renowned institutions and continually add to this
network. Centered on the strengths of management, our core business
strategy is to focus on initial discoveries and early-stage
development. If early clinical trials are successful, we expect to
monetize our discoveries through outlicensing, co-development or outright sale
to third parties.
We
operate a lean infrastructure and our corporate expenses have historically
self-funded through licensing revenues, although we have concluded all revenue
generation from existing license agreements in the three months ended September
30, 2008.
On July
10, 2008, the holder of a majority of our outstanding common stock approved an
amendment to our Articles of Incorporation to change the name to “Medistem Inc.”
Our Board of Directors and majority stockholder approved the name change
in order to avoid confusion with respect to our business
activities. Also on July 10, 2008, the holder of a majority of our
outstanding common stock approved an amendment to our Articles of Incorporation
to effect a 1-for-25 reverse split of our common stock.
We filed a Certificate of Amendment to the Articles of
Incorporation with the Nevada Secretary of State on July 14, 2008, to effect the
amendments described above. The effective date of the name change and
reverse stock split was August 11, 2008.
All 2007
share and per share amounts have been restated to reflect the effects of the
1-for-25 reverse stock split.
Recent
Developments
Publication of Positive
Preclinical Data on Menstrual Derived Stem Cells
On August
19, 2008, we reported positive efficacy data supporting development of our lead
product, the Endometrial Regenerative Cell (ERC) for treatment of an advanced
form of peripheral artery disease known as critical limb ischemia. In
the peer reviewed publication, we and our collaborators reported that
administration of ERC preserved leg function and viability in animals induced to
mimic the human condition of critical limb ischemia. Additionally, the paper
provided mechanistic support for why the ERC inhibit inflammation and can be
used without the need for immunological matching with recipient
tissue.
Dr.
Michael Murphy, a Harvard trained vascular surgeon at Indiana University, was
the lead author of the publication. We have been collaborating with Dr Murphy's
team in the area of therapeutic angiogenesis for more than one and a half
years.
Discovery of ERC Cells Wins
Medicine Publication of the Year
In March
2008, a recent article co-authored by our CEO, Dr. Thomas Ichim, our Chaiman,
Dr. Neil Riordan, and Dr. Xiaolong Meng entitled, "Endometrial regenerative
cells: a novel stem cell population" received BioMed Central's research article
of the year in medicine award. The award recognizes excellence in research that
has been made universally accessible through open access publication in one of
BioMed Central's more than 200 peer reviewed scientific journals. The award was
presented to Dr. Ichim and Dr. Meng at the Royal Society of Medicine in London,
England.
ERC Type Cells Receive
Independent Verification
Aspects
of our work were recently successfully reproduced and advanced by scientists at
the prestigious Keio University School of Medicine located in Tokyo, Japan. In
an independent publication authored by scientists at the Keio University School
of Medicine, a stem cell type found in menstrual blood similar to our ERC cells
was recently described as capable of not only becoming heart tissue in vitro,
but also having ability to repair injured hearts in animal models of heart
attacks.
Expansion of Strategic
Advisory Board
During
the first quarter of 2008, we expanded our strategic advisory board to include
Dr. Nora Sarvetnick of the Scripps Research Institute, La Jolla,
California. Dr. Sarvetnick is a widely respected research scientist
and a collaborator of ours on the testing of the ERC cells in animal
studies. Dr. Sarvetnick joined the faculty at The Scripps Research
Institute in 1990 and in 2000 became a full Professor in the Department of
Immunology. She has over 190 peer reviewed publications and has
received a number of international awards, which include a Career Development
Award from the Juvenile Diabetes Foundation (1990-1993) and a Multidisciplinary
Diabetes Program Project Award from the Juvenile Diabetes Foundation
(1995-2000). She has also twice been awarded an American Diabetes Association
Mentor-Based Postdoctoral Fellowship Program Award (1996-2002 and
2005-2009).
Dr.
Sarvetnick joins the existing SAB board members Drs. Keith March, Mike Murphy,
and Kyle Chan.
New Licensing
Activities
On March
20, 2008, we entered into a licensing agreement with an Indian company for the
exclusive use of Medistem technologies and know-how in the countries of India,
Malaysia, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives, Bhutan, Afghanistan,
Indonesia and Thailand. In exchange for the grant of the exclusive
license, we received cash, a non-controlling equity interest in the licensee and
a license to use and commercialize all of the licensee’s current and future stem
cell technologies. The Company recognized revenue of $250,000 during
the first quarter of 2008 associated with this licensing agreement.
On
September 2, 2008, we
modified our existing license agreement with the Institute for Cellular Medicine
(“ICM”) to provide for immediate liquidity and to reduce our dependence on
revenue streams beyond our control. Under the modified agreement, we
will receive $1,000,000 cash and the return of 560,000 shares of our common
stock (valued at $700,000 based on the closing price on the date of the
transaction). As of September 30, 2008, we had received $600,000 cash and the
560,000 shares of common stock. The remaining $400,000 will be repaid
over a period of eight months. In exchange, the territory of the
license agreement is expanded, we will no longer receive an ongoing royalty
stream from ICM, and all existing loans and royalties due from ICM were
satisfied. The value of the consideration received exceeded the value of
existing amounts due by $885,026. As ICM is controlled by our Chairman and
majority stockholder, and given the amount of our stock used as consideration in
the transaction, we did not recognize this excess as a gain in the accompanying
statement of operations but instead have reflected this as a capital
contribution.
Change in Officers and
Directors
On March
18, 2008, our board of directors appointed Dr. Thomas Ichim as our Chief
Executive Officer. Dr. Ichim, our former head of research and development
activities, succeeds Neil Riordan who continues serving as President and
Chairman of the Board of Directors. The change was made as part of
our ongoing succession planning and enables Dr. Riordan to devote his efforts to
directing research and expanding market opportunities for
Medistem. Dr. Ichim was also elected to our Board of
Directors.
Effective
March 31, 2008, John Peterson retired from our Board of Directors.
Effective
May 16, 2008, Chris McGuinn resigned from his position as Chief Operating
Officer of our company.
Results
of Operations
Due to
the nature of the license agreement between Medistem and ICM, the results of ICM
were consolidated in our financial statements until December 31,
2007. Because of the modifications to the license agreement that
occurred in December 31, 2007 and September 2, 2008, ICM no longer meets the
criteria for consolidation. The financial data presented in this
quarterly report for all periods prior to December 31, 2007 include the
operating results of ICM and Medistem as de-consolidation did not occur until
December 31, 2007.
Revenues
|
Revenues
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
122,079 |
|
|
$ |
648,052 |
|
|
$ |
(525,973 |
) |
|
|
(81.2 |
)% |
|
Nine
Months Ended September 30,
|
|
$ |
653,224 |
|
|
$ |
1,596,210 |
|
|
$ |
(942,986 |
) |
|
|
(59.1 |
)% |
Revenues
consist of fees generated through licensing activities. For the three
months ended September 30, 2008, revenues consisted of royalties from our
license agreement with ICM. For the nine months ended September 30,
2008, revenues included $250,000 related to the new license agreement entered
into for the use of our technologies in India and certain countries in Asia and
the Middle East, and $403,224 of royalties from our license agreement with
ICM. During the three and nine months ended September 30, 2007, ICM
was consolidated in our results of operations and revenues attributable to ICM
totaled $576,502 and $1,432,030 respectively. On a pro forma basis,
had the December 31, 2007 amendment to our license agreement with ICM been
effective at January 1, 2007 (resulting in the deconsolidation of ICM) our
revenues would have been $186,850 and $450,586 during the three and nine months
ended September 30, 2007, respectively.
With the
license modification that occurred during the three months ended September 30,
2008, we have concluded all revenue generation from our existing license
agreements. While we may from time-to-time engage in future licensing
opportunities, we do not expect that such opportunities will provide us enough
cash to finance our biotech development activities without additional financing
activities.
Cost
of Services
|
Cost
of Services
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
(17,377 |
) |
|
$ |
370,161 |
|
|
$ |
(387,538 |
) |
|
|
(104.7 |
)% |
|
Nine
Months Ended September 30,
|
|
$ |
191,131 |
|
|
$ |
1,117,025 |
|
|
$ |
(925,894 |
) |
|
|
(82.9 |
)% |
Cost of
services consists of expenses related to the performance of our license
agreements. Amounts for the three and nine months ended September 30,
2008 consist primarily of stock-based compensation charges for awards granted to
licensee physicians prior to December 31, 2007 that are recognized over their
respective vesting periods. During the three months ended September
30, 2008, we recognized a net gain of $17,377 relate to the reversal of
stock-based compensation charges to true-up estimated forfeitures to reflect
actual forfeiture rates. As we have concluded all
revenue-generating activities, we do not expect to incur future costs of
services associated with our existing licensing arrangements.
During
the three and nine months ended September 30, 2007, ICM was consolidated in our
results of operations. Cost of services during this period includes
costs associated with revenue-generating activities of this
entity. The decrease in cost of services is the result of ICM’s
deconsolidation.
Stock-based
compensation charges included in cost of services were ($17,377) and $190,781
for the three and nine months ended September 30, 2008 and $169,605 and $503,154
for the three and nine months ended September 30, 2007,
respectively.
Research
and Development
|
Research
and Development
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
91,631 |
|
|
$ |
56,642 |
|
|
$ |
34,989 |
|
|
|
61.8 |
% |
|
Nine
Months Ended September 30,
|
|
$ |
225,414 |
|
|
$ |
580,287 |
|
|
$ |
(354,873 |
) |
|
|
(61.2 |
)% |
Research
and development expenses increased for the three months ended September 30, 2008
as compared to the three months ended September 30, 2007 due primarily to
expenses incurred in connection with the generation of positive preclinical data
on our ERC cells as described in Recent Developments
above. Research and development expenses decreased for the
nine months ended September 30, 2008 as compared with the nine months ended
September 30, 2007 due primarily to non-recurring investments made in 2007 to
initiate collaborative research as well as lower stock-based compensation
charges in 2008 due to the vesting of certain awards.
Research
and development costs include research staff salaries, fees to universities for
research collaborations, patent investigational expenditures, application filing
fees, patent attorney costs, and other research and development
costs. Factors that influence our amount of research and development
costs include the number of patents to be pursued, the volume of clinical trials
to be conducted, and the amount of medical discoveries or breakthroughs that
merit further research and development.
The
difference in our research and development costs between the three and nine
month periods ended September 30, 2008 and September 30, 2007, respectively,
were not significantly attributable to ICM’s deconsolidation.
Professional
Fees
|
Professional
Fees
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
45,626 |
|
|
$ |
146,458 |
|
|
$ |
(100,832 |
) |
|
|
(68.8 |
)% |
|
Nine
Months Ended September 30,
|
|
$ |
153,284 |
|
|
$ |
322,809 |
|
|
$ |
(169,525 |
) |
|
|
(52.5 |
)% |
Professional
fees include payments made to consultants and other professionals for a variety
of outsourced services, including legal, accounting, tax, business development,
business process design and execution and marketing.
Professional
fees decreased for the three and nine months ended September 30, 2008 compared
with the three and nine months ended September 30, 2007 partially due to
decreased legal fees and the effects of the deconsolidation of ICM (which
incurred $57,770 and $79,656 in professional fees for the three and nine months
ended September 30, 2007 respectively). Legal fees fluctuate
depending on the amount of compliance, litigation and general corporate related
activities that are being pursued. Professional fees also decreased
as the result of decreased media, investor relations and internet consulting in
2008 as part of cost containment initiatives.
General
and Administrative
|
General
and Administrative
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
252,841 |
|
|
$ |
457,388 |
|
|
$ |
(204,547 |
) |
|
|
(44.7 |
)% |
|
Nine
Months Ended September 30,
|
|
$ |
1,159,624 |
|
|
$ |
1,614,673 |
|
|
$ |
(455,049 |
) |
|
|
(28.2 |
)% |
General
and administrative expenses include stock based compensation, salaries, rent,
utilities, general office expenses, insurance and other costs necessary to
conduct business operations.
General
and administrative expenses decreased in the three months ended September 30,
2008 as compared to three months ended September 30, 2007 due to the effects of
the deconsolidation of ICM (which incurred $246,664 in general and
administrative expenses for the three months ended September 30,
2007). General and administrative expenses also decreased for the
nine months ended September 30, 2008 as compared to September 30, 2007 due to
the effects of the deconsolidation of ICM (which incurred $552,099 in general
and administrative expenses for the nine months ended September 30, 2007) and
the effects of the vendor settlement in 2007, partially offset by increased
stock based compensation in 2008. The stock based compensation
expense included in general and administrative was $117,079 and $682,574 for the
three and nine months ended September 30, 2008 and $115,470 and $436,773 for the
three and nine months ended September 30, 2007 respectively.
We
utilize stock-based compensation as a long-term incentive and as a mechanism for
reducing our cash outlays to key employees, officers, directors and
consultants. The amount of stock based compensation to be recognized
is affected by the value of each award and their respective vesting
periods. We utilize the Black-Scholes model for valuing stock option
awards which is affected by changes in several variables, including
volatility. For awards granted during 2006 and 2007 our volatility
varied between 44 percent and 62 percent as compared to volatility between
113 and 118 percent in 2008. During periods prior to 2008, we
utilized an average of the volatility of selected representative peer companies
as we did not have sufficient trading history for our common
stock. During the first quarter of 2008, we determined that we had a
sufficient trading history to utilize the volatility of our common stock in our
Black-Scholes computations.
Other
Income (Expense)
|
Other
Income (Expense)
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
27,353 |
|
|
$ |
2,230 |
|
|
$ |
25,123 |
|
|
|
1126.6 |
% |
|
Nine
Months Ended September 30,
|
|
$ |
20,466 |
|
|
$ |
9,622 |
|
|
$ |
10,844 |
|
|
|
112.7 |
% |
Other
income (expense) increased during the three and nine months ended September 30,
2008 as compared to the three and nine months ended September 30, 2007 due
primarily to a non-recurring gain of $28,628 associated with the settlement of
certain accrued registration rights penalties owed to two shareholders related
to equity offerings that took place in 2005 and 2006. This gain was
computed as the difference between our existing liability owed to these
shareholders and the value of the consideration paid (consisting of $12,500 cash
and 8500 shares of common stock valued at $1.25 per share on the settlement
date).
Net
Loss
|
Net
Loss
|
|
2008
|
|
|
2007
|
|
|
Change
from
Prior
Year
|
|
|
Percent
Change
from
Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
$ |
(223,339 |
) |
|
$ |
(380,417 |
) |
|
$ |
157,078 |
|
|
|
(41.3 |
)% |
|
Nine
Months Ended September 30,
|
|
$ |
(1,055,813 |
) |
|
$ |
(2,029,012 |
) |
|
$ |
973,199 |
|
|
|
(48.0 |
)% |
Our net
loss decreased for the three and nine months ended September 30, 2008 as
compared to the three and nine months ended September 30, 2007, primarily due to
the effects of the deconsolidation of ICM and reduced operating expenses, each
of which is described above.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2008, we incurred $65,099 in operating cash
outflows which were financed by investing cash inflows of
$579,651. At September 30, 2008, we had cash and cash equivalents
totaling $694,003, working capital of $1,073,945, liabilities of $49,389 and
stockholders’ equity of $1,093,587.
Sources
and Uses of Cash
We
require cash to fund our research and development activities, to build our
operating infrastructure, to pay our personnel and management team and to
finance continued growth. We expect that our existing cash on hand
and the payment of the amount remaining due to our company under the modified
license agreement with ICM will permit us to finance our existing operating
activities for the next 12 months. However, the operations of ICM are
subject to certain degrees of uncertainty and could be negatively affected by
the effects of competition and local government regulations. This
could impair or restrict ICM’s ability to make its remaining payments under the
license agreement, which could adversely affect our cash flows. We do
not expect that our existing cash on hand and the remaining payments from ICM
will provide sufficient cash to finance our operations beyond the next 12
months. Additionally, we are currently pursuing the expansion of our
biotech activities in the United States and to do so we will need to secure
additional financing through future equity or debt offerings or
both. There can be no assurance that such equity or borrowings will
be available or, if available, will be at rates or prices acceptable to
us.
The
accompanying financial statements have been prepared assuming we will continue
as a going concern. We have incurred losses and operational cash
outflows since inception, and have a limited history of revenues. Our
future is dependent upon future profitable operations and the development of new
business opportunities. We currently intend to raise additional funds
via a combination of equity and/or debt offerings in order to finance our
operations until we achieve profitability. We cannot provide
assurance that we will be able to raise a sufficient amount of additional
capital to enable us to continue our operations or that such additional
financing will be available on terms acceptable to our company. To
the extent that we raise additional capital by issuing equity securities,
existing holders of common stock may experience substantial dilution. To
the extent we obtain debt financing, if available, we may become subject to
restrictive covenants that could limit our flexibility in conducting future
business activities. In addition, debt financing will require us to
make timely interest payments and repay the debt, regardless of the
profitability of our company or ability to service the debt. If
additional financing is not available or not available on acceptable terms, we
may not be able to continue our business operations or to fund our research and
development activities.
These
conditions raise substantial doubt about our ability to continue as a going
concern. These financial statements do not include any adjustments that might
arise from this uncertainty.
Analysis
of Cash Flows
Net cash
used in operating activities was $65,099 during the nine months ended September
30, 2008. These cash flows consisted of payments for legal,
professional and consulting expenses, officer salaries, rent and other
expenditures necessary to develop our business infrastructure, and expand our
research and development portfolio and collaborative efforts, which were offset
by cash collections from license agreements. Net cash provided by
investing activities was $579,651 for the nine months ended September 30, 2008,
consisting primarily of $600,000 received on the ICM license modification,
offset by minor payments made to vendors on behalf of ICM. Prior to
our deconsolidation of ICM, many vendors of ICM were paid directly by Medistem
and we still incurred some payments while we transitioned these relationships
directly to the licensee. We do not expect to incur future cash
outflows associated with licensee activities in the future. There
were no financing activities during the nine months ended September 30,
2008.
Net cash
used in operating activities was $295,748 during the nine months ended September
30, 2007. These cash flows consisted of payments for legal, professional and
consulting expenses, medical supplies, rent and other expenditures necessary to
develop our business infrastructure. Net cash used in investing activities was
$188,193 for the nine months ended September 30, 2007, consisting primarily of
net expenditures for medical and laboratory equipment, leasehold improvements
and other fixed assets. There were no financing activities during the nine
months ended September 30, 2007.
We do not
currently have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No 160, “Noncontrolling Interests in
Consolidated Financial Statements; an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The effect of adopting SFAS
160 is not expected to have a material impact on our financial
statements.
Inflation
and Seasonality
We do not
believe that our operations are significantly impacted by
inflation. Our business is not seasonal in nature.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
As of
September 30, 2008, we did not participate in any market risk-sensitive
commodity instruments for which fair value disclosure would be required under
Statement of Financial Accounting Standards No. 107. We believe that we are not
subject in any material way to other forms of market risk, such as foreign
currency exchange risk or foreign customer purchases (of which there were none
in the periods set forth in this report) or commodity price risk.
Item 4T. Controls
and Procedures.
In
accordance with Rule 13a-15(b) or Rule 15d-15(b) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as of the end of the period covered by
this Quarterly Report on Form 10-Q, Medistem’s management evaluated, with the
participation of Medistem’s principal executive officer and principal financial
officer, the effectiveness of the design and operation of Medistem’s disclosure
controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under
the Exchange Act). Based on their evaluation of these disclosure controls and
procedures, Medistem’s chief executive officer and chief financial officer have
concluded that the disclosure controls and procedures were effective as of the
end of the period covered by this report.
There has
been no change in Medistem’s internal control over financial reporting that
occurred during the quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, Medistem’s internal control over
financial reporting.
It
should be noted that any system of controls, however well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless how remote.
PART II – OTHER INFORMATION
Item
1. Legal
Proceedings.
As of the
date of this report, Medistem is not currently involved in any legal
proceedings.
There
have been no changes to the risk factors identified in our annual report on Form
10-K for the year ended December 31, 2007 and they are hereby incorporated by
reference herein.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
On
July 10, 2008, the holder of 3,889,144 shares of the Company’s common stock,
representing a majority of the Company’s outstanding common stock, approved an
amendment to our company’s Articles of Incorporation to change our company’s
name to “Medistem Inc. Also on July 10, 2008, the holder of 3,889,144
shares of the Company’s common stock, representing a majority of the Company’s
outstanding common stock, approved an amendment to our Articles of Incorporation
to effect a 1-for-25 reverse split of our common stock. These actions were
taken by consent in writing pursuant to Nevada law.
Item
5. Other
Information.
None.
|
Exhibit
Number
|
Description
|
|
3.1
|
Certificate
of Amendment to Articles of Incorporation as filed with the Nevada
Secretary of State on July 14, 2008 (1)
|
|
10.1
|
Third
Amended and Restated License Agreement between Medistem Inc. and Institute
for Cellular Medicine, dated September 2, 2008 *
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 *
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934 *
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
|
|
32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
|
* Filed
herewith
(1) Incorporated
by reference to Exhibit 3.1 to the Company’s Form 8-K dated July 10, 2008 as
filed on July 16, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
MEDISTEM
INC.
|
|
(Registrant)
|
|
|
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/
Thomas Ichim
|
Chief
Executive Officer
|
November
12, 2008
|
|
Thomas
Ichim
|
|
|
|
|
|
|
|
/s/
Steven M. Rivers
|
Chief
Financial Officer
|
November
12, 2008
|
|
Steven
M. Rivers
|
|
|