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ACTC > SEC Filings for ACTC > Form 10-Q on 8-May-2012All Recent SEC Filings

Show all filings for ADVANCED CELL TECHNOLOGY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ADVANCED CELL TECHNOLOGY, INC.


8-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion should be read in conjunction with the financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We are a biotechnology company focused on developing and commercializing human stem cell technology in the emerging fields of regenerative medicine and stem cell therapy. Principal activities to date have included obtaining financing, securing operating facilities, and conducting research and development. We have no therapeutic products currently available for sale and do not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that our ability to continue research and development activities is dependent upon the ability of management to obtain additional financing as required.

CRITICAL ACCOUNTING POLICIES

Deferred Issuance Cost- Payments, either in cash or share-based payments, made in connection with the sale of debentures are recorded as deferred debt issuance costs and amortized using the effective interest method over the lives of the related debentures. The weighted average amortization period for deferred debt issuance costs is 48 months.

Fair Value Measurements - For certain financial instruments, including accounts receivable, accounts payable, accrued expenses, interest payable and notes payable, the carrying amounts approximate fair value due to their relatively short maturities.


On January 1, 2008, we adopted FASB ASC 820-10, "Fair Value Measurements and Disclosures." FASB ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Management analyzes all financial instruments with features of both liabilities and equity under ASC 480, "Distinguishing Liabilities From Equity" and ASC 815, "Derivatives and Hedging." Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes model.

Revenue Recognition- Our revenue is generated from license and research agreements with collaborators. Licensing revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the patents related to the license. Deferred revenue represents the portion of the license and other payments received that has not been earned. Costs associated with the license revenue are deferred and recognized over the same term as the revenue. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval.

Stock Based Compensation- We record stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation." ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service period. We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

RESULTS OF OPERATIONS

Comparison of Three Months Ended March 31, 2012 and 2011

                                           Three Months Ended              Three Months Ended
                                             March 31, 2012                  March 31, 2011
                                                          % of                             % of
                                         Amount          Revenue          Amount         Revenue
Revenue                               $     55,685          100.0%     $    153,688         100.0%
Cost of revenue                             15,609           28.0%           22,900          14.9%
Gross profit                                40,076           72.0%          130,788          85.1%
Research and development expenses        2,440,542         4382.8%        1,474,773         959.6%
General and administrative expenses      3,019,005         5421.6%        3,197,526        2080.5%
Loss on settlement of litigation                 -            0.0%          294,144         191.4%
Non-operating income (expense)            (293,019 )       -526.2%        1,493,618         971.9%
Net loss                              $ (5,712,490 )     -10258.6%     $ (3,342,037 )     -2174.6%

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted, and are therefore typically consistent between periods. The decrease in revenue during the three months ended March 31, 2012, was due to license agreements that were terminated in 2011.


Research and Development Expenses and Grant Reimbursements

Research and development expenses ("R&D") consists mainly of facility costs, payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants, and for scientific research. R&D expenditures increased from $1,474,773 in 2011 to $2,440,542 for 2012 for an increase of $965,769. The increase in R&D expenditures during 2012 as compared to 2011 was primarily due to compensation increase of approximately $806,000, clinical trials of approximately $67,000, legal fees of approximately $77,000 and other expenses of approximately $15,000.

Our research and development expenses consist primarily of costs associated with basic and pre-clinical research exclusively in the field of human stem cell therapies and regenerative medicine, with focus on development of our technologies in cellular reprogramming, reduced complexity applications, and stem cell differentiation. These expenses represent both pre-clinical development costs and costs associated with non-clinical support activities such as quality control and regulatory processes. The cost of our research and development personnel is the most significant category of expense; however, we also incur expenses with third parties, including license agreements, sponsored research programs and consulting expenses.

We do not segregate research and development costs by project because our research is focused exclusively on human stem cell therapies as a unitary field of study. Although we have three principal areas of focus for our research, these areas are completely intertwined and have not yet matured to the point where they are separate and distinct projects. The intellectual property, scientists and other resources dedicated to these efforts are not separately allocated to individual projects, since the research is conducted on an integrated basis.

We expect that research and development expenses will increase in the foreseeable future as we add personnel, expand our pre-clinical research, continue clinical trial activities, and increase our regulatory compliance capabilities. The amount of these increases is difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, and initiation of clinical trials. In addition, the results from our basic research and pre-clinical trials, as well as the results of trials of similar therapeutics under development by others, will influence the number, size and duration of planned and unplanned trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with others in the biotechnology or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.

We believe that it is not possible at this stage to provide a meaningful estimate of the total cost to complete our ongoing projects and bring any proposed products to market. The use of human embryonic stem cells as a therapy is an emerging area of medicine, and it is not known what clinical trials will be required by the FDA in order to gain marketing approval. Costs to complete could vary substantially depending upon the projects selected for development, the number of clinical trials required and the number of patients needed for each study. It is possible that the completion of these studies could be delayed for a variety of reasons, including difficulties in enrolling patients, delays in manufacturing, incomplete or inconsistent data from the pre-clinical or clinical trials, and difficulties evaluating the trial results. Any delay in completion of a trial would increase the cost of that trial, which would harm our results of operations. Due to these uncertainties, we cannot reasonably estimate the size, nature nor timing of the costs to complete, or the amount or timing of the net cash inflows from our current activities. Until we obtain further relevant pre-clinical and clinical data, we will not be able to estimate our future expenses related to these programs or when, if ever, and to what extent we will receive cash inflows from resulting products.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 decreased by $178,521 to $3,019,005 in 2012. This expense decrease was primarily a result of a decrease in consultant expenses of approximately $1,077,000 offset by an increase in compensation and stock issued for services of approximately $391,000 and legal expenses of approximately $458,000.


Other Income (Expense)

Other income (expense) consisted of the following:

                                              2012            2011           $ Change        % Change
Interest income                                 5,077           11,784           (6,707 )          -57%
Interest expense and late fees               (272,324 )       (681,710 )        409,386            -60%
Finance cost                                  115,827       (2,625,875 )      2,741,702           -104%
Adjustments to fair value of derivatives     (141,599 )      4,789,419       (4,931,018 )         -103%
Total non-operating income (expense)         (293,019 )      1,493,618       (1,786,637 )

Interest expense decreased from $681,710 for the three months ended March 31, 2012 to $272,324 for the three months ended March 31, 2011. The decrease was primarily due to the $365,000 deferred offering costs related to the Series B Preferred Stock which were recorded to interest expense during the three months ended March 31, 2011.

Finance costs decreased by $2,741,702 because during the three months ended March 31, 2011, an expense of $2,625,875 was recognized for the issuance of warrants and issuance of shares in settlement of warrant related litigation. During the three months ended March 31, 2012, the $115,827 gain was related to a revaluation of the liability outstanding for warrants still awaiting court decisions on litigations (see note 6).

Adjustment to fair value of derivatives changed from a gain of $4,789,419 during the three months ended March 31, 2011, to a loss of $141,599 during the three months ended March 31, 2012. The change of $4,931,018 is due to the fluctuation in our share price and the reduction in the number of outstanding warrants. Our share price changed from $0.21 at December 31, 2010 to $0.18 at March 31, 2011 which resulted in a decrease in derivative fair value of approximately $4,789,000. Our share price changed from $0.08 at December 31, 2011 to $0.09 at March 31, 2012 which resulted in an increase in derivative fair value of approximately $142,000. At March 31, 2011 there were approximately 112,681,000 warrants outstanding compared to approximately 21,757,000 at March 31, 2012.

Net Income (Loss)

Net loss for the three months ended March 31, 2012 and 2011 was $5,712,490 and $3,342,037, respectively. The change in net loss in each period is primarily related to the increase in compensation and research and development.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table sets forth a summary of our cash flows for the periods
indicated below:

                                                              Three Months Ended March 31,
                                                                 2012                2011
Net cash used in operating activities                       $    (4,815,785 )    $ (3,378,500 )
Net cash used in investing activities                                (9,177 )         (19,072 )
Net cash provided by financing activities                         2,500,000         1,258,136
Net increase (decrease) in cash and cash equivalents             (2,324,962 )      (2,139,436 )
Cash and cash equivalents at the end of the period          $    13,103,007      $ 13,749,973

Operating Activities

Our net cash used in operating activities during the three months ended March 31, 2012 and 2011 was $4,815,785 and $3,378,500, respectively. Cash used in operating activities increased during the current period primarily due to an increase in operating expenditures.

Cash Flows from Investing

Cash used in investing activities during the three months ended March 31, 2012 and 2011 was $9,177 and $19,072, respectively. Our cash used in investing activities during the three months ended March 31, 2012 was attributed to the purchase of fixed assets for approximately $9,177.


Cash Flows from Financing Activities

Cash flows provided by financing activities during the three months ended March 31, 2012 and 2011 was $2,500,000 and $1,258,136, respectively. During the three months ended March 31, 2012, we received $2,500,000 from the issuance of 250 shares of Series C Preferred stock.

We plan to fund our operations for the foreseeable future from the following sources:

As of March 31, 2012, we have approximately $10,778,000 in cash.

As of March 31, 2012, approximately $1,580,000 is available to us upon the sale of our Series A-1 preferred stock for a maximum placement commitment of $5 million.

As of March 31, 2012, $11,000,000 is available to us upon the sale of our Series C preferred stock for a maximum placement commitment of $25,000,000.

We continue to repay our debt financings in shares of common stock, enabling us to use our cash resources to fund our operations.

On a long term basis, we have no expectation of generating any meaningful revenues from our product candidates for a substantial period of time and will rely on raising funds in capital transactions to finance our research and development programs. Our future cash requirements will depend on many factors, including the pace and scope of our research and development programs, the costs involved in filing, prosecuting and enforcing patents, and other costs associated with commercializing our potential products. We intend to seek additional funding primarily through public or private financing transactions, and, to a lesser degree, new licensing or scientific collaborations, grants from governmental or other institutions, and other related transactions. If we are unable to raise additional funds, we will be forced to either scale back our business efforts or curtail our business activities entirely. We anticipate that our available cash and expected income will be sufficient to finance most of our current activities for the foreseeable future. We cannot assure you that public or private financing or grants will be available on acceptable terms, if at all. Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our common stock.

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