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ACTC > SEC Filings for ACTC > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ADVANCED CELL TECHNOLOGY, INC.

Form 10-Q for ADVANCED CELL TECHNOLOGY, INC.


8-May-2014

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 April 1, 2014. 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.

Restatement

With this Quarterly Report on Form 10-Q, we have restated the following previously filed consolidated financial statements, data, and related disclosures:

(1) Our consolidated statements of operations for the three months ended March 31, 2013, and the related cash flows for the three months ended March 31, 2013 located in Part I, Item 1 of this Quarterly Report on Form 10-Q; and

(2) Our management's discussion and analysis of financial condition and results of operations as of and for the three months ended March 31, 2013, contained herein;

The restatement results from our review of accounting for a potentially unsettled warrant obligation and stock compensation accounting. See Note 2, "Restatement of Previously Issued Consolidated Financial Statements" of the Notes to Consolidated Financial Statements in Part I, Item 1, for a detailed discussion of the review and effect of the restatement.

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts. For this reason the data set forth in this section may not be comparable to discussions and data in our previously filed Quarterly Reports of Form 10-Q.

Overview

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. We are actively conducting clinical trials for treating dry age-related macular degeneration and Stargardt's macular degeneration. Our preclinical programs involve cell therapies for the treatment of other ocular disorders and for diseases outside the field of ophthalmology, including autoimmune, inflammatory and wound healing-related disorders. Our intellectual property portfolio includes pluripotent human embryonic stem cell-induced pluripotent stem cell platforms; and other cell therapy research programs.

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 March 31, 2014 and 2013

                                  Three Months Ended
                                       March 31,
                                 2014             2013
                                              As Restated        $ Change          % Change
Revenue                      $     39,468     $     87,781     $     (48,313 )        (55.0)%
Cost of revenue                    15,609           34,359            18,750            54.6%
Gross profit                       23,859           53,422           (29,563 )        (55.3)%
Research and development
expenses:
-R&D expenses, excluding
non-cash, stock option
compensation                    2,422,659        2,504,821          (82,162)           (3.3)%
- Non-cash, stock option
compensation                       85,185          593,738         (508,553)          (85.7)%
Total Research and
Development                     2,507,844        3,098,559         (590,715)          (19.1)%
General and administrative
expenses:
-G&A expenses, excluding
non-cash, stock option
compensation                    2,958,678        1,827,859         1,130,819            61.9%
-Non-cash, stock option
compensation                      353,885        1,006,010         (652,125)          (64.8)%
Total General and
Administrative                  3,312,563        2,833,869           478,694            16.9%

Litigation settlement
contingency                     1,901,538                -         1,901,538             100%
Non-operating expense           (991,688)         (631,631 )       (360,057)          (57.0)%
Net loss                     $ (8,689,774 )   $ (6,510,637 )   $ (2,179,137)          (33.5)%

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 March 31, 2014, which was a decrease of $48,313 or 55.0% compared to the three months ended March 31, 2013. The decrease is due to license agreements that expired in 2013. The deferred revenue balance of $1,868,106, as of March 31, 2014, is being amortized and recorded to revenue over approximately 12 years.

Research and Development Expenses

Research and development, or 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, excluding non-cash, stock option compensation expense, decreased from $2,504,821 for the three months ended March 31, 2013 to $2,422,659 for the three months ended March 31, 2014, for a decrease of $82,162 or 3.3%. The decrease in R&D expenditures was primarily due to a decrease in legal costs related to intellectual property of approximately $270,000 and a decrease in pre-clinical and clinical trial costs of approximately $206,000 offset by increases in payroll and related expenses of approximately $215,000, increases in costs for consultants of approximately $117,000 and increases in occupancy costs due to additional lab and manufacturing space of approximately $42,000.

R&D expenses related to non-cash, stock option compensation decreased from $593,738 for the three months ended March 31, 2013 to $85,185 for the three months ended March 31, 2014, for a decrease of $508,553, or 85.7%. This decrease is related to the final vesting of options in 2013 of our chief scientific officer's options associated with his employment contract, for a decrease of approximately $317,000. Additionally, in 2013 new grants vested 20% upfront and subsequently over a 24 month period, whereas new grants in 2014 had no upfront vesting and vest over a 48 month period, resulting in higher stock compensation expense for the three months ended March 31, 2013 as compared to the same period in 2014.

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, or G&A, costs, consist mainly of payroll and payroll related expenses, legal costs relating to corporate matters and litigation, and fees for consultants, service providers and other administrative costs. G&A expenditures, excluding non-cash, stock option compensation expense, increased from $1,827,859 for the three months ended March 31, 2013 to $2,958,678 for the three months ended March 31, 2014, for an increase of $1,130,819 or 61.9%. The increase in G&A expenditures was primarily due to an increase in legal costs related to intellectual property matters of approximately $304,000 and in corporate legal fees of approximately $267,000. The increase in corporate legal expenses is due primarily to our efforts to resolve outstanding non-routine legal issues. Also contributing to the increase in G&A spending was an increase in salary and wage costs as the severance costs for our former Chief Executive Officer, of approximately $345,000, were expensed in the period. Additionally, costs related to accounting and professional fees increased by approximately $136,000.

G&A expenses related to non-cash, stock option compensation decreased from $1,006,010 for the three months ended March 31, 2013 to $353,885 for the three months ended March 31, 2014, for a decrease of $652,125, or 64.8%. This decrease is related to the final vesting of options in 2013 of the former Chief Executive Officer's options associated with his employment contract, for a decrease of approximately $531,000. Additionally, in 2013 new grants vested 20% upfront and subsequently over a 24 month period, whereas new grants in 2014 had no upfront vesting and vest over a 48 month period, resulting in higher stock compensation expense for the three months ended March 31, 2013 as compared to the same period in 2014.

Litigation Settlement Contingency

In connection with the unsettled warrant obligation and the need for a loss contingency accrual relating to the associated litigation, the Company determined that a loss was probable and the amount of loss was reasonably estimable, based on the facts and circumstances surrounding the litigation during the last quarter of 2013. The loss contingency amount for the first quarter of 2014 represents the change from the last quarter in 2013 to the estimated number of shares to settle multiplied by the stock price at the end of the quarter plus an additional amount for potential interest charges.

Other Income (Expense)



                               2014               2013            $ Change          % Change
                                              As Restated
Interest and other
income                     $      54,890     $        1,777     $      53,113            2988.9 %
Interest expense                (296,972 )         (524,189 )         227,217              43.3 %
Finance (cost) gain              (50,726 )          336,880          (387,606 )         (115.1) %
Adjustments to fair
value of unsettled
warrant obligation             (985,908)          (613,032)         (372,876)             (60.8 )%
Adjustments to fair
value of derivatives             287,028            166,933           120,095              71.9 %
Total non-operating
expense                    $    (991,688 )   $     (631,631 )   $    (360,057 )

Interest expense for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 decreased by $227,217 to $296,972 for the three months ended March 31, 2014 compared to $524,189 for the three months ended March 31, 2013. The decrease is due to the discontinuation of interest expense on the Volation and JMJ Financial debt in 2013 and a lower principal balance on the CAMOFI debt in 2014 as compared to 2013.

The change in finance costs during the three months ended March 31, 2014, compared to that of the same period in 2013, relates primarily to warrants that were canceled as part of the Settlement Agreement with the CAMOFI Parties in 2013, resulting in a gain of approximately $390,000.

Adjustments to fair value of unsettled warrant obligation for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 increased by $372,876. The fair value account adjusts the 63.2 million shares which are contractually obligated by the change in the stock price for each period. The increase in expense resulted from the stock price increasing from approximately $0.06 to $0.08 for the three months ended March 31, 2014 compared to a smaller increase during the same period in 2013, from approximately $0.06 to $0.07.

Adjustment to fair value of derivatives was a gain of $287,028 for the three months ended March 31, 2014 compared to a gain of $166,933 for the three months ended March 31, 2013. The change of $120,095 is primarily due to the valuation of the derivative related to the CAMOFI debentures and the fact that the time to maturity is reduced as well as the outstanding balance of the debt.

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,
                                                             2014                2013
Net cash used in operating activities                   $    (5,353,622 )    $ (8,276,448 )
Net cash used in investing activities                           (91,402 )        (107,191 )
Net cash provided by financing activities                     7,706,756         5,253,221
Net increase (decrease) in cash and cash equivalents          2,261,732        (3,130,418 )
Cash and cash equivalents at the end of the period      $     4,005,217         4,111,434

Operating Activities

Our net cash used in operating activities during the three months ended March 31, 2014 and 2013 was $5,353,622and $8,276,448, respectively. Net cash used in operating activities decreased in the three months ended March 31, 2014 period compared to the same period in 2013 period despite a larger net loss by approximately $2.1 million and a smaller add back to cash for non-cash compensation expense, including the value of common stock issued for compensation of approximately $1.2 million. Drivers of improved net cash used in operations for the 2014 period were changes in operating assets and liabilities, which improved in 2014 by approximately $3.1 million over the 2013 period and also by an add back to cash for non-cash financing cost generating approximately $3.0 million in improved cash flow in 2014 as compared to 2013. The non-cash financing costs was primarily related to the change in the non-cash warrant holder litigation expense.

Cash Used in Investing Activities

Cash used in investing activities during the three months ended March 31, 2014 and 2013 was $91,402 and $107,191, respectively. Our cash used in investing activities during the three months ended March 31, 2014 was attributed to the purchase of fixed assets.

Cash Flows from Financing Activities

On September 19, 2012, we entered into a purchase agreement, or Purchase Agreement, with Lincoln Park Capital Fund, LLC or Lincoln Park. Pursuant to the Purchase Agreement, we have the right to sell to Lincoln Park up to $35,000,000 in shares of our common stock. Upon signing the Purchase Agreement, Lincoln Park purchased 10,000,000 shares of our common stock for $800,000 as the initial purchase. In addition, we issued 8,750,000 shares of common stock to Lincoln Park as a commitment fee.

Upon the satisfaction of the conditions set forth in the Purchase Agreement, including the registration statement for the resale of the shares issued thereunder being declared effective by the Securities and Exchange Commission (which effectiveness occurred on November 6, 2012), we have the right over a 36-month period to sell up to an additional $34.2 million worth of shares of our common stock to Lincoln Park, upon the terms set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, the purchase price of such common stock will be based on the prevailing market price of our common stock immediately preceding the time of sales, with us having the ability to control the timing and amount of any future sales, if any, of common stock to Lincoln Park. There are no upper limits to the price Lincoln Park may pay to purchase our common stock. Lincoln Park shall not have the right or the obligation to purchase any shares of common stock on any business day that the closing price of our common stock is below a floor price as provided in the Purchase Agreement. The purchase price means, with respect to any regular purchase, the lower of: (i) the lowest sale price on the applicable purchase date and (ii) the arithmetic average of the three (3) lowest closing sale prices for the common stock during the ten (10) consecutive business days ending on the business day immediately preceding such purchase date (in each case, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction that occurs on or after the date of this Purchase Agreement. However, the purchase price cannot be below $0.03.

Cash flows provided by financing activities during the three months ended March 31, 2014 and 2013 was $7,706,756 and $5,253,221, respectively. During the three months ended March 31, 2014, we received $7,706,756 from the issuance of 114,287,000 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, 2014, we have approximately $4,005,217 in cash.

As of March 31, 2014, $6,574,539 is available to us through the Lincoln Park financing arrangement.

We continue to repay our debt obligations through the issuance of shares of our common stock, enabling us to use our cash resources to fund our operations.

. . .

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