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ACTC > SEC Filings for ACTC > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for ADVANCED CELL TECHNOLOGY, INC.

Form 10-Q for ADVANCED CELL TECHNOLOGY, INC.


11-Aug-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 and six months ended June 30, 2013, and the related cash flows for the three and six months ended June 30, 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 and six months ended June 30, 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 June 30, 2014 and 2013



                                         Three Months Ended
                                              June 30,
                                       2014              2013
                                                     As Restated        $ Change        % Change
Revenue                            $      39,469     $     58,268     $    (18,799 )         (32.3 )%
Cost of revenue                           15,608           16,859            1,251             7.4 %
Gross profit                              23,861           41,409          (17,548 )         (42.4 )%
Research and development
expenses:
-R&D expenses, excluding
non-cash, stock option
compensation                           2,628,481        2,439,739          188,742             7.7 %
- Non-cash, stock option
compensation                              90,144          535,531         (445,387 )         (83.2 )%
Total Research and Development         2,718,625        2,975,270         (256,645 )          (8.6 )%
General and administrative
expenses:
-G&A expenses, excluding
non-cash, stock option
compensation                           1,996,203        1,813,811          182,392            10.1 %
-Non-cash, stock option
compensation                             179,546          839,032         (659,486 )         (78.6 )%
Total General and Administrative       2,175,749        2,652,843         (477,094 )         (18.0 )%

Loss on settlement of litigation      11,567,009                -       11,567,009             100 %
Non-operating income (expense)           919,546       (1,307,352 )      2,226,898           170.3 %
Net loss                           $ (15,517,976 )   $ (6,894,056 )   $ (8,623,920 )        (125.1 )%

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted. Revenue was $39,469 for the three months ended June 30, 2014, which was a decrease of $18,799 or 32.3% compared to the three months ended June 30, 2013. The decrease is due to license agreements that expired in 2013. The deferred revenue balance of $1,828,635, as of June 30, 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, manufacturing, clinical and regulatory 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, increased from $2,439,739 for the three months ended June 30, 2013 to $2,628,481 for the three months ended June 30, 2014, for an increase of $188,742 or 7.7%. The increase in R&D expenditures was primarily due to an increase in payroll and other compensation costs of approximately $489,000 and also due to increases in costs related to outside consultants of approximately $57,000. These increases were offset by decreases in license costs of $200,000, which related to a one-time 2013 license fee for an agreement with Allele and a decrease in legal costs related to intellectual property of approximately $197,000.

R&D expenses related to non-cash, stock option compensation decreased from $535,531 for the three months ended June 30, 2013 to $90,144 for the three months ended June 30, 2014, for a decrease of $445,387, or 83.2%. This decrease is related to the final vesting of options and restricted stock 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 June 30, 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 will increase 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 $1,813,811 for the three months ended June 30, 2013 to $1,996,203 for the three months ended June 30, 2014, for an increase of $182,392 or 10.1%. The increase in G&A expenditures was primarily due to an increase in payroll and other compensation costs of approximately $89,000 and also as a result of increased recruiting costs of approximately $103,000, related to a CEO search. G&A costs also increased due to higher consulting costs of approximately $49,000, an increase in rent and facilities costs of approximately $45,000 and an increase in Directors & Officers insurance costs of approximately $36,000. These increases were offset by decreases in investor relations' costs of approximately $104,000 and legal costs of approximately $61,000.

G&A expenses related to non-cash, stock option compensation decreased from $839,032 for the three months ended June 30, 2013 to $179,546 for the three months ended June 30, 2014, for a decrease of $659,486, or 78.6%. This decrease is related to the final vesting of options and restricted stock 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 June 30, 2013 as compared to the same period in 2014.

Loss on settlement of litigation

The loss on settlement of litigation relates to the settlement in June 2014 of the warrant holder litigation. The total value of the litigation settlement was recorded at $23,577,600 based on a 384,000,000 share settlement valued at $.0614 per share. Offsetting this charge was the reversal of previously recorded accruals for the unsettled warrant obligation and loss contingency totaling $12,010,591.

Other Income (Expense)



                                      2014             2013          $ Change        % Change
                                                   As Restated
Interest and other income          $       951     $      1,015     $       (64 )          (6.3 )%
Interest expense                      (132,532 )       (370,228 )       237,696            64.2 %
Finance cost                          (343,511 )       (291,139 )       (52,372 )         (18.0 )%
Adjustments to fair value of
unsettled warrant obligation         1,004,867         (556,153 )     1,561,020           280.7 %
Fines and penalties                          -         (587,147 )       587,147           100.0 %
Gain on the extinguishment of
debt                                         -          438,587        (438,587 )        (100.0 )%
Adjustments to fair value of
derivatives                            389,771           57,713         332,058           575.4 %
Total non-operating income
(expense)                          $   919,546     $ (1,307,352 )   $ 2,226,898

Interest expense for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 decreased by $237,696 to $132,532. 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 increase in finance costs during the three months ended June 30, 2014, compared to that of the same period in 2013, relates primarily to fees and penalties related to the final payment to retire the CAMOFI Debentures.

Adjustments to fair value of unsettled warrant obligation for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 resulted in an increase to other income of $1,561,020. 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 other income resulted from the stock price decreasing from approximately $0.0773 at March 31, 2014 to $0.0614 at June 4, 2014 when the obligation was settled, whereas in 2013, during the period of March 31, 2013 to June 30, 2013, the stock price increased from $0.0697 to $0.0785.

Adjustment to fair value of derivatives was a gain of $389,771 for the three months ended June 30, 2014 compared to a gain of $57,713 for the three months ended June 30, 2013. The change of $332,058 is primarily due to the valuation of the derivative related to the CAMOFI debentures being revalued to $0 with the retirement of the debt, resulting in a gain of $287,000 for the three months ended June 30, 2014.

Comparison of Six Months Ended June 30, 2013 and 2012



                                          Six Months Ended
                                              June 30,
                                       2014              2013
                                                      As Restated        $ Change         % Change
Revenue                            $      78,937     $     146,049     $     (67,112 )         (46.0 )%
Cost of revenue                           31,217            51,218            20,001            39.1 %
Gross profit                              47,720            94,831           (47,111 )         (49.7 )%
Research and development
expenses:
-R&D expenses, excluding
non-cash, stock option
compensation                           5,051,140         4,944,560           106,580             2.2 %
- Non-cash, stock option
compensation                             175,329         1,129,269          (953,940 )         (84.5 )%
Total Research and Development         5,226,469         6,073,829          (847,360 )         (14.0 )%
General and administrative
expenses:
-G&A expenses, excluding
non-cash, stock option
compensation                           4,954,881         3,641,671         1,313,210            36.1 %
-Non-cash, stock option
compensation                             533,431         1,845,041        (1,311,610 )         (71.1 )%
Total General and Administrative       5,488,312         5,486,712            (1,600 )             -

Loss on settlement of litigation      13,468,547                 -       (13,468,547 )          (100 )%
Non-operating expense                    (72,142 )      (1,938,983 )       1,866,841            96.3 %
Net loss                           $ (24,207,750 )   $ (13,404,693 )   $ (10,803,057 )         (80.6 )%

Revenue

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted. Revenue was $78,937 for the six months ended June 30, 2014, which was a decrease of $67,112 or 46.0% compared to the six months ended June 30, 2013. The decrease is due to license agreements that expired in 2013. Deferred revenue of $1,828,635, as of June 30, 2014, will be 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, manufacturing, clinical and regulatory 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, increased from $4,944,560 for the six months ended June 30, 2013 to $5,051,140 for the six months ended June 30, 2014, for an increase of $106,580 or 2.2%. The increase in R&D expenditures was primarily due to an increase in payroll and other compensation costs of approximately $704,000. For the six months ended June 30, 2014 we increased our staff in the clinical area in preparation for the expansion of our clinical trials into phase 2. Other increases in costs related to outside consultants of approximately $201,000 to support our preparation of phase 2 clinical trials, an increase in rent and facilities costs of approximately $59,000 and additional costs for dues and subscriptions of approximately $53,000. These increases were offset by decreases in license costs of $200,000, which related to a one-time 2013 license fee for an agreement with Allele, a decrease in legal costs related to intellectual property of approximately $467,000, a decrease in pre-clinical and clinical costs of approximately $277,000, primarily due to lower patient enrollment in the period and a decrease in lab testing costs of approximately $77,000 as testing of certain cell lines was put on hold.

R&D expenses related to non-cash, stock option compensation decreased from $1,129,269 for the six months ended June 30, 2013 to $175,329 for the six months ended June 30, 2014, for a decrease of $953,940, or 84.5%. This decrease is related to the final vesting of options and restricted stock in 2013 of our chief scientific officer's options associated with his employment contract, for a decrease of approximately $634,000. 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 six months ended June 30, 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 . . .

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