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

Show all filings for ADVANCED CELL TECHNOLOGY, INC.

Form 10-Q for ADVANCED CELL TECHNOLOGY, INC.


8-Nov-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

Our discussion and analysis of our financial condition and results of operations is based upon consolidated financial statements and condensed consolidated financial statements that we have prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the condensed consolidated financial statements and accompanying notes included in this report. We base our estimates on historical information, when available, and assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies to be critical to the estimates used in the preparation of our financial statements. The following is not intended to be a comprehensive discussion of all of our significant accounting policies. See the note 2 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and the note accompanying our consolidated financial statements appearing in our most recent annual report on Form 10-K for a summary of all of our significant accounting policies and other disclosures required by U.S. GAAP.

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 September 30, 2012 and 2011



                                           Three Months Ended  September 30,            Three Months Ended  September 30,
                                                          2012                                        2011
                                                                      % of                                         % of
                                             Amount                  Revenue               Amount                 Revenue
Revenue                                $           68,184                 100.0 %    $           132,805             100.0 %
Cost of revenue                                    15,609                  22.9 %                 16,650              12.5 %
Gross profit                                       52,575                  77.1 %                116,155              87.5 %
Research and development expenses               2,808,300                4118.7 %              4,035,722            3038.8 %
General and administrative expenses             2,249,818                3299.6 %              2,976,219            2241.0 %
Non-operating income (expense)                 (3,502,708 )             -5137.1 %            (45,625,243 )        -34355.1 %
Net loss                               $       (8,508,251 )            -12478.4 %    $       (52,521,029 )        -39547.5 %

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. Revenue was $68,184 for the three months ended September 30, 2012 a decrease of $64,621 or 49% compared to the three months ended September 30, 2011. The decrease is 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 for the three months ended September 30, 2012 decreased from $4,035,722 in 2011 to $2,808,300 for 2012 for a decrease of $1,227,422 or 30%. The decrease in R&D expenditures during 2012 as compared to 2011 was primarily due to a compensation decrease of approximately $1,953,000 offset by an increase in grant reimbursements of $280,000, consultant fees of approximately $181,000 and legal fees of approximately $165,800.

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 September 30, 2012 compared to the three months ended September 30, 2011 decreased by $726,401 to $2,249,818 in 2012 compared to $2,976,219 for the three months ended September 30, 2011. This decrease was primarily a result of a decrease in option compensation charges of approximately $351,000 and bonuses of approximately $345,000.

Other Income (Expense)



Other income (expense) consisted of the following:



                                    For the three months ended September
                                                    30,
                                        2012                 2011             $ Change          % Change
Interest income                             3,585                5,833            (2,248 )            -39 %
Interest expense and late fees           (278,493 )           (275,378 )          (3,115 )              1 %
Finance cost                           (2,891,600 )        (48,197,130 )      45,305,530              -94 %
Loss attributable to equity
method investment                               -             (820,000 )         820,000             -100 %
Adjustments to fair value of
derivatives                              (336,200 )          3,661,432        (3,997,632 )           -109 %
Total non-operating income
(expense)                              (3,502,708 )        (45,625,243 )      42,122,535

Interest expense remained consistent for the three months ended September 30, 2011 compared to the three months ended September 30, 2012.

The change in finance costs during the three months ended September 30, 2012, compared to that of 2011, relates primarily to settlements. During the three months ended September 30, 2011, the Company incurred approximately $11,920,198 in financing costs due to a settlement with Midsummer Investments resulting from ratchet down provisions within their warrant agreement. Additionally the Company accrued a liability for as an estimate for pending litigations on a similar ratchet down warrant contract with Alpha Capital for $2,487,367 and $33,789,564 for potential claims from other investors. The finance charges for the three months ended September 30, 2012 were based on the change in estimate related to the increase in our stock price from $0.06 at June 30, 2012 to $0.08 at September 30, 2012.

Adjustment to fair value of derivatives changed from a gain of $3,661,432 during the three months ended September 30, 2011, to a loss of $336,200 during the three months ended September 30, 2012. The change of $3,997,632 is due to the fluctuation in our share price and the reduction in the number of outstanding warrants. Our share price decreased from $0.19 at June 30, 2011 to $0.15 at September 30, 2011 which resulted in a decrease in derivative fair value of approximately $3,661,000. Our share price changed from $0.06 at June 30, 2012 to $0.08 at September 30, 2012 which resulted in an increase in derivative fair value of approximately $336,000. At September 30, 2011, there were approximately 70,464,567 warrants outstanding compared to approximately 21,757,000 at September 30, 2012.

Comparison of Nine months ended September 30, 2012 and 2011

                                          Nine Months Ended  September 30,           Nine Months Ended  September 30,
                                                        2012                                       2011
                                                                     % of                                      % of
                                             Amount                 Revenue             Amount                Revenue
Revenue                                $           342,053             100.0 %    $          440,181             100.0 %
Cost of revenue                                     46,827              13.7 %               321,050              72.9 %
Gross profit                                       295,226              86.3 %               119,131              27.1 %
Research and development expenses                7,316,940            2139.1 %             7,042,766            1600.0 %
General and administrative expenses              7,881,294            2304.1 %             8,125,473            1845.9 %
Loss on settlement of litigation                         -               0.0 %               294,144              66.8 %
Non-operating income (expense)                  (3,277,176 )          -958.1 %           (45,339,963 )        -10300.3 %
Net loss                               $       (18,180,184 )         -5315.0 %    $      (60,683,215 )        -13786.0 %

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 nine months ended September 30, 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 $7,042,766 in 2011 to $7,316,940 for 2012 for an increase of $274,174 or 4%. The increase in R&D expenditures during 2012 as compared to 2011 was primarily due to an increase in clinical trials of approximately $199,000, consulting fees of approximately 291,000 and legal fees of approximately $365,000 offset by a decrease in compensation of approximately $557,000.

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 nine months ended September 30, 2012 decreased $244,179 or 3% to $7,881,294 compared to $8,125,473 for the nine months ended September 30, 2011. This decrease was primarily a result of a decrease in consultant expenses of approximately 1,291,000 offset by an increase in compensation and stock issued for services of approximately $186,000 and legal expenses of approximately $783,000.

Other Income (Expense)



Other income (expense) consisted of the following:



                                        For the nine months ended
                                              September 30,
                                        2012                 2011             $ Change          % Change
Interest income                            13,170               28,382           (15,212 )            -54 %
Interest expense and late fees           (826,109 )         (1,229,259 )         403,150              -33 %
Finance cost                              779,481          (51,068,739 )      51,848,220             -102 %
Loss attributable to equity
method investment                               -             (820,000 )         820,000             -100 %
Fines and penalties                    (3,500,000 )                  -        (3,500,000 )           -100 %
Adjustments to fair value of
derivatives                               256,282            7,749,653        (7,493,371 )            -97 %
Total non-operating income
(expense)                              (3,277,176 )        (45,339,963 )      42,062,787

Interest expense decreased from $1,229,259 for the nine months ended September 30, 2011 to $826,109 for the nine months ended September 30, 2012. 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 nine months ended September 30, 2011.

Finance costs decreased by $51,848,220 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. During the nine months ended September 30, 2011, the Company incurred approximately $11,920,198 in financing costs due to a settlement with Midsummer Investments resulting from ratchet down provisions within their warrant agreement. Additionally the Company accrued a liability as an estimate for pending litigations on a similar ratchet down warrant contract with Alpha Capital for $2,487,367 and $33,789,564 for potential claims from other investors. During the nine months ended September 30, 2012, we had income of $779,481 due to the change in estimates related to the settlement and warrant related litigation.

Fines and penalties increased $3,500,000 during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. We have been named as a defendant in a civil action brought by the Securities and Exchange Commission related to transactions involving the sale and issuance of our securities. The Securities and Exchange Commission alleges that certain sales of shares to outside organizations, completed in late 2008 and early 2009 under the company's former management, resulted in $3.5 million in proceeds to us in violation of Section 5(a) and 5(c) of the Securities Act of 1933 because the sale and issuance of these securities were neither registered under the Securities Act nor subject to an exemption from registration under Section
3(a)(10). In addition, we are alleged to have violated Section 13(a) of the Exchange Act of 1934 because we did not disclose the sale and issuance of the shares to the Securities and Exchange Commission on a timely basis

Adjustment to fair value of derivatives changed from a gain of $7,749,653 during the nine months ended September 30, 2011, to a gain of $256,282 during the nine months ended September 30, 2012. The change of $7,493,371 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 $0.15 at September 30, 2011 which resulted in a decrease in derivative fair value of approximately $7,750,000. Our share price remained constant at $0.08 at December 31, 2011 and September 30, 2012. The decrease in fair value of approximately $256,000 is due to the decrease in the remaining life of the outstanding warrants. At September 30, 2011 there were approximately 70,464,567 warrants outstanding compared to approximately 21,757,000 at September 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES



Cash Flows



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



                                                        Nine Months Ended  September 30,
                                                          2012                      2011
Net cash used in operating activities               $     (11,555,224 )         $ (10,828,173 )
Net cash used in investing activities                         (10,269 )               (36,830 )
Net cash provided by financing activities                   6,716,500               8,877,715
Net decrease in cash and cash equivalents                  (4,848,993 )            (1,987,288 )
Cash and cash equivalents at the end of the
period                                              $       8,254,014           $  13,902,121

Operating Activities

Our net cash used in operating activities during the nine months ended September 30, 2012 and 2011 was $11,555,224 and $10,828,173, 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 nine months ended September 30, 2012 and 2011 was $10,269 and $36,830, respectively. Our cash used in investing activities during the nine months ended September 30, 2012 was attributed to the purchase of fixed assets for approximately $10,269.

Cash Flows from Financing Activities

Cash flows provided by financing activities during the nine months ended September 30, 2012 and 2011 was $6,716,500 and $8,877,715, respectively. During the nine months ended September 30, 2012, we received $6,000,000 from the issuance of 600 shares of Series C Preferred stock and $800,000 from the issuance of 10,000,000 shares to Lincoln Park as part of the $35,000,000 . . .

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