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ACTC > SEC Filings for ACTC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ADVANCED CELL TECHNOLOGY, INC.

Form 10-Q for ADVANCED CELL TECHNOLOGY, INC.


12-Nov-2013

Quarterly Report


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

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. Forward-looking statements may include, but are not limited to, statements relating to our outlook or expectations for earnings, revenues, expenses, volatility of our common stock, financial condition or other future financial or business performance, strategies, expectations, or business prospects, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition.

Forward-looking statements can be identified by the use of words such as "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. Forward-looking statements reflect our judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" included elsewhere in this Form 10-Q and in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2013. Additionally, there may be other factors that could preclude us from realizing the predictions made in the forward-looking statements. We operate in a continually changing business environment and new factors emerge from time to time. We cannot predict such factors or assess the impact, if any, of such factors on our financial position or results of operations. All forward-looking statements included in this Form 10-Q speak only as of the date of this Form 10-Q and you are cautioned not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

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 our preclinical development pipeline focuses 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 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 GAAP 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, the Company's management has estimated loss contingencies related to outstanding litigation. In addition, Management has estimated variables used to calculate the Black-Scholes option pricing model used to value derivative instruments and the Company estimates the fair value of the embedded conversion option associated with the senior secured convertible debentures using a binomial lattice model 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 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-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 September 30, 2013 and 2012



                                 Three Months Ended
                                    September 30,
                                2013             2012           $ Change         % Change
Revenue                     $     39,468     $     68,184     $    (28,716 )         -42.1%
Cost of revenue                   15,609           15,609                -             0.0%
Gross profit                      23,859           52,575          (28,716 )         -54.6%
Research and development
expenses                       2,898,253        2,363,098          535,155            22.6%
General and
administrative expenses        3,211,866        2,695,020          516,846            19.2%
Non-operating income
(expense)                        381,138       (3,502,708 )      3,883,846          -110.9%
Net loss                    $ (5,705,122 )   $ (8,508,251 )   $  2,803,129           -32.9%

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted. Revenue was $39,468 for the three months ended September 30, 2013, which was a decrease of $28,716 or 42.1% compared to the three months ended September 30, 2012. The decrease is due to license agreements that expired in 2013. Deferred revenue of $1,947,042 as of September 30, 2013, will be amortized and recorded to revenue over approximately 13 years.

Research and Development Expenses

Research and development ("R&D") expenses consist mainly of payroll and payroll related expenses for our scientific staff, services attained in connection with our ongoing clinical trials and pre-clinical programs, our R&D and GMP facilities, and research supplies and materials. R&D expenditures increased from $2,363,098 for the three months ended September 30, 2012 to $2,898,253 for the three months ended September 30, 2013, for an increase of $535,155 or 22.6%. The increase in R&D expenditures was primarily due to an increase in payroll and related expense of approximately $179,000, consistent with our expansion of our R&D staff. Other items that contributed to the increase in overall R&D spending in the three months ended September 30, 2013, include an increase of approximately $130,000 in spending on our pre-clinical programs, an increase in our clinical trial expenses of approximately $91,000, as we continue to screen, enroll and treat patients in our age-related macular degeneration ("AMD") trial and our Stargardt's macular degeneration trials. We also realized an increase of $81,000 in our occupancy costs due to the additional lab and manufacturing space rented in our Marlborough facility.

Our R&D expenses are primarily associated with basic and pre-clinical research and our clinical development programs, exclusively in the field of human stem cell therapies and regenerative medicine. Our focus is on development of our technologies in cellular reprogramming, reduced complexity applications, and stem cell differentiation. These expenses represent both pre-clinical and clinical development costs and costs associated with support activities such as quality control and regulatory processes. The cost of our research and development personnel is the most significant category of R&D 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 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 to increase modestly from quarter to quarter for the foreseeable future. The rate of increase for any given quarter will be impacted by the timing of enrollment, and treatment of clinical trial patients along with interim results of our many pre-clinical programs. The amount and timing of these fluctuations can be difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, initiation of new clinical trials and rate of progression of existing 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 current and future 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 ("G & A") expenses for the three months ended September 30, 2013 was $3,211,866, as compared to the three months ended September 30, 2012, $2,695,020, an increase of $516,846 or 19.2%. The increase for the three months ended September 30, 2013 is primarily due to an increase in legal fees of approximately $253,000. The significant increase in legal expenses is due primarily to our efforts to resolve outstanding non-routine legal issues. We expect that these issues (e.g. SEC Civil Action and others) will be substantively resolved in the near future, and therefore we expect to realize a decrease in legal expenses in future quarters. Also contributing to the increase in G&A spending was an increase in personnel costs of approximately $168,000 of which $72,000 was non-cash, stock-based compensation. Aside from the expectations of decreased legal expenses as our non-routine matters are substantively resolved, we expect general and administrative expenses to remain at or near current spending levels for the balance of the year.

Other Income (Expense)



                             For the Three Months Ended September
                                             30,
                                   2013                  2012            $ Change         % Change
Interest and other income   $          162,548       $       3,585     $    158,963          4434.1%
Interest expense                      (271,021 )          (278,493 )          7,472             2.7%
Finance gain (loss)                    343,002          (2,891,600 )      3,234,602           111.9%
Adjustments to fair value
of derivatives                         146,609            (336,200 )        482,809          -143.6%
Total non-operating
income (expense)            $          381,138       $  (3,502,708 )   $  3,883,846

Included in interest and other income for the three months ended September 30, 2013 is $148,000 of insurance proceeds received as reimbursement of legal expenses related to certain ongoing litigation matters.

The finance gain (loss) line item of the consolidated statement of operations shifted from a loss in the three months ended, September 30, 2012 to a gain for the same period in 2013. During the three months ended September 30, 2013, we recorded a finance gain of $343,002 due to the change in estimates related to settlements compared to a loss of $2,891,600 for the change in estimates during the three months ended September 30, 2012. The gain of $343,002 for the three months ended September 30, 2013 was primarily due to the decrease in the ending share price from $0.0785 at June 30, 2013 to $0.0713 at September 30, 2013 based on an estimated number of shares to be issued at settlement of 48,307,000. The loss of $2,891,600 for the three months ended September 30, 2012 was primarily due to the increase in the ending share price from $0.06 at June 30, 2012 to $0.08 at September 30, 2012 based on an estimated number of shares to be issued at settlement of 148,307,000.

Adjustments to fair value of derivatives changed from a gain of $146,609 during the three months ended September 30, 2013 to a loss of $336,200 during the three months ended September 30, 2012. The gain of $146,609 for the three months ended September 30, 2013 was primarily due to a decrease in our share price from $0.0785 at June 30, 2013 to $0.0713 at September 30, 2013. During the three months ended September 30, 2012, the loss was primarily due to the increase in our stock price from $0.062 at June 30, 2012 to $0.0763 at September 30, 2012.

Comparison of Nine Months Ended September 30, 2013 and 2012



                                   Nine Months Ended
                                     September 30,
                                2013              2012            $ Change         % Change
Revenue                     $     185,517     $     342,053     $   (156,536 )          -45.8%
Cost of revenue                    66,827            46,827           20,000             42.7%
Gross profit                      118,690           295,226         (176,536 )          -59.8%
Research and development
expenses                        8,285,406         6,204,146        2,081,260             33.5%
General and
administrative expenses         9,148,133         8,994,088          154,045              1.7%
Non-operating income
(expense)                      (1,414,660 )      (3,277,176 )      1,862,516            -56.8%
Net loss                    $ (18,729,509 )   $ (18,180,184 )   $   (549,325 )            3.0%

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. Revenue was $185,517 for the nine months ended September 30, 2013, which was a decrease of $156,536 or 45.8% compared to the nine months ended September 30, 2012. The decrease is due to license agreements that expired in 2013. Deferred revenue of $1,947,042 as September 30, 2013, will be amortized and recorded to revenue over approximately 13 years.

Research and Development Expenses

Research and development ("R&D") expenses consist mainly of payroll and payroll related expenses for our scientific staff, services attained in connection with our ongoing clinical trials and pre-clinical programs, our R&D and GMP facilities, and research supplies and materials. R&D expenditures increased from $6,204,146 for the nine months ended September 30, 2012 to $8,285,406 for the nine months ended September 30, 2013, for an increase of $2,081,260 or 33.5%. This increase in R&D expenditures was primarily due to an increase in clinical trial expenses of approximately $707,000, as we continue to screen, enroll and treat patients in our age-related macular degeneration ("AMD") trial and our Stargardt's macular degeneration trials. We also realized an increase in spending of approximately $527,000, related to license fees, consulting costs, and collaborations in support of our various pre-clinical programs. Also contributing to our increase in R&D spending was an increase of $435,000 for personnel costs, consistent with our expansion of our R&D staff. We also realized an increase of $184,000 in our occupancy costs, due to the additional lab and manufacturing space rented in our Marlborough facility.

Our R&D expenses are primarily associated with basic and pre-clinical research and our clinical development programs, exclusively in the field of human stem cell therapies and regenerative medicine. Our focus is on development of our technologies in cellular reprogramming, reduced complexity applications, and stem cell differentiation. These expenses represent both pre-clinical and clinical development costs and costs associated with 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 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 fluctuate from period to period, for the foreseeable future. Our spending is impacted by the timing of enrollment and treatment of clinical trial patients along with interim results of our many pre-clinical programs. The amount and timing of these fluctuations can be difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, initiation of new clinical trials and rate of progression of existing 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 current and future 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, 2013 was $9,148,133, as compared to the nine months ended September 30, 2012, $8,994,088, an increase of $154,045 or 1.7%. The increase was primarily due to an increase in legal expenses of approximately $442,000. The significant increase in legal expenses is due primarily to our efforts to resolve outstanding non-routine legal issues. We expect that these issues (e.g. SEC Civil Action and other) will be substantively resolved in the near future, and therefore we expect to realize a decrease in legal expenses in future quarters. This increase in legal expenses was partially offset by reduced spending on investor relations of $206,000, and other administrative items. Aside from the expectations of decreased legal expenses as our non-routine matters are substantively resolved, we expect general and administrative expenses to remain at or near current spending levels for the balance of the year.

Other Income (Expense)



                                For the Nine Months Ended
                                      September 30,
                                2013                2012            $ Change         % Change
Interest and other income   $     165,340       $      13,170     $    152,170          1155.4%
Interest expense               (1,165,438 )          (826,109 )       (339,329 )         -41.1%
Finance gain (loss)              (637,257 )           779,481       (1,416,738 )         181.8%
Fines                            (587,147 )        (3,500,000 )      2,912,853            83.2%
Gain on extinguishment of
debt                              438,587                   -          438,587           100.0%
Adjustments to fair value
of derivatives                    371,255             256,282          114,973            44.9%
Total non-operating
income (expense)            $  (1,414,660 )     $  (3,277,176 )   $  1,862,516

Included in interest and other income for the nine months ended September 30, 2013 is $148,000 of insurance proceeds received as reimbursement of legal expenses related to certain ongoing litigation matters.

Interest expense for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 increased by $339,329 or 41.1%. The increase is due to the interest expense on the senior secured convertible debentures that we issued in December 2012 pursuant to the settlement agreement with the CAMOFI Parties. The expense related to the senior secured convertible debentures that we recorded during the nine months ended September 30, 2013 was $304,000 of interest expense, based on the stated interest rate, plus $374,497 . . .

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