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ACTC > SEC Filings for ACTC > Form 10-Q on 9-May-2013All 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.


9-May-2013

Quarterly Report


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

Overview

We are a life science company focused on the emerging field of regenerative medicine. Our core business strategy is to develop and ultimately commercialize stem cell derived cell therapies and biologics that will deliver safe and efficacious patient therapies, and which can be manufactured at scale and are reimbursable at attractive levels. We are conducting several ongoing clinical trials for treating macular degeneration, and have a preclinical development pipeline focused on products for eye diseases, autoimmune and inflammatory diseases, and wound healing.

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.

Use of Estimates - These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, management has estimated loss contingencies related to outstanding litigation. In addition, management has estimated variables used in the binomial models and the Black-Scholes option pricing model used to value derivative instruments as discussed below under "Fair Value Measurements". Also, management has estimated the expected economic life and value of the our licensed technology, our net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the our fixed assets and its accounts receivable allowance. Actual results could differ from those estimates.

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.

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. The fair value of certain conversion features was calculated using a binomial 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.

Comparison of Three months Ended March 31, 2013 and 2012

                                 Three Months Ended                 Three Months Ended
                                   March 31, 2013                     March 31, 2012
                                                 % of                               % of
                                  Amount        Revenue              Amount        Revenue
Revenue                     $     87,781            100.0 %    $     55,685            100.0 %
Cost of revenue                   34,359             39.1 %          15,609             28.0 %
Gross profit                      53,422             60.9 %          40,076             72.0 %
Research and development
expenses                       2,992,000           3408.5 %       2,440,542           4382.8 %
General and
administrative expenses        2,825,864           3219.2 %       3,019,005           5421.6 %
Non-operating income
(expense)                       (648,599 )         (738.9 )%       (293,019 )         (526.2 )%
Net loss                    $ (6,413,041 )        (7305.7 )%   $ (5,712,490 )       (10258.6 )%

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. Revenue was $87,781 for the three months ended March 31, 2013, which was a decrease of $32,096 or 58% compared to the three months ended March 31, 2012. The decrease is due to license agreements that were terminated in 2012.

Research and Development Expenses and Grant Reimbursements

Research and development expenses ("R&D") consist 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 March 31, 2013 increased from $2,440,542 in 2012 to $2,992,000 in 2013 for an increase of $551,458 or 23%. The increase in R&D expenditures during 2013 as compared to 2012 was primarily due to an increase in clinical trial expenses of approximately $609,000, lab testing of $70,000 and supplies of approximately $22,000 offset by a decrease in compensation of approximately $87,000. Grants, which offset the research and development expense, have also increased by approximately $60,000 in 2013 as compared to 2012.

Our R&D expenses are primarily 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 R&D 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 R&D 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, 2013 compared to the three months ended March 31, 2013 decreased by $193,141 to $2,825,864 in 2013 compared to $3,019,005 for the three months ended March 31, 2012. This decrease was primarily a result of a decrease in consultant expenses of approximately $167,000, professional fees of approximately $42,000, insurance expense of approximately $118,000, and offset by an increase in compensation of $127,000.

Other Income (Expense)



                                2013             2012           $ Change         % Change
Interest income             $      1,777     $      5,077     $     (3,300 )             (65 )%
Interest expense and late
fees                            (524,189 )       (272,324 )       (251,865 )             (92 )%
Finance gain (cost)             (293,120 )        115,827         (408,947 )             353 %
Adjustments to fair value
of derivatives                   166,933         (141,599 )        308,532              (218 )%
Total non-operating
income (expense)            $   (648,599 )   $   (293,019 )   $   (355,580 )

Interest expense for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 increased by $251,865 to $524,189 in 2013 compared to $272,324 in 2012. The increase is due to the interest expense on the senior secured convertible debentures that we issued in December 2012. The expense related to the senior secured convertible debentures for the three months ended March 31, 2013 was $120,000 of interest expense plus $131,818 of amortized discount.

The change in finance costs during the three months ended March 31, 2013, compared to that of 2012, relates primarily to settlements. During the three months ended March 31, 2013, we incurred approximately $683,000 in financing costs due to the change in estimates related to settlements which were offset by approximately $390,000 related to warrants that were canceled as part of the Settlement Agreement with the CAMOFI Parties.

Adjustment to fair value of derivatives changed from a loss of $141,599 during the three months ended March 31, 2012, to a gain of $166,933 during the three months ended March 31, 2013. The change of $308,532 is primarily due to the change in the estimated volatility. For the three months ended March 31, 2012, we used an estimated volatility factor of 160%. During the three months ended March 31, 2013, we used estimated volatility factors ranging from 80% to 160% depending on the estimated life of the derivative.

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,
                                                            2013                2012
Net cash used in operating activities                  $    (8,276,448 )    $ (4,815,785 )
Net cash used in investing activities                         (107,191 )          (9,177 )
Net cash provided by financing activities                    5,253,221         2,500,000
Net increase (decrease) in cash and cash equivalents        (3,130,418 )      (2,324,962 )
Cash and cash equivalents at the end of the period     $     4,111,434        10,778,045

Operating Activities

Our net cash used in operating activities during the three months ended March 31, 2013 and 2012 was $8,276,448 and $4,815,785, respectively. Cash used in operating activities increased during the current period primarily due to an increase in operating expenditures.

Cash Used in Investing Activities

Cash used in investing activities during the three months ended March 31, 2013 and 2012 was $107,191 and $9,177, respectively. Our cash used in investing activities during the three months ended March 31, 2013 was attributed to the purchase of fixed assets for approximately $98,386.

Cash Flows from Financing Activities

Cash flows provided by financing activities during the three months ended March 31, 2013 and 2012 was $5,253,221 and $2,500,000, respectively. During the three months ended March 31, 2013, we received $5,253,221 from the issuance of 71,547,000 shares to Lincoln Park as part of the $35,000,000 Purchase Agreement.

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

As of March 31, 2013, we have approximately $4,111,434 in cash.

As of March 31, 2013, $7,500,000 is available to us upon the sale of our Series C preferred stock for a maximum placement commitment of $25,000,000 subject to compliance with the transactions agreement.

As of March 31, 2013, $26,805,677 is available to us through the Lincoln Park financing arrangement.

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.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

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