The accompanying notes are an integral part
of these consolidated financial statements.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATIONAL MATTERS
The unaudited consolidated financial statements have been prepared
by Advanced Cell Technology, Inc. and Subsidiary (collectively the “Company”), pursuant to the rules and regulations
of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of
normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have
been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 1, 2014. The results for the six months ended June 30, 2014 are not necessarily
indicative of the results to be expected for the full year ending December 31, 2014.
Organization and Nature of Business
The Company is a biotechnology company, incorporated in the
state of Delaware, engaged in the development and commercialization of human pluripotent stem cell technology in the field of regenerative
medicine. The Company is conducting clinical trials for treating dry age-related macular degeneration and Stargardt’s macular
degeneration, in addition to several clinical and preclinical programs for other ocular therapies. The Company also has a preclinical
development pipeline in areas outside of ophthalmology, including; autoimmune diseases, inflammatory diseases, and wound healing.
The Company’s intellectual property portfolio includes pluripotent human embryonic stem cell, or hESC; induced pluripotent
stem cell, or iPSC, platforms; and other cell therapy research programs. The corporate headquarters and principle laboratory and
manufacturing facilities are located in Marlborough, Massachusetts.
2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL
STATEMENTS
On March 10, 2014, the Company concluded that its previously
issued consolidated financial statements required a restatement for the years ended December 31, 2012 and 2011. The Company determined
that a misapplication of accounting guidance relating to certain warrants and an associated full-ratchet anti-dilution feature
that was included in these warrants occurred. Additionally the Company concluded that it had an error with its stock compensation
accounting as a result of having inadequate authorized, unissued shares available for its outstanding options in certain periods.
As a result of these errors the Company determined that its financial statements for the following periods (the “Applicable
Periods”) required a restatement and could no longer be relied upon: the fiscal years ended December 31, 2009, December 31,
2010, December 31, 2011 and December 31, 2012; each quarterly period in 2011 and 2012; and the first three quarterly periods in
its fiscal year ended December 31, 2013.
Warrant Accounting Issue
Two separate warrant agreements entered into in September 2005
contained a full ratchet, anti-dilution feature which entitled the holders to automatic adjustments in the number and purchase
price of their shares, if the Company issued lower-priced shares between May 1, 2005 and January 15, 2009, ( the “Pricing
Period”). From the original date of the warrant until the exercise of the warrants in September 2006, the anti-dilution embedded
derivative feature was properly accounted for and recorded at its fair value. From the date of exercise through the end of the
pricing period, the full ratchet feature remained in effect but was not accounted for or recorded at its fair value, which resulted
in an accounting error. In determining the proper accounting management performed a valuation of this full ratchet embedded derivative
using a Monte Carlo simulation model.
Management further determined that as of the end of the pricing
period an adjustment to the shares and purchase price of the shares should have taken place per the full ratchet anti-dilution
feature of the warrant. As the matter went to litigation this contractual obligation was never settled and became fixed at 63.2
million shares with a floor price of $0.06. This unsettled warrant contractual obligation should have been recorded from the end
of the pricing period until settlement with accounting treatment, under ASC 815, requiring mark-to-market adjustments at each reporting
date.
Due to the resulting financial statement impact within the years
impacted, the Company has determined it is necessary to restate its financial statements for the Applicable Periods.
Stock Compensation Issue related to inadequate authorized
and unissued shares to settle share based awards in shares
The Company examined periods being restated for the warrant
liability issue to determine if authorized, unissued share availability was an issue in relation to instruments that have share
based settlement requirements. Through this analysis it was determined that stock options were impacted in certain periods while
other instruments such as warrants, convertible debt and preferred stock already had liability classification and therefore would
not be impacted by inadequate authorized, unissued shares available.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It was determined that in Q1 2009, Q2 2009 and Q4 2011 options
outstanding were impacted by the lack of authorized, unissued shares available. It was further determined that the date in which
committed shares exceeded unauthorized was February 9, 2009 and that shortage of available shares ran through September 10, 2009,
when additional authorized shares were approved. As for 2011, the share issue began on November 2, 2011 and ran through January
24, 2012, when additional authorized shares were approved.
As per the accounting requirements of ASC 718, the inadequate
share issue caused the accounting to change from equity based to liability based accounting, with the vested options to be measured
at fair value as a liability until such time as adequate shares were approved and the accounting for the stock compensation would
revert back to equity based accounting.
This accounting error in treating the stock compensation as
equity throughout these periods with inadequate authorized unissued shares, led the Company to re-measure all stock options impacted
during these periods to effect the proper accounting treatment.
Due to the resulting financial statement impact within the years
impacted, the Company has determined it is necessary to restate its financial statements for the Applicable Periods.
The following tables summarize the effects of the restatement
on the Company’s previously issued condensed consolidated financial statements:
Summary of increases (decreases) in net loss (unaudited)
|
|
Three months ended June 30, 2013
|
|
|
Six months ended June 30, 2013
|
|
|
|
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(6,611,346
|
)
|
|
$
|
(13,024,387
|
)
|
Net adjustments
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
(113,033
|
)
|
|
|
(219,592
|
)
|
General and administrative expenses
|
|
|
(9,524
|
)
|
|
|
(17,529
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
(160,153
|
)
|
|
|
(143,185
|
)
|
Net loss, restated
|
|
$
|
(6,894,056
|
)
|
|
$
|
(13,404,693
|
)
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Net adjustments
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
General and administrative expenses
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
0.00
|
|
|
|
0.00
|
|
Net loss, restated
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Net adjustments
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
General and administrative expenses
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
0.00
|
|
|
|
0.00
|
|
Net loss, restated
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares used in computing net loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,451,694,258
|
|
|
|
2,389,481,712
|
|
Diluted
|
|
|
2,451,694,258
|
|
|
|
2,389,481,712
|
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Statements of Operations (unaudited) for the
three months ended June 30, 2013
|
|
|
|
|
|
Three months ended June 30, 2013
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
58,268
|
|
|
|
|
|
|
$
|
58,268
|
|
Cost of revenue
|
|
|
16,859
|
|
|
|
|
|
|
|
16,859
|
|
Gross profit
|
|
|
41,409
|
|
|
|
–
|
|
|
|
41,409
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,862,237
|
|
|
|
113,033
|
|
|
|
2,975,270
|
|
General and administrative expenses
|
|
|
2,643,319
|
|
|
|
9,524
|
|
|
|
2,652,843
|
|
Total operating expenses
|
|
|
5,505,556
|
|
|
|
122,557
|
|
|
|
5,628,113
|
|
Loss from operations
|
|
|
(5,464,147
|
)
|
|
|
(122,557
|
)
|
|
|
(5,586,704
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,015
|
|
|
|
|
|
|
|
1,015
|
|
Interest expense and late fees
|
|
|
(370,228
|
)
|
|
|
|
|
|
|
(370,228
|
)
|
Finance gain (cost)
|
|
|
(687,139
|
)
|
|
|
396,000
|
|
|
|
(291,139
|
)
|
Fines and penalties
|
|
|
(587,147
|
)
|
|
|
|
|
|
|
(587,147
|
)
|
Gain on extinguishment of debt
|
|
|
438,587
|
|
|
|
|
|
|
|
438,587
|
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
–
|
|
|
|
(556,153
|
)
|
|
|
(556,153
|
)
|
Adjustments to fair value of derivatives
|
|
|
57,713
|
|
|
|
|
|
|
|
57,713
|
|
Total non-operating expense
|
|
|
(1,147,199
|
)
|
|
|
(160,153
|
)
|
|
|
(1,307,352
|
)
|
Loss before provision for income tax
|
|
|
(6,611,346
|
)
|
|
|
(282,710
|
)
|
|
|
(6,894,056
|
)
|
Provision for income tax
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(6,611,346
|
)
|
|
$
|
(282,710
|
)
|
|
$
|
(6,894,056
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,451,694,258
|
|
|
|
–
|
|
|
|
2,451,694,258
|
|
Diluted
|
|
|
2,451,694,258
|
|
|
|
–
|
|
|
|
2,451,694,258
|
|
Consolidated Statements of Operations
(unaudited) for the six months ended June 30, 2013
|
|
Six months ended June 30, 2013
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
146,049
|
|
|
|
|
|
|
$
|
146,049
|
|
Cost of revenue
|
|
|
51,218
|
|
|
|
|
|
|
|
51,218
|
|
Gross profit
|
|
|
94,831
|
|
|
|
–
|
|
|
|
94,831
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,854,237
|
|
|
|
219,592
|
|
|
|
6,073,829
|
|
General and administrative expenses
|
|
|
5,469,183
|
|
|
|
17,529
|
|
|
|
5,486,712
|
|
Total operating expenses
|
|
|
11,323,420
|
|
|
|
237,121
|
|
|
|
11,560,541
|
|
Loss from operations
|
|
|
(11,228,589
|
)
|
|
|
(237,121
|
)
|
|
|
(11,465,710
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,792
|
|
|
|
|
|
|
|
2,792
|
|
Interest expense and late fees
|
|
|
(894,417
|
)
|
|
|
|
|
|
|
(894,417
|
)
|
Finance gain (cost)
|
|
|
(980,259
|
)
|
|
|
1,026,000
|
|
|
|
45,741
|
|
Fines and penalties
|
|
|
(587,147
|
)
|
|
|
|
|
|
|
(587,147
|
)
|
Gain on extinguishment of debt
|
|
|
438,587
|
|
|
|
|
|
|
|
438,587
|
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
–
|
|
|
|
(1,169,185
|
)
|
|
|
(1,169,185
|
)
|
Adjustments to fair value of derivatives
|
|
|
224,646
|
|
|
|
|
|
|
|
224,646
|
|
Total non-operating expense
|
|
|
(1,795,798
|
)
|
|
|
(143,185
|
)
|
|
|
(1,938,983
|
)
|
Loss before provision for income tax
|
|
|
(13,024,387
|
)
|
|
|
(380,306
|
)
|
|
|
(13,404,693
|
)
|
Provision for income tax
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(13,024,387
|
)
|
|
$
|
(380,306
|
)
|
|
$
|
(13,404,693
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
|
(0.01
|
)
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,389,481,712
|
|
|
|
–
|
|
|
|
2,389,481,712
|
|
Diluted
|
|
|
2,389,481,712
|
|
|
|
–
|
|
|
|
2,389,481,712
|
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated Statement of Cash Flows Impact
The following table includes selected information from the Company’s
consolidated statements of cash flows presenting previously reported and restated cash flows, for the six months ended June 30,
2013:
|
|
For the six months ended
|
|
|
|
June 30, 2013
|
|
|
|
As Previously Reported
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,024,387
|
)
|
|
$
|
(13,404,693
|
)
|
Stock based compensation
|
|
|
1,793,884
|
|
|
|
2,031,005
|
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
–
|
|
|
|
1,169,185
|
|
Non-cash financing costs
|
|
|
(128,233
|
)
|
|
|
(1,154,233
|
)
|
Net cash used in operating activities
|
|
|
(12,483,489
|
)
|
|
|
(12,483,489
|
)
|
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
—The Company follows
accounting standards set by the Financial Accounting Standards Board, FASB. The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America, GAAP. References
to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,™ sometimes referred to as
the Codification or ASC.
The accompanying consolidated financial statements have been
prepared in conformity with GAAP which contemplate continuation of the company as a going concern. However, as of June 30, 2014,
the Company has an accumulated deficit of $338.1 million. The ability to continue as a going concern is dependent upon many factors,
including the Company’s ability to raise additional capital in a timely manner. The Company entered into an agreement for
a $30 million equity line arrangement in late June 2014. The accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Principles of Consolidation
— The accounts
of the Company and its wholly-owned subsidiary Mytogen, Inc. are included in the accompanying consolidated financial statements.
All intercompany balances and transactions were eliminated in consolidation.
Segment Reporting
—ASC 280,
“Segment
Reporting”
requires use of the “management approach” model for segment reporting. The management approach
model is based on the way a company’s management organizes segments within the company for making operating decisions and
assessing performance. The Company determined it has one operating segment. Disaggregation of the Company’s operating results
is impracticable, because the Company’s research and development activities and its assets overlap, and management reviews
its business as a single operating segment. Thus, discrete financial information is not available by more than one operating segment.
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 Company’s licensed technology, the Company’s
net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment
banks, and the useful lives of the Company’s fixed assets. Actual results could differ from those estimates.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash and Cash Equivalents
— Cash equivalents
are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains
its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses
related to this concentration of risk. As of June 30, 2014 and December 31, 2013, the Company had deposits in excess of federally-insured
limits totaling $3,678,495 and $1,668,232, respectively.
Commitments and Contingencies
— The Company
is subject to various claims and contingencies related to lawsuits as well as commitments under contractual and other obligations.
The Company recognizes liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated.
Relating to loss contingencies the Company accrues the best
estimate of a loss within a range. If no estimate in a range is better than any other, the minimum amount is accrued. The Company
discloses a reasonably possible loss in excess of the amount accrued, if applicable. For reasonably possible loss contingencies
the Company discloses the nature of the loss contingency and give a range of the estimate of possible loss or state that an estimate
cannot be made.
Grant Received
— From time to time, the
Company participates in research grants both as an initiator of grants as well as a sub-recipient of grant funds. The Company incurs
costs for the grant and is subsequently reimbursed for these expenses by grant receipts. The Company records such receipts as a
reduction in research and development costs. For the three and six months ended June 30, 2014, the Company had no research grants
recorded. For the three and six months ended June 30, 2013, the Company recorded $60,022 and $120,044, respectively, as a reduction
in research and development costs.
Grants Receivable
— The Company periodically
assesses its grants receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely,
the Company records an allowance for that doubtful account. Once the Company has exhausted efforts to collect, management writes
off the grants receivable against the allowance it has already created.
Property and Equipment
— The Company records
its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon disposition of property
and equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net
book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets
are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged
as collateral for the related lease.
The Company provides for depreciation over the assets’
estimated useful lives as follows:
Machinery & equipment
|
|
4 years
|
Computer equipment
|
|
3 years
|
Office furniture
|
|
4 years
|
Leasehold improvements
|
|
Lesser of lease life or economic life
|
Capital leases
|
|
Lesser of lease life or economic life
|
Patents
— The Company follows ASC 350-30,
“General Intangibles Other than Goodwill,”
in accounting for its patents. ASC 350-30 provides that costs of
internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate
lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when
incurred. The Company has expensed as research and development expense all costs associated with developing its patents.
Equity Method Investment
— The Company follows
ASC 323,
“Investments-Equity Method and Joint Ventures,”
in accounting for its investment in the joint venture.
In the event the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero,
the Company will discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed
obligations of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint
venture subsequently reports net income, the Company will resume applying the equity method only after its share of that net income
equals the share of net losses not recognized during the period the equity method was suspended.
Deferred Costs
— Consist of the following:
(a) Payments, either in cash or share-based, made in connection
with the sale of debentures which are amortized using the effective interest method over the lives of the related debentures. These
deferred issuance costs are charged to financing costs when and if the related debt instrument is retired or converted early. The
weighted average amortization period for deferred debt issuance costs is 48 months.
(b) Payments made to secure commitments under certain financing
arrangements. These amounts are recognized in financing costs ratably over the period of the financing arrangements, and are recognized
in financing costs immediately if the arrangement is cancelled, forfeited or the utility of the arrangement to the company is otherwise
compromised.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(c) Payments made to financial institutions and consulting firms
in order to provide financing related services. These costs are being amortized over the terms of the related agreements.
Long-Lived Assets
— The Company follows ASC
360-10,
“Property, Plant, and Equipment,”
which established a “primary asset” approach to determine
the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset
to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Through June 30, 2014, the
Company had not experienced impairment losses on its long-lived assets.
Fair Value Measurements
—
The Company applies
the provisions of ASC 820-10,
“Fair Value Measurements and Disclosures.”
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. For certain financial instruments, including cash and cash equivalents, grants receivable, prepaid expenses,
accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. The
carrying amount of senior secured convertible debentures approximates fair value as the interest rate charged on the debentures
is based on the prevailing rate. 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.
|
The Company 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 Company uses Level 2 inputs for its valuation methodology
for certain warrant derivative liabilities. The Company’s 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 Company uses Level 3 inputs for its valuation methodology
for the fair value of certain embedded conversion options and warrant and option derivative liabilities.
The Company estimates the fair value of the embedded conversion
option associated with its 8% convertible debentures using a binomial lattice, which estimates and compares the present value of
the principal and interest payments to the as converted value to determine whether the holder of the notes should convert the notes
into the Company’s common stock or continue to receive principal and interest payments. The Company uses this methodology
to determine the beneficial conversion features because there are no observable inputs available with respect to the fair value.
The binomial lattice relies on the following Level 3 inputs:
(1) expected volatility of the Company’s common stock; (2) potential discount for illiquidity of large blocks of the Company’s
common stock, and (3) discount rate for contractual debt principal and interest payments. The fair value of the embedded beneficial
conversion feature is estimated as the difference between the fair value of the notes with and without the conversion feature.
The fair value of the notes without the conversion feature is determined using one Level 3 input, the discount rate for contractual
debt interest and principal payments.
|
·
|
The expected volatility of the Company’s common stock is estimated from the historical volatility of daily returns in the Company’s common stock price. The Company monitors the volatility of its common stock on a quarterly basis to observe trends that may impact the fair value of the notes.
|
|
·
|
The discount for illiquidity is measured using an average-strike option that calculates the discount as the opportunity cost for not being able to sell a large block of the Company’s common stock immediately at prevailing observable market prices. Inputs to the average-strike option model include the expected volatility of the Company’s common stock and time to sell a large block of the Company’s stock as Level 3 inputs and other observable inputs. The time to sell the stock is estimated considering the historical daily trading volume of the Company’s common stock and market maker estimates of the amount of shares that can be offered for sale above the normal the daily trading volume without depressing the price of the Company’s common stock.
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2014, the Company identified the following assets
and liabilities that are required to be presented on the balance sheet at fair value:
Description
|
|
Fair Value
As of
June 30, 2014
|
|
|
Fair Value Measurements at
June 30, 2014
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant and option derivative liabilities
|
|
$
|
270,999
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
270,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,999
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
270,999
|
|
The following tables reconcile the change in fair value for
measurements categorized within Level 3 of the fair value hierarchy:
|
|
Warrant and Option Derivative Liabilities
|
|
Balance at December 31, 2013
|
|
$
|
284,799
|
|
Total (gains) for the period included in earnings
|
|
|
(13,800
|
)
|
Balance at June 30, 2014
|
|
$
|
270,999
|
|
|
|
Embedded Conversion Option Liabilities
|
|
Balance at December 31, 2013
|
|
$
|
663,000
|
|
Total (gains) for the period included in earnings
|
|
|
(663,000
|
)
|
Balance at June 30, 2014
|
|
$
|
–
|
|
Gains and losses included in earnings for the six months ended
June 30, 2014 are reported as follows:
|
|
Warrant and Option Derivative Liabilities
|
|
Total gain included in earnings
|
|
$
|
13,800
|
|
|
|
Embedded Conversion Option Liabilities
|
|
Total gain included in earnings
|
|
$
|
663,000
|
|
The following table provides quantitative information about
measurements categorized within Level 3 of the fair value hierarchy:
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Valuation
|
|
|
|
|
|
Description
|
|
2014
|
|
|
Technique
|
|
Unobservable Input
|
|
Value
|
|
Warrant and Option derivative liabilities
|
|
$
|
270,999
|
|
|
Black Scholes Model
|
|
Expected volatility of the Company's common stock
|
|
|
65% - 90%
|
|
For the three and six months ended June 30, 2014 the Company
recognized a gain of $389,771 and $676,800, respectively, for the changes in the valuation of derivative liabilities. For the three
and six months ended June 30, 2013 the Company recognized a gain of $57,713 and $224,646, respectively, for the changes in the
valuation of derivative liabilities.
The Company did not identify any non-recurring assets and liabilities
that were recorded at fair value during the periods presented.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
and Deferred Revenue
—
The Company’s revenues are primarily 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.
License fee revenue begins to be recognized in the first full
month following the effective date of the license agreement. 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.
In some cases, the Company is entitled to receive royalty payments
from licensees. In such cases, the Company recognizes the royalties when they are earned and collectability of those royalty payments
is reasonably assured.
In connection with its license agreements, the Company recorded
$39,469 and $78,937 in license fee revenue for the three and six months ended June 30, 2014, respectively, in its consolidated
statements of operations, and recorded $58,268 and $146,049 in license fee revenue for the three and six months ended June 30,
2013, respectively.
The remainder of the license fees have been accrued in deferred
revenue at June 30, 2014 and December 31, 2013, respectively.
Research and Development Costs
— Research
and development costs consist of expenditures for the research and development of patents and technology, which cannot be capitalized.
The Company’s research and development costs consist mainly of payroll and payroll related expenses, research supplies and
research grants. 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. Research and development costs are expensed
as incurred.
Share-Based Compensation
— The Company records
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. The Company recognizes in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees and non-employees. There were 125,658,698 options outstanding
as of June 30, 2014.
Income Taxes
— Deferred income taxes are
provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest
and penalties that would be payable to the taxing authorities upon examination.
Applicable interest and penalties associated with unrecognized
tax benefits are classified as additional income taxes in the statements of operations.
Net Loss Per Share
— Earnings per share
is calculated in accordance with the ASC 260-10,
“Earnings Per Share.”
Basic earnings-per-share is based upon
the weighted average number of common shares outstanding. Diluted earnings-per-share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
At June 30, 2014 and 2013, approximately 133,035,654 and 168,401,502
potentially dilutive shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their
inclusion would be anti-dilutive.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Concentrations and Other Risks
— Currently,
the Company’s revenues are concentrated on a small number of license agreements with customers. Revenues are based on amortizing
funds already received over contractual terms of agreements. Based on the insignificance of these revenues to the Company’s
operations and the nature of the agreements, any concentration of revenue among a small number of customers does not result in
a risk to the Company.
Other risks include the uncertainty of the regulatory environment
and the effect of future regulations on the Company’s business activities. As the Company is a biotechnology research and
development company, there is also the attendant risk that someone could commence legal proceedings over the Company’s discoveries.
Recent Accounting Pronouncements -
During the
quarter ended June 30, 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance.
The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects
the consideration that the company expects to receive for those goods or services. The new standard will be effective for the Company
on January 1, 2017. The Company is currently evaluating the potential impact that Topic 606 may have on its financial position
and results of operations.
In July 2013, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(ASU 2013-11). ASU 2013-11 clarifies guidance and
eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for
fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is
not expected to have a material impact on consolidated results of operations, financial condition, or liquidity.
In February 2013, the FASB issued ASU No.
2013-02, Comprehensive Income (Topic 220) –
Reporting of Amounts Reclassified out of Accumulative Other Comprehensive
Income
(ASU 2013-02), which replaces the presentation requirements for reclassifications out of accumulated other comprehensive
income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 requires an entity to provide information about the amounts reclassified out
of accumulated other comprehensive income by component and to present significant amounts reclassified out of accumulated other
comprehensive income by respective line items of net income if the amount reclassified is required to be reclassified to net income
in its entirety. The adoption of this standard is not expected to have a material impact on consolidated results of operations,
financial condition, or liquidity.
4. INVESTMENT IN JOINT VENTURE
On December 1, 2008, the Company and CHA Bio & Diostech
Co., Ltd. (“CHA”), formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International,
Inc. (“SCRMI”), will develop human blood cells and other clinical therapies based on the Company’s hemangioblast
program, one of the Company’s core technologies. Under the terms of the agreement, the Company purchased upfront a 33% interest
in the joint venture, and will receive another 7% interest upon fulfilling certain obligations under the agreement over a period
of 3 years. The Company’s contribution includes (a) the uninterrupted use of a portion of its leased facility at the Company’s
expense, (b) the uninterrupted use of certain equipment in the leased facility, and (c) the release of certain of the Company’s
research and science personnel to be employed by the joint venture. In return, for a 60% interest, CHA has agreed to contribute
$150,000 cash and to fund all operational costs in order to conduct the hemangioblast program. Effective May 1, 2010, the Company
was no longer obligated to provide laboratory space to SCRMI. As of June 30, 2014, the Company holds a 40% interest in the joint
venture and CHA owns a 60% interest. The two partners to the joint venture are in negotiations on further funding of the joint
venture, but there can be no assurances that an agreement will be reached. Any financial statement impact at this time is unclear
should an agreement not be reached.
The Company has agreed to collaborate with the joint venture
in securing grants to further research and development of its technology. Additionally, SCRMI has agreed to pay the Company a fee
of $500,000 for an exclusive, worldwide license to the Hemangioblast Program. The Company recorded $7,353 and $14,706 in license
fee revenue for the three and six months ended June 30, 2014, respectively, and $7,353 and $14,706 in license fee revenue for the
three and six months ended June 30, 2013, respectively, in the consolidated statements of operations, and the balance of unamortized
license fee of $337,010 and $351,715 is included in deferred revenue in the accompanying consolidated balance sheets at June 30,
2014 and December 31, 2013, respectively.
On July 15, 2011, the Company and CHA entered into a binding
term sheet, with the expectation of entering into a future definitive agreement, in which the joint venture was realigned around
both product development rights and research responsibilities. Under the terms of the binding term sheet, SCRMI exclusively licensed
the rights to the Hemangioblast Program to the Company for United States and Canada and expanded the jurisdictional scope of the
license to CHA to include Japan (in addition to South Korea, which was already exclusively licensed to CHA). As part of the agreement,
the scientists at SCRMI involved in the Hemangioblast Program were transferred to the Company, and SCRMI discontinued its research
activity and became solely a licensing entity. The Company is obligated to meet a minimal research spending requirement of $6.75
million by July 31, 2014 in order to maintain its exclusive license, up to the point of filing an investigational new drug for
a therapeutic product. Intellectual property rights created by the Company in the course of its research are subject to a non-exclusive
license to CHA for Japan and South Korea, and to SCRMI to be sub-licensable under certain circumstances for countries other than
the United States, Canada, Japan and South Korea. Pursuant to the agreement, the Company paid $820,000 to SCRMI which is recorded
to “losses attributable to equity method investments.” By filing the investigational new animal drug application on
September 12, 2013 with the Federal Drug Administration, the Company has met the commitment required to maintain its exclusive
license.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table is a summary of key financial data for the
joint venture as of and for the six months ended June 30, 2014 and 2013:
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Current assets
|
|
$
|
257,400
|
|
|
$
|
191,544
|
|
Noncurrent assets
|
|
|
1,298,307
|
|
|
|
1,245,289
|
|
Current liabilities
|
|
|
292,116
|
|
|
|
294,165
|
|
Noncurrent liabilities
|
|
|
1,729,495
|
|
|
|
2,021,611
|
|
Net revenue
|
|
|
146,058
|
|
|
|
146,058
|
|
Net income (loss)
|
|
$
|
101,095
|
|
|
$
|
84,638
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following at June 30, 2014 and December 31, 2013:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Machinery & equipment (1)
|
|
$
|
1,135,385
|
|
|
$
|
1,086,800
|
|
Computer equipment
|
|
|
64,967
|
|
|
|
49,707
|
|
Office furniture
|
|
|
49,560
|
|
|
|
38,783
|
|
Leasehold improvements (1)
|
|
|
604,732
|
|
|
|
559,969
|
|
|
|
|
1,854,644
|
|
|
|
1,735,259
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(1,046,025
|
)
|
|
|
(981,683
|
)
|
Property and equipment, net
|
|
$
|
808,619
|
|
|
$
|
753,576
|
|
(1)
|
The June 30, 2014 balances include approximately $133,038 in machinery & equipment and $366,223 in leasehold improvements that were not yet placed in service at June 30, 2014 and therefore had not started being depreciated as of that date.
|
Depreciation expense for the three and six months ended June
30, 2014 amounted to $33,382 and $64,342, respectively. Depreciation expense for the three and six months ended June 30, 2013 amounted
to $19,850 and $37,702, respectively.
6. ACCRUED SETTLEMENT
The accrued settlement is comprised of the following at June
30, 2014 and December 31, 2013:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
SEC Civil Action
|
|
$
|
2,724,411
|
|
|
$
|
4,086,619
|
|
SEC Section 16 Investigation
|
|
|
375,000
|
|
|
|
–
|
|
Total
|
|
$
|
3,099,411
|
|
|
$
|
4,086,619
|
|
SEC Civil Action
In May 2012, the Company was named as a defendant in a civil
action brought by the Securities and Exchange Commission related to transactions involving the sale and issuance of the Company’s
securities. The Securities and Exchange Commission alleges that Company violated Section 5(a) and 5(c) of the Securities Act of
1933 because certain sales of shares to outside organizations, completed in late 2008 and early 2009 under the Company’s
former management, resulted in $3.5 million in proceeds to the Company, were neither registered under the Securities act nor subject
to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. In addition, the Company is
alleged to have violated Section 13(a) of the Exchange Act of 1934 because the Company did not disclose the sale and issuance of
the shares to the Securities and Exchange Commission on a timely basis.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 2013, the Company settled the civil action. Under
the terms of the settlement accepted by the SEC, the Company consented to entry of judgment under which it neither admits nor denies
liability and has agreed to disgorgement of $3.5 million in proceeds from the transactions in question. In addition, the Company
will pay approximately $587,000 in pre-judgment interest. The total amount due, approximately $4.1 million, will be paid over six
equal quarterly installments. The first installment was placed into escrow in July 2013 and was applied to the aggregate amount
due upon the acceptance by the SEC of the settlement agreement. The next installment was due and paid in April 2014 and the most
recent payment was due and paid in July 2014. In addition, the settlement permanently restrains and enjoins the Company from violations
of Sections 5(a) and 5(c) of the Securities Act, Section 13(a) of the Exchange Act and Rule 13a-11 under the Exchange Act.
SEC Section 16 Investigation
In April 2013, it was determined that Gary Rabin, our former
Chief Executive Officer, failed to report 27 transactions in which Mr. Rabin sold shares of the Company’s common stock that
took place between February 7, 2011 and January 10, 2013. The Company was advised that the SEC was investigating transactions involving
sales of shares of our common stock that the former Chief Executive Officer failed to report in a timely manner on Form 4 under
Section 16 of the Exchange Act. The Company has discussed a resolution to the matter with the SEC and has recorded the $375,000
as the expected settlement amount.
7. CONVERTIBLE PROMISSORY NOTES
CAMOFI Senior Secured Convertible Debentures
On January 11, 2013 the Company entered into a settlement agreement
and mutual release (“the Settlement Agreement”) with CAMOFI Master LDC (“CAMOFI”) and CAMZHN Master LDC
(“CAMHZN” and together with CAMOFI, the “CAMOFI Parties”), relating to the lawsuit between the Settling
Parties, as plantiffs, and the Company, as defendant, in the Supreme Court of New York. Pursuant to the Settlement Agreement the
Company issued Debentures in the principal amount of $4,732,781 and $1,267,219 to CAMOFI and CAMHZN, respectively (together the
“Debentures”).
The Debentures have an effective date of December 31, 2012,
accrue interest at the rate of 8% per annum and mature on June 30, 2015. The Company may pre-pay all or a portion of the amounts
due under the Debentures prior to maturity without penalty. Both of the Debentures are convertible at the option of the holder
at a price per share of common stock equal to 80% of VWAP of the ten consecutive trading days prior to the conversion date. The
Company must make quarterly payments under the Debentures on the last day of each calendar quarter commencing on March 31, 2013
in the amount of $600,000. The quarterly payments may, at the option of the Company and subject to the satisfaction of certain
conditions, be paid in shares of Common Stock. In such case, the conversion price for such payment will be based on the lesser
of (i) the conversion price as defined in the agreement or (ii) 80% of the average of the 10 closing prices immediately prior
to the date the quarterly payment is due. To secure its obligations under the Debentures, the Company granted a security interest
in substantially all of the Company’s assets, including its intellectual property, to the CAMOFI Parties. The Debentures
contain certain covenants customary for debt instruments of its kind.
On April 29, 2014, the Company received an Acceleration Notice
from the CAMOFI Parties of a declaration that the aggregate principal amount remaining under the Debentures due June 30, 2015 issued
by the Company and held by each of CAMOFI Parties subject to adjustment as set forth therein, together with any other amounts owed
under the Debentures were immediately due and payable in accordance with their terms. The Acceleration Notice followed the delivery
of a notice to the Company on April 15, 2014 stating that, due to the Company’s failure to deliver shares of common stock
issuable to the CAMOFI Parties within three days of a conversion event, an “Event of Default” had occurred and the
CAMOFI Parties were reserving all rights held by them arising from such Event of Default. At the time of the conversion event,
the Company determined not to deliver the shares to the CAMOFI Parties in order to comply with applicable securities laws. The
Company later delivered the shares to the CAMOFI Parties in compliance with applicable securities laws, prior to the delivery of
the Default Notice.
On May 2, 2014 the Company paid to the CAMOFI Parties an aggregate
amount of approximately $1,616,000 calculated in accordance with the payment acceleration provisions of the Debentures and satisfying
the Company’s obligations under the Debentures. The payment represented the remaining $1,200,000 in principal Debentures
due and an additional amount of approximately $416,000, which represented penalties, interest and legal cost reimbursement to the
CAMOFI Parties. With the payment, the Company satisfied in full its obligations under the Debentures and the terms of the Settlement
Agreement and Mutual Release dated as of December 31, 2012 pursuant to which the Debentures were issued in January 2013. The Company
received correspondence from the CAMOFI Parties stating that they believe the aggregate amount due to be different than the amount
the Company paid. The Company believes that its interpretation of the Debentures is accurate and complete.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Debentures had contained an embedded beneficial conversion
feature as the Debentures are convertible at a price per share of common stock equal to 80% of VWAP of the ten consecutive trading
days prior to the conversion date. The embedded beneficial conversion feature was modeled using a binomial lattice model, and had
a calculated value at December 31, 2013 of $663,000. The Company recorded a gain of $663,000 for the change in the fair value of
the embedded conversion option liability for the six months ended June 30, 2014 as the derivative was recorded at $0 at June 30,
2014 with the retirement of the remaining debentures.
The Company recorded a debt discount of $725,000, which was
to be amortized over the life of the note using the effective interest rate of 22.9%. The unamortized discount balance of $108,229
was written off to interest expense with the retirement of the remaining outstanding debentures.
8. LOSS CONTINGENCY ACCRUAL
The loss contingency accrual is comprised of the following at
June 30, 2014 and December 31, 2013:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Warrant holder litigation
|
|
$
|
–
|
|
|
$
|
6,228,621
|
|
Miscellaneous settlements
|
|
|
221,581
|
|
|
|
203,358
|
|
Total
|
|
$
|
221,581
|
|
|
$
|
6,431,979
|
|
Warrant holder litigation
On June 4, 2014, the Company entered into a settlement agreement
(the “June 2014 Agreement”) with each of Gary D. Aronson (“Aronson”), John S. Gorton, individually and
as trustee of the John S. Gorton Separate Property Trust dated March 3, 1993 (“Gorton”), herronlaw apc, attorneys for
Aronson (“Herron”), Miller and Steele LLP, attorneys for Gorton (“Miller/Steele”) and Michael A. Bourke,
attorney for both Aronson and Gorton (“Bourke”). The June 2014 Agreement relates to previously disclosed lawsuits filed
against the Company by each of Aronson and Gorton in August 2011 in the United States District Court for the District of Massachusetts
claiming that the Company breached an anti-dilution provision contained in warrants held by each of Aronson and Gorton as a result
of certain transactions between the Company and other third-party investors.
Pursuant to the settlement agreement, in exchange for dismissal
of the lawsuit by the warrant holders, the Company issued 384,000,000 shares of its common stock. On the date of the settlement
the shares were valued at $.0614 per share for a total value of $23,577,600. With the settlement the Company reversed the existing
accruals recorded for warrant holder litigation under loss contingency as well as under the unsettled warrant obligation. As a
result the Company recorded a loss on settlement of litigation of $11,567,009 and $13,468,547 for the three and six months ended
June 30, 2014, respectively. (see Note 9).
At December 31, 2013 the Company had 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 represented the estimated number of shares to settle above a determined share amount
necessary to settle the warrant share obligation plus an additional amount for potential interest charges.
Miscellaneous settlements
The Company was not able to reach settlement agreements with
all of holders of convertible promissory notes and warrants that were issued between 2005 and 2010. The Company has not been contacted
by the remaining holders nor has it been able to reach them for potential settlement discussions. If the Company is able to negotiate
with the holders it anticipates that the number of shares to be issued will be similar to the settlements that have already been
finalized as of December 31, 2012.
9.
Unsettled Warrant
obligation
The Company determined that it had an unsettled warrant obligation
related to two warrant agreements entered into in 2005. The warrant agreement had anti-dilution ratchet provisions which the Company
determined led to a contractual obligation, which became fixed on January 15, 2009, to issue approximately 63.2 million common
shares. The Company further determined that those common shares represent a liability which should be recorded at fair value at
each accounting period with changes to that fair value being recorded in earnings. Fair value is based on the share obligation
multiplied by the stock price at the end of each reporting period, with a liability “floor” established, at $0.06 per
share, based on the stock price at the time the ratchet provision was triggered. At December 31, 2013 the liability has been recorded
at $3,899,391.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 2014, the warrant holder litigation with Aronson
and Gorton was settled as the Company entered into a settlement agreement with the parties, thus eliminating the unsettled
warrant obligation accrual at June 30, 2014 (see Note 8). The Company conducted a final valuation of the 63.2 million shares
of unsettled warrant obligation on the day of settlement, June 4, 2014, and the liability was adjusted to $3,880,431 before
being adjusted for the settlement. As a result of this final valuation the Company recorded $1,004,867 through
earnings during the three months ended June 30, 2014.
10. SERIES B PREFERRED STOCK
On November 2, 2009 (“Effective Date”), the Company
entered into a preferred stock purchase agreement with Optimus Life Sciences Capital Partners, LLC (“Investor” or “Optimus”).
Pursuant to the purchase agreement, the Company agreed to sell, and the Investor agreed to purchase, in one or more purchases from
time to time at the Company’s sole discretion, (i) up to 1,000 shares of Series B preferred stock at a purchase price of
$10,000 per share, for an aggregate purchase price of up to $10,000,000, and (ii) five-year warrants to purchase shares of the
Company’s common stock with an aggregate exercise price equal to 135% of the purchase price paid by the Investor, at an exercise
price per share as follows:
On the sixth (6th) trading day following the tranche notice
date, the exercise price of the Optimus warrant shall be adjusted to equal the VWAP for the 5 trading days beginning on and including
the tranche notice date (as so adjusted, the “Adjusted Exercise Price”); and
If the Adjusted Exercise Price results in additional Warrant
Shares being issuable to the Holder, such additional shares shall be delivered to the Holder within one Trading Day following the
Adjustment Date. If the Adjusted Exercise Price results in less Warrant Shares being issuable to the Holder, the excess Warrant
Shares shall be returned by the Holder to the Company within one Trading Day following on the Adjustment Date.
The Company agreed to pay to the Investor a commitment fee of
$500,000, at the earlier of the closing of the first Tranche or the six month anniversary of the effective date, payable at the
Company’s election in cash or common stock valued at 90% of the volume weighted average price of the Company’s common
stock on the five trading days preceding the payment date. The $500,000 commitment fee was outstanding and was recorded in accrued
expenses in the Company’s consolidated balance sheet at December 31, 2009. During 2010, the Company issued 50 shares of preferred
stock as payment for the commitment fee.
During 2010, the Company delivered tranche notices to Optimus
Life Sciences Capital Partners, LLC for delivery of a total of 1,000 shares under the Series B preferred stock for funding in the
amount of $10,000,000 ($9,485,000 in cash proceeds, $500,000 of commitment fee applied, and $15,000 in legal fees).
During 2010, in connection with the funding, the Company issued
95,870,362 shares of its common stock upon exercise of the same number of warrants, which were granted simultaneously with the
Company’s tranche notices. During 2010, the Company received secured promissory notes in the amount of $13,500,000 to settle
the warrant exercise.
Dividends
Commencing on the date of the issuance of any shares of Series
B preferred stock, Holders of Series B preferred stock will be entitled to receive dividends on each outstanding share of Series
B preferred stock, which will accrue in shares of Series B preferred stock at a rate equal to 10% per annum from the issuance date
compounded annually. Accrued dividends will be payable upon redemption of the Series B preferred stock. Accrued dividends were
$2,980,258 and $3,587,748 at June 30, 2014 and December 31, 2013, respectively.
Redemption Rights
Upon or after the fourth anniversary of the initial issuance
date, the Company will have the right, at the Company’s option, to redeem all or a portion of the shares of the Series B
preferred stock, at a price per share equal to 100% of the Series B liquidation value. The preferred stock may be redeemed at the
Company’s option, commencing 4 years from the issuance date at a price per share of (a) $10,000 per share plus accrued but
unpaid dividends (the “Series B Liquidation Value”), or, at a price per share of: (x) 127% of the Series B Liquidation
Value if redeemed on or after the first anniversary but prior to the second anniversary of the initial issuance date, (y) 118%
of the Series B Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the initial
issuance date, and (z) 109% of the Series B Liquidation Value if redeemed on or after the third anniversary but prior to the fourth
anniversary of the initial issuance date.
Liquidation Rights
The preferred shares shall, with respect to dividend, rights
upon liquidation, winding-up or dissolution, rank: (i) senior to the Company’s common stock, and any other class or series
of preferred stock of the Company, except Series A-1 Convertible Preferred Stock which shall rank senior in right of liquidation
and pari passu with respect to dividends; and (ii) junior to all existing and future indebtedness of the Company.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
If the Company determines to liquidate, dissolve or wind-up
its business, it must redeem the Series B preferred stock at the prices set forth above. Upon any liquidation, dissolution or winding
up of the Company the Holders of Series B preferred stock shall be first entitled to be paid out of the assets of the Company available
for distribution to its stockholders an amount with respect to each share of Series B preferred stock equal to $10,000, plus any
accrued and unpaid dividends.
The Company has classified the Series B redeemable preferred
stock in the equity section in its consolidated balance sheets.
Related Secured Promissory Notes Receivable:
In accordance with the terms of the Series B preferred stock
agreement, Optimus issued to the Company a secured promissory note in consideration for receiving and exercising warrants under
each tranche. The value of each secured promissory note equals the value of the warrants that Optimus received. Interest on the
notes accrues at 2% per year, compounding annually if the interest remains unpaid at the end of each year. The note is secured
by freely tradable marketable securities belonging to Optimus. Each promissory note matures on the fourth anniversary of its issuance.
In the event the Company redeems all or a portion of any shares
of Series B preferred stock held by Optimus, the Company will be permitted to offset the full amount of such proceeds against amounts
outstanding under the promissory notes. Accordingly, the Company included the discounted value of the secured promissory notes
as a separate component of stockholders’ deficit at June 30, 2014 and December 31, 2013.
June 2014 Redemption
In June 2014 the Company redeemed 250 shares of the Series
B preferred, all of which were upon or after the fourth anniversary of their initial issuance date, representing three separate
tranches. As part of the redemption, the promissory notes receivable balances for these tranches were netted against the accrued
dividends payable, with the net dividend payable balance of $70,129 being paid out in cash and a charge being recorded to stockholders
equity.
The value of the secured promissory notes in the consolidated
balance sheet was $10,448,835, net of discounts of $403,049 and accrued interest of $726,884 at June 30, 2014, reflecting a face
value of $10,125,000. The value of the secured promissory notes in the consolidated balance sheet was $13,561,607, net of discounts
of $654,559 and accrued interest of $716,166 at December 31, 2013, reflecting a face value of $13,500,000. The Company determined
that a 10% discount is appropriate, in order to consistently reflect the Company’s cost of borrowing under the terms of the
underlying Series B preferred stock that permits offset. The Company recorded an initial discount on the promissory notes in the
amount of $3,519,238 during the year ended December 31, 2010. The Company accretes interest at 10% over the respective four-year
terms of the promissory notes.
During the three and six months ended June 30, 2014 the Company
accreted interest on the promissory notes in the amount of $298,006 and $556,170, respectively, and during the three and six months
ended June 30, 2013, the Company accreted interest on the promissory notes in the amount of $312,116 and $601,958, respectively,
which was recorded in accumulated deficit during the periods then ended. The Company recorded dividends on its Series B preferred
stock during the three and six months ended June 30, 2014 of $297,448 and $631,581 respectively and during the three and six months
ended June 30, 2013 of $312,718 and $603,119, respectively. The accrued dividends are offset by the accretion of the note receivable
discount.
As of June 30, 2014 and December 31, 2013, 750 and 1,000 shares
of Series B preferred stock, respectively, were outstanding. As of June 30, 2014, the Company has drawn the entire commitment
of $10,000,000.
11. SERIES C PREFERRED STOCK
On December 30, 2010 (the “Series C Effective Date”),
the Company entered into a securities purchase agreement (the “Series C Purchase Agreement”) with Socius CG II, Ltd.,
a Bermuda exempted company (“Socius”). Pursuant to the Series C Purchase Agreement:
|
·
|
The Company agreed to sell, and Socius agreed to purchase, in one or more purchases from time to time (each such purchase, a “Series C Tranche”) in the Company’s sole discretion (subject to the conditions set forth therein), (i) up to 2,500 shares of Series C preferred stock at a purchase price of $10,000 per share, for an aggregate purchase price of up to $25,000,000, and (ii) a two-year warrant (the “Socius Warrant”) obligating Socius to purchase shares of the Company’s common stock with an aggregate exercise price equal to 20% of the purchase price paid by Socius for the Series C preferred stock sold in each Series C Tranche, at an exercise price per share equal to the closing bid price of the Company’s common stock on the date the Company provides notice of such Series C Tranche (the “Series C Tranche Notice”). On each date that the Company delivers a Series C Tranche Notice to Socius, Socius shall also become obligated, pursuant to a right automatically vesting on such Series C Tranche Notice date, to purchase that number of shares of common stock (such shares of common stock, the “Additional Investment Shares”) equal in dollar amount to 100% of the Series C Tranche amount set forth in the Series C Tranche Notice at a price per share equal to the closing bid price of the Company’s common stock on the Series C Tranche Notice date.
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
·
|
The Series C Purchase Agreement requires that, when the Company requests Socius to purchase a tranche of Series C preferred stock, the mandatory purchase by Socius of the related Additional Investment Shares must occur no later than sixty (60) calendar days following the Series C Tranche Notice date.
|
|
·
|
The Socius Warrant was issued to Socius on December 30, 2010 (the “Closing Date”) simultaneous with entering into the Series C Purchase Agreement. The Socius Warrant was issued with an initial exercise price per warrant of $0.16 per share and for a total of up to 31,250,000 shares, subject to adjustment as described therein. On January 10, 2011, Socius and the Company entered into a letter agreement in which the parties agreed that, following arms-length negotiations and notwithstanding anything to the contrary in the Socius Warrant, that the initial number of shares issuable under the Socius Warrant, subject to the adjustment mechanism set forth therein, was equal to 30,000,000.
|
|
·
|
As required by the Series C Purchase Agreement, the Socius Warrant must be exercised for such number of shares of common stock equal in amount to 20% of the cumulative purchase price paid by Socius for the Series C preferred stock. The maximum amount of Series C preferred stock that Socius may become obligated to purchase under all Series C Tranches is $25,000,000. Assuming the maximum drawdown of $25,000,000 by the Company under the Series C Purchase Agreement, Socius would be required to exercise the Socius Warrant to purchase 20% of this total dollar amount, or $5,000,000 worth of the Company’s common stock.
|
|
·
|
The letter agreement entered into on January 10, 2011, modified the Socius Warrant only with respect to the initial number of underlying shares and expressly provides that, except as so modified, the Socius Warrant shall remain unchanged and shall continue in full force and effect.
|
|
·
|
At the initial closing pursuant to the Series C Purchase Agreement, which occurred on the Closing Date, (i) Socius purchased 400 shares of Series C preferred stock and the Company received gross proceeds of $4,000,000. (ii) the Company delivered to Socius an initial warrant (the “Initial Warrant”) obligating Socius to purchase shares of its common stock with an aggregate purchase price of $800,000, which shall be automatically exercisable on the date a registration statement for the resale of all shares of common stock issuable pursuant to the Series C Purchase Agreement is declared effective (which effectiveness occurred on April 13, 2011), with delivery of such shares made to Socius on the trading day immediately following the exercise date at a per-share price equal to the closing bid price of the Company’s common stock on the delivery date, and (iii) Socius became obligated to purchase additional shares of common stock equal in aggregate dollar amount to $4,000,000 (such shares of common stock the “Initial Investment Shares”), with delivery of such shares made to Socius on the trading day immediately following the date the registration statement is declared effective at a price per share equal to the closing bid price of the Company’s common stock on the delivery date.
|
|
·
|
The Company agreed to pay to Socius a commitment fee of $1,250,000 (the “Commitment Fee”), at the earlier of the closing of the first Series C Tranche or the six month anniversary of the Series C Effective Date. This Commitment Fee is payable solely at the Company’s election, in cash or in the alternative, in shares of common stock valued at 88% of the volume weighted average price of the Company’s common stock on the 5 trading days preceding the payment date. If the Company elects to pay the Commitment Fee in shares of its common stock, no cash payment would be due as the issuance of shares would satisfy the Commitment Fee obligation in full. The Company issued 7,562,008 shares of its common stock on September 30, 2011 as full payment of the commitment fee.
|
|
·
|
The Company agreed to use its best efforts to file within 60 days of the Series C Effective Date, and cause to become effective as soon as possible thereafter, a registration statement with the Securities and Exchange Commission for the resale of all shares of common stock issuable pursuant to the Series C Purchase Agreement, including the shares of common stock underlying the Socius Warrant, shares of the common stock issuable upon exercise of the Initial Warrant, shares of common stock issuable as Initial Investment Shares, shares of common stock issuable as Additional Investment Shares, and shares of common stock issuable in payment of the Commitment Fee.
|
|
·
|
In the event that Socius does not comply with its obligations under the Series C Purchase Agreement (including its obligations to exercise the Socius Warrant), the Series C Purchase Agreement provides that, in addition to being entitled to exercise all rights provided therein or granted by law, the Company would be entitled to seek specific performance by Socius under the Series C Purchase Agreement and the Socius Warrant.
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 30, 2010, in accordance with the Series C Purchase
Agreement, the Company filed a certificate of designations for the Series C preferred stock with the Secretary of State of the
State of Delaware. As previously reported, pursuant to the certificate of designations, the Series C preferred stock shall, with
respect to dividend, rights upon liquidation, winding-up or dissolution, rank: (i) senior to the Company’s common stock,
and any other class or series of preferred stock of the Company (collectively, with any warrants, rights, calls or options exercisable
for or convertible into such preferred stock, the “Junior Securities”); provided, however, the Series A-1 redeemable
convertible preferred stock and Series B preferred stock (together, the “Senior Securities”) shall rank senior in right
of redemption, liquidation, and dividends; and (ii) junior to all existing and future indebtedness of the Company.
As of June 30, 2014 and December 31, 2013, the Company had drawn
$17,500,000 of the $25,000,000 commitment.
Dividends
Commencing on the date of the issuance of any shares of Series
C preferred stock, holders of Series C preferred stock will be entitled to receive dividends on each outstanding share of Series
C preferred stock, which will accrue in shares of Series C preferred stock at a rate equal to 6% per annum from the issuance date
compounded annually. Accrued dividends will be payable upon redemption of the Series C preferred stock. Accrued dividends were
$3,040,267 and $2,454,853 at June 30, 2014 and December 31, 2013, respectively.
Redemption Rights
Upon or after the fourth anniversary of the initial issuance
date, the Company will have the right, at the Company’s option, to redeem all or a portion of the shares of the Series C
preferred stock, at a price per share equal to 100% of the Series C liquidation value. The Series C preferred stock may be redeemed
at the Company’s option, commencing 4 years from the issuance date at a price per share of (a) $10,000 per share plus accrued
but unpaid dividends (the “Series C Liquidation Value”), or, at a price per share of : (i) 136% of the Series C Liquidation
Value if redeemed prior to the first anniversary of the initial issuance date, (ii) 127% of the Series C Liquidation Value if redeemed
on or after the first anniversary but prior to the second anniversary of the initial issuance date, (iii) 118% of the Series C
Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the initial issuance date,
and (iv) 109% of the Series C Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary
of the initial issuance date.
Termination and Liquidation Rights
If the Company determines to liquidate, dissolve or wind-up
its business, it must redeem the Series C preferred stock at the prices set forth above. Upon any liquidation, dissolution or winding
up of the Company, the holders of Series C preferred stock shall be first entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series C preferred stock equal to $10,000,
plus any accrued and unpaid dividends.
Related Secured Promissory Notes Receivable:
As of June 30, 2014, Socius has issued $21,000,000 in notes
receivable in accordance with the terms of the Series C Purchase Agreement. Interest on the notes accrues at 2% per year, compounding
annually if the interest remains unpaid at the end of each year. The notes are secured by freely tradable marketable securities
belonging to Socius. Each promissory note matures on the fourth anniversary of its issuance.
In the event the Company redeems all or a portion of any shares
of Series C preferred stock held by Socius, the Company will be permitted to offset the full amount of such proceeds against amounts
outstanding under the promissory notes. Accordingly, the Company included the discounted value of the secured promissory notes
as a separate component of stockholders’ deficit at June 30, 2014 and December 31, 2013.
At June 30, 2014, the value of the secured promissory notes
in the consolidated balance sheet was $21,049,355, net of discounts of $965,383 and accrued interest of $1,014,738, reflecting
a face value of $21,000,000.
At December 31, 2013, the value of the secured promissory notes
in the consolidated balance sheet was $20,451,788, net of discounts of $1,363,762 and accrued interest of $815,549, reflecting
a face value of $21,000,000.
The Company determined that a 6% discount is appropriate, in
order to consistently reflect the Company’s cost of borrowing under the terms of the underlying Series C preferred stock
that permits offset. The Company recorded an initial discount on the promissory notes in the amount of $1,968,050 during the year
ended December 31, 2011 and an additional $1,026,809 of debt discounts during the year ended December 31, 2012 related to the fifth,
sixth and seventh tranche notice. The Company accretes interest at 6% over the respective four-year terms of the promissory notes.
During the three and six months ended June 30 2014, the Company
accreted interest on the promissory note in the amount of $303,641 and $597,568, respectively, and during the three and six months
ended June 30, 2013 the Company accreted interest on the promissory note in the amount of $286,454 and $563,744, respectively,
which was recorded in accumulated deficit during the periods then ended. The Company recorded dividends on its Series C preferred
stock during the three and six months ended June 30, 2014, of $295,743 and $585,414, respectively and recorded dividends of $279,003
and $552,277 during the three and six months ended June 30, 2013, respectively. The accrued dividends are offset by the accretion
of the note receivable discount.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has classified the Series C preferred stock in
the equity section in its consolidated balance sheets. As of June 30, 2014 and December 31, 2013, 1,750 shares of Series C preferred
stock were outstanding.
12. WARRANT SUMMARY
Warrant Activity
A summary of warrant activity for the six months ended June
30, 2014 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
|
Warrants
|
|
|
Price $
|
|
|
Life (in years)
|
|
|
(000)$
|
|
Outstanding, December 31, 2013
|
|
|
|
7,829,883
|
|
|
|
0.28
|
|
|
|
1.82
|
|
|
|
–
|
|
Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
|
(452,927
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2014
|
|
|
|
7,376,956
|
|
|
|
0.29
|
|
|
|
1.41
|
|
|
|
|
|
Exercisable, June 30, 2014
|
|
|
|
7,376,956
|
|
|
|
0.29
|
|
|
|
1.41
|
|
|
|
–
|
|
The aggregate intrinsic value in the table above is before applicable
income taxes and is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s
common stock as of the reporting date.
The following table summarizes information about warrants outstanding
and exercisable at June 30, 2014:
|
|
Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
Price $
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price $
|
|
.10 - .11
|
|
|
2,786,320
|
|
|
|
0.50
|
|
|
|
0.10
|
|
.20 - .30
|
|
|
1,630,000
|
|
|
|
1.50
|
|
|
|
0.25
|
|
.38-.39
|
|
|
1,330,636
|
|
|
|
3.07
|
|
|
|
0.39
|
|
.40-.45
|
|
|
815,000
|
|
|
|
1.50
|
|
|
|
0.45
|
|
0.70
|
|
|
815,000
|
|
|
|
1.50
|
|
|
|
0.70
|
|
|
|
|
7,376,956
|
|
|
|
|
|
|
|
|
|
13. STOCKHOLDERS’ DEFICIT TRANSACTIONS
On June 27, 2014, the Company entered into a purchase agreement
with Lincoln Park Capital Fund, LLC, (“Lincoln Park”) pursuant to which the Company has the right to sell
to Lincoln Park up to $30,000,000 in shares of its common stock, subject to certain limitations set forth in the purchase agreement.
On June 27, 2014, the Company and Lincoln Park also entered
into a registration rights agreement, pursuant to which the Company is required to file a registration statement with the SEC to
register the resale of the shares of common stock issued and issuable to Lincoln Park, pursuant to the purchase agreement.
Upon the satisfaction of the conditions
set forth in the purchase agreement, including the registration statement being declared effective by the SEC, the Company has
the right over a 36-month period to sell up to an additional $30,000,000 million worth of shares of its 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 the Company’s common stock immediately preceding the time of sales,
with the Company controlling 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 the Company’s 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 the Company’s 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 Agreement). However, the purchase price cannot be below
$0.03.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The purchase agreement contains customary representations, warranties,
covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. Lincoln
Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s
common stock. The purchase agreement may be terminated by the Company at any time at its discretion without any cost to the Company.
The proceeds received by the Company under the purchase agreement are expected to be used to fund the Company’s clinical
activities.
In consideration for entering into the purchase agreement,
the Company issued to Lincoln Park 10,600,707 shares of its common stock as a commitment fee. The shares related to the commitment
fee have been issued in reliance on an exemption from registration under the Securities Act of 1933, as amended pursuant to Section
4(a)(2) thereof and Regulation D promulgated thereunder, and will be registered for resale on the registration statement that
the Company must file pursuant to the purchase agreement and the Registration Rights Agreement. The shares related to the commitment
fee are fully earned as of the date of the agreement. There were no other considerations given to Lincoln Park for entering into
this agreement with the Company.
From January 1, 2014 to June 30, 2014, Lincoln Park purchased
226,974,958 shares of common stock for cash proceeds of $14,281,295.
From January 27, 2014 to June 30, 2014, the Company issued an
aggregate of 427,373,609 shares in settlements, including 384,000,000 shares in settlement of the Aronson-Gorton warrant holder
litigation valued at $23,577,600 and 43,373,609 shares in settlement of $2,400,000 Debentures to the CAMOFI Parties as required
by the Settlement Agreement.
During the six months ended June 30, 2014, the Company issued
various board members 1,972,826 shares of common stock valued at $142,734 as compensation for board services.
14. STOCK-BASED COMPENSATION
Stock Plans
|
|
|
|
|
|
|
|
Options/Shares
|
|
|
|
|
|
|
Options/Shares
|
|
|
Options
|
|
|
Available
|
|
|
Total
|
|
Stock Plan
|
|
Issued
|
|
|
Outstanding
|
|
|
For Grant
|
|
|
Authorized
|
|
2004 Stock Plan
|
|
|
2,492,000
|
|
|
|
70,000
|
|
|
|
1,215,104
|
|
|
|
2,800,000
|
|
2004 Stock Plan II
|
|
|
650,000
|
|
|
|
420,000
|
|
|
|
651,161
|
|
|
|
1,301,161
|
|
2005 Stock Plan
|
|
|
158,079,319
|
|
|
|
125,168,698
|
|
|
|
423,759,464
|
|
|
|
581,838,783
|
|
|
|
|
161,221,319
|
|
|
|
125,658,698
|
|
|
|
425,625,729
|
|
|
|
585,939,944
|
|
Stock Option Activity
A summary of option activity for the six months ended June 30,
2014 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (in years)
|
|
|
Value
|
|
Outstanding, December 31, 2013
|
|
|
118,278,611
|
|
|
$
|
0.19
|
|
|
|
6.95
|
|
|
$
|
10,319
|
|
Granted
|
|
|
16,075,000
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited/canceled
|
|
|
(8,694,913
|
)
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2014
|
|
|
125,658,698
|
|
|
|
0.17
|
|
|
|
7.16
|
|
|
|
65,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2014
|
|
|
122,815,109
|
|
|
$
|
0.17
|
|
|
|
7.10
|
|
|
$
|
63,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2014
|
|
|
103,784,935
|
|
|
$
|
0.19
|
|
|
|
6.69
|
|
|
$
|
49,039
|
|
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The aggregate intrinsic value in the table above is before applicable
income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s
common stock as of the reporting date.
The following table summarizes information about stock options
outstanding and exercisable at June 30, 2014.
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Remaining
|
|
Number
|
|
Exercise
|
|
Remaining
|
|
Price
|
|
of Shares
|
|
Price
|
|
Life (Years)
|
|
of Shares
|
|
Price
|
|
Life (Years)
|
$
|
0.05 - 0.0799
|
|
23,305,714
|
$
|
0.07
|
|
9.05
|
|
14,251,547
|
$
|
0.07
|
|
9.02
|
|
0.08 - 0.10
|
|
42,329,081
|
|
0.09
|
|
7.43
|
|
29,509,485
|
|
0.09
|
|
6.52
|
|
0.101 - 0.157
|
|
20,250,000
|
|
0.15
|
|
6.96
|
|
20,250,000
|
|
0.15
|
|
6.96
|
|
0.158 - 0.21
|
|
25,634,166
|
|
0.19
|
|
6.23
|
|
25,634,166
|
|
0.19
|
|
6.23
|
|
0.22 - 0.45
|
|
10,420,000
|
|
0.37
|
|
6.74
|
|
10,420,000
|
|
0.37
|
|
6.74
|
|
0.46 - 0.85
|
|
3,114,737
|
|
0.85
|
|
0.59
|
|
3,114,737
|
|
0.85
|
|
0.59
|
$
|
0.86 - 2.48
|
|
605,000
|
$
|
2.02
|
|
1.38
|
|
605,000
|
$
|
2.02
|
|
1.38
|
|
|
|
125,658,698
|
|
|
|
|
|
103,784,935
|
|
|
|
|
The assumptions used in calculating the fair value of options
granted using the Black-Scholes option- pricing model for options granted during the three months ended June 30, 2014 are as follows:
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
Risk-free interest rate
|
|
0.02 – 2.27%
|
|
0.76 - 1.91%
|
Expected life of the options
|
|
5.00 - 6.25 years
|
|
5.00 - 6.50 years
|
Expected volatility
|
|
112 - 148%
|
|
160%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected forfeitures
|
|
13%
|
|
13%
|
The weighted average grant-date fair value
for the options granted during the six months ended June 30, 2014 and 2013 was $0.0768 and $0.08, respectively.
Stock-based compensation expense to employees
for the three and six months ended June 30, 2014 was $219,611 and $566,206 and for the three and six months ended June 30, 2013
was $898,381 and $2,031,005, respectively.
The compensation expense related to the
unvested options as of June 30, 2014, was $1,400,227 which will be recognized over the weighted average period of 2.81 years.
15. SUBSEQUENT EVENTS
On various dates from July 1, 2014 through August 4, 2014, Lincoln
Park purchased 26,511,447 shares of common stock for cash proceeds to the Company of $1,852,618.
On June 24, 2014, the Company issued a press release announcing
that it had named Paul K. Wotton as its Chief Executive Officer. Dr. Wotton’s employment with the Company began on July 21,
2014.
On August 7, 2014, the Company redeemed 750 shares of its
Series B Preferred Stock and the associated outstanding dividends payable from Optimus Life Sciences Capital Partners, LLC,
or Optimus, in exchange for (i) cancellation of the secured promissory notes and associated accrued interest of $10,874,257,
issued to the Company by Optimus and (ii) $25,000 cash. Following this repurchase, the Company has zero shares of Series B
Preferred Stock outstanding.
On August 7, 2014, the Company redeemed 1,750 shares of
its Series C Preferred Stock and the associated outstanding dividends payable from Socius CGIII, Ltd., or Socius, in exchange
for (i) cancellation of the secured promissory notes and associated accrued interest of $22,186,899, issued to the Company
by Socius and (ii) $25,000 cash. Following this repurchase, the Company has zero shares of Series C Preferred
Stock outstanding.