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EX-23.1 - EXHIBIT 23.1 - Ocata Therapeutics, Inc. | ex231.htm |
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 2009
REGISTRATION
NO. 333 -163202
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED
CELL TECHNOLOGY, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
2834
|
87-0656515
|
||
(State
or jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
incorporation
or organization)
|
Classification
Code Number)
|
Identification
No.)
|
381
Plantation Street
Worcester,
MA 01605
(510)
748-4900
(Address
and telephone number of principal executive offices)
William
M. Caldwell, IV
381
Plantation Street
Worcester,
MA 01605
(510)
748-4900
(Name,
address and telephone number of agent for service)
Copies
to:
Thomas A.
Rose, Esq.
David B.
Manno, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32 nd Floor
New York,
New York 10006
(212)
930-9700
(212)
930-9725 (fax)
Approximate date of commencement of
proposed sale to the public: From time to time after the effective date
of this registration statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
(COVER
CONTINUES ON FOLLOWING PAGE)
1
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated
filer
o Accelerated
filer
o Non-accelerated
filer
x Smaller reporting
company
CALCULATION OF
REGISTRATION FEE
Title of each class of
securities
to be registered
|
Amount to be
Registered
|
Proposed Maximum
Offering Price Per
Security (1)
|
Proposed Maximum
Aggregate Offering
Price
|
Amount of
Registration Fee
|
||||||||||||
Common
Stock, $.001 par value per share (2)
|
34,230,000
|
$
|
0.10
|
$
|
3,423,000
|
$
|
191.00
|
|||||||||
Common
Stock, $.001 par value per share (3)
|
135,198,027
|
$
|
0.10
|
$
|
13,519,803
|
$
|
754.40
|
|||||||||
Common
Stock, $.001 par value per share (4)
|
7,374,631
|
$
|
0.10
|
$
|
737,463
|
$
|
41.15
|
|||||||||
Total
|
176,802,658
|
$
|
0.10
|
$
|
17,682,027
|
$
|
986.66
|
(1)
Estimated solely for purposes of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, using the average of
the high and low prices as reported on the Over-the-Counter Bulletin Board on
November 16, 2009, which was $0.10 per share.
(2)
Represents shares of common stock of Advanced Cell Technology, Inc., issuable
upon exercise of convertible notes, offered by the selling
stockholders.
(3)
Represents shares of common stock of Advanced Cell Technology, Inc., issuable
upon exercise of warrants, offered by the selling stockholders.
(4)
Represents shares of common stock of Advanced Cell Technology, Inc., issuable as
payment of a commitment fee, offered by the selling stockholders.
*
Previously paid.
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
2
PRELIMINARY
PROSPECTUS, SUBJECT TO COMPLETION, DATED DECEMBER
23, 2009
ADVANCED
CELL TECHNOLOGY, INC.
176,802,658
Shares of Common Stock
This
prospectus relates to the public offering of up to 176,802,658 shares of common
stock, par value $.001 per share, of Advanced Cell Technology, Inc. (“Common
Stock”), by the selling stockholders.
The
selling stockholders may sell Common Stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions.
We will
not receive any of the proceeds from the sale of Common Stock by the selling
stockholders. We will pay the expenses of registering these shares.
Investment
in the Common Stock involves a high degree of risk. You should
consider carefully the risk factors beginning on page 9 of this prospectus
before purchasing any of the shares offered by this prospectus.
Our
common stock is quoted on the Over-the-Counter Bulletin Board and trades under
the symbol "ACTC". The last reported sale price of our common
stock on the Over-the-Counter Bulletin Board on December
21, 2009 , was approximately $ 0.09 per
share.
We
may amend or supplement this prospectus from time to time by filing amendments
or supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is_________, 2009.
3
ADVANCED
CELL TECHNOLOGY, INC.
TABLE
OF CONTENTS
Page
|
||
Prospectus
Summary
|
5
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|
Risk
Factors
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9
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Use
of Proceeds
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27
|
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Forward-Looking
Statements
|
27
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|
Selling
Security Holders
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28
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|
Plan
of Distribution
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32
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Description
of Securities to be Registered
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33
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Interests
of Named Experts and Counsel
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34
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Description
of Business
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34
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Description
of Property
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47
|
|
Legal
Proceedings
|
47
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
48
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|
Market
Price of and Dividends on Registrant's Common Equity and Related
Stockholder Matters
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60
|
|
Directors,
Executive Officers, Promoters and Control Persons
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62
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Changes
in Accountants
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62
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Executive
Compensation
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63
|
|
Security
Ownership of Certain Beneficial Owners and
Management
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65
|
|
Certain
Relationships and Related Transactions, and Corporate
Governance
|
66
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|
Additional
Information
|
67
|
|
Indemnification
for Securities Act Liabilities
|
61
|
|
Legal
Matters
|
68
|
|
Experts
|
68
|
|
Unaudited
Financial Statements
|
F-1
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|
Audited
Financial Statements
|
F-32
|
You may
only rely on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with different
information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its
date.
4
Prospectus
Summary
This
summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common
stock.
About
Us
Advanced
Cell Technology, Inc., a Delaware corporation (the “Company”, “we”, “us” or
“our”) is a biotechnology company focused on developing and commercializing
human embryonic and adult stem cell technology in the emerging field of
regenerative medicine.
We have
acquired, developed and maintain a portfolio of patents and patent applications
that form the proprietary base for our research and development efforts in the
area of embryonic and adult stem cell research. We believe that our intellectual
property represents one of the strongest portfolios in the field. We employ a
team including some of the world's leading scientists in the field of stem cell
research and development and experts in the conduct of clinical trials. We
believe our technology base, in combination with our know-how, provides a
competitive advantage and will facilitate the successful development and
commercialization of products for use in treatment of a wide array of chronic
degenerative diseases and in regenerative repair of acute disease, such as
trauma, myocardial infarction and burns.
Our
belief that our intellectual property represents one of the strongest portfolios
in the field is supported by:
·
|
The
size, date and pace of filing, and focus of the
portfolio.
|
·
|
The
relative immaturity of this field of
study.
|
·
|
The
limited number of truly competitive portfolios of intellectual
property.
|
Regenerative
medicine is a new and emerging field of study involving development of medical
therapies based on advances in stem cell and nuclear transfer technology. We
have developed and maintain a broad portfolio with ownership or exclusive
licensing of over 45 issued patents and over 170 patent applications in the
field of regenerative medicine and related technologies. This significant volume
of patents and patent licenses has been developed in the short span of
approximately the past seven to ten years.
The
Company has no therapeutic products currently available for sale and does not
expect to have any therapeutic products commercially available for sale for a
period of years, if at all. These factors indicate that the Company’s ability to
continue its research and development activities is dependent upon the ability
of management to obtain additional financing as required.
We have
incurred losses since inception. As of September 30, 2009, we have an
accumulated deficit of $139,458,558 and a stockholders’ deficit of
$70,817,898. We incurred net losses of $1,204,274 and $49,640,954 for
the three and nine months ended September 30, 2009, respectively, and
$33,903,513 and $15,898,725 for the years ended December 31, 2008 and 2007,
respectively.
In our
auditors' report dated July 2, 2009, they have expressed substantial doubt about
our ability to continue as a going concern.
Our
executive offices are located at 381 Plantation Street, Worcester, MA 01605. Our
website is located at www.advancedcell.com, and our telephone number is
508-756-1212.
Recent
Developments
Series
B Preferred Shares Transaction
On
November 2, 2009 (the “Effective Date”), the Company entered into a preferred
stock purchase agreement (the “Purchase Agreement”) with Optimus Capital
Partners, LLC, doing business as Optimus Life Sciences Capital Partners, LLC
(the “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 (“Tranches”) in the Company’s sole
discretion (subject to the conditions set forth therein), (i) up to 1,000
shares of Series B Preferred Stock (the “Preferred Shares”) 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 (the “Optimus 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 equal to the closing bid price of the Company’s
common stock on the date the Company provides notice of such
Tranche. The Optimus Warrants were issued on the Effective Date
to Optimus CG II Ltd., Optimus’s designee, and will vest and become
exercisable in replacement of a five-year warrant to purchase 119,469,027
shares of common stock with an exercise price per share of $0.113 the
Company issued on the Effective Date (which may only be exercised for such
number of shares of common stock equal in amount to 135% of the cumulative
purchase price paid by the Investor). The business purpose of exchanging
the warrants to be issued with each Tranche for the warrants originally
issued on November 2, 2009, is to enable the holder to have separate
instruments for the vested portion of the warrants, and to allow the
parties to more easily track the warrants that are
vested. Rather than being required to track these potential
multiple combinations of numbers, the parties believed that it would be
simpler to adopt the “replacement” warrant process. The process
is comparable to what happens when a warrant holder exercises only a
portion of an existing warrant, or anytime a holder divides a warrant into
two or more separate instruments that together represent all of the rights
embodied in the original instrument. For these reasons, we do
not believe that the “replacement warrant” should be viewed as a newly
issued warrant, but rather as a replacement issued as a substitute for a
portion of the previously issued warrant that was
surrendered.
|
5
·
|
The
Company agreed to pay to the Investor a commitment fee of $500,000 (the
“Commitment Fee”), 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
Company agreed to use its best efforts to file within 60 days of the
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 Purchase Agreement, including the shares of common stock underlying
the Optimus Warrants, and shares issuable in payment of the Commitment
Fee.
|
·
|
On
November 3, 2009, the Company filed a certificate of designations for the
Series B Preferred Stock (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, 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. In addition, the Preferred Shares (a) shall accrue dividends
at a rate of 10% per annum, payable in Preferred Shares, (ii)
shall not have voting rights, and (iii) 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
|
Notes
Transaction
The
Company will be required to redeem the Notes monthly commencing in May 2010, in
the amount of 14.28% of the initial principal amount of the Notes, in cash or
common stock at the Company’s option (subject to the conditions set forth in the
Notes), until the Notes are paid in full.
The
initial closing under the Subscription Agreement occurred on November 12, 2009,
pursuant to which, the Company sold Notes in the principal amount of $1,662,000
for a purchase price of $1,385,000. In addition, on November 13, 2009, the
Company sold Notes in the principal amount of $441,000 for a purchase price of
$367,500 (including $67,500 paid for by forgiveness of legal fees owed to a
subscriber). The closing that occurred on November 13, 2009 was deemed part of
the initial closing, such that, pursuant to the initial closing under the
Subscription Agreement, the Company sold Notes in the aggregate principal amount
of $2,103,000 for an aggregate purchase price of $1,752,500. Pursuant to the
initial closing under the Subscription Agreement, the Company also issued an
aggregate of (i) 14,020,000 Class A Warrants, and (ii) Additional Investment
Rights for the purchase of up to (a) $4,206,000 principal amount of AIR Notes
for a purchase price of up to $3,505,000 and (b) 28,040,000 Class B
Warrants.
The
Subscribers also agreed to purchase, subject to customary conditions, additional
Notes in the principal amount of $2,103,000, for a purchase price of $1,720,000,
in a second closing to occur within 90 days of the initial closing.
6
JMJ
Transaction
On
October 1, 2009, in connection with an amendment to an agreement between the
Company and JMJ Financial, the Company borrowed $1,000,000 and issued a
convertible promissory note for $1,200,000 (the “JMJ Note”). The JMJ Note is
convertible into shares of the Company’s common stock at a conversion price of
the lesser of (i) $0.25 per share or (ii) eighty percent of the average of the
three lowest trade prices in the 20 trading prior to the
conversion.
In
connection with the foregoing, the Company relied upon the exemption from
securities registration afforded by Rule 506 of Regulation D as promulgated by
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, and transfer was restricted by the
Company in accordance with the requirements of the Securities Act of
1933.
7
About
This Offering
This
prospectus includes (i) 119,469,027 shares issuable upon exercise of the Optimus
Warrants, (ii) 7,374,631 shares of common stock issuable as payment
of the Commitment Fee, (iii) 21,030,000 shares of the Company’s common stock
issuable upon conversion of the Notes sold at the initial closing under the
Subscription Agreement, (iv) 14,020,000 shares of common stock
issuable upon exercise of the Class A Warrants issued at the initial closing
under the Subscription Agreement, and (v) 13,200,000 shares of common stock
issuable upon conversion of the JMJ Note (including $1,200,000 in principal and
$120,000 in interest).
The
number of shares of common stock issuable upon exercise of the Optimus Warrants
was estimated based on the closing price of the Company’s common stock as of
October 30, 2009 (the last trading day prior to the Effective Date of the
Purchase Agreement). The number of shares of common stock issuable as payment of
the Commitment Fee was determined based on increasing by 50% the number of
shares that would be issuable as payment of the Commitment Fee based on 90% of
the closing price of the Company’s common stock as of October 30, 2009. The
number of shares of common stock issuable upon conversion of the JMJ Note was
estimated based on a conversion price of $0.10.
This
prospectus also includes:
●
|
33,000
shares of common stock issuable upon exercise of warrants with an exercise
price of $0.10, issued to William Woodward, on September 15, 2005, for
consulting services. The warrants terminate on December 30,
2014.
|
●
|
650,000
shares of common stock issuable upon exercise of warrants, with an
exercise price of $0.05, issued to Nancy Burrows, in 2004,
in connection with a private equity financing. The warrants
terminate on December 31, 2012.
|
●
|
An
aggregate of 1,026,000 shares of common stock issuable upon exercise of
warrants, with an exercise price of $0.05, issued to Andwell,
LLC, on November 26, 2004, in connection with a private equity
financing. Andwell, LLC is an entity affiliated with William Caldwell, our
chief executive officer. The warrants terminate on December 31,
2012.
|
8
Estimated
use of proceeds
This
prospectus relates to shares of our Common Stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any of the
proceeds resulting from the sale of Common Stock by the selling
stockholders.
Summary of the Shares offered by the
Selling Stockholders.
The
following is a summary of the shares being offered by the selling
stockholders:
Common
Stock offered by the selling stockholders
|
Up
to 176,802,658 shares of Common Stock (including 135,198.027 shares of
common stock issuable upon exercise of
warrants, 34,230,000 shares of common stock issuable upon
conversion of notes, and 7,374,631 shares of common stock issuable as
payment of a commitment fee).
|
Common
Stock outstanding prior to the offering
|
613,885,468 (1)
|
|
Common
Stock to be outstanding after the offering
|
790,688,126
assuming the full exercise of the warrants and full conversion of the
notes the underlying shares of which are included in this prospectus, and
the issuance of 7,374,631 shares as payment of a commitment
fee.
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the Common Stock
hereunder.
|
|
(1)
Based upon the total number of issued and outstanding shares as of
November 13, 2009.
|
RISK
FACTORS
An
investment in the Company’s common stock involves a high degree of risk. You
should carefully consider the risks described below as well as other information
provided to you in this prospectus, including information in the section of this
document entitled “Forward Looking Statements.” The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties not presently known to us or that we currently believe are
immaterial may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of operations
could be materially adversely affected, the value of our common stock could
decline, and you may lose all or part of your investment.
Risks
Relating to the Company’s Early Stage of Development
We
may not be able to continue as a going concern.
Our
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. We have a history of operating losses that are
likely to continue in the future. Our auditors have included an explanatory
paragraph in their Report of Independent Registered Public Accounting Firm
included in our audited consolidated financial statements for the years ended
December 31, 2008 and 2007 to the effect that our significant losses from
operations and our dependence on equity and debt financing raise substantial
doubt about our ability to continue as a going concern. Our consolidated
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.
Our
business is at an early stage of development and we may not develop therapeutic
products that can be commercialized.
We do not
yet have any product candidates in late-stage clinical trials or in the
marketplace. Our potential therapeutic products will require extensive
preclinical and clinical testing prior to regulatory approval in the United
States and other countries. We may not be able to obtain regulatory approvals
(see REGULATORY RISKS), enter clinical trials for any of our products, or
commercialize any products. Our therapeutic and product candidates may prove to
have undesirable and unintended side effects or other characteristics adversely
affecting their safety, efficacy or cost-effectiveness that could prevent or
limit their use. Any product using any of our technology may fail to provide the
intended therapeutic benefits, or achieve therapeutic benefits equal to or
better than the standard of treatment at the time of testing or production. In
addition, we will need to determine whether any of our potential products can be
manufactured in commercial quantities or at an acceptable cost. Our efforts may
not result in a product that can be or will be marketed successfully. Physicians
may not prescribe our products, and patients or third party payors may not
accept our products. For these reasons we may not be able to generate revenues
from commercial production.
9
We
have limited clinical testing, regulatory, manufacturing, marketing,
distribution and sales capabilities which may limit our ability to generate
revenues.
Due to
the relatively early stage of our therapeutic products, regenerative medical
therapies and stem cell therapy-based programs, we have not yet invested
significantly in regulatory, manufacturing, marketing, distribution or product
sales resources. We cannot assure you that we will be able to invest
or develop any of these resources successfully or as expediently as necessary.
The inability to do so may inhibit or harm our ability to generate revenues or
operate profitably.
We have a history of operating
losses and we may not achieve future revenues or operating
profits.
We have
generated modest revenue to date from our operations. Historically, we have had
net operating losses each year since our inception. As of September
30, 2009, we have an accumulated deficit of $139,458,558 and a stockholders’
deficit of $70,817,898. We incurred net losses of $1,204,274 and
$49,640,954 for the three and nine months ended September 30, 2009,
respectively, and $33,903,513 and $15,898,725 for the years ended December 31,
2008 and 2007, respectively. We have limited current potential sources of income
from licensing fees and the Company does not generate significant revenue
outside of licensing non-core technologies. Additionally, even if we are able to
commercialize our technologies or any products or services related to our
technologies it is not certain that they will result in revenue or
profitability.
We
are in the early stages of a strategic joint venture which may slow, impede or
result in the termination of potential therapeutic products whose development is
now the responsibility of the partnership and not solely of the
Company.
The
Company has entered into a new partnership (CHA) and as a result, we are subject
to 3rd party interests
(see RISKS RELATED TO THIRD PARTY RELIANCE) and control issues, including with
respect to certain of our employees no longer being exclusively managed by us.
We therefore could be at risk for losing key employees. Additionally substantial
operating and working capital will be required and there is no assurance that
CHA Biotech Co. limited, partner in our joint venture, will be able to fund
their requirements.
We
have a limited operating history on which investors may evaluate our operations
and prospects for profitable operations.
If we
continue to suffer losses as we have in the past, investors may not receive any
return on their investment and may lose their entire investment. Our prospects
must be considered speculative in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly in light of the uncertainties relating to the new, competitive and
rapidly evolving markets in which we anticipate we will operate. To attempt to
address these risks, we must, among other things, further develop our
technologies, products and services, successfully implement our research,
development, marketing and commercialization strategies, respond to competitive
developments and attract, retain and motivate qualified personnel. A substantial
risk is involved in investing in us because, as an early stage company we have
fewer resources than an established company, our management may be more likely
to make mistakes at such an early stage, and we may be more vulnerable
operationally and financially to any mistakes that may be made, as well as to
external factors beyond our control.
Risks
Relating to Technology
We
are dependent on new and unproven technologies.
Our risks
as an early stage company are compounded by our heavy dependence on emerging and
sometimes unproven technologies. If these technologies do not produce
satisfactory results, our business may be harmed. Additionally some of our
technologies and significant potential revenue sources involve ethically
sensitive and controversial issues which could become the subject of legislation
or regulations that could materially restrict our operations and, therefore,
harm our financial condition, operating results and prospects for bringing our
investors a return on their investment.
Over
the last twelve months we have narrowed our potential product pool to focusing
on our Retinal Program as well as the applications of our I.P.S. technology,
which will limit our revenue sources.
Our human
embryonic stem cell and regenerative medical therapy programs are in the
pre-clinical stage and the Company doesn’t foresee having a commercial product
until clinical trials are completed. We have identified the programs that we are
working to get into the clinical testing phase. We have narrowed the scope of
our developmental focus to our Retinal Program and those related therapies,
focusing our products related to our I.P.S. technology and, as part of our
recently established partnership with CHA, developing products in the
Hemangioblast/immunology arena. (see DESCRIPTION OF BUSINESS Section of
prospectus). As a result of our narrower product focus, we have fewer revenue
sources. Our emphasis on fewer programs may hinder our results if these programs
are not successful. Although our adult stem cell myoblast program has completed
Phase I and Ib FDA clinical trials we have suspended that program indefinitely
due to a lack of funding in the cardiac area. As a result of our
emphasis on our retinal program, our hemangioblast program and our IPS
technology, our ability to progress as a company is more significantly hinged on
the success of fewer programs and thus, a setback or adverse development
relating to any one of them could potentially have a significant impact on share
price as well as an inhibitory effect on our ability to raise additional
capital. Additionally, we
partially rely on nuclear transfer and embryonic stem cell and myoblast
technologies that we may not be able to successfully develop, which will prevent
us from generating revenues, operating profitably or providing investors any
return on their investment. We cannot guarantee that we will be able to
successfully develop our Retinal, hemangioblast, IPS-related technologies,
nuclear transfer technology, embryonic stem cell or myoblast technologies or
that such development will result in products or services with any significant
commercial utility. We anticipate that the commercial sale of such products or
services, and royalty/licensing fees related to our technology, would be our
primary sources of revenues. If we are unable to develop our technologies,
investors will likely lose their entire investment in us.
10
We
may not be able to commercially develop our technologies and proposed product
lines, which, in turn, would significantly harm our ability to earn revenues and
result in a loss of investment.
Our
ability to commercially develop our technologies will be dictated in large part
by forces outside our control which cannot be predicted, including, but not
limited to, general economic conditions, the success of our research and
pre-clinical and field testing, the availability of collaborative partners to
finance our work in pursuing applications of nuclear transfer technology and
technological or other developments in the biomedical field which, due to
efficiencies, technological breakthroughs or greater acceptance in the
biomedical industry, may render one or more areas of commercialization more
attractive, obsolete or competitively unattractive. It is possible that one or
more areas of commercialization will not be pursued at all if a collaborative
partner or entity willing to fund research and development cannot be located.
Our decisions regarding the ultimate products and/or services we pursue could
have a significant adverse affect on our ability to earn revenue if we
misinterpret trends, underestimate development costs and/or pursue wrong
products or services. Any of these factors either alone or in concert could
materially harm our ability to earn revenues or could result in a loss of any
investment in us.
If
we are unable to keep up with rapid technological changes in our field or
compete effectively, we will be unable to operate profitably.
We are
engaged in activities in the biotechnology field, which is characterized by
extensive research efforts and rapid technological progress. If we fail to
anticipate or respond adequately to technological developments, our ability to
operate profitably could suffer. We cannot assure you that research and
discoveries by other biotechnology, agricultural, pharmaceutical or other
companies will not render our technologies or potential products or services
uneconomical or result in products superior to those we develop or that any
technologies, products or services we develop will be preferred to any existing
or newly-developed technologies, products or services.
Risks
Related to Intellectual Property
Our
business is highly dependent upon maintaining licenses with respect to key
technology.
Several
of the key patents we utilize are licensed to us by third parties. These
licenses are subject to termination under certain circumstances (including, for
example, our failure to make minimum royalty payments or to timely achieve
development and commercialization benchmarks). The loss of any of such licenses,
or the conversion of such licenses to non-exclusive licenses, could harm our
operations and/or enhance the prospects of our competitors.
Certain
of these licenses also contain restrictions, such as limitations on our ability
to grant sublicenses that could materially interfere with our ability to
generate revenue through the licensing or sale to third parties of important and
valuable technologies that we have, for strategic reasons, elected not to pursue
directly. The possibility exists that in the future we will require further
licenses to complete and/or commercialize our proposed products. We cannot
assure you that we will be able to acquire any such licenses on a commercially
viable basis.
Certain
of our technology is not protectable by patent.
Certain
parts of our know-how and technology are not patentable. To protect our
proprietary position in such know-how and technology, we intend to require all
employees, consultants, advisors and collaborators to enter into confidentiality
and invention ownership agreements with us. We cannot assure you, however, that
these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use
or disclosure. Further, in the absence of patent protection, competitors who
independently develop substantially equivalent technology may harm our
business.
Patent
litigation presents an ongoing threat to our business with respect to both
outcomes and costs.
We have
previously been involved in patent interference litigation, and it is possible
that further litigation over patent matters with one or more competitors could
arise. We could incur substantial litigation or interference costs in defending
ourselves against suits brought against us or in suits in which we may assert
our patents against others. If the outcome of any such litigation is
unfavorable, our business could be materially adversely affected. To determine
the priority of inventions, we may also have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial cost to us. Without additional capital, we may not
have the resources to adequately defend or pursue this litigation.
11
We may not be able to protect our
proprietary technology, which could harm our ability to operate
profitably.
The
biotechnology and pharmaceutical industries place considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Our success will depend, to a substantial degree, on our ability to
obtain and enforce patent protection for our products, preserve any trade
secrets and operate without infringing the proprietary rights of others. We
cannot assure you that:
·
|
we
will succeed in obtaining any patents in a timely manner or at all, or
that the breadth or degree of protection of any such patents will protect
our interests,
|
·
|
the
use of our technology will not infringe on the proprietary rights of
others,
|
·
|
patent
applications relating to our potential products or technologies will
result in the issuance of any patents or that, if issued, such patents
will afford adequate protection to us or not be challenged invalidated or
infringed, or
|
·
|
patents
will not issue to other parties, which may be infringed by our potential
products or technologies.
|
12
We are
aware of certain patents that have been granted to others and certain patent
applications that have been filed by others with respect to nuclear transfer
technologies. The fields in which we operate have been characterized by
significant efforts by competitors to establish dominant or blocking patent
rights to gain a competitive advantage, and by considerable differences of
opinion as to the value and legal legitimacy of competitors' purported patent
rights and the technologies they actually utilize in their
businesses.
Patents
obtained by other persons may result in infringement claims against us that are
costly to defend and which may limit our ability to use the disputed
technologies and prevent us from pursuing research and development or
commercialization of potential products.
A number
of other pharmaceutical, biotechnology and other companies, universities and
research institutions have filed patent applications or have been issued patents
relating to cell therapies, stem cells, and other technologies potentially
relevant to or required by our expected products. We cannot predict which, if
any, of such applications will issue as patents or the claims that might be
allowed. We are aware that a number of companies have filed applications
relating to stem cells. We are also aware of a number of patent applications and
patents claiming use of stem cells and other modified cells to treat disease,
disorder or injury.
If third
party patents or patent applications contain claims infringed by either our
licensed technology or other technology required to make and use our potential
products and such claims are ultimately determined to be valid, there can be no
assurance that we would be able to obtain licenses to these patents at a
reasonable cost, if at all, or be able to develop or obtain alternative
technology. If we are unable to obtain such licenses at a reasonable cost, we
may not be able to develop some products commercially. We may be required to
defend ourselves in court against allegations of infringement of third party
patents. Patent litigation is very expensive and could consume substantial
resources and create significant uncertainties. And adverse outcome in such a
suit could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require us to cease using
such technology.
We are not in full compliance with
some of our license agreements.
We are
not in full compliance with some of our licenses (see Our Intellectual Property
in the DESCRIPTION OF BUSINESS section of this prospectus) and due to limited
financial resources we cannot guarantee that we will regain full compliance
status. If we are unable to be in compliance with our license agreements, our
business may be harmed.
We
may not be able to adequately defend against piracy of intellectual property in
foreign jurisdictions.
Considerable
research in the areas of stem cells, cell therapeutics and regenerative medicine
is being performed in countries outside of the United States, and a number of
potential competitors are located in these countries. The laws protecting
intellectual property in some of those countries may not provide adequate
protection to prevent our competitors from misappropriating our intellectual
property. Several of these potential competitors may be further along in the
process of product development and also operate large, company-funded research
and development programs. As a result, our competitors may develop more
competitive or affordable products, or achieve earlier patent protection or
product commercialization than we are able to achieve. Competitive products may
render any products or product candidates that we develop obsolete.
Regulatory Risks
We
cannot market our product candidates until we receive regulatory
approval.
We must
comply with extensive government regulations in order to obtain and maintain
marketing approval for our products in the United States and abroad. The process
of obtaining regulatory approval is lengthy, expensive and uncertain. In the
United States, the FDA imposes substantial requirements on the introduction of
biological products and many medical devices through lengthy and detailed
laboratory and clinical testing procedures, sampling activities and other costly
and time-consuming procedures. Satisfaction of these requirements typically
takes several years and the time required to do so may vary substantially based
upon the type and complexity of the biological product or medical
device.
In
addition, product candidates that we believe should be classified as medical
devices for purposes of the FDA regulatory pathway may be determined by the FDA
to be biologic products subject to the satisfaction of significantly more
stringent requirements for FDA approval. Any difficulties that we encounter in
obtaining regulatory approval may have a substantial adverse impact on our
business and cause our stock price to significantly decline.
We
cannot assure you that we will obtain FDA or foreign regulatory approval to
market any of our product candidates for any indication in a timely manner or at
all.
If we
fail to obtain regulatory approval of any of our product candidates for at least
one indication, we will not be permitted to market our product candidates and
may be forced to cease our operations.
13
Even
if some of our product candidates receive regulatory approval, these approvals
may be subject to conditions, and we and our third party manufacturers will in
any event be subject to significant ongoing regulatory obligations and
oversight.
Even if
any of our product candidates receives regulatory approval, the manufacturing,
marketing and sale of our product candidates will be subject to stringent and
ongoing government regulation. Conditions of approval, such as limiting the
category of patients who can use the product, may significantly impact our
ability to commercialize the product and may make it difficult or impossible for
us to market a product profitably. Changes we may desire to make to an approved
product, such as cell culturing changes or revised labeling, may require further
regulatory review and approval, which could prevent us from updating or
otherwise changing an approved product. If our product candidates are approved
by the FDA or other regulatory authorities for the treatment of any indications,
regulatory labeling may specify that our product candidates be used in
conjunction with other therapies.
Once
obtained, regulatory approvals may be withdrawn and can be expensive to
maintain.
Regulatory
approval may be withdrawn for a number of reasons, including the later discovery
of previously unknown problems with the product. Regulatory approval may also
require costly post-marketing follow-up studies, and failure of our product
candidates to demonstrate sufficient efficacy and safety in these studies may
result in either withdrawal of marketing approval or severe limitations on
permitted product usage. In addition, numerous additional regulatory
requirements relating to, among other processes, the labeling, packaging,
adverse event reporting, storage, advertising, promotion and record-keeping will
also apply. Furthermore, regulatory agencies subject a marketed product, its
manufacturer and the manufacturer's facilities to continual review and periodic
inspections. Compliance with these regulatory requirements are time consuming
and require the expenditure of substantial resources.
If any of
our product candidates is approved, we will be required to report certain
adverse events involving our products to the FDA, to provide updated safety and
efficacy information and to comply with requirements concerning the
advertisement and promotional labeling of our products. As a result, even if we
obtain necessary regulatory approvals to market our product candidates for any
indication, any adverse results, circumstances or events that are subsequently
discovered, could require that we cease marketing the product for that
indication or expend money, time and effort to ensure full compliance, which
could have a material adverse effect on our business.
If
our products do not comply with applicable laws and regulations our business
will be harmed.
Any
failure by us, or by any third parties that may manufacture or market our
products, to comply with the law, including statutes and regulations
administered by the FDA or other U.S. or foreign regulatory authorities, could
result in, among other things, warning letters, fines and other civil penalties,
suspension of regulatory approvals and the resulting requirement that we suspend
sales of our products, refusal to approve pending applications or supplements to
approved applications, export or import restrictions, interruption of
production, operating restrictions, closure of the facilities used by us or
third parties to manufacture our product candidates, injunctions or criminal
prosecution. Any of the foregoing actions could have a material adverse effect
on our business.
Our products may
not be accepted in the marketplace.
If we are
successful in obtaining regulatory approval for any of our product candidates,
the degree of market acceptance of those products will depend on many factors,
including:
·
|
Our
ability to provide acceptable evidence and the perception of patients and
the healthcare community, including third party payors, of the positive
characteristics of our product candidates relative to existing treatment
methods, including their safety, efficacy, cost effectiveness and/or other
potential advantages,
|
·
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The
incidence and severity of any adverse side effects of our product
candidates,
|
·
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The
availability of alternative
treatments,
|
·
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The
labeling requirements imposed by the FDA and foreign regulatory agencies,
including the scope of approved indications and any safety
warnings,
|
·
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Our
ability to obtain sufficient third party insurance coverage or
reimbursement for our products
candidates,
|
·
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The
inclusion of our products on insurance company coverage
policies,
|
·
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The
willingness and ability of patients and the healthcare community to adopt
new technologies,
|
14
·
|
The
procedure time associated with the use of our product
candidates,
|
·
|
Our
ability to manufacture or obtain from third party manufacturers sufficient
quantities of our product candidates with acceptable quality and at an
acceptable cost to meet demand, and
|
·
|
Marketing
and distribution support for our
products.
|
We cannot
predict or guarantee that physicians, patients, healthcare insurers, third party
payors or health maintenance organizations, or the healthcare community in
general, will accept or utilize any of our product candidates. Failure to
achieve market acceptance would limit our ability to generate revenue and would
have a material adverse effect on our business. In addition, if any of our
product candidates achieve market acceptance, we may not be able to maintain
that market acceptance over time if competing products or technologies are
introduced that are received more favorably or are more
cost-effective.
Risks
Related to Domestic Governmental Regulation
Companies
such as ours engaged in research using embryonic stem cells, adult stem cells
and IPS technology are currently subject to strict government regulations, and
our operations could be harmed by any legislative or administrative efforts
impacting the use of nuclear transfer technology or human embryonic
material.
We
cannot assure you that our operations will not be harmed by any legislative or
administrative efforts by politicians or groups opposed to the development of
I.P.S. (Induced Pluripotent Stem Cell) technology generally or the use of IPS
technology in the development of therapies specifically. Further, we cannot
assure you that legislative or administrative restrictions directly or
indirectly delaying, limiting or preventing the use of IPS in the development of
products or human embryonic material or the sale, manufacture or use of products
or services derived from IPS or human embryonic material will not be adopted in
the future.
Restrictions
on the use of human embryonic stem cells, and the ethical, legal and social
implications of that research, could prevent us from developing or gaining
acceptance for commercially viable products in these areas.
Some of
our most important programs involve the use of stem cells that are derived from
human embryos. The use of human embryonic stem cells gives rise to ethical,
legal and social issues regarding the appropriate use of these cells. In the
event that our research related to human embryonic stem cells becomes the
subject of adverse commentary or publicity, the market price for our common
stock could be significantly harmed. Some political and religious groups have
voiced opposition to our technology and practices. We use stem cells derived
from human embryos that have been created for in vitro fertilization procedures
but are no longer desired or suitable for that use and are donated with
appropriate informed consent for research use. Many research institutions,
including some of our scientific collaborators, have adopted policies regarding
the ethical use of human embryonic tissue. These policies may have the effect of
limiting the scope of research conducted using human embryonic stem cells,
thereby impairing our ability to conduct research in this field.
Despite
the rescission of the President Bush’s Executive order in August 2001 by
President Barack Obama in March 2009, the overall effect of new laws drafted by
the NIH and put into effect regarding the dropping of restrictions on hES
research has yet to be seen or made clear.
While it
is unclear whether Federal law continues to restrict the use of federal funds
for human embryonic cell research, commonly referred to as hES cell research,
there can be no assurance that our operations will not be restricted by any
future legislative or administrative efforts by politicians or groups opposed to
the development of hES call technology or nuclear transfer technology.
Additionally there are no allowances made addressing the legality of therapies
resulting from IPS technology. Additionally the executive order does not
overturn the Dickey–Wicker Amendment, a 13-year-old ban on federal funding for
the actual creation of new stem cell lines, an act that destroys an embryo. In
the United States these efforts still must be funded privately or by state
governments. Further, there can be no assurance that legislative or
administrative restrictions directly or indirectly delaying, limiting or
preventing the use of hES technology, nuclear transfer technology, IPS
technology, the use of human embryonic material, or the sale, manufacture or use
of products or services derived from nuclear transfer technology or other hES
technology will not be adopted or extended in the future.
Because
we or our collaborators must obtain regulatory approval to market our products
in the United States and other countries, we cannot predict whether or when we
will be permitted to commercialize our products.
Federal,
state and local governments in the United States and governments in other
countries have significant regulations in place that govern many of our
activities. We are or may become subject to various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous substances used in
connection with our research and development work. The preclinical testing and
clinical trials of the products that we or our collaborators develop are subject
to extensive government regulation that may prevent us from creating
commercially viable products from our discoveries. In addition, the sale by us
or our collaborators of any commercially viable product will be subject to
government regulation from several standpoints, including manufacturing,
advertising and promoting, selling and marketing, labeling, and
distributing.
15
If, and
to the extent that, we are unable to comply with these regulations, our ability
to earn revenues will be materially and negatively impacted. The regulatory
process, particularly in the biotechnology field, is uncertain, can take many
years and requires the expenditure of substantial resources. Biological drugs
and non-biological drugs are rigorously regulated. In particular, proposed human
pharmaceutical therapeutic product candidates are subject to rigorous
preclinical and clinical testing and other requirements by the FDA in the United
States and similar health authorities in other countries in order to demonstrate
safety and efficacy. We may never obtain regulatory approval to market our
proposed products. For additional information about governmental regulations
that will affect our planned and intended business operations, see "DESCRIPTION
OF BUSINESS—Government
Regulation".
Our
products may not receive FDA approval, which would prevent us from commercially
marketing our products and producing revenues.
The FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacture and marketing of pharmaceutical products through
lengthy and detailed laboratory, pre-clinical and clinical testing procedures,
sampling activities and other costly and time-consuming procedures. Satisfaction
of these regulations typically takes several years or more and varies
substantially based upon the type, complexity and novelty of the proposed
product. We cannot assure you that FDA approvals for any products developed by
us will be granted on a timely basis, if at all. Any such delay in obtaining, or
failure to obtain, such approvals could have a material adverse effect on the
marketing of our products and our ability to generate product revenue. For
additional information about governmental regulations that will affect our
planned and intended business operations, see "DESCRIPTION OF BUSINESS—Government
Regulation".
For-profit entities may be
prohibited from benefiting from grant funding.
There has
been much publicity about grant resources for stem cell research, including
Proposition 71 in California, which is described more fully under the
heading "DESCRIPTION OF BUSINESS—California
Proposition 71". Recent developments regarding the State of
California deep and significant financial problems has had a direct and
significant impact on the availability of funds: funding commitments have not
been met by CIRM and there is no guarantee that any funds will flow to
for-profit institutions as most of it will go to state and not-for-profit
institutions. Additionally state rules and regulations related to any funding
that may ultimately be provided, the type of entity that will be eligible for
funding, the science to be funded, and funding details have not been finalized.
As a result of these uncertainties regarding Proposition 71, we cannot
assure you that funding, if any, will be available to us, or any for-profit
entity.
The government
maintains certain rights in technology that we develop using government grant
money and we may lose the revenues from such technology if we do not
commercialize and utilize the technology pursuant to established government
guidelines.
Certain
of our and our licensors' research has been or is being funded in part by
government grants. In connection with certain grants, the U.S. government
retains rights in the technology developed with the grant. These rights could
restrict our ability to fully capitalize upon the value of this
research.
Risks
Related to International Regulation
We may not be able to obtain
required approvals in other countries.
The
requirements governing the conduct of clinical trials and cell culturing and
marketing of our product candidates outside the United States vary widely from
country to country. Foreign approvals may take longer to obtain than FDA
approvals and can require, among other things, additional testing and different
clinical trial designs. Foreign regulatory approval processes generally include
all of the risks associated with the FDA approval processes. Some foreign
regulatory agencies also must approve prices of the products. Regulatory
approval in one country does not ensure regulatory approval in another, but a
failure or delay in obtaining regulatory approval in one country may negatively
impact the regulatory process in others. We may not be able to file for
regulatory approvals and may not receive necessary approvals to market our
product candidates in any foreign country. If we fail to comply with these
regulatory requirements or fail to obtain and maintain required approvals in any
foreign country, we will not be able to sell our product candidates in that
country and our ability to generate revenue will be adversely
affected.
Financial
Risks
We
may not be able to raise the required capital to conduct our operations and
develop and commercialize our products.
We
require substantial additional capital resources in order to conduct our
operations and develop and commercialize our products and run our facilities. We
will need significant additional funds or a collaborative partner, or both, to
finance the research and development activities of our therapies and potential
products. Accordingly, we are continuing to pursue additional sources of
financing. Our future capital requirements will depend upon many
factors, including:
16
·
|
The
continued progress and cost of our research and development
programs,
|
·
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The
progress with pre-clinical studies and clinical
trials,
|
·
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The
time and costs involved in obtaining regulatory
clearance,
|
·
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The
costs in preparing, filing, prosecuting, maintaining and enforcing patent
claims,
|
·
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The
costs of developing sales, marketing and distribution channels and our
ability to sell the therapies/products if
developed,
|
·
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The
costs involved in establishing manufacturing capabilities for commercial
quantities of our proposed
products,
|
·
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Competing
technological and market
developments,
|
·
|
Market
acceptance of our proposed
products,
|
·
|
The
costs for recruiting and retaining employees and consultants,
and
|
·
|
The
costs for educating and training physicians about our proposed
therapies/products.
|
Additional
financing through strategic collaborations, public or private equity financings
or other financing sources may not be available on acceptable terms, or at all.
Additional equity financing could result in significant dilution to our
shareholders. Further, if additional funds are obtained through arrangements
with collaborative partners, these arrangements may require us to relinquish
rights to some of our technologies, product candidates or products that we would
otherwise seek to develop and commercialize on our own. If sufficient capital is
not available, we may be required to delay, reduce the scope of or eliminate one
or more of our programs or potential products, any of which could have a
material adverse affect on our financial condition or business
prospects.
Risks
Relating to the September 2005, September 2006, August 2007 and March 2008
Financings
If we are required for any reason to
repay our outstanding debentures we would be required to deplete our working
capital, if available, or raise additional funds. Our failure to repay the
convertible debentures, if required, could result in legal action against us,
which could require the sale of substantial
assets.
We
have outstanding, as of September 30, 2009, $17,309,453 aggregate original
principal amount of convertible debentures with $5,781,661 in 2008 Debentures
$8,863,489 in 2007 Debentures, $2,532,902 in 2006 Debentures, and $131,401 in
2005 Debentures. We are required to redeem on a monthly basis, by payment, at
our option, with cash or with shares of our common stock, 1/16th of the
aggregate original principal amount of the debentures.
Any event
of default could require the early repayment of the convertible debentures, and
additional interest is accruing on the outstanding principal balance of the
debentures. We anticipate that the full amount of the convertible debentures
will be converted into shares of our common stock, in accordance with the terms
of the convertible debentures; however no assurance can be provided that any
amount of debentures will be converted. If, prior to the maturity date, we are
required to repay the convertible debentures in full, we would be required to
use our limited working capital and raise additional funds. If we remain unable
to repay the notes when required, the debenture holders could commence legal
action against us to recover the amounts due. Any such action could require us
to curtail or cease operations.
On July
29, 2009, we entered into a consent, amendment and exchange agreement with
holders of our outstanding convertible debentures and warrants, which were
issued in private placements in 2005, 2006, 2007 and 2008. We agreed to issue to
each debenture holder in exchange for the holder’s debenture an amended and
restated debenture in a principal amount equal to the principal amount of the
holder’s debenture times 1.35 minus any interest paid thereon. The conversion
price under the amended and restated debentures was reduced to $0.10, subject to
certain customary anti-dilution adjustments. The maturity date under the amended
and restated debentures was extended until December 30, 2010. The amended and
restated debentures bear interest at 12% per annum. Further, we agreed to issue
to each holder in exchange for the holder’s warrant an amended and restated
warrant, which exercise price was reduced to $0.10, subject to certain customary
anti-dilution adjustments. Further, we agreed to issue to each holder in
exchange for the holder’s warrants amended and restated warrants, as well as
additional warrants exercisable into 79,076,873 shares of our common stock for a
total of warrants exercisable into 192,172,519 shares of common stock, both
warrants containing a reduced exercise price of $0.10, subject to certain
customary anti-dilution adjustments. The termination date under the amended and
restated warrants was extended until June 30, 2014. Simultaneously with the
signing of this agreement, we and the debenture holders entered into a
standstill and forbearance agreement, whereby the debenture holders agreed to
forbear from exercising their rights and remedies under the original debentures
and transaction documents.
17
There are a large
number of shares underlying our convertible debentures and convertible
promissory notes in full, and warrants that and the Company is liable to
provide. The sale of these shares may depress the market price of our common
stock.
As of
September 30, 2009, on an aggregated basis our 2005, 2006, 2007 and 2008
debenture and promissory note financings may result in being converted into
183,514,607 shares of our common stock, and warrants, options and preferred
stock that may be converted into approximately 222,962,000 shares of our common
stock.
Sales of
a substantial number of shares of our common stock in the public market could
adversely affect the market price for our common stock and make it more
difficult for you to sell shares of our common stock at times and prices that
you feel are appropriate.
The issuance of
shares upon conversion of the convertible debentures and exercise of outstanding
warrants will cause immediate and substantial dilution to our existing
stockholders.
The
issuance of shares upon conversion of the convertible debentures and exercise of
warrants, including the replacement warrants, will result in substantial
dilution to the interests of other stockholders since the selling security
holders may ultimately convert and sell the full amount issuable on conversion.
Although no single selling security holder may convert its convertible
debentures and/or exercise its warrants if such conversion or exercise would
cause it to own more than 4.99% of our outstanding common stock, this
restriction does not prevent each selling security holder from converting and/or
exercising some of its holdings and then converting the rest of its holdings. In
this way, each selling security holder could sell more than this limit while
never holding more than this limit. There is no upper limit on the number of
shares that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock.
In addition, the issuance of the 2008 Debentures and the 2008 Warrants triggered
certain anti-dilution rights for certain third parties currently holding our
securities resulting in substantial dilution to the interests of other
stockholders.
Our
outstanding indebtedness on our 2005, 2006, 2007 and 2008 Debentures imposes
certain restrictions on how we conduct our business. In addition, all of our
assets, including our intellectual property, are pledged to secure this
indebtedness. If we fail to meet our obligations under the Debentures, our
payment obligations may be accelerated and the collateral securing the debt may
be sold to satisfy these obligations.
The
Debentures and related agreements contain various provisions that restrict our
operating flexibility. Pursuant to the agreement, we may not, among other
things:
-
|
Except
for certain permitted indebtedness, enter into, create, incur, assume,
guarantee or suffer to exist any indebtedness for borrowed money of any
kind, including but not limited to, a guarantee, on or with respect to any
of its property or assets now owned or hereafter acquired or any interest
therein or any income or profits
therefrom,
|
-
|
Except
for certain permitted liens, enter into, create, incur, assume or suffer
to exist any liens of any kind, on or with respect to any of its property
or assets now owned or hereafter acquired or any interest therein or any
income or profits therefrom,
|
-
|
Amend
our certificate of incorporation, bylaws or other charter documents so as
to materially and adversely affect any rights of holders of the Debentures
and Warrants,
|
-
|
Repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of our common stock or common stock
equivalents,
|
-
|
Enter
into any transaction with any of our affiliates, which would be required
to be disclosed in any public filing with the Securities and Exchange
Commission, unless such transaction is made on an arm's-length basis and
expressly approved by a majority of our disinterested directors (even if
less than a quorum otherwise required for board
approval),
|
-
|
Pay
cash dividends or distributions on any of our equity
securities,
|
-
|
Grant
certain registration rights,
|
-
|
Enter
into any agreement with respect to any of the foregoing,
or
|
-
|
Make
cash expenditures in excess of $1,000,000 per calendar month, subject to
certain specified exceptions.
|
These
provisions could have important consequences for us, including (i) making it
more difficult for us to obtain additional debt financing from another lender,
or obtain new debt financing on terms favorable to us, (ii) causing us to use a
portion of our available cash for debt repayment and service rather than other
perceived needs and/or (iii) impacting our ability to take advantage of
significant, perceived business opportunities.
18
Our
obligations under our securities purchase agreements are secured by
substantially all of our assets.
Our
obligations under certain security agreements, executed in connection with the
amended and restated debentures, are secured by substantially all of our assets.
As a result, if we default under the terms of the security agreement, such
holders could foreclose on their security interest and liquidate all of our
assets. This would cause operations to cease.
Risks
Related to Third Party Reliance
We
depend on third parties to assist us in the conduct of our preclinical studies
and clinical trials, and any failure of those parties to fulfill their
obligations could result in costs and delays and prevent us from obtaining
regulatory approval or successfully commercializing our product candidates on a
timely basis, if at all.
We engage
consultants and contract research organizations to help design, and to assist us
in conducting, our preclinical studies and clinical trials and to collect and
analyze data from those studies and trials. The consultants and contract
research organizations we engage interact with clinical investigators to enroll
patients in our clinical trials. As a result, we depend on these consultants and
contract research organizations to perform the studies and trials in accordance
with the investigational plan and protocol for each product candidate and in
compliance with regulations and standards, commonly referred to as "good
clinical practice", for conducting, recording and reporting results of clinical
trials to assure that the data and results are credible and accurate and the
trial participants are adequately protected, as required by the FDA and foreign
regulatory agencies. We may face delays in our regulatory approval process if
these parties do not perform their obligations in a timely or competent fashion
or if we are forced to change service providers.
We
depend on our collaborators to help us develop and test our proposed products,
and our ability to develop and commercialize products may be impaired or delayed
if collaborations are unsuccessful.
Our
strategy for the development, clinical testing and commercialization of our
proposed products requires that we enter into collaborations with corporate
partners, licensors, licensees and others. We are dependent upon the subsequent
success of these other parties in performing their respective responsibilities
and the continued cooperation of our partners. Under agreements with
collaborators, we may rely significantly on such collaborators to, among other
things:
·
|
Design
and conduct advanced clinical trials in the event that we reach clinical
trials;
|
·
|
Fund
research and development activities with
us;
|
·
|
Pay
us fees upon the achievement of milestones;
and
|
·
|
Market
with us any commercial products that result from our
collaborations.
|
Our
collaborators may not cooperate with us or perform their obligations under our
agreements with them. We cannot control the amount and timing of our
collaborators’ resources that will be devoted to our research and development
activities related to our collaborative agreements with them. Our collaborators
may choose to pursue existing or alternative technologies in preference to those
being developed in collaboration with us.
19
The
development and commercialization of potential products will be delayed if
collaborators fail to conduct these activities in a timely manner, or at all. In
addition, our collaborators could terminate their agreements with us and we may
not receive any development or milestone payments.
If we do
not achieve milestones set forth in the agreements, or if our collaborators
breach or terminate their collaborative agreements with us, our business may be
materially harmed.
In
an effort to conserve financial resources (see FINANCIAL RISK), we have
implemented reductions in our work force.
As a
result of these and other factors, we may not be successful in hiring or
retaining key personnel. Our inability to replace any key employee could harm
our operations.
Our
reliance on the activities of our non-employee consultants, research
institutions, and scientific contractors, whose activities are not wholly within
our control, may lead to delays in development of our proposed
products.
We rely
extensively upon and have relationships with scientific consultants at academic
and other institutions, some of whom conduct research at our request, and other
consultants with expertise in clinical development strategy or other matters.
These consultants are not our employees and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities of these
consultants and, except as otherwise required by our collaboration and
consulting agreements to the extent they exist, can expect only limited amounts
of their time to be dedicated to our activities. These research facilities may
have commitments to other commercial and non-commercial entities. We have
limited control over the operations of these laboratories and can expect only
limited amounts of time to be dedicated to our research goals.
Preclinical
& Clinical Product Development Risks
We have limited experience in
conducting and managing preclinical development activities, clinical trials and
the application process necessary to obtain regulatory
approvals.
Our
limited experience in conducting and managing preclinical development
activities, clinical trials and the application process necessary to obtain
regulatory approvals might prevent us from successfully designing or
implementing a preclinical study or clinical trial. If we do not succeed in
conducting and managing our preclinical development activities or clinical
trials, or in obtaining regulatory approvals, we might not be able to
commercialize our product candidates, or might be significantly delayed in doing
so, which will materially harm our business.
Our
ability to generate revenues from any of our product candidates will depend on a
number of factors, including our ability to successfully complete clinical
trials, obtain necessary regulatory approvals and implement our
commercialization strategy. In addition, even if we are successful in obtaining
necessary regulatory approvals and bringing one or more product candidates to
market, we will be subject to the risk that the marketplace will not accept
those products. We may, and anticipate that we will need to, transition from a
company with a research and development focus to a company capable of supporting
commercial activities and we may not succeed in such a transition.
Because
of the numerous risks and uncertainties associated with our product development
and commercialization efforts, we are unable to predict the extent of our future
losses or when or if we will become profitable.
Our
failure to successfully commercialize our product candidates or to become and
remain profitable could depress the market price of our common stock and impair
our ability to raise capital, expand our business, diversify our product
offerings and continue our operations.
None
of the products that we are currently developing has been approved by the FDA or
any similar regulatory authority in any foreign country. Our approach of using
cell-based therapy for the treatment of Retinal disease (we are beginning with a
treatment for Startgardt’s disease and Age-related Macular Degeneration) is
risky and unproven and no products using this approach have received regulatory
approval in the United States or Europe.
We
believe that no company has yet been successful in its efforts to obtain
regulatory approval in the United States or Europe of a cell-based therapy
product for the treatment of retinal disease or degeneration in humans.
Cell-based therapy products, in general, may be susceptible to various risks,
including undesirable and unintended side effects, unintended immune system
responses, inadequate therapeutic efficacy or other characteristics that may
prevent or limit their approval by regulators or commercial use. Many companies
in the industry have suffered significant setbacks in advanced clinical trials,
despite promising results in earlier trials. If our clinical trials are
unsuccessful or significantly delayed, or if we do not complete our clinical
trials, we will not receive regulatory approval for or be able to commercialize
our product candidates.
20
Our
lead product candidate, our therapeutic Retinal program has note yet started
Phase I Clinical Trials and has not yet received approval from the FDA or any
similar foreign regulatory authority for any indication.
We
cannot market any product candidate until regulatory agencies grant approval or
licensure. In order to obtain regulatory approval for the sale of any product
candidate, we must, among other requirements, provide the FDA and similar
foreign regulatory authorities with preclinical and clinical data that
demonstrate to the satisfaction of regulatory authorities that our product
candidates are safe and effective for each indication under the applicable
standards relating to such product candidate. The preclinical studies and
clinical trials of any product candidates must comply with the regulations of
the FDA and other governmental authorities in the United States and similar
agencies in other countries. Our therapeutic Retinal program may never receive
approval from the FDA or any similar foreign regulatory authority.
We
may experience numerous unforeseen events during, or as a result of, the
clinical trial process that could delay or prevent regulatory approval and/or
commercialization of our product candidates, including the
following:
·
|
The
FDA or similar foreign regulatory authorities may find that our product
candidates are not sufficiently safe or effective or may find our cell
culturing processes or facilities
unsatisfactory,
|
·
|
Officials
at the FDA or similar foreign regulatory authorities may interpret data
from preclinical studies and clinical trials differently than we
do,
|
·
|
Our
clinical trials may produce negative or inconclusive results or may not
meet the level of statistical significance required by the FDA or other
regulatory authorities, and we may decide, or regulators may require us,
to conduct additional preclinical studies and/or clinical trials or to
abandon one or more of our development
programs,
|
·
|
The
FDA or similar foreign regulatory authorities may change their approval
policies or adopt new regulations,
|
·
|
There
may be delays or failure in obtaining approval of our clinical trial
protocols from the FDA or other regulatory authorities or obtaining
institutional review board approvals or government approvals to conduct
clinical trials at prospective
sites,
|
·
|
We,
or regulators, may suspend or terminate our clinical trials because the
participating patients are being exposed to unacceptable health risks or
undesirable side effects,
|
·
|
We
may experience difficulties in managing multiple clinical
sites,
|
·
|
Enrollment
in our clinical trials for our product candidates may occur more slowly
than we anticipate, or we may experience high drop-out rates of subjects
in our clinical trials, resulting in significant
delays,
|
·
|
We
may be unable to manufacture or obtain from third party manufacturers
sufficient quantities of our product candidates for use in clinical
trials, and
|
·
|
Our
product candidates may be deemed unsafe or ineffective, or may be
perceived as being unsafe or ineffective, by healthcare providers for a
particular indication.
|
Any delay
of regulatory approval will harm our business.
Risks
Related to Competition
The
market for therapeutic stem cell products is highly competitive.
We expect
that our most significant competitors will be fully integrated pharmaceutical
companies and more established biotechnology companies. These companies are
developing stem cell-based products and they have significantly greater capital
resources in research and development, manufacturing, testing, obtaining
regulatory approvals, and marketing capabilities. Many of these potential
competitors are further along in the process of product development and also
operate large, company-funded research and development programs. As a result,
our competitors may develop more competitive or affordable products, or achieve
earlier patent recognition and filings.
The
biotechnology industries are characterized by rapidly evolving technology and
intense competition. Our competitors include major multinational pharmaceutical
companies, specialty biotechnology companies and chemical and medical products
companies operating in the fields of regenerative medicine, cell therapy, tissue
engineering and tissue regeneration.
Many of
these companies are well-established and possess technical, research and
development, financial and sales and marketing resources significantly greater
than ours. In addition, certain smaller biotech companies have formed strategic
collaborations, partnerships and other types of joint ventures with larger, well
established industry competitors that afford these companies' potential research
and development and commercialization advantages. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting and financing research activities which may produce products
directly competitive to those we are developing. Moreover, many of these
competitors may be able to obtain patent protection, obtain FDA and other
regulatory approvals and begin commercial sales of their products before we
do.
21
In
the general area of cell-based therapies (including both ES cell and autologous
cell therapies), we compete with a variety of companies, most of whom are
specialty biotechnology companies, such as Geron Corporation, Genzyme
Corporation, StemCells, Inc., Aastrom Biosciences, Inc., Viacell, Inc., MG
Biotherapeutics, Celgene, BioHeart, Inc., Baxter Healthcare, Osiris Therapeutics
and Cytori.
Each of
these companies are well-established and have substantial technical and
financial resources compared to us. However, as cell-based products are only
just emerging as medical therapies, many of our direct competitors are smaller
biotechnology and specialty medical products companies. These smaller companies
may become significant competitors through rapid evolution of new technologies.
Any of these companies could substantially strengthen their competitive position
through strategic alliances or collaborative arrangements with large
pharmaceutical or biotechnology companies.
The
diseases and medical conditions we are targeting have no effective long-term
therapies. Nevertheless, we expect that our technologies and products will
compete with a variety of therapeutic products and procedures offered by major
pharmaceutical companies (in the Retinal Disease indication one of our primary
competitors is Celgene). Many pharmaceutical and biotechnology companies are
investigating new drugs and therapeutic approaches for the same purposes, which
may achieve new efficacy profiles, extend the therapeutic window for such
products, alter the prognosis of these diseases, or prevent their
onset.
We
believe that our products, when and if successfully developed, will compete with
these products principally on the basis of improved and extended efficacy and
safety and their overall economic benefit to the health care
system.
Competition
for any stem cell products that we may develop may be in the form of existing
and new drugs, other forms of cell transplantation, ablative and simulative
procedures, and gene therapy. We believe that some of our competitors are also
trying to develop stem and progenitor cell-based technologies. We expect that
all of these products will compete with our potential stem cell products based
on efficacy, safety, cost and intellectual property positions. We may also face
competition from companies that have filed patent applications relating to the
use of genetically modified cells to treat disease, disorder or injury. In the
event our therapies should require the use of such genetically modified cells,
we may be required to seek licenses from these competitors in order to
commercialize certain of our proposed products, and such licenses may not be
granted.
If
we develop products that receive regulatory approval, they would then have to
compete for market acceptance and market share. For certain of our potential
products, an important success factor will be the timing of market introduction
of competitive products. This timing will be a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
Our
competition includes both public and private organizations and collaborations
among academic institutions and large pharmaceutical companies, most of which
have significantly greater experience and financial resources than we
do.
Private
and public academic and research institutions also compete with us in the
research and development of therapeutic products based on human embryonic and
adult stem cell technologies. In the past several years, the pharmaceutical
industry has selectively entered into collaborations with both public and
private organizations to explore the possibilities that stem cell therapies may
present for substantive breakthroughs in the fight against disease.
The
biotechnology and pharmaceutical industries are characterized by intense
competition. We compete against numerous companies, both domestic and foreign,
many of which have substantially greater experience and financial and other
resources than we have. Several such enterprises have initiated cell therapy
research programs and/or efforts to treat the same diseases targeted by
us.
Companies
such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom
Biosciences, Inc. and Viacell, Inc., as well as others, many of which
have substantially greater resources and experience in our fields than we do,
are well situated to effectively compete with us. Any of the world's largest
pharmaceutical companies represents a significant actual or potential competitor
with vastly greater resources than ours. These companies hold licenses to
genetic selection technologies and other technologies that are competitive with
our technologies. These and other competitive enterprises have devoted, and will
continue to devote, substantial resources to the development of technologies and
products in competition with us.
22
Many
of our competitors have significantly greater experience than we have in the
development, pre-clinical testing and human clinical trials of biotechnology and
pharmaceutical products, in obtaining FDA and other regulatory approvals of such
products and in manufacturing and marketing such products.
Accordingly
our competitors may succeed in obtaining FDA approval for products more rapidly
or effectively than we can. Our competitors may also be the first to discover
and obtain a valid patent to a particular stem cell technology which may
effectively block all others from doing so. It will be important for us or our
collaborators to be the first to discover any stem cell technology that we are
seeking to discover. Failure to be the first could prevent us from
commercializing all of our research and development affected by that discovery.
Additionally, if we commence commercial sales of any products, we will also be
competing with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which we have no experience.
General
Risks Relating to Our Business
We
are subject to litigation that will be costly to defend or pursue and uncertain
in its outcome.
Our
business may bring us into conflict with our licensees, licensors, or others
with whom we have contractual or other business relationships, or with our
competitors or others whose interests differ from ours. If we are unable to
resolve those conflicts on terms that are satisfactory to all parties, we may
become involved in litigation brought by or against us. That litigation is
likely to be expensive and may require a significant amount of management's time
and attention, at the expense of other aspects of our business. The outcome of
litigation is always uncertain, and in some cases could include judgments
against us that require us to pay damages, enjoin us from certain activities, or
otherwise affect our legal or contractual rights, which could have a significant
adverse effect on our business. See "LEGAL PROCEEDINGS" in this prospectus for a
more complete discussion of currently pending litigation against the
Company.
We
may not be able to obtain third-party patient reimbursement or favorable product
pricing, which would reduce our ability to operate profitably.
Our
ability to successfully commercialize certain of our proposed products in the
human therapeutic field may depend to a significant degree on patient
reimbursement of the costs of such products and related treatments at acceptable
levels from government authorities, private health insurers and other
organizations, such as health maintenance organizations. We cannot assure you
that reimbursement in the United States or foreign countries will be available
for any products we may develop or, if available, will not be decreased in the
future, or that reimbursement amounts will not reduce the demand for, or the
price of, our products with a consequent harm to our business. We cannot predict
what additional regulation or legislation relating to the health care industry
or third-party coverage and reimbursement may be enacted in the future or what
effect such regulation or legislation may have on our business. If additional
regulations are overly onerous or expensive, or if health care related
legislation makes our business more expensive or burdensome than originally
anticipated, we may be forced to significantly downsize our business plans or
completely abandon our business model.
Our
products are likely to be expensive to manufacture, and they may not be
profitable if we are unable to control the costs to manufacture
them.
Our
products are likely to be significantly more expensive to manufacture than most
other drugs currently on the market today. Our present manufacturing processes
produce modest quantities of product intended for use in our ongoing research
activities, and we have not developed processes, procedures and capability to
produce commercial volumes of product. We hope to substantially reduce
manufacturing costs through process improvements, development of new science,
increases in manufacturing scale and outsourcing to experienced manufacturers.
If we are not able to make these or other improvements, and depending on the
pricing of the product, our profit margins may be significantly less than that
of most drugs on the market today. In addition, we may not be able to charge a
high enough price for any cell therapy product we develop, even if they are safe
and effective, to make a profit. If we are unable to realize significant profits
from our potential product candidates, our business would be materially
harmed.
Our
current source of revenues depends on the stability and performance of our
sub-licensees.
Our
ability to collect royalties on product sales from our sub-licensees will depend
on the financial and operational success of the companies operating under a
sublicense. Revenues from those licensees will depend upon the financial and
operational success of those third parties. We cannot assure you that these
licensees will be successful in obtaining requisite financing or in developing
and successfully marketing their products. These licensees may experience
unanticipated obstacles including regulatory hurdles, and scientific or
technical challenges, which could have the effect of reducing their ability to
generate revenues and pay us royalties.
23
We
depend on key personnel for our continued operations and future success, and a
loss of certain key personnel could significantly hinder our ability to move
forward with our business plan.
Because
of the specialized nature of our business, we are highly dependent on our
ability to identify, hire, train and retain highly qualified scientific and
technical personnel for the research and development activities we conduct or
sponsor. The loss of one or more certain key executive officers, or scientific
officers, would be significantly detrimental to us. In addition, recruiting and
retaining qualified scientific personnel to perform research and development
work is critical to our success. Our anticipated growth and expansion into areas
and activities requiring additional expertise, such as clinical testing,
regulatory compliance, manufacturing and marketing, will require the addition of
new management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel in
the areas of our present and planned activities, and there can be no assurance
that we will be able to continue to attract and retain the qualified personnel
necessary for the development of our business. The failure to attract and retain
such personnel or to develop such expertise would adversely affect our
business.
Our
credibility as a business operating in the field of human embryonic stem cells
is largely dependent upon the support of our Ethics Advisory Board.
Because
the use of human embryonic stem cells gives rise to ethical, legal and social
issues, we have instituted an Ethics Advisory Board. Our Ethics Advisory Board
is made up of highly qualified individuals with expertise in the field of human
embryonic stem cells. We cannot assure you that these members will continue to
serve on our Ethics Advisory Board, and the loss of any such member may affect
the credibility and effectiveness of the Board. As a result, our business may be
materially harmed in the event of any such loss.
Our
insurance policies may be inadequate and potentially expose us to unrecoverable
risks.
We have
limited director and officer insurance and commercial insurance policies. Any
significant insurance claims would have a material adverse effect on our
business, financial condition and results of operations. Insurance availability,
coverage terms and pricing continue to vary with market conditions. We endeavor
to obtain appropriate insurance coverage for insurable risks that we identify,
however, we may fail to correctly anticipate or quantify insurable risks, we may
not be able to obtain appropriate insurance coverage, and insurers may not
respond as we intend to cover insurable events that may occur. We have observed
rapidly changing conditions in the insurance markets relating to nearly all
areas of traditional corporate insurance. Such conditions have resulted in
higher premium costs, higher policy deductibles, and lower coverage limits. For
some risks, we may not have or maintain insurance coverage because of cost or
availability.
We
have no product liability insurance, which may leave us vulnerable to future
claims we will be unable to satisfy.
The
testing, manufacturing, marketing and sale of human therapeutic products entail
an inherent risk of product liability claims, and we cannot assure you that
substantial product liability claims will not be asserted against us. We have no
product liability insurance. In the event we are forced to expend significant
funds on defending product liability actions, and in the event those funds come
from operating capital, we will be required to reduce our business activities,
which could lead to significant losses.
We cannot
assure you that adequate insurance coverage will be available in the future on
acceptable terms, if at all, or that, if available, we will be able to maintain
any such insurance at sufficient levels of coverage or that any such insurance
will provide adequate protection against potential liabilities. Whether or not a
product liability insurance policy is obtained or maintained in the future, any
product liability claim could harm our business or financial
condition.
We
presently have members of management and other key employees located in various
locations throughout the country which adds complexities to the operation of the
business.
Presently,
we have members of management and other key employees located in both California
and Massachusetts, which adds complexities to the operation of our
business.
We
face risks related to compliance with corporate governance laws and financial
reporting standards.
The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the Securities and Exchange Commission and the Public Company
Accounting Oversight Board, require changes in the corporate governance
practices and financial reporting standards for public companies. These new
laws, rules and regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 relating to internal control over financial
reporting, referred to as Section 404, have materially increased our legal
and financial compliance costs and made some activities more time-consuming and
more burdensome.
24
Risks
Relating to Our Common Stock
Stock prices for biotechnology
companies have historically tended to be very volatile.
Stock
prices and trading volumes for many biotechnology companies fluctuate widely for
a number of reasons, including but not limited to the following factors, some of
which may be unrelated to their businesses or results of
operations:
·
|
Clinical
trial results,
|
·
|
The
amount of cash resources and ability to obtain additional
funding,
|
·
|
Announcements
of research activities, business developments, technological innovations
or new products by companies or their
competitors,
|
·
|
Entering
into or terminating strategic
relationships,
|
·
|
Changes
in government regulation,
|
·
|
Disputes
concerning patents or proprietary
rights,
|
·
|
Changes
in revenues or expense levels,
|
·
|
Public
concern regarding the safety, efficacy or other aspects of the products or
methodologies being developed,
|
·
|
Reports
by securities analysts,
|
·
|
Activities
of various interest groups or
organizations,
|
·
|
Media
coverage, and
|
·
|
Status
of the investment markets.
|
This
market volatility, as well as general domestic or international economic, market
and political conditions, could materially and adversely affect the market price
of our common stock and the return on your investment.
A
significant number of shares of our common stock have become available for sale
and their sale could depress the price of our common stock.
On
March 1, 2008, a significant number of our outstanding securities
(including the 2007 Debentures and the 2007 Warrants and the shares of common
stock underlying such securities) that were previously restricted became
eligible for sale under Rule 144 of the Securities Act, and their sale will
not be subject to any volume limitations.
Not
including the shares of common stock underlying the 2005 Debentures, the 2005
Warrants, the 2006 Debentures, the 2006 Warrants, the replacement warrants, the
2007 Debentures, the 2007 Warrants, the February Promissory Note, the April 2008
Debentures, the February and April 2008 Warrants, and the Series A-1 convertible
preferred stock, there are presently approximately 27,739,000 outstanding
options, warrants and other securities convertible or exercisable into shares of
our common stock.
We may
also sell a substantial number of additional shares of our common stock in
connection with a private placement or public offering of shares of our common
stock (or other series or class of capital stock to be designated in the
future). The terms of any such private placement would likely require us to
register the resale of any shares of capital stock issued or issuable in the
transaction. We have also issued common stock to certain parties, such as
vendors and service providers, as payment for products and services. Under these
arrangements, we may agree to register the shares for resale soon after their
issuance. We may also continue to pay for certain goods and services with
equity, which would dilute your interest in the company.
Sales of
a substantial number of shares of our common stock under any of the
circumstances described above could adversely affect the market price for our
common stock and make it more difficult for you to sell shares of our common
stock at times and prices that you feel are appropriate.
25
We
do not intend to pay cash dividends on our common stock in the foreseeable
future.
Any
payment of cash dividends will depend upon our financial condition, results of
operations, capital requirements and other factors and will be at the discretion
of our board of directors. We do not anticipate paying cash dividends on our
common stock in the foreseeable future. Furthermore, we may incur additional
indebtedness that may severely restrict or prohibit the payment of
dividends.
Our common stock is subject to
"penny stock" regulations and restrictions on initial and secondary
broker-dealer sales.
The
Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any listed, trading equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exemptions. Penny stocks are subject to certain
additional oversight and regulatory requirements. Brokers and dealers affecting
transactions in our common stock in many circumstances must obtain the written
consent of a customer prior to purchasing our common stock, must obtain
information from the customer and must provide disclosures to the customer.
These requirements may restrict the ability of broker-dealers to sell our common
stock and may affect your ability to sell your shares of our common stock in the
secondary market.
As
an issuer of “penny stock,” the protection provided by the federal securities
laws relating to forward looking statements does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, the
Company will not have the benefit of this safe harbor protection in the event of
any legal action based upon a claim that the material provided by the Company
contained a material misstatement of fact or was misleading in any material
respect because of the Company’s failure to include any statements necessary to
make the statements not misleading. Such an action could hurt our financial
condition.
26
FORWARD-LOOKING
STATEMENTS
This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,”
“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,”
“believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue”
and variations thereof, and other statements contained in this prospectus,
regarding matters that are not historical facts and are forward-looking
statements. Because these statements involve risks and uncertainties, as well as
certain assumptions, actual results may differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to risks inherent
in: our early stage of development, including a lack of operating history,
lack of profitable operations and the need for additional capital; the
development and commercialization of largely novel and unproven technologies and
products; our ability to protect, maintain and defend our intellectual property
rights; uncertainties regarding our ability to obtain the capital resources
needed to continue research and development operations and to conduct research,
preclinical development and clinical trials necessary for regulatory approvals;
uncertainty regarding the outcome of clinical trials and our overall ability to
compete effectively in a highly complex, rapidly developing, capital intensive
and competitive industry. See “Risk Factors” set forth herein for a more
complete discussion of these factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
that they are made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking
statements include our plans and objectives for future operations, including
plans and objectives relating to our products and our future economic
performance. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, future business decisions, and the time and money required to
successfully complete development and commercialization of our technologies, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove inaccurate and, therefore, we cannot assure you that the
results contemplated in any of the forward-looking statements contained herein
will be realized. Based on the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved.
USE
OF PROCEEDS
We will
receive no proceeds from the sale of shares of Common Stock offered by the
selling stockholders. However, we will generate proceeds from the cash exercise
of the warrants by the selling stockholders, if any. We intend to use those
proceeds for general corporate purposes.
27
SELLING
SECURITY HOLDERS
The
following table details the name of each selling stockholder, the number of
shares owned by that selling stockholder, and the number of shares that may be
offered by each selling stockholder for resale under this prospectus. The
selling stockholders may sell up to 176,802,658 shares of our Common Stock
from time to time in one or more offerings under this prospectus. Because each
selling stockholder may offer all, some or none of the shares it holds, and
because, based upon information provided to us, there are currently no
agreements, arrangements, or understandings with respect to the sale of any of
the shares, no definitive estimate as to the number of shares that will be held
by each selling stockholder after the offering can be provided. The following
table has been prepared on the assumption that all shares offered under this
prospectus will be sold to parties unaffiliated with the selling
stockholders.
Name
of Selling Shareholder
|
Beneficial
Ownership Before the Offering (1)
|
Percentage
of Ownership Before the Offering
|
Shares
of Common Stock Included in Prospectus
|
Beneficial
Ownership After the Offering
|
Percentage
of Ownership After Completion of Offering (2)
|
William
R. McAdam
149
Mill Valley, CA 94941
|
2,000,000
(3)
|
*
|
2,000,000
(3)
|
0
|
*
|
John
A. Kryzanowski
480
Throckmorton Avenue
Mill
Valley, CA 94941
|
2,000,000
(3)
|
*
|
2,000,000
(3)
|
0
|
*
|
Alpha
Capital Anstalt
9490
Furstentums
Vaduz,
Lichtenstein
|
12,000,000
(4)
|
1.92%
|
12,000,000
(4)
|
0
|
*
|
Brio
Capital L.P.
401
E. 34th
Street—Suite South 33C
New
York, NY 10016
|
3,000,000
(5)
|
*
|
3,000,000
(5)
|
0
|
*
|
Brio
Capital Select LLC
523
Albermarle Road
Cedarhurst,
NY 11516
|
1,700,000
(6)
|
*
|
1,700,000
(6)
|
0
|
*
|
Paragon
Capital LP
110
East 59th
Street, 29th
Floor
New
York, NY 10022
|
1,000,000
(7)
|
*
|
1,000,000
(7)
|
0
|
*
|
Barbara
McShane
39
Southwind Cir.
Richmond,
CA 94804
|
1,000,000
(7)
|
*
|
1,000,000
(7)
|
0
|
*
|
Midsummer
Investment, Ltd.
294
Madison Avenue—38th
Floor
New
York, NY 10014
|
5,000,000
(8)
|
*
|
5,000,000
(8)
|
0
|
*
|
Gemini
Master Fund, Ltd.
135
Liverpool Drive, #C
Cardiff,
CA 92007
|
6,000,000
(9)
|
*
|
6,000,000
(9)
|
0
|
*
|
Pierce
Atwood LLP
One
Monument Square
Portland,
ME 04101
|
1,350,000
(10)
|
*
|
1,350,000
(10)
|
0
|
*
|
28
Optimus
CG II, Ltd.
11150
Santa Monica Boulevard, Suite 1500
Los
Angeles, CA 90025
|
0
|
*
|
126,843,658
(11)
|
0
|
*
|
JMJ
Financial
|
12,000,000
(12)
|
2.12%
|
13,200,000
(13)
|
0
|
*
|
Andwell,
LLC (14)
c/o
Advanced Cell Technology, Inc.
381
Plantation Street
Worcester,
MA 01605
|
1,026,000
(15)
|
*
|
1,026,000
(15)
|
0
|
*
|
Nancy
Burrows (16)
c/o
Advanced Cell Technology, Inc.
381
Plantation Street
Worcester,
MA 01605
|
650,000
(15)
|
*
|
650,000
(15)
|
0
|
*
|
William
Woodward
|
33,000
(17)
|
*
|
33,000
(17)
|
0
|
*
|
* Less
than 1%.
(1)
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholders has sole or shared voting power or investment
power and also any shares, which the selling stockholders has the right to
acquire within 60 days. As of November 13, 2009, the Company had 613,885,468
shares of common stock issued and outstanding.
(2)
Assumes the sale of all shares included in this prospectus.
(3)
Represents (i) 1,200,000 shares issuable upon conversion of Notes, and (ii)
800,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(4)
Represents (i) 7,200,000 shares issuable upon conversion of Notes, and (ii)
4,800,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(5)
Represents (i)1,800,000 shares issuable upon conversion of Notes, and (ii)
1,200,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(6)
Represents (i)1,020,000 shares issuable upon conversion of Notes, and (ii)
680,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
29
(7)
Represents (i) 600,000 shares issuable upon conversion of Notes, and (ii)
400,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(8)
Represents (i) 3,000,000 shares issuable upon conversion of Notes, and (ii)
2,000,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(9)
Represents (i) 3,600,000 shares issuable upon conversion of Notes, and (ii)
2,400,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(10)
Represents (i) 810,000 shares issuable upon conversion of Notes, and (ii)
540,000 shares issuable upon exercise of Class A Warrants, which the selling
stockholder purchased at the initial closing under the Subscription
Agreement.
(11)
Represents (i) 7,374,631 shares issuable as payment of the Commitment Fee, and
(ii) 119,469,027 shares issuable upon exercise of the Optimus Warrants issued to
Optimus CG II, Ltd., an affiliate of Optimus, under the Purchase Agreement. The
Optimus Warrants vest and may be exercised for that number of shares of common
stock equal to 135% of the cumulative amount of any tranche purchase prices
under tranche exercise notices pursuant to the Purchase
Agreement.
(12)
Represents shares of common stock issuable upon conversion of $1,200,000
principal amount of the JMJ Note.
(13)
Represents shares of common stock issuable upon conversion of the JMJ Note
(including $1,200,000 in principal and $120,000 in interest).
(14)
Andwell, LLC is an entity affiliated with William Caldwell, our chief executive
officer.
(15)
Represents shares issuable upon exercise of warrants with an exercise price of
$0.05.
(16)
Nancy Burrows is the wife of William Caldwell, our chief executive
officer.
(17)
Represents shares of common stock issuable upon exercise of warrants with an
exercise price of $0.10.
30
PLAN
OF DISTRIBUTION
Each
selling stockholder and any of its pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of its shares of
common stock on the Over-the-Counter Bulletin Board or any other stock exchange,
market or trading facility on which our shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. A selling
stockholder may use any one or more of the following methods when selling
shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
·
|
privately
negotiated transactions;
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
·
|
Through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
·
|
a
combination of any such methods of sale;
or
|
·
|
Any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended, if available, rather than under this
prospectus.
A selling
stockholder or its pledgees, donees, transferees or other successors in
interest, may also sell the shares directly to market makers acting as
principals and/or broker-dealers acting as agents for themselves or their
customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. A
selling stockholder cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholder. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities
Act.
We are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholder,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
A selling
stockholder may pledge its shares to their brokers under the margin provisions
of customer agreements. If a selling stockholder defaults on a margin loan, the
broker may, from time to time, offer and sell the pledged shares. The selling
stockholder and any other persons participating in the sale or distribution of
the shares will be subject to applicable provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations under such act,
including, without limitation, Regulation M. These provisions may restrict
certain activities of, and limit the timing of purchases and sales of any of the
shares by, the selling stockholder or any other such person. In the event that
the selling stockholder is deemed affiliated with purchasers or distribution
participants within the meaning of Regulation M, then the selling stockholder
will not be permitted to engage in short sales of common stock. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder is contractually
restricted from engaging in short sells. In addition, if such short sale is
deemed to be a stabilizing activity, then the selling stockholder will not be
permitted to engage in a short sale of our common stock. All of these
limitations may affect the marketability of the shares.
If the
selling stockholder notifies us that it has a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling stockholder
and the broker-dealer.
32
DESCRIPTION
OF SECURITIES TO BE REGISTERED
This
prospectus includes 176,802,658 shares of our Common Stock offered by the
selling stockholders. The following description of our Common Stock is only a
summary. You should also refer to our certificate of incorporation and bylaws,
which have been filed as exhibits to the registration statement of which this
prospectus forms a part.
We are
authorized to issue 1,750,000,000 shares of Common Stock having a par value of
$0.001 per share and 50,000,000 shares of preferred stock having a par value of
$0.001 per share (“Preferred Stock”). Holders of Common Stock are entitled to
one vote for each share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. Accordingly, holders of a majority of
the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive proportionately any dividends as may be declared by our
board of directors, subject to any preferential dividend rights of outstanding
preferred stock. Our outstanding shares of Common Stock are fully paid and
non-assessable. Holders of shares of Common Stock have no conversion, preemptive
or other subscription rights, and there are no redemption or sinking fund
provisions applicable to the Common Stock.
Effective
March 3, 2009, we entered into a $5 million credit facility (“Facility”) with a
life sciences fund. Under the terms of the agreement, we may draw down funds, as
needed, from the investor through the issuance of Series A-1 convertible
preferred stock, par value $.001, at a basis of 1 share of Series A-1
convertible preferred stock for every $10,000 invested. The preferred stock pays
dividends, in kind of preferred stock, at an annual rate of 10%, matures in four
years from the initial drawdown date, and is convertible at the option of the
holder into common stock at $0.75 per share. As of September 30, 2009, we had
drawn down approximately $2,288,000 on this credit facility.
On
November 2, 2009 (the “Effective Date”), the Company entered into a preferred
stock purchase agreement (the “Purchase Agreement”) with Optimus Capital
Partners, LLC, doing business as Optimus Life Sciences Capital Partners, LLC
(the “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 (“Tranches”) in the Company’s sole
discretion (subject to the conditions set forth therein), (i) up to 1,000
shares of Series B Preferred Stock (the “Preferred Shares”) 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 (the “Optimus 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 equal to the closing bid price of the Company’s
common stock on the date the Company provides notice of such
Tranche. The Optimus Warrants were issued on the Effective Date
to Optimus CG II Ltd., Optimus’s designee, and will vest and become
exercisable in replacement of a five-year warrant to purchase 119,469,027
shares of common stock with an exercise price per share of $0.113 the
Company issued on the Effective Date (which may only be exercised for such
number of shares of common stock equal in amount to 135% of the cumulative
purchase price paid by the Investor). The business purpose of exchanging
the warrants to be issued with each Tranche for the warrants originally
issued on November 2, 2009, is to enable the holder to have separate
instruments for the vested portion of the warrants, and to allow the
parties to more easily track the warrants that are
vested. Rather than being required to track these potential
multiple combinations of numbers, the parties believed that it would be
simpler to adopt the “replacement” warrant process. The process
is comparable to what happens when a warrant holder exercises only a
portion of an existing warrant, or anytime a holder divides a warrant into
two or more separate instruments that together represent all of the rights
embodied in the original instrument. For these reasons, we do
not believe that the “replacement warrant” should be viewed as a newly
issued warrant, but rather as a replacement issued as a substitute for a
portion of the previously issued warrant that was
surrendered.
|
·
|
The
Company agreed to pay to the Investor a commitment fee of $500,000 (the
“Commitment Fee”), 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
Company agreed to use its best efforts to file within 60 days of the
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 Purchase Agreement, including the shares of common stock underlying
the Optimus Warrants, and shares issuable in payment of the Commitment
Fee.
|
·
|
On
November 3, 2009, the Company filed a certificate of designations for the
Series B Preferred Stock (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, 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. In addition, the Preferred Shares (a) shall accrue dividends
at a rate of 10% per annum, payable in Preferred Shares, (ii)
shall not have voting rights, and (iii) 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
|
33
INTERESTS
OF NAMED EXPERTS AND COUNSEL
The
validity of the shares of common stock offered hereby will be passed upon for
the Registrant by Sichenzia Ross Friedman Ference LLP, 61 Broadway, 32nd fl.,
New York, NY 10006. Sichenzia Ross Friedman Ference LLP or certain members or
employees of Sichenzia Ross Friedman Ference LLP will receive 150,000 shares of
the Company’s restricted common stock. .
DESCRIPTION OF
BUSINESS
Overview
We are a
biotechnology company focused on developing and commercializing human embryonic
and adult stem cell technology in the emerging field of regenerative
medicine.
We were
incorporated in Nevada under the name Two Moon Kachinas Corp. on May 18, 2000.
On December 30, 2004, we filed an amendment to our articles of incorporation to
change our corporate name to A.C.T. Holdings, Inc. On January 31, 2005, we
completed the acquisition of Advanced Cell Technology, Inc., a Delaware
corporation (prior to the Reincorporation (as defined below), “ACT”), pursuant
to the terms of an Agreement and Plan of Merger dated January 3, 2005. As a
result of the transaction, we terminated our kachina doll business and succeeded
to the business operations and research efforts of ACT in the field of
biotechnology. On June 17, 2005, we filed an amendment to our articles of
incorporation to change our corporate name to Advanced Cell Technology, Inc. On
November 18, 2005, we consummated a merger with and into our wholly-owned
subsidiary ACT (the “Reincorporation”). As a result of the
Reincorporation, we became a Delaware corporation.
We have
acquired, developed and maintain a portfolio of patents and patent applications
that form the proprietary base for our research and development efforts in the
area of embryonic and adult stem cell research. We believe that our intellectual
property represents one of the strongest portfolios in the field. We employ a
team including some of the world's leading scientists in the field of stem cell
research and development and experts in the conduct of clinical trials. We
believe our technology base, in combination with our know-how, provides a
competitive advantage and will facilitate the successful development and
commercialization of products for use in treatment of a wide array of chronic
degenerative diseases and in regenerative repair of acute disease, such as
trauma, myocardial infarction and burns.
Our
belief that our intellectual property represents one of the strongest portfolios
in the field is supported by:
·
|
The
size, date and pace of filing, and focus of the
portfolio.
|
·
|
The
relative immaturity of this field of
study.
|
·
|
The
limited number of truly competitive portfolios of intellectual
property.
|
Regenerative
medicine is a new and emerging field of study involving development of medical
therapies based on advances in stem cell and nuclear transfer technology. We
have developed and maintain a broad portfolio with ownership or exclusive
licensing of over 45 issued patents and over 170 patent applications in the
field of regenerative medicine and related technologies. This significant volume
of patents and patent licenses has been developed in the short span of
approximately the past seven to ten years.
Although
we have strong competitors in this field, there are a limited number of
companies operating in this field. We believe our intellectual property
portfolio compares favorably with those of our competition based upon its size,
focus and filing dates.
With
respect to the focus of our human embryonic stem cell portfolio, we believe that
somatic cell nuclear transfer and chromatin transfer are, and will prove to be,
one of the technological keys to successful development of stem cell therapies.
See "Cellular Reprogramming" below. We own or have a license to numerous other
technologies for dealing with transplant rejection, including means of
activating oocytes during nuclear transfer, parthenogenesis,
transdifferentiation, and dedifferentiation. Our intellectual property also
includes patent rights and applications for specific applications of stem cell
technology in producing retinal pigment epithelium, hemangioblasts, myoblast
stem cells and numerous methods and compositions for the use of these
technologies and derived cells in heart disease, immunodeficiency estates and
cancer.
With
respect to the company's myoblast program, we believe that the technology has
demonstrated that a myoblast transplantation treatment is feasible and safe in
clinical trials conducted to date and that the technology could address the
large market potential presented by heart failure.
Our
research efforts to date in human embryonic technologies are at the level of
clinical trials, pre-clinical development and basic research. Our myoblast
program has received FDA clearance to proceed to Phase II human clinical
trials. We are focused on leveraging our key assets, including our intellectual
property, our scientific team, our facilities and our capital, to accelerate the
advancement of our stem cell technologies. In addition, we are pursuing
strategic collaborations with members of academia, industry and foundations to
further accelerate the pace of our research efforts.
34
The
Field of Regenerative Medicine
The
emerging field of treatment called "regenerative medicine" or "cell therapy"
refers to treatments that are founded on the concept of producing new cells to
replace malfunctioning or damaged cells as a vehicle to treat disease and
injury. Our focus is the development of effective methods to generate
replacement cells from both human embryonic and adult stem cells. Many
significant and currently untreatable human diseases arise from the loss or
malfunction of specific cell types in the body. This is especially true of
diseases associated with aging such as Alzheimer's disease, Parkinson's disease,
type II diabetes, heart failure, osteoarthritis, and aging of the immune
system, known as immunosenescence. This is also true for medical conditions
resulting from damage to cells due to acute disease, such as trauma, infarction
and burns. We believe that replacing damaged or malfunctioning cells with fully
functional ones may be a useful therapeutic strategy in treating many of these
diseases and conditions.
A stem
cell is a cell that has the ability to branch out and change, or differentiate,
into two or more different cell types. Stem cells are self-renewing primitive
cells that have the ability to develop into functional, differentiated cells. In
general, there are two broad categories of stem cells: adult stem cells and
embryonic stem cells. Adult stem cells are derived from various tissues in the
human body. Because they can branch out into many different cell types, they are
referred to as "multipotent." Multipotent means these cells develop into
multiple, but not all, types of cells in the body. Embryonic stem cells,
referred to as ES cells, which are derived from pre-implantation embryos, are
unique because they are "pluripotent," which means that they can develop into
all cells and tissues in the body, and they self-renew indefinitely in their
undifferentiated state. The ability of ES cells to divide indefinitely in the
undifferentiated state without losing pluripotency is a unique characteristic
that distinguishes them from all other stem cells discovered to date in
humans.
Our
business is focused on both the development and commercialization of adult stem
cell transplantation therapies and ES cell based technologies. Our adult stem
cell-based products are specifically targeted at therapies for heart and other
cardiovascular disease and are at a more advanced stage of development than our
human ES cell based technologies. By contrast, our human ES cell-based
technologies are not yet in clinical trials, but we believe these technologies
have potentially broader and more powerful applications with respect to a wide
range of diseases.
Human
ES Cell Programs
Since the
discovery of the human ES cell, medical researchers worldwide have generally
recognized the significance of this new technology and have begun to focus
research on the translation of this discovery into important new therapies.
Specifically, researchers have focused on several key challenges
including:
·
|
isolating
and purifying cell lines,
|
·
|
growing
stable cell lines in culture for long periods without
mutations,
|
·
|
manufacturing
cell lines in numbers sufficient for
therapy,
|
·
|
differentiating
ES cells into all of the cell types desired for therapies,
and
|
·
|
solving
the potential rejection of ES cells used in therapies due to
immuno-incompatibility with the
patient.
|
We
believe that solving the potential rejection of ES cells in patients is the
greatest scientific obstacle to developing successful therapeutics. Our research
and technologies are focused on solving this obstacle by creating stem cell
therapeutics with compatible tissues. Compatible tissues are referred to as
being histocompatible.
We
believe the potential markets for regenerative medicine and stem cell therapy
are large. The table below summarizes the potential United States patient
populations which we believe may be amenable to cell or organ transplantation
and represent target markets for products generated through our regenerative
medicine technology.
POTENTIAL
U.S. PATIENT POPULATIONS FOR CELL-BASED THERAPIES
Medical Condition
|
Number of
Patients*
|
|
Cardiovascular
disease
|
70 million
|
|
Autoimmune
disease
|
50 million
|
|
Diabetes
|
18 million
|
|
Osteoporosis
|
10 million
|
|
Cancer
|
10 million
|
|
Alzheimer's
disease
|
4.5 million
|
|
Parkinson's
disease
|
1 million
|
|
Burns
(severe)
|
1.1 million
|
|
Spinal-cord
injuries
|
0.25 million
|
|
Birth
defects
|
0.15 million/year
|
* These
estimates are based on the most current patient estimates published by the
following organizations as of April 2005: the American Heart Association, the
American Autoimmune Related Diseases Association, SEER (Surveillance,
Epidemiology and End Result), American Burn Association, March of Dimes, the
Alzheimer's Association, the Alzheimer's Disease Education & Referral
Center (National Institute on Aging), the National Institutes of Health's
National Institute on Neurological Disorders and Stroke, the Foundation for
Spinal Cord Injury Prevention, Care & Cure, the Centers for Disease
Control and Prevention, the American Association of Diabetes Educators, the
Northwest Parkinson's Foundation and the Parkinson's Action
Network.
35
Our
Human Embryonic Stem Cell Technologies
The
ability to produce embryonic stem cells that are immunologically compatible with
the patient is the hallmark and the strength of our technology platform. We
believe our technology platform will enable the transformation of a patient's
cells into an embryonic state where those cells can be differentiated into
specific therapeutically relevant cell types that are genetically identical to
the patient. We believe our technology may also enable the production of stem
cell lines, from sources external to the patient, that have a sufficiently high
level of histocompatibility to be useful in making cell therapies readily
accessible to a large segment of the patient population, without the need for
exact genetic matching of tissues. As a result, our technology avoids reliance
on more limited approaches that involve use of cell lines that are not
histocompatible with the recipient, or therapies based upon use of adult stem
cells.
In August
2001, the President of the United States set guidelines for federal funding of
research on embryonic stem cells from human embryos created by in-vitro
fertilization, referred to as IVF. IVF-ES cells have the drawback that they are
not genetically matched to the recipient patient. These ES cells are allogeneic.
The word allogeneic literally means "other DNA type." Therapies using allogeneic
cell lines can result in immune system incompatibilities where the host immune
system attacks and rejects the transplanted cells or the transplanted cells
attack the host. These incompatibilities may be partially suppressed with
powerful immunosuppressive drugs, but the side effects can be severe and result
in life-threatening complications. As a result, these incompatibilities will
generate significant inefficiencies in the application of cell
therapies.
The
strategic focus of our human ES cell technology is to produce cell lines that
are both histocompatible with the patient and pluripotent. We have numerous
proprietary technologies that we believe will generate histocompatible,
pluripotent stem cells for patient-specific application. These cells maximize
the potential for effective use as transplants to replace diseased or destroyed
cells in human patients. If successfully developed, our cellular reprogramming
technologies will make it possible to produce cells that have the proliferative
capacity of young cells, have specific therapeutic application, and are
immunologically compatible with the patient.
All of
our ES cell technologies are at the level of basic research or in the
pre-clinical stage of development.
Our ES Cell
Research Programs
Our ES
cell research programs are divided into three core categories: cellular
reprogramming, our reduced complexity program, and stem cell differentiation.
Each of these core areas of focus are discussed below.
I.
Cellular Reprogramming
This
research program involves development of therapies based on the use of
genetically identical pluripotent stem cells generated by our cellular
reprogramming technologies. These technologies can be used to generate
patient-specific pluripotent cells and tissues for transplantation. We believe
our technology platform will enable the transformation of a patient's cell into
pluripotent ES cells that are histocompatible with the patient and have the
potential to be differentiated into any of the over 200 different human cell
types that may be therapeutically relevant in treating diseased or destroyed
tissues in human patients. We expect that our cellular reprogramming
technologies will offer a new avenue for the introduction of targeted genetic
modifications in cells and for the regeneration of cell lifespan, thereby making
youthful cells available for aging patients. The combination of these advances,
the ability to produce young cells of certain kinds that are histocompatible
with the patient, is a core potential application of our technology. We believe
these cellular reprogramming technologies will be effective therapies where
there is time to prepare customized therapy through reprogramming of the
patient's own cells.
Some of
the technologies that support our cellular reprogramming program are somatic
cell nuclear transfer, chromatin transfer, and fusion technologies.
36
Somatic
cell nuclear transfer, referred to as SCNT, refers to the process wherein a body
cell is transferred to an egg cell from which the nuclear DNA has been removed.
This results in the body cell being "reprogrammed" by the egg cell. This
reprogramming transforms the cell from the type of cell it was, for instance a
skin cell, into an embryonic cell with the power to become any cell type in the
body. A related technology is called chromatin transfer. Through this
technology, the DNA and attached proteins, or chromatin, of the somatic cell is
reprogrammed prior to transfer into an egg cell. Chromatin transfer has the
potential to improve the efficiencies and therefore reduce the cost of nuclear
transfer. We believe that one critical advantage of our proprietary SCNT and
chromatin transfer technologies is that the cells are "rejuvenated" by returning
the cell to a youthful state. This is important because these youthful cells
will have the proliferative capacity of young cells. These healthy replacement
cells, which would be genetically identical to the patient's own cells, would
then be used for cell transplantation.
Our
fusion technologies involve the fusion of the cytoplasm of one cell into
another. In the same manner that the cytoplasm of an egg cell is capable of
transforming any cell back to an embryonic state, the fusion of the cytoplasm of
other cell types, including differentiated cell types (such as blood cells) is
capable of reprogramming another cell type, such as a skin cell. These
technologies have the potential of transforming a cell from a patient into
another medically-useful cell type also identical to the patient. They also have
the potential to fuse the cytoplasm of undifferentiated cells, such as embryonic
stem cells, with somatic cells to transport the somatic cell DNA back to
pluripotency. We believe that the fusion technology we are developing can be
developed into as broad and powerful a technique as SCNT, producing
histocompatible, youthful stem cells that are multi and potentially even
pluripotent. If successfully developed, this technology may also provide a
pathway that does not utilize human egg cells which would reduce the cost of the
procedure and increase the number of patients that could benefit from its
implementation.
II.
Stem Cell Differentiation
Regenerative
medicine requires that stem cells, from whatever source derived, be
differentiated, or re-differentiated, into specific body cell types and then
physically transplanted into a patient. Differentiation into tissues such as
cardiac muscle, blood, and other tissues occurs spontaneously in ES cells being
cultured in a dish. Successful application of stem cell technology will require
control over the specific kinds of cells into which stem cells differentiate.
Control of differentiation and the culture and growth of stem and differentiated
cells are important current areas of research for us. Also, some chemicals, such
as retinoic acid, can be used to trigger differentiation into specific cell
types such as nerve cells. We intend to pursue differentiation approaches both
in-house and through collaborations with other researchers who have particular
interests in, and skills related to, cellular differentiation. These efforts
include using both animal and human stem cell lines. Our research in this area
includes projects focusing on developing many different cell types that may be
used in the future to treat a wide range of diseases.
Currently
our researchers are working on projects to generate stable cell lines with
particular focus on retinal pigment epithelium, or RPE, cells, and hemangioblast
cells.
Retinal Pigment Epithelium
Program. In November, 2006 we published data
demonstrating human ES cell-derived RPE cells were capable of rescuing visual
function in Royal College of Surgeon rats. Following the publication of that
data, we entered into a pre-clinical development collaboration with Casey Eye
Institute at Oregon Health & Science University. The purpose of the
collaboration is to conduct dosage and safety studies in preparation for IND and
Phase I human clinical trials.
In
June 2009 the Company, along with its collaborators published results of the
Long-term Safety and Function of RPE from Human Embryonic Stem Cells in
Preclinical Models of Macular Degeneration. In parallel the Company entered into
a Master Service Agreement with Sinclair Research of Auxvasse, MO to perform a
Biodistribution and Safety/Tumorgenicity Study to further support these
results.
Hemangioblast
Program. Hemangioblasts are a newly-characterized
stem cell capable of differentiating into both hematopoietic, meaning blood cell
forming, and angiogenic, meaning blood vessel endothelium forming, cells. We
believe it will be possible to utilize hemangioblast cells in engraftment to
repair age-related endothelial dysfunction associated with numerous significant
age-related diseases, including cardiovascular disease, stroke, and even perhaps
cancer. In 2006 we successfully derived hemangioblast cells generated from the
company's blastomere-derived human embryonic stem cell lines. In 2007, we
published data reporting that through utilization of hemangioblast based therapy
we generated function in
vivo with respect to the repair of eschemic retinal vasculatures and
restoration of blood flow in eschemic limbs. In addition, we also reported
increased survival rates of animals suffering from myocardial
infarction.
III.
Adult Stem Cell Program
Our adult
stem cell-based program is developing an autologous myoblast transplantation
therapy delivered using a minimally invasive catheter injection system to
restore cardiac function in patients with advanced heart disease. The key target
for the therapy will be heart failure patients with New York Heart Association
("NYHA") scores Class II to IV. The company's therapy could also benefit
patients supported on ventricular assistance devices and potential additional
indications, such as acute myocardial infarction, peripheral artery disease, and
non-cardiac tissue repair. Currently available treatment options for heart
failure patients are inadequate and can only slow the progression of heart
failure; none can halt or reverse the process. We believe our autologous
myoblast transplantation therapy uses patented myoblast compositions for
catheter delivery to the heart offering repair of the disease in heart failure
patients and for those end-stage disease patients on ventricular assistance
device support. These indications represent a significant unmet medical need and
hold significant potential for clinical approval.
37
Our
transplantation therapy involves extraction through simple biopsy from a
patient's thigh of myoblasts, which are non-embryonic, skeletal muscle stem
cells, that can be expanded in culture and injected back into damaged and
scarred regions of the heart. This therapy promotes repair of damaged cardiac
tissue by autologous cells, thereby avoiding immune rejection as each patient
receives their own cells. Skeletal muscle, unlike heart muscle, can repair
itself after injury. Skeletal muscle contains immature myoblasts that can fuse
with surrounding myoblasts or with damaged muscle fibers to regenerate
contractile skeletal muscle. In experimental models, our researchers have
demonstrated that skeletal myoblasts can be transplanted into an infarcted
myocardium with the subsequent development of elongated, striated cells
characteristic of both skeletal and cardiac muscle. Our Phase I clinical
studies have demonstrated the efficacy of this therapy on a preliminary basis.
Our Phase II and III studies planned for commencement in 2010 will evaluate
the applications for myoblast transplantation in slowing and/or reversing the
impact of heart failure.
We
perform our myoblast expansion, packaging, shipment, and quality testing using
proprietary procedures that adhere to GMP regulations for manufacturing clinical
trial material. After expansion, the myoblasts are packaged and delivered to the
clinical site for implantation into the injured heart tissue by a surgeon or
interventional cardiologist. To maximize cell therapy effectiveness, adequate
numbers of cells must be delivered to the site of damage in a repeatable and
safe manner. Our therapy utilizes a minimally invasive catheter-based delivery
methodology, which provides a safe, targeted and high efficiency approach to
cell delivery to the infarct area.
We have
completed preclinical testing, two multi-center Phase I clinical trials and
a multi-center Phase Ib clinical trial and we anticipate initiating at least one
multi-regional, Phase II study in 2010, subject to raising sufficient
capital to fund this program.
We
believe that, unlike currently available treatment options, myoblast therapy has
the ability to repair and improve the function of a damaged heart. Our
preclinical and clinical studies support the conclusion that our therapy
presents significant advantages over currently available treatments,
including:
·
|
Ability
to restore cardiac function through new muscle
formation
|
·
|
Ability
to prevent further decline of heart
function
|
·
|
No
risk immunological rejection of myoblasts due to autologous nature of the
therapy
|
·
|
Complementary
to and capable of improving outcomes of current therapeutic options for
heart disease
|
Potential
Commercial Applications of our ES Cell and Adult Stem Cell
Technologies
We
believe that, if successfully developed, stem cell-based therapy has the
potential to provide treatment for a broad range of acute and chronic
degenerative diseases. We believe the potential applications of cell-based
therapeutics include:
·
|
hematopoietic
cells for blood diseases and
cancer,
|
·
|
myocardial
and endothelial vascular tissue for cardiovascular
disease,
|
·
|
congestive
heart failure, myocardial infarction and other cardiovascular
disease
|
·
|
skin
cells for dermatological
conditions,
|
·
|
retinal
pigment epithelium cells as treatment for macular degeneration and retinal
pigmentosis,
|
·
|
neural
cells for spinal cord injury, Parkinson's disease and other
neuro-degenerative diseases,
|
·
|
pancreatic
islet Я cells for diabetes,
|
·
|
liver
cells for hepatitis and cirrhosis,
|
·
|
cartilage
cells for arthritis, and
|
·
|
lung
cells for a variety of pulmonary
diseases.
|
While we
expect that any future products will take the form of medical procedures,
tangible therapeutics, or combinations thereof, we currently have no products,
and the identity of our future products, if any, is dependent upon the results
of our ongoing research efforts, and, therefore cannot be determined at this
time.
38
Our
Intellectual Property
Our
research and development is supported by a broad intellectual property
portfolio. We currently own or have exclusive licenses to over 45 patents and
have over 170 patent applications pending worldwide in the field of regenerative
medicine and stem cell therapy. We also have non-exclusive rights to a portfolio
of patents and patent applications that support our core intellectual
property.
Our
success will likely depend upon our ability to preserve our proprietary
technologies and operate without infringing the proprietary rights of other
parties. However, we may rely on certain proprietary technologies and know-how
that are not patentable. We protect such proprietary information, in part, by
the use of confidentiality agreements with our employees, consultants and
certain of our contractors.
We
maintain a disciplined patent policy and, when appropriate, seek patent
protection for inventions in our core technologies and in ancillary technologies
that support our core technologies or which we otherwise believe will provide us
with a competitive advantage. We pursue this strategy by filing patent
applications for discoveries we make, either alone or in collaboration with
scientific collaborators and strategic partners. Typically, although not always,
we file patent applications both in the United States and in select
international markets. In addition, we plan to obtain licenses or options to
acquire licenses to patent filings from other individuals and organizations that
we anticipate could be useful in advancing our research, development and
commercialization initiatives and our strategic business interests.
The
following table identifies the issued patents we own or license that we believe
currently support our technology platform.
Owned
by Advanced Cell Technology, Inc.
Number
Patent
|
Country
|
Filing
Date
|
Issue
Date
|
Expiration
Date*
|
Title
|
|||||
6,808,704
|
United
States (US)
|
09/06/2000
|
10/26/2004
|
09/6/2020
|
Method
for Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer
Techniques
|
|||||
783162
|
Australia
(AU)
|
09/06/2000
|
01/12/2006
|
09/6/2020
|
Method
for Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer
Techniques
|
|||||
265679
|
Mexico
|
09/06/2000
|
04/03/2009
|
09/06/2020
|
Method
for Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer
Techniques
|
|||||
536786
|
New
Zealand (NZ)
|
09/06/2000
|
01/11/2007
|
09/6/2020
|
Method
for Generating Immune-Compatible Cells and Tissues Using Nuclear Transfer
Techniques
|
|||||
782385
|
AU
|
10/13/2000
|
11/3/2005
|
10/13/2020
|
Method
of Differentiation of Morula or Inner Cell Mass Cells and Method of Making
Lineage-Defective Embryonic Stem Cells
|
|||||
518191
|
NZ
|
10/13/2000
|
05/10/2004
|
10/13/2020
|
Method
of Differentiation of Morula or Inner Cell Mass Cells and Method of Making
Lineage-Defective Embryonic Stem Cells
|
|||||
516236
|
NZ
|
06/30/2000
|
08/07/2005
|
06/30/2020
|
Cytoplasmic
Transfer to De-Differentiate Recipient Cells
|
|||||
782286
|
AU
|
06/30/2000
|
10/27/2005
|
06/30/2020
|
Cytoplasmic
Transfer to De-Differentiate Recipient Cells
|
|||||
531844
|
NZ
|
09/06/2000
|
12/08/05
|
09/06/2020
|
Telomere
Restoration and Extension of Cell Life-Span in Animals Cloned from
Senescent Somatic Cells
|
|||||
519347
|
NZ
|
12/20/2000
|
11/11/2004
|
12/20/2020
|
Method
to Produce Cloned Embryos and Adults from Cultured
Cells
|
|||||
00818200.0
|
China
(CN)
|
12/20/2000
|
10/18/2006
|
12/20/2020
|
Method
to Produce Cloned Embryos and Adults from Cultured
Cells
|
|||||
5,453,366
|
US
|
03/15/1993
|
09/26/1995
|
09/26/2012
|
Method
of Cloning Bovine Embryos
|
|||||
6,011,197
|
US
|
01/28/1999
|
01/04/2000
|
03/06/2017
|
Method
of Cloning Bovines Using Reprogrammed Non-Embryonic Bovine
Cells
|
|||||
6,395,958
|
US
|
07/15/1999
|
05/28/2002
|
03/06/2017
|
Method
of Producing a Polypeptide in an Ungulate
|
|||||
5,496,720
|
US
|
02/10/1993
|
03/05/1996
|
03/05/2013
|
Parthenogenic
Oocyte Activation
|
|||||
5,843,754
|
US
|
06/06/1995
|
12/01/1998
|
12/01/2015
|
Parthenogenic
Bovine Oocyte Activation
|
|||||
6,194,202
|
US
|
03/04/1996
|
02/27/2001
|
02/10/2013
|
Parthenogenic
Oocyte Activation
|
|||||
6,077,710
|
US
|
10/21/1998
|
06/20/2000
|
02/10/2013
|
Parthenogenic
Oocyte Activation
|
|||||
5,346,990
|
US
|
03/12/1991
|
09/13/1994
|
09/13/2011
|
Sex-Associated
Membrane Proteins and Methods for Increasing the Probability that
Offspring will be of a Desired
Sex
|
39
Owned
by Advanced Cell Technology, Inc.'s wholly-owned subsidiary
Mytogen, Inc.
Number
Patent
|
Country
|
Filing
Date
|
Issue
Date
|
Expiration
Date*
|
Title
|
|||||
6,673,604
|
US
|
07/24/2000
|
01/06/2004
|
07/24/2020
|
Muscle
Cells and Their Use in Cardiac Repair**
|
|||||
6,432,711
|
US
|
11/01/1994
|
08/13/2002
|
08/13/2019
|
Embryonic
Stem Cells Capable of Differentiating into Desired Cell
Lines
|
|||||
2,174,746
|
Canada
(CA)
|
11/02/1994
|
04/24/2007
|
11/02/2014
|
Embryonic
Stem Cells Capable of Differentiating into Desired Cell
Lines
|
[Missing
Graphic Reference]
** Currently
undergoing Inter Partes Reexamination
University
of Massachusetts Exclusive License to Advanced Cell
Technology, Inc.
Number
Patent
|
Country
|
Filing Date
|
Issue Date
|
Expiration
Date*
|
Title
|
|||||
518365
|
NZ
|
10/27/2000
|
08/12/2004
|
10/27/2020
|
Gynogenetic
or Androgenetic Production of Pluripotent Cells and Cell Lines, and Use
Thereof to Produce Differentiated Cells and
Tissues
|
|||||
782846
|
AU
|
10/27/2000
|
12/15/2005
|
10/27/2020
|
Gynogenetic
or Androgenetic Production of Pluripotent Cells and Cell Lines, and Use
Thereof to Produce Differentiated Cells and
Tissues
|
|||||
5994619
|
US
|
12/16/1996
|
11/30/1999
|
04/01/2016
|
Production
of Chimeric Bovine or Porcine Animals Using Cultured Inner Cell Mass
Cells
|
|||||
5905042
|
US
|
04/01/1996
|
05/08/1999
|
04/01/2016
|
Production
of Chimeric Bovine or Porcine Animals Using Cultured Inner Cell Mass
Cells
|
* Actual
patent expiration dates may differ from the dates listed herein including due to
patent term adjustments pursuant to 35 U.S.C. § 154(b) and 37 C.F.R. §§
1.702-1.705.
40
The
fundamental consequence of patent expiration is that the invention covered by
that patent will enter the public domain. However, the expiration of patent
protection, or anticipated patent protection, for the bulk of our portfolio is
not scheduled to begin for approximately ten to fifteen years. Due to the rapid
pace of technology development in this field, and the volume of intellectual
property we anticipate will be generated over the next decade, it is unlikely
that the expiration of any existing patents or patent rights would have an
adverse affect on our business. Due to our current stage of development, our
existing patent portfolio is not currently supporting a marketed product, so we
will not suffer from any reduction in product revenue from patent expiration.
Any actual products that we develop are expected to be supported by intellectual
property covered by current patent applications that, if granted, would not
expire for 20 years from the date first filed. For example, our patent
rights under the University of Massachusetts license listed in the patent table,
above, do not begin to expire until 2016. Due to the early stage of our
business, we differ from, for example, the pharmaceutical industry where the
loss of a key significant patent can result in contemporaneous loss of products,
programs or revenues. As our table demonstrates, our business is at the front
end of the patent protection spectrum and is not expected to be significantly
impacted by expiration of existing patents or patents issued in response to
existing applications.
Research
and License Agreements
Licenses
of Intellectual Property to Us
The
following summarizes technology licensed to us.
UMass License - On
February 1, 2002 and April 16, 1996, we entered into exclusive license
agreements (indefinite license period) with the University of Massachusetts. The
1996 Agreement has been amended by amendments dated September 1, 1997,
May 31, 2000 and September 19, 2002. Pursuant to these agreements, the
University of Massachusetts, referred to as UMass, exclusively licensed to us
certain biological materials, patent rights and related technology for
commercialization in specified fields. The license agreements require us to use
diligent efforts to develop licensed products and licensed services and require
us to pay certain royalties, minimum annual royalties, milestone payments and
sublicense income to UMass. UMass received 73,263 shares of common stock of ACT
as partial consideration of the license granted. We are currently behind on our
payments of all UMass license fees, since 2008, and as such we are in breach of
the license agreement.
2002 License - Under the 2002
license, UMass licenses to us certain patent rights relating to the cloning of
non-human animals for use in connection with the development, manufacture and
sale of products and services in the field of non-human animals for agriculture,
companion animals, research and diagnostic products, non-human and human
therapeutics, and neutraceuticals, except production of immunoglobulin in the
blood of Bos taurus and
Bos indicus. We are
required to pay royalties to UMass ranging from 1.5% to 2.0% based on the
covered product or service. We agreed to pay minimum royalty payments of $15,000
on the first and second anniversary of the agreement, $20,000 on the third
anniversary, $25,000 on the fourth anniversary, and increasing to $45,000 on the
fifth anniversary and for each year thereafter. We also agreed to make milestone
payments to UMass of up to $1,630,000 upon the achievement of various
development and commercialization milestones. Finally, we have agreed to pay
UMass 18% of all sublicense income.
1996 License - The 1996
license covers certain patent rights, biological materials and know-how related
to the cloning of non-human animals and cells for use in cell fields except the
production of immunoglobulin in the blood of Bos taurus and Bos indicus. We are required
to pay royalties ranging from 2.5% to 4.5% on net sales of products and services
covered by the license, and minimum royalty payments in the amount of $15,000
per year (beginning on the later of the fourth year after the effective date of
the agreement or the completion of certain clinical trials) for net sales on
products and services for use in human therapeutics, and $30,000 per year
(beginning in the third year after the effective date of the agreement) for net
sales on products and services for all uses other than in human therapeutics.
UMass agreed to waive minimum royalty payments during any calendar year in which
we fund research at UMass in the aggregate amount of $300,000. There are no
milestone payments. We agreed to pay UMass 18% of all sublicense income except
for equity. With respect to equity, we are required to pay UMass an amount equal
to 10% of the total equity we receive for any transfer of rights under the 1996
license.
Both the
2002 agreement and the 1996 agreement remain in effect until all issued patents
within the patent rights licensed under the agreement have expired, or for a
period ten years after the effective date of the agreement if no patents have
issued within that ten-year period. Each party has the right to terminate the
agreement upon the occurrence of a material uncured breach. We also have the
right to terminate at any time for any reason with ninety days' written
notice.
Wake Forest License - On
January 26, 2001, we entered into a materials and research data license
agreement with Wake Forest University (indefinite license period), pursuant to
which WFU granted to us a worldwide, exclusive, royalty-free, perpetual and
irrevocable right and license to use certain data and stem cells and stem cell
cultures created by us from biological materials provided by WFU to us for
specified purposes only. The agreement allows us to utilize certain primate skin
cells and ovary materials produced by WFU and transferred to us pursuant to an
agreement relating to the transfer of biological materials. There are no
milestone payments. There are no royalty requirements unless we desire to
negotiate a commercial license for use of the biological materials provided to
us by WFU. WFU received 60,000 shares of common stock of ACT Group, Inc., a
now dissolved Delaware corporation referred to hereinafter as ACT Group. We have
agreed to provide WFU samples of stem cells for WFU's research, education and
teaching purposes and we have a first option to obtain an exclusive license to
any intellectual property rights claimed by WFU in connection with the use of
such stem cells. The term of the license granted is perpetual and irrevocable
absent a breach by us.
41
WiCell 2002 License - In
March 2002, we entered into an industry research license and material transfer
agreement (indefinite license period) with WiCell Research Institute, Inc.,
referred to as WiCell, pursuant to which WiCell granted to us a non-exclusive
license, with no right to sublicense, to make, use and sell or otherwise
transfer certain primate embryonic stem cells and derivatives thereof for
internal research purposes and to receive such primate embryonic stem cells or
derivatives from third parties for internal research purposes. In consideration
of the license granted to us by WiCell, we agreed to pay a license fee of
$100,000 and an annual maintenance fee of $25,000. The license includes a grant
from us to WiCell of a non-exclusive, royalty-free, irrevocable, paid-up
research license under any inventions made by or for us to the extent that such
inventions are a modification of an invention described in the licensed patent
rights. We are currently behind on our payments of the license fees, since 2008,
and as such we are in breach of the license agreement.
WARF and WiCell 2007 License -
On May 2, 2007, we entered into a commercial products addendum
(indefinite period) with the Wisconsin Alumni Research Foundation ("WARF") and
its subsidiary, WiCell Research Institute, Inc., ("WiCell"). The addendum
amends in certain respects the industry research license and material transfer
agreement discussed above. The addendum (i) grants to us a non-exclusive,
world-wide commercial license to 23 issued patents and 123 patents pending to
pursue therapeutic and research products utilizing human embryonic stem cell
technology and (ii) provides for certain sublicensing rights to enable us
to further the development and commercialization of products. The addendum
requires us to make certain royalty payments and pay license fees to WARF as set
forth in the addendum. The maintenance fees required under the 2002 WiCell
License are waived during the term of the 2007 License.
Kirin License - Effective
May 9, 2006, we entered into an exclusive license agreement (indefinite
license period) with Kirin Beer Kabushiki Kaisha, and its subsidiaries
Aurox, LLC, Hematech, LLC and Kirin SD, Inc. (which we
collectively refer to as Kirin), pursuant to which Kirin exclusively licensed to
us certain patent rights, with the right to sublicense, for use in connection
with the research, development, manufacture and sale of therapeutic and
diagnostic human cell products. The agreement also requires Kirin to disclose to
us on a periodic basis a written report of improvements to the patent
rights.
In
consideration of the rights and licenses granted to us, we paid Kirin an initial
license fee and we have agreed to pay royalties representing a percentage of the
net sales of all royalty-bearing products and services covered by the license.
We are also required to pay a minimum annual royalty payment under the license.
We also agreed to pay Kirin a percentage of any and all fees obtained in
connection with the sublicensing of the patent rights. There are no milestone
payments under the agreement. The license granted in the agreement continues in
force until the expiration of all patent rights included in the license or for a
period of 10 years from the effective date of the agreement if no patents
have issued within that 10-year period. The agreement may be terminated by
either party in the event of an uncured breach, and the agreement may also be
terminated by us at any time by giving written notice to Kirin. The license has
been exclusively sublicensed to Embryome Sciences since August
2008.
Start Licensing License - On
August 30, 2006, we entered into a Settlement and License Agreement with
UMass and Start Licensing, Inc. (indefinite license period). Pursuant to
this agreement Start Licensing licenses to us, on a nonexclusive, royalty-free
and paid-up basis, certain patent rights for use with non-human animal research
or studies, including preclinical trials, in connection with the research,
development and sale of therapeutic and diagnostic human cell
products.
Cardion License - Cardion
Pharmaceuticals, Inc. and Diacrin, Inc. entered into a patent license
agreement on September 30, 2002 (indefinite license period); the agreement
was transferred to our wholly owned subsidiary Mytogen, Inc. on
December 28, 2005. Under the agreement, Mytogen has a worldwide,
non-exclusive right and license under certain specified patent rights, with the
right to sublicense, to make, have made, use, have used, offer for sale, sell,
lease, import and/or otherwise dispose of products in the field described as
cell-transplantation treatments and related therapies that use genetically
unmodified skeletal myoblasts for the treatment of cardiovascular disease. Under
the agreement Mytogen is required to make certain milestone payments (ranging
from $500,000 to $1,500,000 upon the occurrence of specified events), an annual
maintenance fee of $25,000, and earned royalties equal to (i) 5% of the net
sales price of all covered products sold to its end-user customers and
(ii) 5% of net sales of covered products sold by Mytogen's
sublicensees.
GenVec Agreement - On
December 28, 2005, Mytogen and GenVec, Inc. entered into a patent
assignment and security agreement (indefinite period). Under the agreement, as
amended on July 31, 2007, GenVec assigned certain agreements and
intellectual property to Mytogen, and retained a royalty-free non-exclusive
license, with the right to grant sublicenses, to practice the intellectual
property in connection with products, processes or services developed or
provided by GenVec other than autologous and allogenic skeletal myoblasts for
cardiac therapy. Under the original agreement, Mytogen granted a security
interest in the assigned intellectual property, but the security interest was
released in the amendment to the agreement. Under the agreement, as amended,
Mytogen must use commercially reasonable efforts to commercialize the assigned
intellectual property, including by spending specified amounts in support of
research and development in support of such commercialization; Mytogen must pay
GenVec one-half of the first milestone payment (anticipated to be two million
U.S. dollars) received by Mytogen under the Terumo Agreement; and Mytogen must
also pay GenVec four percent (4%) of the net sales revenue from sales or other
provision of products, processes or services covered by the
agreement.
42
TransXenoGen – On March 24,
2006, the Company entered into a license agreement (indefinite license period)
for the development of certain cell processing of ESCs. This license agreement
was terminated in the first quarter of 2008.
Exclusive
Licenses of Intellectual Property by Us
The
following summarizes licenses from us to third parties.
Exeter Life Sciences License -
On October 22, 2003, we entered into an exclusive license with
Exeter Life Sciences, Inc. (indefinite license period), pursuant to which
we exclusively licensed to Exeter certain technology and patent rights for use
in the fields of agriculture, endangered species, companion animals and equine
animals. The license also grants Exeter a right of first negotiation to any
improvement patents that are obtained by us that relate to the licensed
intellectual property or which are useful, necessary or required to develop or
manufacture certain animals, cells or tissues within the defined fields of
use.
Under the
agreement, we license rights to certain patent rights and technology useful for
the fields of use of non-human animals for agriculture, endangered animals and
companion animals; excluding production of such animals for the primary purpose
of producing human and non-human animal therapeutics and human healthcare
products, including without limitation the production of biopharmaceutical
agents in milk, such as proteins, peptides and polypeptides for pharmaceutical,
neutraceutical or other use, and excluding the production of immunoglobulin in
the blood of Bos taurus
and Bos indicus. The
field includes:
·
|
the
cloning, development, manufacture and sale of cloned non-human animals,
including without limitation, bovine, hircine, ovine, porcine, equine
animals and ungulates (as well as any transgenic variance or enhancements
thereto) or products that are composed of, made in or derived, extracted
or isolated from cells or tissues of such animals for the production of
food or fiber, and the rendering of services or uses that relate to the
production of such products;
|
·
|
the
cloning, development, manufacture and sale of endangered species for
purposes of researching, aiding, reproducing or assisting in the
reproduction of such endangered
species;
|
·
|
the
cloning, development, and sale of hircine, ovine, feline, canine and
equine animals (as well as any transgenic variance or enhancements
thereto) for personal, business or commercial purposes, specifically
excluding the sale of these animals as scientific research laboratory
subjects; and
|
·
|
the
cloning, development, manufacture and sale of cloned equine animals (as
well as any transgenic variance or enhancements thereto) or products that
are composed of, made in or derived, extracted or isolated from cells or
tissues of such animals for non-therapeutic purposes, including but not
limited to, for use in agriculture, for use as food, for use as companion,
service, work or recreational animals, or for use as racing or other
equine event animals, and the rendering of services or uses that relate to
the production of such products.
|
In
consideration of the rights and licenses granted to Exeter, Exeter paid to us an
initial license fee of $1,000,000, and has agreed to pay royalties equal to 5%
of the net sales of all products and services covered by the license; provided
that, sublicense income for license products that are the progeny of cloned
animals covered by the license or products obtained from such progeny, the
royalty is 3%. Exeter is required to pay an annual maintenance fee for the
license, equal to $100,000 in 2005, increasing annually by $50,000 up to
$500,000. Exeter's obligation to pay the annual maintenance fee was suspended
until certain intellectual property that is the subject of litigation, namely
the matter styled University
of Massachusetts v. James M. Robl and Phillipe Collas, Massachusetts
Superior Court, Suffolk County, Docket No. 04-0445-BLS, was settled in
dispute. Negotiations are continuing to amend the license subject to the
outcome of the settlement. The license also provides that we will refund certain
amounts to Exeter if certain conditions concerning the referenced litigation are
not met and that we will extend to Exeter rights associated with "improvement
patents" that are obtained by us or the University in connection with the
referenced litigation or any patent interference or opposition proceedings
involving us that relate to the licensed intellectual property or which are
useful, necessary or required to develop or manufacture cloned and/or transgenic
non-human animals and cloned and/or transgenic cells and tissues from non-human
animals within the field of use. The license grants Exeter a right of first
negotiation to any improvement patents. There are no milestone payments. Exeter
agrees to pay us a total of 25% of all sublicense income under the license.
Either party may terminate the agreement in the event of an uncured breach.
Exeter may terminate without cause on 60 days' prior written notice to us,
or may terminate immediately in the event of a change in law that materially
affects Exeter's ability to commercialize the licensed intellectual property
under the license.
We expect
that the Exeter Life Science License will be amended as a result of the Start
Settlement and the settlement of the University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00706 RMU), and University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00353 RMU).
43
Lifeline License - On
May 14, 2004, we entered into three license agreements (indefinite license
periods) with Lifeline Cell Technology, formerly known as PacGen
Cellco, LLC; the licenses were subsequently amended in August 2005.
Pursuant to the license agreements, as amended, we licensed to Lifeline, on an
exclusive or non-exclusive basis, as applicable, certain know-how and patent
rights for, among other things, the research, development, manufacture and sale
of human cells for cell therapy in the treatment of human diabetes and liver
diseases, and retinal diseases and retinal degenerative diseases. The license
agreements require milestone payments up to $1.75 million in the aggregate.
The agreement requires Lifeline to meet minimum research and development
requirements. The licenses continue until expiration of the last valid claim
within the licensed patent rights. Either party may terminate the agreements for
an uncured breach, and Lifeline may terminate the agreement at any time with
30 days' notice.
Exclusive License Agreement Number
1, as amended, covers patent rights and technology developed by us that are
relevant to:
·
|
the
research, development, manufacture and sale of human and non-human animal
cells for commercial research and
|
·
|
the
manufacture and selling of human cells for therapeutic and diagnostic use
in the treatment of human diabetes and liver diseases, and retinal
diseases and retinal degenerative
diseases.
|
Lifeline
has agreed to pay us royalties ranging from 3% to 10% on net sales of products
and services covered by the license, and a minimum royalty fee of $175,000 in
the first year, plus, commencing 12 months after the effective date of the
agreement, additional minimum royalty fees in the amount of $15,000 at
12 months, $37,500 at 24 months, $60,625 at 36 months, and
$75,000 annually thereafter. Lifeline also agreed to pay a license fee in the
amount of $225,000 in the form of a Convertible Promissory Note, which was
repaid in cash in 2007.
We expect
that Lifeline Exclusive License Agreement Number 1, as amended, will be
further amended as a result of the Start Settlement and the settlement of University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00706 RMU), and University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00353 RMU).
Exclusive
License Agreement Number 2, as amended, covers patent rights and technology
developed by UMass relevant to:
·
|
the
research, development, manufacture and sale of human and non-human animal
cells and defined animal cell lines for commercial
research,
|
·
|
the
manufacture and selling of human cells for therapeutic and diagnostic use
in the treatment of human diabetes and liver diseases and retinal diseases
and retinal degenerative diseases,
and
|
·
|
the
use of defined animal cell lines in the process of manufacturing and
selling human cells for therapeutic and diagnostic use in the treatment of
human diabetes and liver diseases.
|
Lifeline
is required to pay us royalties ranging from 3% to 12% on net sales of products
and services covered by the license, and a minimum royalty fee of $100,000 in
the first year, plus, commencing 12 months after the effective date of the
agreement, additional minimum royalty fees in the amount of $15,000 at 12
months, $30,000 at 24 months, $45,000 at 36 months, and $60,000 annually
thereafter. Lifeline also paid a license fee in the amount of $150,000 on June
1, 2007.
We expect
that Lifeline Exclusive License Agreement Number 2, as amended, will be
further amended as a result of the Start Settlement and the settlement of University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00706 RMU), and University of Massachusetts and
Advanced Cell Technology, Inc. v. Roslin Institute (Edinburgh), Geron
Corporation and Exeter Life Sciences, Inc., U.S. District Court for
the District of Columbia (Case No. 1:05-cv-00353 RMU).
Exclusive License Agreement
Number 3, as amended, covers patent rights and technology developed
by Infigen relevant to the research, development, manufacture and sale of human
cells for cell therapy in the treatment of therapeutic and diagnostic use in the
treatment of human diabetes and liver diseases, and retinal diseases and retinal
degenerative diseases. Lifeline is required to pay us royalties equal to 6% of
net sales of products and services covered by the license, and a minimum royalty
fee of $25,000 in the first year, plus, commencing 12 months after the
effective date of the agreement, additional minimum royalty fees in the amount
of $7,500 at 12 months, $7,500 at 24 months, $6,875 at 36 months,
and $15,000 annually thereafter. Lifeline also paid a license fee in the amount
of $225,000 in cash on June 1, 2007.
44
We expect
that Lifeline Exclusive License Agreement Number 3, as amended, will be
further amended or terminated, as a result of the dissolution of Infigen and the
acquisition by us of certain of the Infigen patent rights.
Start Licensing License - On
August 30, 2006, we entered into a Settlement and License Agreement with
UMass and Start Licensing, Inc. (indefinite license period). See
description of this agreement above. Pursuant to this agreement, we granted
Start Licensing a worldwide, exclusive, fully paid-up and royalty-free license,
with the right to grant sublicenses, to certain patent rights for use in
connection with all uses and applications in non-human animals. The agreement
was reached in connection with the settlement of the patent interference
actions. The terms of the agreement also includes an initial payment to us,
which has been made, and certain milestone payments. In addition, under the
agreement, Start, Geron Corporation and Roslin Institute ("Roslin") each agree
not to sue us under certain patent applications owned by Roslin.
Terumo Agreement -
Diacrin, Inc. and Terumo Corporation entered into a development and
license agreement on September 4, 2002 (indefinite license period); the
agreement was transferred to Mytogen on December 28, 2005. Under the
agreement, the parties agreed to collaborate to develop and commercialize
products in the field described as autologous skeletal myoblasts for cardiac
therapy (and conditionally allogenic skeletal myoblasts for cardiac therapy) in
Japan and such other Asian countries as the parties may agree. Pursuant to the
agreement, Terumo has an exclusive, royalty-bearing license, with a limited
right to grant sublicenses, under certain technology and patent rights
controlled by Mytogen; and a non-exclusive, non-royalty bearing right and
license to use certain data resulting from clinical trials for products based on
the licensed technology and patent rights for purposes of seeking regulatory
approvals. The agreement specifies the rights and obligations of the parties
with respect to collaboration and development of products covered by the
agreement. The agreement also requires Terumo to make certain milestone
payments, including the following: two million dollars upon initiation of any
clinical trials of any covered product in Japan; two million dollars upon the
first filing for regulatory approval of a covered product in Japan; one million
dollars upon the first filing for regulatory approval of a covered product in
any country other than Japan if the territory is expanded to include countries
other than Japan; two million dollars upon the first commercial sale of a
covered product in Japan; and one million dollars upon the first commercial sale
of a covered product in any country other than Japan if the territory is
expanded to include countries other than Japan. Terumo is also required under
the agreement to pay royalties in an amount equal to ten percent (10%) of the
net sales on covered products. In May 2008, Terumo exercised an option to extend
a milestone for one year for $300,000. The milestone consisted of a Phase I
clinical trial for the Myoblast Program in Japan and was extended for two
years.
Pharming Technologies B.V.
License - On February 26, 2008, we entered into a License Agreement
with Pharming Technologies B.V., referred to as Pharming, pursuant to which
we exclusively licensed to Pharming certain patents including oocyte activation
patents for all uses and applications in or related to non-human animals
(indefinite license period). We retained all use and applications of such
patents in or related to humans.
Transition Holdings, Inc. -
On December 18, 2008, we entered into a license agreement with an
Ireland-based investor, Transition Holdings Inc. (“Transition”), for certain of
our non-core technology (indefinite license period). Under the agreement,
Transition agreed to acquire a license to the technology for $3.5 million in
cash.
Stem Cell & Regenerative
Medicine International, Inc. - On December 1, 2008, the Company and CHA
Bio & Diostech Co., Ltd. (“CHA”), a leading Korean-based biotechnology
company focused on the development of stem cell technologies, 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 our Hemangioblast Program, one of our core
technologies. SCRMI has agreed to pay the Company fee of $500,000 for an
exclusive, worldwide, license to the Hemangioblast Program (indefinite license
period).
CHA – On March 31, 2009, we
entered into a licensing agreement (indefinite license period) under which we
have licensed our retinal pigment epithelium (“RPE”) technology, for the
treatment of diseases of the eye, to CHA for development and commercialization
exclusively in Korea. We are eligible to receive up to $1.9 million in fees
based upon achieving certain milestones, including us making an IND submission
to the US FDA to commence clinical trials in humans using the technology, which
we currently plan to do during the second half of 2009. We received an up-front
fee of $250,000 and additional consideration under the agreement in the amount
of $850,000. Under the terms of the agreement, CHA will incur all of the cost
associated with RPE clinical trials in Korea.
CHA – On May 21, 2009, we
have entered into a licensing agreement (indefinite license period) under which
we will license our proprietary single blastomere technology, which has the
potential to generate stable cell lines, including retinal pigment epithelium
(RPE) cells for the treatment of diseases of the eye, to CHA for development and
commercialization exclusively in Korea. We received a $300,000 up-front license
fee. We believe there are some 200 different retinal diseases that may be
impacted by this stem cell derived therapy including macular degeneration.
Age-related macular degeneration (AMD) affects more than 30 million people
worldwide and is the leading cause of blindness in people over 60 years of age
in the United States (Source: Foundation For Fighting Blindness).
45
Embroyme Sciences, Inc. – In
2008, we entered into a license agreement (indefinite license period) whereby we
licensed to Embryome Sciences certain cell processing technologies, including
the technology licensed from Kirin Beer. We received an up-front payment of
$470,000 and will receive royalties from future sales of product that utilizes
the technologies from the licenses.
Nonexclusive
Licenses of Intellectual Property by Us
We have
entered into numerous nonexclusive license agreements pursuant to which we have
granted non-exclusive rights to various parties to use certain patent rights in
defined fields. These licenses generally provide for commercialization of our
intellectual property and typically contain minimum royalties, milestones and
continuing royalties based upon percentages of revenue.
Regulations
In
addition to safety regulations enforced by the FDA, we are also subject to
regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future and federal, state, local, and foreign regulations.
Outside
the United States, we will be subject to regulations that govern the import of
drug products from the United States or other manufacturing sites and foreign
regulatory requirements governing human clinical trials and marketing approval
for our products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.
The
United States Congress, several states and foreign countries have considered
legislation banning or restricting human application of ES cell-based and
nuclear transfer based technologies. No assurance can be given regarding future
restrictions or prohibitions that might affect our technology and business. In
addition, we cannot assure you that future judicial rulings with respect to
nuclear transfer technology or human ES cells will not have the effect of
delaying, limiting or preventing the use of nuclear transfer technology or ES
cell-based technology or delaying, limiting or preventing the sale, manufacture
or use of products or services derived from nuclear transfer technology or ES
cell-derived material. Any such legislative or judicial development would harm
our ability to generate revenues and operate profitably.
For
additional information about governmental regulations that will affect our
planned and intended business operations, see "Risk Factors".
Employees
As of
September 30, 2009, we had 13 full-time employees, of whom 6 hold Ph.D. or M.D.
degrees. 10 employees are directly involved in research and development
activities and 3 are engaged in business development and administration. We also
use the services of numerous outside consultants in business and scientific
matters. We believe that we have good relations with our employees and
consultants.
Competition
The
biotechnology industries are characterized by rapidly evolving technology and
intense competition. Our competitors include major multinational pharmaceutical
companies, specialty biotechnology companies and chemical and medical products
companies operating in the fields of regenerative medicine, cell therapy, tissue
engineering and tissue regeneration. Many of these companies are
well-established and possess technical, research and development, financial and
sales and marketing resources significantly greater than ours. In addition,
certain smaller biotech companies have formed strategic collaborations,
partnerships and other types of joint ventures with larger, well established
industry competitors that afford these companies' potential research and
development and commercialization advantages. Academic institutions,
governmental agencies and other public and private research organizations are
also conducting and financing research activities which may produce products
directly competitive to those we are developing. Moreover, many of these
competitors may be able to obtain patent protection, obtain FDA and other
regulatory approvals and begin commercial sales of their products before we
do.
Several
such enterprises have initiated cell therapy research programs and/or efforts to
treat the same diseases targeted by us. Companies such as Geron
Corporation, Genzyme Corporation, StemCells, Inc., Aastrom
Biosciences, Inc. and Viacell, Inc., as well as others, many of which
have substantially greater resources and experience in our fields than we do,
are well situated to effectively compete with us. Any of the world's largest
pharmaceutical companies represents a significant actual or potential competitor
with vastly greater resources than ours. These companies hold licenses to
genetic selection technologies and other technologies that are competitive with
our technologies. These and other competitive enterprises have devoted, and will
continue to devote, substantial resources to the development of technologies and
products in competition with us.
In the
general area of cell-based therapies (including both ES cell and autologous cell
therapies), we compete with a variety of companies, most of whom are specialty
biotechnology companies, such as Geron Corporation, Genzyme Corporation,
StemCells, Inc., Aastrom Biosciences, Inc., Viacell, Inc., MG Biotherapeutics,
Celgene, BioHeart, Inc., Baxter Healthcare, Osiris Therapeutics and Cytori. Each
of these companies are well-established and have substantial technical and
financial resources compared to us. However, as cell-based products are only
just emerging as medical therapies, many of our direct competitors are smaller
biotechnology and specialty medical products companies. These smaller companies
may become significant competitors through rapid evolution of new technologies.
Any of these companies could substantially strengthen their competitive position
through strategic alliances or collaborative arrangements with large
pharmaceutical or biotechnology companies.
46
The
diseases and medical conditions we are targeting have no effective long-term
therapies. Nevertheless, we expect that our technologies and products will
compete with a variety of therapeutic products and procedures offered by major
pharmaceutical companies (in the Retinal Disease indication one of our primary
competitors is Celgene). Many pharmaceutical and biotechnology companies are
investigating new drugs and therapeutic approaches for the same purposes, which
may achieve new efficacy profiles, extend the therapeutic window for such
products, alter the prognosis of these diseases, or prevent their onset. We believe that our
products, when and if successfully developed, will compete with these products
principally on the basis of improved and extended efficacy and safety and their
overall economic benefit to the health care system.
Competition
for any stem cell products that we may develop may be in the form of existing
and new drugs, other forms of cell transplantation, ablative and simulative
procedures, and gene therapy. We believe that some of our competitors are also
trying to develop stem and progenitor cell-based technologies. We expect that
all of these products will compete with our potential stem cell products based
on efficacy, safety, cost and intellectual property positions. We may also face
competition from companies that have filed patent applications relating to the
use of genetically modified cells to treat disease, disorder or injury. In the
event our therapies should require the use of such genetically modified cells,
we may be required to seek licenses from these competitors in order to
commercialize certain of our proposed products, and such licenses may not be
granted.
If we
develop products that receive regulatory approval, they would then have to
compete for market acceptance and market share. For certain of our potential
products, an important success factor will be the timing of market introduction
of competitive products. This timing will be a function of the relative speed
with which we and our competitors can develop products, complete the clinical
testing and approval processes, and supply commercial quantities of a product to
market. These competitive products may also impact the timing of clinical
testing and approval processes by limiting the number of clinical investigators
and patients available to test our potential products.
Research
and Development
For the
years ended December 31, 2008 and 2007 we incurred $8,635,577 and $12,744,913,
respectively, on research and development.
DESCRIPTION
OF PROPERTY
Our
headquarters are located in Worcester, Massachusetts, where we lease
approximately 14,000 square foot of office and laboratory facilities. The
monthly rent for this property is $20,271. We have the Worcester facility under
an eight year sub-lease which expires on April 30, 2010. We also lease
approximately 700 square feet of corporate office space in Santa Monica, CA. The
lease for our Santa Monica office terminates on February 28, 2010. The monthly
rent for this space is $2,170.
LEGAL
PROCEEDINGS
Gary D. Aronson v. Advanced Cell
Technology, Inc., Superior Court of California, County of Alameda, Case No.
RG07348990. John S.
Gorton v. Advanced Cell Technology, Inc, Superior Court of California, County of
Alameda Case No. RG07350437. On October 1, 2007 Gary D. Aronson
brought suit against us with respect to a dispute over the interpretation of the
anti-dilution provisions of our warrants issued to Mr. Aronson on or about
September 14, 2005. John S. Gorton initiated a similar suit on October 10,
2007. The two cases have been consolidated. The plaintiffs allege that we
breached warrants to purchase securities issued by us to these individuals by
not timely issuing stock after the warrants were exercised, failing to issue
additional shares of stock in accordance with the terms of the warrants and
failing to provide proper notice of certain events allegedly triggering
Plaintiffs' purported rights to additional shares. Plaintiffs
assert monetary damages in excess of $14 million. Plaintiffs may
alternatively seek additional shares in the Company with a value potentially in
excess of $14 million, or may seek a combination of monetary damages and shares
in the Company. Plaintiffs also seek prejudgment interest and
attorney fees. Discovery is not complete and no conclusions have been
reached as to the potential exposure to us or whether we have liability.
Alexandria Real Estate-79/96
Charlestown Navy Yard v.
Advanced Cell Technology, Inc. and Mytogen, Inc. (Suffolk County,
Massachusetts) : The Company and its subsidiary Mytogen, Inc. are
currently defending themselves against a civil action brought in Suffolk
Superior Court, No. 09-442-B, by their former landlord at 79/96 Thirteenth
Street, Charlestown, Massachusetts, a property vacated by us and Mytogen
effective May 31, 2008. In that action, Alexandria Real Estate-79/96 Charlestown
Navy Yard (“ARE”) is alleging that it has been unable to relet the premises and
therefore seeking rent for the vacated premises since September 2008.
Alexandria is also seeking certain clean-up and storage expenses. We are
defending against the suit, claiming that ARE had breached the covenant of quiet
enjoyment as of when Mytogen vacated, and that had ARE used reasonable diligence
in its efforts to secure a new tenant, it would have been more successful.
No trial date has been set.
47
Alpha Capital Ansalt v. Advanced
Cell Technology, Inc., Case No.09 Civ 670 (LAK), United States District Court,
Southern District of New York: On March 5, 2009, we settled a lawsuit
originally brought by Alpha Capital on February 11, 2009, who is an investor in
our 2006, 2007, and 2008 debentures, and associated with the default on August
6, 2008 on all debentures. In settlement of the lawsuit, we agreed to reduce the
conversion price on convertible debentures held by Alpha Capital to $0.02 per
share, effective immediately, so long as we have a sufficient number of
authorized shares to honor the request for conversion.
Bristol Investment Fund, Ltd. as
Collateral Agent for the Holders of Certain Original Issue Discount Senior
Convertible Debentures v. Alexandria Real Estate—79/96 Charlestown Navy Yard,
LLC (Suffolk Superior Court). The Company has been named as a third party
defendant in this action, filed September 16, 2009, in which the plaintiff
alleges that Alexandria Real Estate (“Alexandria”) improperly charged a trustee
holding approximately $146,000 of funds in a Company account that Bristol
claimed as collateral. Alexandria brought a third party complaint against the
Company for indemnification.
Bristol Investment Fund, Ltd. and
Bristol Capital, LLC v. Advanced Cell Technology, Inc. and Mytogen, Inc.
(Supreme Court of the State of New York, County of New York): On March 9,
2009, plaintiffs filed a complaint and summons in the Supreme Court of the State
of New York, County of New York against the Company and its subsidiary Mytogen,
Inc. Plaintiffs’ complaint alleges, among other things, that the Company has
breached the terms of certain contracts with plaintiffs; namely, convertible
debentures and a consulting agreement. Plaintiffs seek preliminary and permanent
injunctive relief directing the Company to deliver to plaintiff Bristol
Investment Fund, Ltd. (“Bristol”) 2.5 million shares of its common stock,
declaring a conversion price of $0.02 for the convertible debentures held by
plaintiffs, and directing the Company to honor plaintiff’s future conversion
requests. Plaintiffs also seek compensatory damages in an amount to be
determined at trial, but alleged in the complaint to exceed $1.5 million. On May
1, 2009, the Company filed an answer to plaintiffs’ complaint. On May 13, 2009,
the Company filed a motion to stay the action and to compel arbitration of all
claims by Bristol. The court has not yet ruled on the Company’s motion to stay
the action and to compel arbitration. On or about September 16, 2009, plaintiffs
filed an order to show cause, seeking the issuance of a preliminary injunction
directing the Company to deliver to Bristol 2.5 shares of its common stock
pursuant to a convertible debenture and 47.4 million shares of its common
stock pursuant to common stock purchase warrants, declaring a
conversion price of $0.02 for the convertible debenture held by plaintiffs, and
enjoining or restraining the Company from issuing shares of its common stock to
any entity other than plaintiffs or the other holders of convertible debentures.
On September 25, 2009, the Company submitted its response in opposition to
plaintiffs’ motion and moved by cross-motion for dismissal of the complaint,
based on the terms of the consent, waiver, amendment and exchange agreement
entered into between the Company and the holders of over 95% of the outstanding
principal amount of the Amended and Restated Debentures. The court has not yet
ruled on the respective motions. The Company intends to continue to contest the
case vigorously.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward
Looking Statements
This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as “may,” “assumes,” “forecasts,” “positions,”
“predicts,” “strategy,” “will,” “expects,” “estimates,” “anticipates,”
“believes,” “projects,” “intends,” “plans,” “budgets,” “potential,” “continue”
and variations thereof, and other statements contained in this prospectus,
regarding matters that are not historical facts and are forward-looking
statements. Because these statements involve risks and uncertainties, as well as
certain assumptions, actual results may differ materially from those expressed
or implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to risks inherent
in: our early stage of development, including a lack of operating history,
lack of profitable operations and the need for additional capital; the
development and commercialization of largely novel and unproven technologies and
products; our ability to protect, maintain and defend our intellectual property
rights; uncertainties regarding our ability to obtain the capital resources
needed to continue research and development operations and to conduct research,
preclinical development and clinical trials necessary for regulatory approvals;
uncertainty regarding the outcome of clinical trials and our overall ability to
compete effectively in a highly complex, rapidly developing, capital intensive
and competitive industry. See “Risk Factors” set forth herein for a more
complete discussion of these factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
that they are made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking
statements include our plans and objectives for future operations, including
plans and objectives relating to our products and our future economic
performance. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions, future business decisions, and the time and money required to
successfully complete development and commercialization of our technologies, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove inaccurate and, therefore, we cannot assure you that the
results contemplated in any of the forward-looking statements contained herein
will be realized. Based on the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved.
OVERVIEW
The
following discussion should be read in conjunction with the financial statements
and notes thereto included in this prospectus.
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.
48
CRITICAL
ACCOUNTING POLICIES
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. The weighted average amortization period for deferred debt
issuance costs is 48 months.
Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
On
January 1, 2008, we adopted FASB ASC 820-10, “Fair Value Measurements and
Disclosures.” FASB ASC 820-10 defines fair value, and establishes a
three-level valuation hierarchy for disclosures of fair value measurement that
enhances disclosure requirements for fair value measures. The carrying amounts
reported in the consolidated balance sheets for receivables and current
liabilities each qualify as financial instruments and are a reasonable estimate
of their fair values because of the short period of time between the origination
of such instruments and their expected realization and their current market rate
of interest. The three levels of valuation hierarchy are defined as
follows:
-
|
Level
1 inputs to the valuation methodology are quoted prices for identical
assets or liabilities in active
markets.
|
-
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
-
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
Management
analyzes all financial instruments with features of both liabilities and equity
under FASB ASC 480, “Distinguishing Liabilities From
Equity” and FASB 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.
Revenue
Recognition— Our revenues are 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— Effective January 1, 2006, we adopted the fair value
recognition provisions of FASB ASC 718 “Compensation-Stock
Compensation,” using the modified-prospective transition method. Under
this method, stock-based compensation expense is recognized in the consolidated
financial statements for stock options granted, modified or settled after the
adoption date. In accordance with FAS 123(R), the unamortized portion of
options granted prior to the adoption date is recognized into earnings after
adoption. Results for prior periods have not been restated, as provided for
under the modified-prospective method.
Under
FASB ASC 718, stock-based compensation expense recognized is based on the value
of the portion of share-based payment awards that are ultimately expected to
vest during the period. Based on this, our stock-based compensation is reduced
for estimated forfeitures at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
Recent
Accounting Pronouncements
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”) codified in FASB ASC 855-10-05, which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. SFAS 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, management adopted this
pronouncement during the second quarter of 2009. SFAS 165 requires that public
entities evaluate subsequent events through the date that the financial
statements are issued. Management has evaluated subsequent events through the
time of filing these financial statements with the SEC on November __, 2009.
49
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”),
codified as FASB ASC 860, which requires entities to provide more information
regarding sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. SFAS 166 eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets and requires additional disclosures. SFAS 166 is effective for fiscal
years beginning after November 15, 2009. We do not believe the adoption of SFAS
166 will have on our financial condition, results of operations or cash
flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”), codified as FASB ASC 810-10, which modifies how
a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
clarifies that the determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. SFAS 167 requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS 167 is effective for fiscal years
beginning after November 15, 2009. We do not believe the adoption of SFAS 167
will have on its financial condition, results of operations or cash
flows.
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles,
which establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC 105, we have updated references to GAAP in our financial
statements issued for the period ended September 30, 2009. The adoption of FASB
ASC 105 did not impact our financial position or results of
operations.
Results
of Operations
Comparison
of Three Months Ended September 30, 2009 and 2008
Three months ended September 30,
|
Three months ended September 30,
|
|||||||||||||||
2009
|
2008
|
|||||||||||||||
% of
|
% of
|
|||||||||||||||
Amount
|
Revenue
|
Amount
|
Revenue
|
|||||||||||||
REVENUE
|
$
|
248,141
|
100.0
|
%
|
$
|
242,195
|
100.0
|
%
|
||||||||
COST
OF REVENUE
|
108,049
|
43.5
|
%
|
95,180
|
39.3
|
%
|
||||||||||
GROSS
PROFIT
|
140,092
|
56.5
|
%
|
147,015
|
60.7
|
%
|
||||||||||
RESEARCH
AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
|
700,818
|
282.4
|
%
|
1,434,896
|
592.5
|
%
|
||||||||||
GENERAL
AND ADMINSTRATIVE EXPENSES
|
453,561
|
182.8
|
%
|
594,663
|
245.5
|
%
|
||||||||||
LOSS
ON SETTLEMENT OF LITIGATION
|
110,000
|
44.3
|
%
|
740,849
|
305.9
|
%
|
||||||||||
OTHER
INCOME (EXPENSE)
|
(79,987
|
)
|
-32.2
|
%
|
(9,978,249
|
)
|
-4119.9
|
%
|
||||||||
NET
LOSS
|
$
|
(1,204,274
|
)
|
-485.3
|
%
|
$
|
(12,601,642
|
)
|
-5203.1
|
%
|
Revenue
Revenue
for the three months ended September 30, 2009 and 2008 was $248,141 and
$242,195, respectively, which represents an increase of $5,946. These
amounts relate primarily to license fees and royalties collected that are being
amortized over the period of the license granted, and are therefore typically
consistent between periods. The increase in revenue during the three months
ended September 30, 2009, was due to more new licenses being granted during the
year as compared to the three months ended September 30, 2008.
50
Of the
revenue recognized during the three months ended September 30, 2009, we
recognized $51,470 in license fee revenue from Transition Holdings, Inc. On
December 18, 2008, we entered into a license agreement with Transition for
certain of our non-core technology. Under the agreement, Transition agreed to
acquire a license to the technology for a total of $3.5 million in cash. We are
recognizing revenue from this agreement over its 17-year patent useful
life.
Research
and Development Expenses and Grant Reimbursements
Research
and development expenses (“R&D”) for the three months ended September 30,
2009 and 2008 were $700,818 and $1,434,896, respectively, a decrease of
$734,078. R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research. The decline in
R&D expenditures during the three months ended September 30, 2009 as
compared to the same period in 2008 is primarily due to the fact that we have
exercised efforts to reduce our operating expenditures.
Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant category of expense; however, we
also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.
We do not
segregate research and development costs by project because our research is
focused exclusively on human stem cell therapies as a unitary field of study.
Although we have three principal areas of focus for our research, these areas
are completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.
We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.
Grant
reimbursements for the three months ended September 30, 2009 and 2008 were $0
and $0, respectively. The Company did not receive any grant
reimbursements during the three months ended September 30, 2009 or
2008.
General
and Administrative Expenses
General
and administrative expenses for the three months ended September 30, 2009 and
2008 were $453,561 and $594,663, respectively, a decrease of
$141,102. This expense decrease was primarily a result of management’s
efforts to reduce costs and streamline operations during the three months ended
September 30, 2009 so that we could move closer to achieving profitability.
General and administrative expenses should continue to slightly decrease over
the short term as we continue to streamline our operations and reduce our costs
until we are able to expand.
Loss
on Settlement
Loss on
settlement for the three months ended September 30, 2009 and 2008 was $110,000
and $740,849, respectively. On July 6, 2009, we settled a lawsuit with an
investor whereby we agreed to provide the investor with an additional $110,000
principal, which is to be upon the same terms and conditions as the original
April 2008 debenture. Accordingly, we recognized a loss on settlement in the
amount of $110,000 during the three months ended September 30, 2009 for the
amount of principal that was added to the April 2008 convertible
debenture.
51
In
September 2008, CEOcast, an investor relations firm, assigned
invoices for services it asserted it rendered to us in the amount of
$82,316.51 to Outboard Investments. In September 2008, Outboard filed
an action against us in the Circuit Court of the Twelfth Judicial Circuit,
Sarasota County, Florida. In the action, Outboard asserted that we
failed to pay the $82,316.51 in principal plus interest due on the CEOcast
invoice. After negations between us and Outboard, in September 2008,
we entered into a settlement agreement with Outboard pursuant to which we agreed
to issue Outboard 16,463,302 shares of our common stock in exchange for
satisfaction of the claim for $82,231.51.
The Court
held a fairness hearing to review the proposed settlement
agreement. After the hearing, the Court issued an order approving the
settlement agreement and finding that, assuming the satisfaction of all the
other applicable securities laws and regulations, the issuance of the shares to
Outboard was exempt from registration under the Securities Act of 1933, as
amended.
Other
than the claim for payment and the settlement agreement, we have not had and do
not have any relationship with Outboard nor have we entered into any other
transactions with them either prior to or after the claim and settlement
agreement.
Other
Income (Loss)
Other
income (loss) for the three months ended September 30, 2009 and 2008 were
($79,987) and ($9,978,249), respectively, which represents an increase of
$9,898,262 in income. The change in other income (loss) in the three months
ended September 30, 2009, compared to that of the earlier period, relates
primarily to adjustments to loss on extinguishment of convertible debentures and
note, change in fair value of derivatives related to the debt financings,
default interest charges on all debt, and amortization of debt issuance costs
and debt discounts.
On July
29, 2009, we entered into a consent, amendment and exchange agreement with
holders of our outstanding convertible debentures and warrants, which were
issued in private placements in 2005, 2006, 2007 and 2008. We agreed to issue to
each debenture holder in exchange for the holder’s debenture an amended and
restated debenture in a principal amount equal to the principal amount of the
holder’s debenture times 1.35 minus any interest paid thereon. The conversion
price under the amended and restated debentures was reduced to $0.10, subject to
certain customary anti-dilution adjustments. The maturity date under the amended
and restated debentures was extended until December 30, 2010. The amended and
restated debentures bear interest at 12% per annum. Further, we agreed to issue
to each holder in exchange for the holder’s warrants amended and restated
warrants, as well as additional warrants exercisable into 79,076,873 shares of
our common stock for a total of warrants exercisable into 192,172,519 shares of
common stock, both warrants containing a reduced exercise price of $0.10,
subject to certain customary anti-dilution adjustments. The termination date
under the amended and restated warrants was extended until June 30, 2014.
Simultaneously with the signing of this agreement, we and the debenture holders
entered into a standstill and forbearance agreement, whereby the debenture
holders agreed to forbear from exercising their rights and remedies under the
original debentures and transaction documents. During the three months ended
September 30, 2009, we recognized a loss on extinguishment of convertible
debentures of $34,679,545 representing the difference between the fair value of
the amended and restated convertible debentures and the carrying value of the
original 2005, 2006, 2007 and 2008 convertible debentures.
On August
25, 2009, we entered into an amendment to our convertible promissory notes with
JMJ Financial, originally executed on February 14, 2008. The note has been
amended as follows:
·
|
Note A: The original issue discount has
been increased by 10%, or $60,000, such that the new principal amount is
$660,000.
|
|
·
|
Note B: The original issue discount has
been increased by 10%, or $120,000, such that the new principal amount is
$1,320,000.
|
All other
terms and conditions of the original convertible promissory note remain in full
force and effect. During the three months ended September 30, 2009, we
recognized a gain on extinguishment of convertible debentures of $199,418
representing the difference between the fair value of the amended and restated
convertible promissory notes and the carrying value of the original convertible
promissory notes.
Interest
income was $371 and $70 during the three months ended September 30, 2009 and
2008, respectively. Interest income was lower in the three months ended
September 30, 2009 than in the three months ended September 30, 2008 due to the
lower cash balances held in interest-bearing deposits during the periods.
Interest expense was $2,354,537 and $13,740,858 for the three months ended
September 30, 2009 and 2008, respectively, which represents a decrease of
$11,386,321. The decrease in interest expense in the three months ended
September 30, 2009, compared to the earlier period primarily to amortization of
debt discounts and deferred financing costs being recorded during 2008 for all
debentures until their default on August 6, 2008. Therefore, no additional
interest expense arose in 2009 from this amortization until after the
aforementioned debenture and promissory note modifications. Interest expense
during the three months ended September 30, 2009 relates to debenture default
interest through the dates of debenture and promissory note modifications in the
amount of $201,724, and $2,152,813 in amortization of debt discounts and
deferred debt issuance costs.
The gain
on the fair value of derivatives was $36,754,306 and $3,762,539, for the three
months ended September 30, 2009 and 2008, respectively. The change in
our share price contributed most significantly to the change on the fair value
of derivatives during the three months ended September 30, 2009. In periods when
the share price increases, the derivative securities become more attractive to
exercise or in-the-money, and therefore the value of the derivative liabilities
increases. The opposite is true when the share price decreases.
52
Net loss
for the three months ended September 30, 2009 and 2008 was $1,204,274 and
$12,601,642, respectively. The change in loss in each period is the result of
changes to the fair value of derivatives and interest charges related to
convertible debentures, and during the three months ended September 30, 2009 is
offset by the loss on extinguishment of convertible debentures and
note.
Comparison
of Nine Months Ended September 30, 2009 and 2008
Nine months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
||||||||||||||
|
% of
|
% of
|
||||||||||||||
|
Amount
|
Revenue
|
Amount
|
Revenue
|
||||||||||||
REVENUE
|
$
|
785,112
|
100.0
|
%
|
$
|
540,926
|
100.0
|
%
|
||||||||
COST
OF REVENUE
|
324,148
|
41.3
|
%
|
406,094
|
75.1
|
%
|
||||||||||
GROSS
PROFIT
|
460,964
|
58.7
|
%
|
134,832
|
24.9
|
%
|
||||||||||
RESEARCH
AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
|
2,138,843
|
272.4
|
%
|
8,084,149
|
1494.5
|
%
|
||||||||||
GENERAL
AND ADMINSTRATIVE EXPENSES
|
1,961,195
|
249.8
|
%
|
4,160,601
|
769.2
|
%
|
||||||||||
LOSS
ON SETTLEMENT OF LITIGATION
|
4,903,949
|
624.6
|
%
|
740,849
|
137.0
|
%
|
||||||||||
OTHER
INCOME (EXPENSE)
|
(41,097,931
|
)
|
-5234.7
|
%
|
(14,859,951
|
)
|
-2747.1
|
%
|
||||||||
NET
INCOME (LOSS)
|
$
|
(49,640,954
|
)
|
-6322.8
|
%
|
$
|
(27,710,718
|
)
|
-5122.8
|
%
|
Revenue
Revenue
for the nine months ended September 30, 2009 and 2008 was $785,112 and $540,926,
respectively, which represents an increase of $244,186. These amounts
relate primarily to license fees and royalties collected that are being
amortized over the period of the license granted, and are therefore typically
consistent between periods. The increase in revenue during the nine months ended
September 30, 2009, was due to more new licenses being granted as compared to
the nine months ended September 30, 2008.
Of the
revenue recognized during the nine months ended September 30, 2009, we
recognized $147,058 in license fee revenue from Transition Holdings, Inc. On
December 18, 2008, we entered into a license agreement with Transition for
certain of our non-core technology. Under the agreement, Transition agreed to
acquire a license to the technology for a total of $3.5 million in cash. We are
recognizing revenue from this agreement over its 17-year patent useful
life.
Research
and Development Expenses and Grant Reimbursements
Research
and development expenses (“R&D”) for the nine months ended September 30,
2009 and 2008 were $2,275,683 and $8,189,318, respectively, a decrease of
$5,913,635. R&D consists mainly of facility costs, payroll and payroll
related expenses, research supplies and costs incurred in connection with
specific research grants, and for scientific research. The decline in
R&D expenditures during the nine months ended September 30, 2009 as compared
to the same period in 2008 is primarily due to the fact that we closed our
Charlestown, Massachusetts and Alameda, California facilities at the end of May
2008 and have exercised efforts to reduce our operating
expenditures.
Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant category of expense; however, we
also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.
We do not segregate
research and development costs by project because our research is focused
exclusively on human stem cell therapies as a unitary field of study. Although
we have three principal areas of focus for our research, these areas are
completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
53
We expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research, begin
clinical trial activities, and increase our regulatory compliance capabilities.
The amount of these increases is difficult to predict due to the uncertainty
inherent in the timing and extent of progress in our research programs, and
initiation of clinical trials. In addition, the results from our basic research
and pre-clinical trials, as well as the results of trials of similar
therapeutics under development by others, will influence the number, size and
duration of planned and unplanned trials. As our research efforts mature, we
will continue to review the direction of our research based on an assessment of
the value of possible commercial applications emerging from these efforts. Based
on this continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.
We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.
Grant
reimbursements for the nine months ended September 30, 2009 and 2008 were
$136,840 and $105,169, respectively. The Company received one grant during
the nine months ended September 30, 2009 and one grant during the nine months
ended September 30, 2008, both from the National Institutes of
Health.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended September 30, 2009 and
2008 was $1,961,195 and $4,160,601, respectively, a decrease of
$2,199,406. This expense decrease was primarily a result of management’s
efforts to reduce costs and streamline operations during the nine months ended
September 30, 2009 so that we could move closer to achieving profitability.
General and administrative expenses should continue to slightly decrease over
the short term as we continue to streamline our operations and reduce our costs
until we are able to expand.
Loss
on Settlement
Loss on
settlement for the nine months ended September 30, 2009 and 2008 were $4,903,949
and $740,849, respectively. During the nine months ended September
30, 2009, we settled $505,199 in accounts payable through the issuance of
39,380,847 shares of our common stock with a value of $5,299,148. Accordingly,
we recorded a loss on settlement of $4,793,949 for the nine months ended
September 30, 2009. Further, on July 6, 2009, we settled a lawsuit with an
investor whereby we agreed to provide the investor with an additional $110,000
principal, which is to be upon the same terms and conditions as the original
April 2008 debenture. Accordingly, we recognized a loss on settlement in the
amount of $110,000 during the three months ended September 30, 2009 for the
amount of principal that was added to the April 2008 convertible
debenture.
In
September 2008, CEOcast, an investor relations firm, assigned
invoices for services it asserted it rendered to us in the amount of
$82,316.51 to Outboard Investments. In September 2008, Outboard filed
an action against us in the Circuit Court of the Twelfth Judicial Circuit,
Sarasota County, Florida. In the action, Outboard asserted that we
failed to pay the $82,316.51 in principal plus interest due on the CEOcast
invoice. After negations between us and Outboard, in September 2008,
we entered into a settlement agreement with Outboard pursuant to which we agreed
to issue Outboard 16,463,302 shares of our common stock in exchange for
satisfaction of the claim for $82,231.51.
The Court
held a fairness hearing to review the proposed settlement
agreement. After the hearing, the Court issued an order approving the
settlement agreement and finding that, assuming the satisfaction of all the
other applicable securities laws and regulations, the issuance of the shares to
Outboard was exempt from registration under the Securities Act of 1933, as
amended.
Other
than the claim for payment and the settlement agreement, we have not had and do
not have any relationship with Outboard nor have we entered into any other
transactions with them either prior to or after the claim and settlement
agreement.
Other
Income (Loss)
Other
income (loss) for the nine months ended September 30, 2009 and 2008 was
($41,097,931) and ($14,859,951), respectively, representing an increase in the
expense of $26,237,980. The change in other income (loss) in the three months
ended September 30, 2009, compared to that of the earlier period, relates
primarily to adjustments to loss on extinguishment of convertible debentures and
note, change in fair value of derivatives related to the debt financings,
default interest charges on all debt, and amortization of debt issuance costs
and debt discounts.
54
In
connection with the July 29, 2009 consent, amendment and exchange agreement
(mentioned above in the “Other
Income (Loss)” section in our analysis of the three months ended
September 30, 2009 and 2008), during the nine months ended September 30, 2009,
we recognized a loss on extinguishment of convertible debentures of $34,679,545
representing the difference between the fair value of the amended and restated
convertible debentures and the carrying value of the original 2005, 2006, 2007
and 2008 convertible debentures.
In
connection with the August 25, 2009 amendment to the convertible promissory
notes with JMJ Financial, agreement (mentioned above in the “Other Income (Loss)” section
in our analysis of the three months ended September 30, 2009 and 2008), during
the nine months ended September 30, 2009, we recognized a gain on extinguishment
of convertible debentures of $199,418 representing the difference between the
fair value of the amended and restated convertible promissory notes and the
carrying value of the original convertible promissory notes.
During
the nine months ended September 30, 2009, we recognized a loss on modification
of debentures in the amount of $1,796,368. This loss arose from a court order
that we allow an investor to convert its 2007 and 2008 debenture balances at
$0.02 per share. The change in fair value immediately after the conversion price
reduction from immediately before the conversion price reduction gave rise to
the loss on modification.
Interest
income was $2,129 and $8,236 during the nine months ended September 30, 2009 and
2008, respectively. Interest income was lower in the nine months ended September
30, 2009 than in the nine months ended September 30, 2008 due to the lower cash
balances held in interest-bearing deposits during the periods. Interest expense
was $3,890,447 and $26,488,148 for the nine months ended September 30, 2009 and
2008, respectively, which represents a decrease of $22,597,701. The decrease in
interest expense in the nine months ended September 30, 2009, compared to the
earlier period primarily to amortization of debt discounts and deferred
financing costs being recorded during 2008 for all debentures until their
default on August 6, 2008. Therefore, no additional interest expense arose in
2009 from this amortization until after the aforementioned debenture and
promissory note modifications. Interest expense during the nine months ended
September 30, 2009 relates to debenture default interest through the dates of
debenture and promissory note modifications in the amount of $1,311,330, and
$2,408,978 in amortization of debt discounts and deferred debt issuance
costs.
The gain
(loss) on the fair value of derivatives was ($788,680) and $11,989,715, for the
nine months ended September 30, 2009 and 2008, respectively. The
change in our share price contributed most significantly to the change on the
fair value of derivatives during the nine months ended September 30, 2009. In
periods when the share price increases, the derivative securities become more
attractive to exercise or in-the-money, and therefore the value of the
derivative liabilities increases. The opposite is true when the share price
decreases.
Net
Loss
Net loss
for the nine months ended September 30, 2009 and 2008 was $49,640,954 and
$27,710,718, respectively. The change in loss in each period is the result of
loss on extinguishment of convertible debentures and note in 2009, changes to
the fair value of derivatives in 2008 and interest charges related to
convertible debentures in both periods.
Liquidity
and Capital Resources
Cash Flows
The
following table sets forth a summary of our cash flows for the periods indicated
below:
Nine months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
cash used in operating activities
|
$
|
(3,059,608
|
)
|
$
|
(3,772,675
|
)
|
||
Net
cash used in investing activities
|
(7,538
|
)
|
(174,017
|
)
|
||||
Net
cash provided by financing activities
|
3,308,000
|
2,790,122
|
||||||
Net
increase (decrease) in cash and cash equivalents
|
240,854
|
(1,156,570
|
)
|
|||||
Cash
and cash equivalents at the end of the period
|
$
|
1,057,758
|
$
|
9,546
|
Operating
Activities
Our net
cash used in operating activities during the nine months ended September 30,
2009 and 2008 was $3,059,608 and $3,772,675, respectively. Cash used in
operating activities decreased during the current period primarily due to a
decrease in operating expenditures, including reduced expenditures resulting
from the closures in May 2008 of the Alameda, California and Charlestown,
Massachusetts facilities.
55
Cash
Flows from Investing and Financing Activities
Cash used
in investing activities during the nine months ended September 30, 2009 and 2008
was $7,538 and $174,017, respectively. Our cash used in investing activities
during the nine months ended September 30, 2009 was attributed to payment of a
deposit on our leased space in Los Angeles, California as well as a payment for
the purchase of fixed assets for approximately $5,300. Cash provided by
investing activities during the nine months ended September 30, 2008 was
primarily due to purchases of property and equipment. Cash flows provided by
financing activities during the nine months ended September 30, 2009 was
$3,308,000. During the nine months ended September 30, 2009, we received
$2,288,000 from the issuance of Series A-1 convertible preferred stock, and
$1,020,000 from the issuance of convertible promissory notes. During the nine
months ended September 30, 2008, we made payments of $18,650 on notes and leases
and another $3,660 for issuance costs on a note payable. We also received
proceeds of $600,000 from the issuance of a convertible note payable as well as
$2,182,432 from the issuance of notes payable during the nine months ended
September 30, 2008.
We are
financing our operations primarily from the following activities:
·
|
On
December 18, 2008, we entered into a license agreement with an
Ireland-based investor, Transition Holdings Inc. (“Transition”), for
certain of our non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. As of
September 30, 2009, we received the entire $3.5 million in cash under this
agreement.
|
|
·
|
On
March 30, 2009, we entered into a license agreement with CHA under which
we will license our RPE technology, for the treatment of diseases of the
eye, to CHA for development and commercialization exclusively in Korea. We
are eligible to receive up to a total of $1.9 million in fees based upon
the parties achieving certain milestones, including us making an IND
submission to the US FDA to commence clinical trials in humans using the
technology. We received an up-front fee under the license in the amount of
$1,100,000. Under the agreement, CHA will incur all of the cost associated
with the RPA clinical trials in Korea. The agreement is part of the joint
venture between the two companies.
|
|
·
|
On
March 11, 2009, we entered into a $5 million credit facility (“Facility”)
with a life sciences fund. Under the agreement, the proceeds from the
Facility must be used exclusively for us to file an investigational new
drug (“IND”) for our retinal pigment epithelium (“RPE”) program, and will
allow us to complete both Phase I and Phase II studies in humans. An IND
is required to commence clinical trials. Under the terms of the agreement,
we may draw down funds, as needed for clinical development of the RPE
program, from the investor through the issuance of Series A-1 convertible
preferred stock. The preferred stock pays dividends, in kind of preferred
stock, at an annual rate of 10%, matures in four years from the initial
issuance date, and is convertible into common stock at $0.75 per share. On
October 19, 2009, we entered into two letter agreements with Volation Life
Sciences Capital Partners, LLC (“Volation”) (See Note 10), pursuant to
which (i) the Company reduced the conversion price of its outstanding
Series A-1 convertible preferred stock issued to Volation to $.10 per
share resulting in 22,880,000 shares of Common Stock upon conversion, (ii)
issued Volation 2,500,000 shares of its Common Stock at $0.10 per share in
payment of an outstanding commitment fee, and (iii) Volation waived the
delinquency in non-payment of the $250,000 commitment fee
required pursuant to the preferred stock purchase agreement between the
Company and Volation.
|
|
·
|
On
May 13, 2009, the Company entered into another license
agreement with CHA under which the Company will license its proprietary
“single blastomere technology,” which has the potential to generate stable
cell lines, including RPE for the treatment of diseases of the eye, for
development and commercialization exclusively in Korea. We received an
upfront license fee of $300,000.
|
|
·
|
On
July 29, 2009, we entered into a consent, amendment and exchange agreement
with holders of our outstanding convertible debentures and warrants, which
were issued in private placements in 2005, 2006, 2007 and 2008. We agreed
to issue to each debenture holder in exchange for the holder’s debenture
an amended and restated debenture in a principal amount equal to the
principal amount of the holder’s debenture times 1.35 minus any interest
paid thereon. The conversion price under the amended and restated
debentures was reduced to $0.10, subject to certain customary
anti-dilution adjustments. The maturity date under the amended and
restated debentures was extended until December 30, 2010. The amended and
restated debentures bear interest at 12% per annum. Further, we agreed to
issue to each holder in exchange for the holder’s warrants amended and
restated warrants, as well as additional warrants exercisable into
79,076,873 shares of our common stock for a total of warrants exercisable
into 192,172,519 shares of common stock, both warrants containing a
reduced exercise price of $0.10, subject to certain customary
anti-dilution adjustments. The termination date under the amended and
restated warrants was extended until June 30, 2014. Simultaneously with
the signing of this agreement, we and the debenture holders entered into a
standstill and forbearance agreement, whereby the debenture holders agreed
to forbear from exercising their rights and remedies under the original
debentures and transaction documents.
|
|
·
|
During
September 2009, we received $1,020,000 under its convertible promissory
notes with JMJ Financial, originally executed on February 14,
2008.
|
|
·
|
On October
19, 2009, we entered into two letter agreements with Volation Life
Sciences Capital Partners, LLC (“Volation”), pursuant to which
(i) we reduced the conversion price of our outstanding Series A-1
convertible preferred stock issued to Volation to $.10 per share resulting
in 22,880,000 shares of Common Stock upon conversion, (ii) issued Volation
2,500,000 shares of our Common Stock at $0.10 per share in payment of an
outstanding commitment fee, and (iii) Volation waived the delinquency
in non-payment of the $250,000 commitment fee required pursuant
to the preferred stock purchase agreement between us and
Volation.
|
56
·
|
In
connection with an amendment to an agreement between us and JMJ Financial,
on October 1, 2009, we borrowed $1,000,000 and issued a convertible
promissory note for $1,200,000. We shall pay a one-time
interest payment of 10% of the principal of the promissory note which is
due on the maturity date of the promissory note, which is October 1,
2012. The promissory note is convertible into shares of
our common stock at a conversion price of the lesser of (i) $.25 per share
or (ii) eighty percent of the average of the three lowest trade prices in
the 20 trading days prior to the conversion.
|
|
·
|
In
connection with an amendment to an agreement between us and JMJ Financial,
on October 1, 2009, we borrowed $1,000,000 and issued a secured &
collateralized promissory note. We shall pay a one-time interest payment
of 12% of the principal of the promissory note which is due on the
maturity date of the promissory note, which is October 1,
2012.
|
|
·
|
On
November 2, 2009 (“Effective Date”), we entered into a preferred stock
purchase agreement with Optimus Life Sciences Capital Partners, LLC
(“Investor”). 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 (“Tranches”) in the Company’s sole discretion (subject to the
conditions set forth therein), (i) up to 1,000 shares of Series B
Preferred Stock (the “Preferred Shares”) 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 (the “Optimus 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
equal to the closing bid price of the Company’s common stock on the date
the Company provides notice of such Tranche. The Optimus
Warrants were issued on the Effective Date to Optimus CG II Ltd.,
Optimus’s designee, and will vest and become exercisable in replacement of
a five-year warrant to purchase 119,469,027 shares of common stock with an
exercise price per share of $0.113 the Company issued on the Effective
Date (which may only be exercised for such number of shares of common
stock equal in amount to 135% of the cumulative purchase price paid by the
Investor). The business purpose of exchanging the warrants to be issued
with each Tranche for the warrants originally issued on November 2, 2009,
is to enable the holder to have separate instruments for the vested
portion of the warrants, and to allow the parties to more easily track the
warrants that are vested. Rather than being required to track
these potential multiple combinations of numbers, the parties believed
that it would be simpler to adopt the “replacement” warrant
process. The process is comparable to what happens when a
warrant holder exercises only a portion of an existing warrant, or anytime
a holder divides a warrant into two or more separate instruments that
together represent all of the rights embodied in the original
instrument. For these reasons, we do not believe that the
“replacement warrant” should be viewed as a newly issued warrant, but
rather as a replacement issued as a substitute for a portion of the
previously issued warrant that was
surrendered.
|
·
|
On
November 12, 2009, we entered into a subscription agreement (the
“Subscription Agreement”) with the subscribers (the “Subscribers”).
Pursuant to the subscription agreement, we agreed to sell, and the
subscribers agreed to purchase, subject to the terms and conditions
therein, promissory notes in the principal amount of a minimum of
$2,400,000, for a purchase price of a minimum of $2,000,000 (the “Notes”).
The Notes will be convertible into shares of our common stock at a
conversion price of $0.10. The initial closing under the Subscription
Agreement occurred on November 12, 2009, pursuant to which, we sold Notes
in the principal amount of $1,662,000, for a purchase price of $1,385,000,
and issued 11,080,000 Class A Warrants and Additional Investment Rights
for the purchase of (a) up to $3,324,000 principal amount of AIR Notes for
a purchase price of up to $2,770,000 and (b) up to 22,160,000 Class B
Warrants. In addition, on November 13, 2009, we sold Notes in the
principal amount of $441,000 for a purchase price of $367,500 (including
$67,500 paid for in forgiveness of legal fees owed to a subscriber) and
issued Additional Investment Rights for the purchase of (a) up to $882,000
principal amount of Notes for a purchase price of up to $735,000 and (b)
up to 5,880,000 Class B Warrants. The closing that occurred on November
13, 2009 was deemed part of the initial
closing.
|
To a
substantially lesser degree, financing of our operations is provided through
grant funding, payments received under license agreements, and interest earned
on cash and cash equivalents.
With the
exception of 2002, when we sold certain assets of a subsidiary resulting in a
gain for the year, we have incurred substantial net losses each year since
inception as a result of research and development and general and administrative
expenses in support of our operations. We anticipate incurring substantial net
losses in the future.
Our cash
and cash equivalents are limited. In the short term, we will require substantial
additional funding prior to September 30, 2010 in order to maintain our current
level of operations. If we are unable to raise additional funding, we will
be forced to either substantially scale back our business operations or curtail
our business operations entirely.
On a
longer term basis, we have no expectation of generating any meaningful revenues
from our product candidates for a substantial period of time and will rely on
raising funds in capital transactions to finance our research and development
programs. Our future cash requirements will depend on many factors,
including the pace and scope of our research and development programs, the costs
involved in filing, prosecuting and enforcing patents, and other costs
associated with commercializing our potential products. We intend to seek
additional funding primarily through public or private financing transactions,
and, to a lesser degree, new licensing or scientific collaborations, grants from
governmental or other institutions, and other related transactions. If we
are unable to raise additional funds, we will be forced to either scale back or
business efforts or curtail our business activities entirely. We
anticipate that our available cash and expected income will be sufficient to
finance most of our current activities for at least four months from the date we
file these financial statements, although certain of these activities and
related personnel may need to be reduced. We cannot assure you that public
or private financing or grants will be available on acceptable terms, if at
all. Several factors will affect our ability to raise additional funding,
including, but not limited to, the volatility of our Common Stock.
57
Comparison
of the Years Ended December 31, 2008 and 2007
2008
|
2007
|
|||||||||||||||
%
of
|
%
of
|
|||||||||||||||
Amount
|
Revenue
|
Amount
|
Revenue
|
|||||||||||||
Revenue
|
$
|
787,106
|
100.0
|
%
|
$
|
647,349
|
100.0
|
%
|
||||||||
Cost
of Revenue
|
765,769
|
97.3
|
%
|
428,913
|
66.3
|
%
|
||||||||||
Gross
profit
|
21,337
|
2.7
|
%
|
218,436
|
33.7
|
%
|
||||||||||
Research
and development expenses and Grant reimbursements
|
8,530,408
|
1083.8
|
%
|
16,772,470
|
2590.9
|
%
|
||||||||||
General
and administrative expenses
|
5,009,418
|
636.4
|
%
|
6,781,705
|
1047.6
|
%
|
||||||||||
Non-operating
income (expense):
|
(20,385,024
|
)
|
-2589.9
|
%
|
7,437,014
|
1148.8
|
%
|
|||||||||
Net
loss
|
$
|
(33,903,513
|
)
|
-4307.4
|
%
|
$
|
(15,898,725
|
)
|
-2456.0
|
%
|
Revenues
Revenues
relate to license fees and royalties collected that are being amortized over the
period of the license granted, and are therefore typically consistent between
periods. The increase in revenue during the year ended December 31, 2008, was
due to more new licenses being granted as compared to the year ended December
31, 2007. We received approximately $3,500,000 in license fees in 2008, and of
that we recognized just $300,000 in license fee revenues during the year ended
December 31, 2008. We also received an additional $1,500,000 from Transition
Holdings, Inc. as license fee revenue in the first quarter 2009. We expect that
our collaboration efforts with CHA Biotech in the SCRMI joint venture will
provide us valuable opportunities to develop and license our
technologies.
Research
and Development Expenses and Grant Reimbursements
Research
and development expenses (“R&D”) consists mainly of facility costs, payroll
and payroll related expenses, research supplies and costs incurred in connection
with specific research grants, and for scientific research. R&D
expenditures declined from $16,772,470 in 2007 to $8,530,408 for
2008. The decline in R&D expenditures during the 2008 as compared
to 2007 is primarily due to the fact that we closed our Charlestown,
Massachusetts and Alameda, California facilities at the end of May
2008.
58
Our
research and development expenses consist primarily of costs associated with
basic and pre-clinical research exclusively in the field of human stem cell
therapies and regenerative medicine, with focus on development of our
technologies in cellular reprogramming, reduced complexity applications, and
stem cell differentiation. These expenses represent both pre-clinical
development costs and costs associated with non-clinical support activities such
as quality control and regulatory processes. The cost of our research and
development personnel is the most significant category of expense; however, we
also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.
We do not
segregate research and development costs by project because our research is
focused exclusively on human stem cell therapies as a unitary field of study.
Although we have three principal areas of focus for our research, these areas
are completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
We expect
that research and development expenses will increase in the foreseeable future
as we add personnel, expand our pre-clinical research, begin clinical trial
activities, and increase our regulatory compliance capabilities. The amount of
these increases is difficult to predict due to the uncertainty inherent in the
timing and extent of progress in our research programs, and initiation of
clinical trials. In addition, the results from our basic research and
pre-clinical trials, as well as the results of trials of similar therapeutics
under development by others, will influence the number, size and duration of
planned and unplanned trials. As our research efforts mature, we will continue
to review the direction of our research based on an assessment of the value of
possible commercial applications emerging from these efforts. Based on this
continuing review, we expect to establish discrete research programs and
evaluate the cost and potential for cash inflows from commercializing products,
partnering with others in the biotechnology or pharmaceutical industry, or
licensing the technologies associated with these programs to third
parties.
We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human embryonic stem cells as a therapy is an
emerging area of medicine, and it is not known what clinical trials will be
required by the FDA in order to gain marketing approval. Costs to complete could
vary substantially depending upon the projects selected for development, the
number of clinical trials required and the number of patients needed for each
study. It is possible that the completion of these studies could be delayed for
a variety of reasons, including difficulties in enrolling patients, delays in
manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion
of a trial would increase the cost of that trial, which would harm our results
of operations. Due to these uncertainties, we cannot reasonably estimate the
size, nature nor timing of the costs to complete, or the amount or timing of the
net cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we will
receive cash inflows from resulting products.
General
and Administrative Expenses
General
and administrative expenses for 2008 compared to 2007 decreased by $1,772,287 to
$5,009,418 in 2008. This expense decrease was primarily a result of management’s
efforts to reduce costs and streamline operations so that we could move closer
to achieving profitability. General and administrative expenses
should continue to slightly decrease over the short term as we continue to
streamline our operations and reduce our costs until we are able to expand. We
expect that with the successful IND submission of our core technologies and a
rebound of the U.S. and world economy will come additional opportunities for
growth and capital.
Other
Income (Expense)
Other
income (expense), net, for 2008 and 2007 was ($20,385,024) and $7,437,014,
respectively. The change of ($27,822,038) is primarily due to the increase in
interest expense, the decrease in the adjustments to fair value of derivatives
and the loss on settlement of debt.
The
interest expense including late fees was $26,614,761 and $21,023,663, for the
years ended 2008 and 2007, respectively. The increase in interest
expense is due to the additional debt that was issued and the late fees incurred
as we have not issued shares to convert the debt to equity and we do not have
the cash to pay down the notes. Further, the interest expense in 2008 was
greater than in 2007 because we amortized remaining debt discounts on all
outstanding debentures as a result of our default on August 6,
2008.
The gain
on the fair value of derivatives was $13,082,247 and $32,835,057, for the years
ended 2008 and 2007, respectively. The decline in our share price in
2007 and 2008 contributed most significantly to the gain on the fair value of
derivatives. In periods when the share price declines, the derivative securities
become less attractive to exercise or out-of-the-money, and therefore the value
of the derivative liabilities declines.
59
During
the year ended 2008, we had a loss of $5,436,137 related to debt settlement
compared to a gain of $193,862 during the year ended 2007. Between
September 29, 2008 and January 20, 2009, the Company settled certain past due
accounts payable by the issuance of shares of its common stock. In aggregate,
the Company settled $1,108,673 in accounts payable through the issuance of
260,116,283 shares of its common stock. A loss of $4,695,289 was recorded
related to the settlement of this debt during the year ended December 31, 2008
related to the settlement of these payable balances.
Liquidity
and Capital Resources
Cash
Flows
The
following table sets forth a summary of our cash flows for the periods indicated
below:
2008
|
2007
|
|||||||
Net
cash used in operating activities
|
$
|
(2,964,820
|
)
|
$
|
(16,031,464
|
)
|
||
Net
cash used in investing activities
|
(174,514
|
)
|
(139,873
|
)
|
||||
Net
cash provided by financing activities
|
2,790,122
|
8,648,117
|
||||||
Net
decrease in cash and cash equivalents
|
(349,212
|
)
|
(7,523,220
|
)
|
||||
Cash
and cash equivalents at the end of the period
|
$
|
816,904
|
$
|
1,166,116
|
As
reflected in the accompanying financial statements, we have losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and current liabilities exceed current assets. We may thus not be able
to continue as a going concern. Notwithstanding success in raising capital,
there continues to be substantial doubt about the Company’s ability to continue
as a going concern.
In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon our continued operations, which, in turn, is
dependent upon our ability to continue to raise capital and ultimately generate
positive cash flows from operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classifications of liabilities that might be necessary
should we be unable to continue its existence.
Off-Balance
Sheet Arrangements
We do not
maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a
material current or future effect upon our financial condition or results of
operations.
MARKET
PRICE OF AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The
Company’s Common Stock is listed on the Over-the-Counter Bulletin Board under
the symbol “ACTC.” The following table sets forth the range of high
and low bid prices of our common stock for the periods
indicated. These prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
Calendar
Quarter
|
High
Bid
|
Low
Bid
|
||||||
2007
First Quarter
|
$
|
1.19
|
$
|
0.54
|
||||
2007
Second Quarter
|
$
|
1.10
|
$
|
0.32
|
||||
2007
Third Quarter
|
$
|
0.52
|
$
|
0.26
|
||||
2007
Fourth Quarter
|
$
|
0.31
|
$
|
0.15
|
||||
2008
First Quarter
|
$
|
0.25
|
$
|
0.14
|
||||
2008
Second Quarter
|
$
|
0.13
|
$
|
0.06
|
||||
2008
Third Quarter
|
$
|
0.07
|
$
|
0.01
|
||||
2008
Fourth Quarter
|
$
|
0.05
|
$
|
0.02
|
||||
2009
First Quarter
|
$
|
0.29
|
$
|
0.04
|
||||
2009
Second Quarter
|
$
|
0.26
|
$
|
0.10
|
||||
2009
Third Quarter
|
$
|
0.24
|
$
|
0.11
|
||||
2009
Fourth Quarter (as of December 21 , 2009)
|
$
|
0.14
|
$
|
0.09
|
As of
December 21 , 2009, the last sale price reported on
the Over-the-Counter Bulletin Board for the Company’s Common Stock was
approximately $ 0.09 per share.
As of
December 21, 2009, there were approximately 278
shareholders of record of our common stock.
60
Penny
Stock Rules
Our
shares of Common Stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, authorized for quotation from the NASDAQ stock market, issued by a
registered investment company, and excluded from the definition on the basis of
price (at least $5.00 per share), or based on the issuer's net tangible assets
or revenues. In the last case, the issuer's net tangible assets must exceed
$3,000,000 if in continuous operation for at least three years or $5,000,000 if
in operation for less than three years, or the issuer's average revenues for
each of the past three years must exceed $6,000,000.
Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
Dividends
We have
not declared any dividends on our Common Stock to date and we do not anticipate
declaring or paying any cash dividends on our Common Stock in the foreseeable
future.
Securities
Authorized for Issuance Under Equity Compensation Plan
The
following table shows information with respect to each equity compensation plan
under which the Company's common stock is authorized for issuance as of the
fiscal year ended December 31, 2008.
EQUITY
COMPENSATION PLAN INFORMATION
Plan Category
|
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants and
rights
|
Weighted
average
exercise price of
outstanding
options,
warrants and
rights
|
Number of
securities
remaining
available
for issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders
|
23,496,705
|
(1)
|
$
|
0.52
|
16,030,589
|
(2)
|
||||||
Equity
compensation plans not approved by security holders
|
6,156,391
|
0.52
|
-
|
|||||||||
Total
|
29,653,096
|
0.52
|
16,030,589
|
________________________
(1)
|
Awards
for 2,492,000 options have been issued under the Advanced Cell
Technology, Inc. 2004 Stock Option Plan I ("2004 Plan 1"),
1,301,161 options have been issued under the Advanced Cell
Technology, Inc. 2004 Stock Option Plan II ("2004 Plan 2"
and together with the 2004 Plan I, the "2004 ACT Plans"), and
19,703,544 options have been issued under the 2005 Stock
Plan.
|
(2)
|
This
number included 308,000 shares available under the 2004 Plan I and
15,722,589 shares available under the 2005 Stock
Plan.
|
61
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our
directors are elected at the annual meeting of shareholders to hold office until
the annual meeting of shareholders for the ensuing year or until their
successors have been duly elected and qualified. Officers are elected annually
by the Board of Directors and serve at the discretion of the Board. The
directors and executive officers of the Company are as follows:
Name
|
Age
|
Position
|
||
William
M. Caldwell, IV
|
61
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Robert
P. Lanza M.D.
|
52
|
Chief
Scientific Officer
|
||
Alan
C. Shapiro, Ph.D.
|
63
|
Member
of the Board of Directors
|
||
Erkki
Ruoslahti, M.D., Ph.D.
|
68
|
Member
of the Board of Directors
|
||
Gary
Rabin
|
43
|
Member
of the Board of Directors
|
Background
of Executive Officers and Directors
William M. Caldwell, IV has
been our Chief Executive Officer and Chairman of the Board of Directors since
the acquisition of ACT in January 2005. He has a 30-year management career
working with emerging technologies and restructuring distressed corporate
environments. During his career he has served in senior executive positions both
in marketing and finance. He has worked with Booz Allen and Hamilton; the Flying
Tiger Line Inc.; Van Vorst Industries; and Kidder Peabody. He started a
firm specializing in strategy and financial planning which was instrumental in
restructuring over $1.0 billion of debt for over twenty companies and
partnerships. He was a pioneer in the satellite radio auctions as President of
Digital Satellite Broadcasting Corporation; assisted in the financing and became
President and ultimately CEO in the restructuring of CAIS Internet, and has
advised corporations, both public and private, in technology,
telecommunications, retailing, real estate, hospitality, publishing, and
transportation. He received his B.A. degree from the University of Southern
California and was a Multinational Enterprise Fellow at the Wharton School of
Business of the University of Pennsylvania . He serves as a director of Lee
Pharmaceuticals and King Koil Franchising Corp. Mr. Caldwell is not an
officer or director of any other reporting company.
Robert P. Lanza, M.D. has been
our Chief Scientific Officer since October 2007 and has been with the Company
since the acquisition of the ACT in January 2005. Dr. Lanza has over
20 years of research and industrial experience in the areas of tissue
engineering and transplantation medicine. Before joining ACT in 1998, from 1990
to 1998, Dr. Lanza was Director of Transplantation Biology at BioHybrid
Technologies, Inc., where he oversaw that company's xenotransplantation and
bioartificial pancreas programs. He has edited or authored sixteen books,
including Principles of Tissue Engineering (2d ed. co-edited with R. Langer and
J. Vacante), Yearbook of Cell and Tissue Transplantation, One World The
Health & Survival of the Human Species in the Twenty-First Century, and
Xeno: The Promise of Transplanting Animal Organs into Humans (co-authored with
D.K.C. Cooper). Dr. Lanza received his B.A. and M.D. Degrees from the
University of Pennsylvania, where he was both a University Scholar and Benjamin
Franklin Scholar. Dr. Lanza is not an officer or director of any other
reporting company.
Alan C. Shapiro, Ph.D. has
served as director since 2005. He adds more than 30 years' experience in
corporate and international financial management to the Company.
Dr. Shapiro is currently the Ivadelle and Theodore Johnson Professor of
Banking and Finance at the Marshall School of Business, University of Southern
California, where he previously served as the Chairman of the Department of
Finance and Business Economics, Marshall School of Business. Prior to joining
the University of Southern California, Dr. Shapiro taught as an Assistant
Professor at the University of Pennsylvania, Wharton School of Business, and has
been a visiting professor at Yale University, UCLA, the Stockholm School of
Economics, University of British Columbia, and the U.S. Naval Academy.
Dr. Shapiro has published over 50 articles in such academic and
professional journals as the Journal of Finance, Harvard Business Review, and
the Journal of Business, among many others. He frequently serves as an expert
witness in cases involving valuation, economic damages, international finance,
takeovers, and transfer financing through Trident Consulting Group LLC. He
received his B.A. in Mathematics from Rice University, and a Ph.D. in Economics
from Carnegie Mellon University. Dr. Shapiro is a trustee of Pacific
Corporate Group's Private Equity Fund.
Erkki Ruoslahti, M.D., Ph.D.
has served as a director since November 2005. Dr. Ruoslahti joined The
Burnham Institute in 1979 and served as its President from 1989 to 2002.
Dr. Ruoslahti is the recipient of the 2005 Japan Prize for his work in cell
biology. Dr. Ruoslahti's other honors include the Gairdner Prize, and
membership in the U.S. National Academy of Sciences, Institute of Medicine, and
American Academy of Arts and Sciences. He is a Knight of the Order of the White
Rose of Finland. Dr. Ruoslahti earned his M.D. and Ph.D. from the
University of Helsinki in Finland. After postdoctoral training at the California
Institute of Technology, he held various academic appointments in Finland and at
City of Hope National Medical Center in Duarte, California. Dr. Ruoslahti's
research has been the basis of several drugs currently on the market or in
clinical trials. He has been a founder and director of several biotechnology
companies. Dr. Ruoslahti is not an officer or director of any other
reporting company.
62
Gary Rabin has served as a
director since December 2007. Mr. Rabin has a twenty year career in finance
that primarily encompasses investment management and capital raising targeting
small-cap and emerging growth companies. Currently, Mr. Rabin is the Managing
Partner of Vine Holdings, a long/short hedge fund focused on the media and
communications industry. Until July 2007, Mr. Rabin was a Portfolio Manager at
MAC Investment Management, LLC ("MAC"), which he joined in November 2005.
MAC is a long/short fundamental equity hedge fund concentrating on
growth-oriented stocks including technology, communications and healthcare.
Previously, Mr. Rabin was a Managing Director and Portfolio Manager at Marketus
Associates, a long/short hedge fund where he focused on communications,
healthcare services, energy and special situations. Prior to that, Mr. Rabin was
Managing Director and Co-Head of the Media and Telecom Investment Banking Group
at CIBC World Markets ("CIBC"), where he was responsible for all corporate
finance and M&A, financial restructurings, and principal investing
activities (both debt and equity) within the sector. Before joining CIBC,
Mr. Rabin served in an operating capacity at a broadband services company
when he was Chief Strategy Officer of CAIS Internet, Inc. ("CAIS"). At
CAIS, he was responsible for raising over $500 million of financing
commitments in both the public equity markets and from his relationships at
Kohlberg, Kravis Roberts & Co., Qwest Communications, Cisco,
Nortel, 3Com and Microsoft. Mr. Rabin has also started and served as
Managing Director and Head of the Global Telecom Investment Banking Group at ING
Barings Furman Selz, and was a founder of the telecom group at UBS Securities.
Mr. Rabin began his career in finance in 1987, and concentrated on energy,
utilities, and metals until 1993. Throughout his career, Mr. Rabin has been
responsible for building and developing businesses. Mr. Rabin earned an AB
in Economics from the University of Michigan.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table summarizes the annual compensation paid to our named executive
officers for the two years ended December 31, 2008 and 2007:
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
All
Other Compensation
|
Total
|
||||||||||||||||||||
Name and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||
William
M. Caldwell, IV
|
2008
|
350,000
|
-
|
-
|
-
|
995
|
(1)
|
350,995
|
|||||||||||||||||
Chief
Executive Officer and
|
2007
|
348,374
|
150,000
|
-
|
-
|
2,376
|
(1)
|
500,750
|
|||||||||||||||||
Chairman
of the Board of Directors
|
|||||||||||||||||||||||||
Robert
P. Lanza, M.D.,
|
2008
|
290,000
|
35,000
|
-
|
168,237
|
636
|
(1)
|
493,873
|
|||||||||||||||||
Chief
Scientific Officer
|
2007
|
342,805
|
50,000
|
-
|
28,910
|
483
|
(1)
|
422,198
|
|||||||||||||||||
Jonathan
F. Atzen
|
2008
|
78,077
|
-
|
93,669
|
1,598
|
3,001
|
(2)
|
176,345
|
|||||||||||||||||
Sr.
Vice President, General
|
2007
|
338,537
|
60,000
|
-
|
6,391
|
12,360
|
(3)
|
417,288
|
|||||||||||||||||
Counsel
and Secretary (3)
|
Please
see the assumptions relating to the valuation of our stock option awards which
are contained in Notes to our unaudited and audited Financial Statements
included in this prospectus.
(1) This
amount represents a life insurance premium paid by the Company for the named
executive officer.
(2)
Effective as of March 7, 2008, Mr. Atzen resigned from his positions
at the Company and terminated his employment arrangement with the Company. This
amount represents $2,670 in payments made to Mr. Atzen as part of his
$1,000 monthly car allowance through his termination date and $331 in life
insurance premiums paid by the Company for Mr. Atzen.
(3) This
amount represents $12,000 in payments made to Mr. Atzen as part of his
$1,000 monthly car allowance and $360 in life insurance premiums paid by
the Company for Mr. Atzen.
Employment
Agreements
Employment Agreement with William M.
Caldwell, IV. On December 31, 2004, we
entered into an employment agreement with William M. Caldwell, IV, our Chief
Executive Officer. The agreement expired in June 2008. Certain terms of the
agreement are on a month-to-month basis. The agreement provides for annual
compensation in the amount of $200,000, increasing to $250,000 upon the
completion of an equity financing that results in increased financing to us of
at least $10 million, and an annual bonus of $50,000 until
Mr. Caldwell's salary reaches $250,000, after which any bonus shall paid be
at the discretion of the Board of Directors. We have also agreed to reimburse
Mr. Caldwell for certain commuting expenses through June 2005 and
relocation expenses after June 2005. Pursuant to his agreement,
Mr. Caldwell received 1,903,112 options under the 2005 Stock Plan, 25% of
which vested upon grant with the remainder vesting in equal monthly installments
over 30 months. In the event of a change of control of us, 50% of any
unvested options held by Mr. Caldwell will become vested. The agreement
provides for severance in the amount of six months' salary in the event
Mr. Caldwell's employment is terminated without cause and accelerated
vesting of 50% of any unvested options. In the event Mr. Caldwell's
employment is terminated without cause following a change of control, he is
entitled to a lump sum severance payment equal to six months' base salary and
accelerated vesting of 100% of any unvested stock options.
63
Mr. Caldwell's
agreement contains non-solicitation, confidentiality and non-competition
covenants, and a requirement that Mr. Caldwell assign all invention and
intellectual property rights to us. The agreement may be terminated by either
party with or without cause with thirty days' written notice.
Employment Agreement with Robert P.
Lanza, M.D. On October 1, 2009, the Company
entered into an employment agreement (the “Agreement”) with Robert P. Lanza, the
Company’s chief scientific officer since October 2007. Pursuant to the
Agreement, the parties agreed as follows:
·
|
Robert
P. Lanza will continue to serve as the Company’s chief scientific officer,
for a term of two years commencing on October 1, 2009, subject to earlier
termination as provided therein. The term under the Agreement may be
extended by mutual written
agreement.
|
·
|
The
Company will pay Mr. Lanza a base salary of $375,000 per annum, which may
be increased during the term at the sole discretion of the Company’s board
of directors. The Company may also pay Mr. Lanza annual bonuses in the
Company’s sole discretion.
|
·
|
The
Company will recommend to the Company’s board of directors that the
Company issue to Mr. Lanza restricted common stock in an amount equal to
the greater of (a) 20,000,000 shares or (b) 3% of any newly authorized
employee stock pool. Such issuance will be made by no later than the
January 2010 meeting of the board of
directors.
|
·
|
If
Mr. Lanza’s employment under the Agreement is terminated by the Company
without cause (as defined therein), the Company will pay Mr. Lanza
severance of one year’s base
salary.
|
Employment Agreement with Jonathan
F. Atzen. On April 1, 2005, we entered into an employment
agreement with Jonathan F. Atzen, our Senior Vice President and General Counsel.
The agreement provides for annual compensation of $195,000, increasing to
$245,000 upon the completion of an equity financing that results in increased
financing to us of at least $10 million. The agreement provides for an
annual bonus as determined by our Chief Executive Officer and our Board of
Directors. Mr. Atzen received a one-time advance of an annual bonus in the
amount of $40,000. Mr. Atzen was awarded 400,000 stock options under the
2005 Stock Plan, 10% of which vested upon grant with the remainder vesting in
equal monthly installments over 48 months. In the event of a change of
control of us, 50% of any unvested options held by Mr. Atzen will become
vested. In the event Mr. Atzen's employment is terminated without cause by
us or for good reason by Mr. Atzen, he is entitled to a lump sum severance
payment equal to six months' base salary, accelerated vesting of 50% of his
unvested stock options, and reimbursed cost of medical coverage for a period of
six months. In the event Mr. Atzen is terminated without cause following a
change of control, he is entitled to a lump sum severance payment equal to six
months' base salary and accelerated vesting of 50% of any unvested stock
options. Effective March 7, 2008, Mr. Atzen resigned from his
positions with the Company and terminated his employment arrangement with the
Company. In connection with Mr. Atzen's resignation, the Company agreed to
(i) pay Mr. Atzen $48,333.33 as a severance payment, (ii) issue a
fully vested option to purchase an aggregate of 400,000 shares of common stock
of the Company, (iii) issue an aggregate of 936,692 shares of the common
stock of the Company, (iv) provide for the vesting of all outstanding stock
options held by Mr. Atzen and (v) provide Mr. Atzen and his
family with full healthcare and dental coverage for a period of 6 months as
was provided to Mr. Atzen during his employment.
Director
Compensation for Year Ending December 31, 2008
The
following table sets forth compensation paid to our non-employee directors
during the year ended December 31, 2008.
DIRECTOR
COMPENSATION
Fees Earned
|
Stock
|
Option
|
All Other
|
||||||||||||||||||
or Paid in Cash
|
Awards
|
Awards
|
Compensation
|
Total
|
|||||||||||||||||
Name and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||
Alan
C. Shapiro, Ph.D.
|
2008
|
70,000
|
-
|
-
|
-
|
70,000
|
|||||||||||||||
Alan
G. Walton, Ph.D., D.Sc. (1)
|
2008
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Erkki
Ruoslahti, M.D., Ph.D.
|
2008
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Gary
Rabin
|
2008
|
-
|
-
|
-
|
-
|
-
|
(1) Dr.
Walton resigned from the board of directors in May 2008.
64
Director
Compensation Arrangements
Non-executive
members of the Company's Board of Directors receive (1) an initial grant of
100,000 shares of common stock, (2) an annual grant of 100,000 shares of
common stock (this number has been increased to 200,000 for 2008), (3) an
annual retainer of $40,000 (payable quarterly) and (4) a cash payment for
attendance at each board meeting in the amount of $1,500 for in-person meetings
and $1,000 for telephonic meetings. Regarding members of the Company's Audit
Committee, the Chair receives a payment of $1,500 per meeting and the regular
members receive $1,000 per meeting. With respect to the Company's Compensation
Committee and the Company's Nominating and Corporate Governance Committee, the
Chair receives a payment of $1,125 per meeting and the regular members receive
$750 per meeting. Each director is entitled to receive payment of the directors'
fees in the form of shares of the Company's Common Stock valued at 150% of the
actual directors' fees due and payable. The fee structure for the directors was
established and approved by the Compensation Committee and ratified by the full
Board of Directors.
Outstanding
Equity Awards at December 31, 2008
Number of
|
Number of
|
||||||||||||
Securities
|
Securities
|
||||||||||||
Underlying
|
Underlying
|
Option
|
Option
|
||||||||||
Unexercised
|
Unexercised
|
Exercise
|
Expiration
|
||||||||||
Options (#)
|
Options (#)
|
Price
|
Date
|
||||||||||
Name
|
Exercisable
|
Unexercisable
|
($)
|
($)
|
|||||||||
William
M. Caldwell, IV
|
651,161
|
(1)
|
-
|
0.25
|
12/31/2014
|
||||||||
Chief
Executive Officer and
|
1,903,112
|
(1)
|
-
|
0.85
|
1/31/2015
|
||||||||
Chairman
of the Board of Directors
|
|||||||||||||
Robert
P. Lanza, M.D.,
|
750,000
|
(2)
|
-
|
0.05
|
8/12/2014
|
||||||||
Chief
Scientific Officer
|
489,583
|
(3)
|
10,417
|
0.85
|
1/31/2015
|
||||||||
250,000
|
(2)
|
-
|
2.20
|
9/15/2015
|
|||||||||
896,552
|
(3)
|
3,103,448
|
0.21
|
2/7/2018
|
(1)
|
These
options held by Mr. Caldwell vest as follows: 25% vested immediately
upon grant with the remainder vesting in equal monthly installments over
30 months.
|
(2)
|
These
options held by Dr. Lanza vested in full as of December 31,
2006.
|
(3)
|
These
options held by Dr. Lanza vest in equal monthly installments over
48 months.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of November 10, 2009 with
respect to the beneficial ownership of the Company’s outstanding Common Stock by
(i) any holder of more than five (5%) percent; (ii) each of the Company’s
executive officers and directors; and (iii) the Company’s directors and
executive officers as a group. Except as otherwise indicated, each of the
stockholders listed below has sole voting and investment power over the shares
beneficially owned.
Number of
|
||||||||
Shares
|
||||||||
Beneficially
|
||||||||
Name and Address
of Beneficial Owner (1)
|
Owned
|
Percentage
(2)
|
||||||
5%
or Greater Stockholders
|
||||||||
None
|
||||||||
Directors
and Named Executive Officers
|
||||||||
William
M. Caldwell, IV
|
2,801,021
|
(3)
|
*
|
|||||
Robert
P. Lanza, M.D.
|
2,686,135
|
(4)
|
*
|
|||||
Alan
C. Shapiro
|
6,129,432
|
(5)
|
*
|
|||||
Erkki
Ruoslahti
|
120,086
|
(6)
|
*
|
|||||
Gary
Rabin
|
1,862,960
|
(7)
|
*
|
|||||
Directors
and Executive Officers as a Group ( 5 Persons)
|
13,599,634
|
2.18
|
%
|
* Less
than 1%
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is c/o
Advanced Cell Technology, Inc., 381 Plantation Street, Worcester, MA
01605.
|
(2)
|
Applicable
percentage ownership is based on 613,885,468 shares of Common Stock
outstanding as of November 10, 2009, together with securities exercisable
or convertible into shares of Common Stock within 60 days of November 10,
2009 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to
securities. Shares of Common Stock that are currently exercisable or
exercisable within 60 days of November 10, 2009 are deemed to be
beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
|
(3)
|
Includes
2,554,273 shares issuable upon exercise of stock options that are
currently exercisable or exercisable within 60 days of November 10, 2009
that are held directly by Mr.
Caldwell.
|
(4)
|
Includes
2,386,135 shares issuable upon exercise of stock options that are
currently exercisable or exercisable within 60 days of November 10,
2009.
|
(5)
|
Includes
(i) indirect ownership of 1,682,346 shares and 2,565,778 shares issuable
upon conversion of convertible debentures held by The Shapiro Family Trust
and of which Dr. Shapiro may be deemed the beneficial owner, (ii)
1,694,245 shares issuable upon exercise of warrants held by The Shapiro
Family Trust and of which Dr. Shapiro may be deemed the beneficial owner,
and (iii) 100,000 shares issuable upon exercise of stock options that are
currently exercisable or exercisable within 60 days of November 10,
2009.
|
(6)
|
Includes
100,000 shares issuable upon exercise of stock options that are currently
exercisable or exercisable within 60 days of November 10,
2009.
|
(7)
|
Includes
indirect ownership of 1,862,960 shares issuable upon exercise of certain
warrants and upon conversion of the debentures held by PDP I, LLC, which
such number of shares represents Mr. Rabin's proportional interest in the
total number of shares held by PDP I, LLC, based on his 33.33% equity
interest in the entity.
|
65
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND CORPORATE GOVERNANCE
Certain
Relationships and Related Transactions
Except as
described below, none of the following parties has, since January 1, 2008,
had any material interest, direct or indirect, in any transaction with us or in
any presently proposed transaction that has or will materially affect us, other
than as noted in this section:
·
|
Any
of our directors or officers,
|
·
|
Any
person proposed as a nominee for election as a
director,
|
·
|
Any
person who beneficially owns, directly or indirectly, shares carrying more
than 5% of the voting rights attached to our outstanding shares of common
stock,
|
·
|
Any
of our promoters, and
|
·
|
Any
relative or spouse of any of the foregoing persons who has the same house
as such person.
|
All
references to share numbers in this section are on a pre-reverse split
basis.
Private
Equity Financing
Dr.
Shapiro, one of the Company’s directors, may be deemed the beneficial owner of
the securities owned by The Shapiro Family Trust. Refinanced bridge debt
consisted of $70,000 in unsecured convertible notes previously issued and sold
to The Shapiro Family Trust on March 21, 2008. The net outstanding amount of
principal plus interest of the Notes was converted into the debt within the
April 2008 debenture on a dollar-for-dollar basis.
Gary
Rabin, a member of the Board of Directors may be deemed the beneficial owner of
the securities owned by PDPI, LLC, in which he holds a partnership interest.
Refinanced debt consisted of $60,000 in an unsecured note previously issued and
sold to PDPI, LLC, and another $61,000 assumed by PDPI, LLC, and consisted of
amounts owed by a third party which were rolled over into the April 2008
Debenture.
Consulting
Services
Courtney
Burrows, a family member of Mr. Caldwell, performed consulting services in 2008
that consisted of cell biology and technical writing services. For her services
performed, she received approximately 6,300.
Director
Independence
The
Company complies with the standards of "independence" under the Nasdaq
Marketplace Rules. Accordingly, a director will only qualify as an "independent
director" if, in the opinion of our Board of Directors, that person does not
have a material relationship with our company which would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director. A director who is, or at any time during the past three years, was
employed by the Company or by any parent or subsidiary of the Company, shall not
be considered independent. Accordingly, Dr. Alan Shapiro, Dr. Erkki
Ruoslahti and Mr. Gary Rabin meet the definition of "independent director"
under Nasdaq Marketplace Rule 4200(A)(15).
66
ADDITIONAL
INFORMATION
Federal
securities laws require us to file information with the Commission concerning
our business and operations. Accordingly, we file annual, quarterly, and special
reports, and other information with the Commission. You can inspect and copy
this information at the public reference facility maintained by the Commission
at 100 F Street, NE, Washington, D.C. 20549.
You can
get additional information about the operation of the Commission's public
reference facilities by calling the Commission at 1-800-SEC-0330. The Commission
also maintains a web site (http://www.sec.gov) at which you can read or download
our reports and other information.
We have
filed with the Commission a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the common stock being offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus does
not contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to Advanced
Cell Technology, Inc. and the common stock offered hereby, reference is made to
the registration statement, and such exhibits and schedules. A copy of the
registration statement, and the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
at the addresses set forth above, and copies of all or any part of the
registration statement may be obtained from such offices upon payment of the
fees prescribed by the Commission. In addition, the registration statement may
be accessed at the Commission’s web site.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our
directors and officers are indemnified by our bylaws against amounts actually
and necessarily incurred by them in connection with the defense of any action,
suit or proceeding in which they are a party by reason of being or having been
directors or officers of the Company. Our certificate of incorporation provides
that none of our directors or officers shall be personally liable for damages
for breach of any fiduciary duty as a director or officer involving any act or
omission of any such director or officer. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
permitted to such directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by us of expenses incurred or paid by such director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
67
LEGAL
MATTERS
The
validity of the shares offered hereby will be passed upon for us by Sichenzia
Ross Friedman Ference LLP, 61 Broadway, New York, New
York 10006.
EXPERTS
The
consolidated financial statements of Advanced Cell Technology, Inc. as
of December 31, 2008 and 2007 and for the fiscal years then ended,
included in this registration statement on Form S-1, have been audited by
SingerLewak LLP, independent auditors, as stated in their report appearing with
the financial statements. These financial statements are included in reliance
upon the report of SingerLewak LLP given upon their authority as experts in
accounting and auditing.
68
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
1,057,758
|
$
|
816,904
|
||||
Accounts
receivable
|
-
|
261,504
|
||||||
Prepaid
expenses
|
55,466
|
32,476
|
||||||
Deposits
|
2,170
|
-
|
||||||
Deferred
royalty fees, current portion
|
182,198
|
182,198
|
||||||
Total
current assets
|
1,297,592
|
1,293,082
|
||||||
Property
and equipment, net
|
182,055
|
400,008
|
||||||
Investment
in joint venture
|
-
|
225,200
|
||||||
Deferred
royalty fees, less current portion
|
522,840
|
659,488
|
||||||
Deferred
issuance costs, net of amortization of $603,448 and
$8,666,387
|
4,377,553
|
-
|
||||||
TOTAL
ASSETS
|
$
|
6,380,040
|
$
|
2,577,778
|
||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
6,835,891
|
$
|
8,287,786
|
||||
Accrued
expenses
|
1,425,513
|
2,741,591
|
||||||
Accrued
default interest
|
-
|
3,717,384
|
||||||
Deferred
revenue, current portion
|
992,664
|
834,578
|
||||||
Advances
payable, other
|
130,000
|
130,000
|
||||||
2005
Convertible debenture and embedded derivatives, net of discounts of $0 and
$0
|
-
|
85,997
|
||||||
2006
Convertible debenture and embedded derivatives (fair value $0 and
$1,993,354)
|
-
|
1,993,354
|
||||||
2007
Convertible debenture and embedded derivatives (fair value $0 and
$7,706,344)
|
-
|
7,706,344
|
||||||
February
2008 Convertible promissory note and embedded derivatives (fair value $0
and $1,757,470)
|
-
|
1,757,470
|
||||||
April
2008 Convertible debenture and embedded derivatives (fair value $0 and
$4,066,505)
|
-
|
4,066,505
|
||||||
Amended
and restated convertible debentures, current portion, net of discounts of
$1,240,575 and $0, respectively
|
12,849,395
|
-
|
||||||
Amended
and restated convertible promissory note, current portion, net of
discounts of $225,827 and $0, respectively
|
857,861
|
-
|
||||||
Warrant
derivative liabilities
|
25,003,235
|
2,655,849
|
||||||
Embedded
conversion option liabilities
|
17,605,348
|
-
|
||||||
Deferred
joint venture obligations, current portion
|
94,412
|
167,335
|
||||||
Short
term capital leases
|
12,955
|
12,955
|
||||||
Notes
payable, other
|
468,425
|
468,425
|
||||||
Total
current liabilities
|
66,275,699
|
34,625,573
|
||||||
Amended
and restated debentures, less current portion, net of discounts of
$283,465 and $0, respectively
|
2,936,018
|
-
|
||||||
Deferred
joint venture obligations, less current portion
|
11,232
|
63,473
|
||||||
Deferred
revenue, less current portion
|
5,924,518
|
3,817,716
|
||||||
Total
liabilities
|
75,147,467
|
38,506,762
|
||||||
Series
A-1 Convertible Preferred Stock, $0.001 par value; 50,000,000 shares
authorized,
|
||||||||
229
and 0 shares issued and outstanding; aggregate liquidation value, net of
discounts: $2,372,209 and $0, respectively
|
2,050,471
|
-
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
STOCKHOLDERS'
DEFICIT:
|
||||||||
Common
stock, $0.001par value; 1,750,000,000 shares authorized,
|
||||||||
547,964,766
and 429,448,381 issued and outstanding
|
547,964
|
429,448
|
||||||
Additional
paid-in capital
|
68,092,696
|
53,459,172
|
||||||
Accumulated
deficit
|
(139,458,558
|
)
|
(89,817,604
|
)
|
||||
Total
stockholders' deficit
|
(70,817,898
|
)
|
(35,928,984
|
)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
6,380,040
|
$
|
2,577,778
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
1
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue (License fees
and royalties)
|
$
|
248,141
|
$
|
242,195
|
$
|
785,112
|
$
|
540,926
|
||||||||
Cost
of Revenue
|
108,049
|
95,180
|
324,148
|
406,094
|
||||||||||||
Gross
profit
|
140,092
|
147,015
|
460,964
|
134,832
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
700,818
|
1,434,896
|
2,275,683
|
8,189,318
|
||||||||||||
Grant
reimbursements
|
-
|
-
|
(136,840
|
)
|
(105,169
|
)
|
||||||||||
General
and administrative expenses
|
453,561
|
594,663
|
1,961,195
|
4,160,601
|
||||||||||||
Loss
on settlement of litigation
|
110,000
|
740,849
|
4,903,949
|
740,849
|
||||||||||||
Total
operating expenses
|
1,264,379
|
2,770,408
|
9,003,987
|
12,985,599
|
||||||||||||
Loss
from operations
|
(1,124,287
|
)
|
(2,623,393
|
)
|
(8,543,023
|
)
|
(12,850,767
|
)
|
||||||||
Non-operating
income (expense):
|
||||||||||||||||
Interest
income
|
371
|
70
|
2,129
|
8,236
|
||||||||||||
Interest
expense and late fees
|
(2,354,537
|
)
|
(13,740,858
|
)
|
(3,890,447
|
)
|
(26,488,148
|
)
|
||||||||
Charges
related to issuance of 2008 convertible debentures
|
-
|
-
|
-
|
(1,217,342
|
)
|
|||||||||||
Income
related to repricing of 2006 and 2007 convertible debentures and
warrants
|
-
|
-
|
-
|
847,588
|
||||||||||||
Adjustments
to fair value of derivatives
|
36,754,306
|
3,762,539
|
(788,680
|
)
|
11,989,715
|
|||||||||||
Losses
attributable to equity method investment
|
-
|
-
|
(144,438
|
)
|
-
|
|||||||||||
Loss
on extinguishment of convertible debentures and note
|
(34,480,127
|
)
|
-
|
(36,276,495
|
)
|
-
|
||||||||||
Total
non-operating income (expense)
|
(79,987
|
)
|
(9,978,249
|
)
|
(41,097,931
|
)
|
(14,859,951
|
)
|
||||||||
Loss
before income tax
|
(1,204,274
|
)
|
(12,601,642
|
)
|
(49,640,954
|
)
|
(27,710,718
|
)
|
||||||||
Income
tax
|
-
|
-
|
-
|
-
|
||||||||||||
Net
loss
|
$
|
(1,204,274
|
)
|
$
|
(12,601,642
|
)
|
$
|
(49,640,954
|
)
|
$
|
(27,710,718
|
)
|
||||
Weighted
average shares outstanding :
|
||||||||||||||||
Basic
|
501,293,320
|
194,417,191
|
477,394,516
|
148,070,055
|
||||||||||||
Diluted
|
501,293,320
|
194,417,191
|
477,394,516
|
148,070,055
|
||||||||||||
Loss
per share:
|
||||||||||||||||
Basic
|
$
|
(0.00
|
)
|
$
|
(0.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
||||
Diluted
|
$
|
(0.00
|
)
|
$
|
(0.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
2
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Additional
|
Total
|
|||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
Stockholders'
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
Balance
December 31, 2008
|
429,448,381
|
$
|
429,448
|
$
|
53,459,172
|
$
|
(89,817,604
|
)
|
$
|
(35,928,984
|
)
|
|||||||||
Convertible
debentures redemptions
|
12,627,425
|
12,627
|
1,250,115
|
1,262,742
|
||||||||||||||||
Convertible
debenture and promissory note conversions
|
41,608,113
|
41,608
|
3,140,191
|
3,181,799
|
||||||||||||||||
Option
compensation charges
|
277,351
|
277,351
|
||||||||||||||||||
Issuance
of stock in settlement of accounts payable
|
39,380,847
|
39,381
|
5,259,767
|
5,299,148
|
||||||||||||||||
Issuance
of stock in payment of debt issue costs for preferred stock credit
facility
|
24,900,000
|
24,900
|
4,706,100
|
4,731,000
|
||||||||||||||||
Net
loss for the nine months ended September 30, 2009
|
(49,640,954
|
)
|
(49,640,954
|
)
|
||||||||||||||||
Balance
September 30, 2009
|
547,964,766
|
$
|
547,964
|
$
|
68,092,696
|
$
|
(139,458,558
|
)
|
$
|
(70,817,898
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements
F -
3
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Nine Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(49,640,954
|
)
|
$
|
(27,710,718
|
)
|
||
Adjustments
to reconcile net loss to net cash
|
||||||||
used
in operating activities:
|
||||||||
Depreciation
and amortization
|
304,083
|
312,672
|
||||||
Write-off
of uncollectible accounts receivable
|
-
|
25,000
|
||||||
Amortization
of deferred charges
|
136,648
|
528,593
|
||||||
Amortization
of deferred revenue
|
(785,112
|
)
|
(553,355
|
)
|
||||
Redeemable
preferred stock dividend accrual
|
84,209
|
-
|
||||||
Stock
based compensation
|
277,351
|
768,193
|
||||||
Amortization
of deferred issuance costs
|
603,447
|
4,792,087
|
||||||
Amortization
of discounts
|
1,805,531
|
17,458,660
|
||||||
Loss
on extinguishment of convertible debentures and note
|
36,276,495
|
-
|
||||||
Adjustments
to fair value of derivatives
|
788,680
|
(11,989,715
|
)
|
|||||
Charges
related to issuance of February 2008 convertible notes
|
-
|
685,573
|
||||||
Charges
related to issuance of April 2008 convertible notes
|
-
|
531,769
|
||||||
Repricing
of 2006 and 2007 convertible debentures and warrants
|
-
|
(847,588
|
)
|
|||||
Shares
of common stock issued for services
|
-
|
9,496
|
||||||
Warrants
issued for consulting services
|
-
|
155,281
|
||||||
Charges
related to settlement of anti-dilution provision
|
-
|
15,581
|
||||||
Issuance
of note for services received
|
-
|
750,000
|
||||||
Shares
of common stock issued for financing costs
|
-
|
697,834
|
||||||
Non-cash
rent expense
|
-
|
254,231
|
||||||
Forfeiture
of rent deposits
|
-
|
88,504
|
||||||
Loss
on settlement of litigation
|
4,903,949
|
740,849
|
||||||
Loss
attributable to investment in joint venture
|
144,438
|
-
|
||||||
Amortization
of deferred joint venture obligations
|
(125,164
|
)
|
-
|
|||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivable
|
261,504
|
(4,767
|
)
|
|||||
Prepaid
expenses
|
(22,990
|
)
|
(1,626
|
)
|
||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
(2,433,053
|
)
|
5,065,128
|
|||||
Accrued
interest
|
1,311,330
|
3,535,643
|
||||||
Deferred
revenue
|
3,050,000
|
920,000
|
||||||
Net
cash used in operating activities
|
(3,059,608
|
)
|
(3,772,675
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(5,368
|
)
|
(174,017
|
)
|
||||
Payment
of deposits
|
(2,170
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(7,538
|
)
|
(174,017
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from issuance of convertible notes
|
1,020,000
|
2,182,432
|
||||||
Payments
on notes and leases
|
-
|
(18,650
|
)
|
|||||
Proceeds
from notes payable
|
-
|
630,000
|
||||||
Payment
for issuance costs on note payable
|
-
|
(3,660
|
)
|
|||||
Proceeds
from issuance of Series A-1 convertible preferred stock
|
2,288,000
|
-
|
||||||
Net
cash provided by financing activities
|
3,308,000
|
2,790,122
|
||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
240,854
|
(1,156,570
|
)
|
|||||
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
|
816,904
|
1,166,116
|
||||||
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
|
$
|
1,057,758
|
$
|
9,546
|
||||
CASH
PAID FOR:
|
||||||||
Interest
|
$
|
-
|
$
|
2,504
|
||||
Income
taxes
|
$
|
514
|
$
|
-
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
||||||||
Issuance
of 12,627,425 and 59,805,820 shares of common stock in redemption of
convertible debentures
|
$
|
1,262,742
|
$
|
5,307,226
|
||||
Issuance
of 41,608,113 and 38,100,654 shares of common stock in conversion of
convertible debentures
|
$
|
3,181,799
|
$
|
5,915,442
|
||||
Issuance
of 24,900,000 shares of common stock in payment convertible preferred
stock issuance costs
|
$
|
4,731,000
|
$
|
-
|
||||
Issuance
of 39,380,847 shares of common stock in settlement of
litigation
|
$
|
5,299,148
|
$
|
-
|
||||
Issuance
of 70,503 shares of common stock to settle an anti-dilution provision
feature of convertible debenture
|
$
|
-
|
$
|
15,581
|
||||
Issuance
of 1,200,000 shares of common stock upon exercise of employee stock
options
|
$
|
-
|
$
|
60,000
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
4
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
1.
ORGANIZATIONAL MATTERS
Organization
and Nature of Business
Advanced
Cell Technology, Inc. (the “Company”) is a biotechnology company, incorporated
in the state of Delaware, focused on developing and commercializing human
embryonic and adult stem cell technology in the emerging fields of regenerative
medicine. Principal activities to date have included obtaining financing,
securing operating facilities, and conducting research and development. The
Company has no therapeutic products currently available for sale and does not
expect to have any therapeutic products commercially available for sale for a
period of years, if at all. These factors indicate that the Company’s ability to
continue its research and development activities is dependent upon the ability
of management to obtain additional financing as required.
Going
Concern
As
reflected in the accompanying financial statements, the Company has losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and current liabilities exceed current assets. The Company may thus not
be able to continue as a going concern and fund cash requirements for operations
through the next 12 months with current cash reserves. As discussed below, the
Company was able to raise additional cash during the third quarter of
2009. Notwithstanding success in raising capital, there continues to be
substantial doubt about the Company’s ability to continue as a going
concern.
In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon continued operations of the Company, which, in
turn, is dependent upon the Company’s ability to continue to raise capital and
ultimately generate positive cash flows from operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue its
existence.
Management
has taken or plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
·
|
On
March 30, 2009, the Company entered into a license agreement with CHA Bio
& Diostech Co., Ltd . (“CHA”) under which
the Company will license its retinal pigment epithelium (“RPE”)
technology, for the treatment of diseases of the eye, to CHA for
development and commercialization exclusively in Korea. The Company is
eligible to receive up to a total of $1.9 million in fees based upon the
parties achieving certain milestones, including the Company making an IND
submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the
amount of $1,100,000 during the nine months ended September 30, 2009.
Under the agreement, CHA will incur all of the costs associated with the
RPA clinical trials in Korea. The agreement is part of continuing
cooperation and collaboration between the two companies. See Note
3.
|
·
|
On
March 11, 2009, the Company entered into a $5 million credit facility
(“Facility”) with a life sciences fund. Under the terms of the agreement,
the Company may draw down funds from the investor through the issuance of
Series A-1 redeemable convertible preferred stock. The preferred stock
pays dividends, in kind of preferred stock, at an annual rate of 10%,
matures in four years from the initial issuance date, and is convertible
anytime into common stock at $0.75 per share. As of November 3, 2009, the
Company has drawn down approximately $2,288,000 on this facility. See Note
10. On October 19, 2009, the Company entered into two letter agreements
with Volation Life Sciences Capital Partners, LLC (“Volation”) (See Note
10), pursuant to which (i) the Company reduced the conversion price of its
outstanding Series A-1 convertible preferred stock issued to Volation to
$.10 per share resulting in 22,880,000 shares of Common Stock upon
conversion, (ii) issued Volation 2,500,000 shares of its Common Stock at
$0.10 per share in payment of an outstanding commitment fee, and (iii)
Volation waived the delinquency in non-payment of the $250,000
commitment fee required pursuant to the preferred stock purchase agreement
between the Company and Volation.
|
F -
5
·
|
On
May 13, 2009, the Company entered into another license agreement with CHA
under which the Company will license its proprietary “single blastomere
technology,” which has the potential to generate stable cell lines,
including RPE for the treatment of diseases of the eye, for development
and commercialization exclusively in Korea. The Company received an
upfront license fee of $300,000. See Note
3.
|
·
|
On
July 29, 2009, the Company entered into a consent, amendment and exchange
agreement with holders of the Company’s outstanding convertible debentures
and warrants, which were issued in private placements to the 2005, 2006,
2007 and 2008 debentures. The Company agreed to issue to each debenture
holder in exchange for the holder’s debenture an amended and restated
debenture in a principal amount equal to the principal amount of the
holder’s debenture times 1.35 minus any interest paid thereon. The
conversion price under the amended and restated debentures was reduced to
$0.10, subject to certain customary anti-dilution adjustments. The
maturity date under the amended and restated debentures was extended until
December 30, 2010. The amended and restated debentures bear interest at
12% per annum. Further, the Company agreed to issue to each holder in
exchange for the holder’s warrants amended and restated warrants, as well
as additional warrants exercisable into 79,076,873 shares of the Company’s
common stock for a total of warrants exercisable into 192,172,519 shares
of common stock, both warrants containing a reduced exercise price of
$0.10, subject to certain customary anti-dilution adjustments. The
termination date under the amended and restated warrants was extended
until June 30, 2014. Simultaneously with the signing of this agreement,
the Company and the debenture holders entered into a standstill and
forbearance agreement, whereby the debenture holders agreed to forbear
from exercising their rights and remedies under the original debentures
and transaction documents.
|
·
|
During
September 2009, the Company received $1,020,000 under its convertible
promissory notes with JMJ Financial, originally executed on February 14,
2008. See Note 6.
|
|||
·
|
See
Note 16 “Subsequent Events” for additional financing procured through
November 16, 2009.
|
|||
·
|
Management anticipates raising additional future capital from its current convertible debenture holders, or other financing sources, that will be used to fund any capital shortfalls. The terms of any financing will likely be negotiated based upon current market terms for similar financings. No commitments have been received for additional investment and no assurances can be given that this financing will ultimately be completed. | |||
·
|
Management
has focused its scientific operations on product development in order to
accelerate the time to market products which will ultimately generate
revenues. While the amount or timing of such revenues cannot be
determined, management believes that focused development will ultimately
provide a quicker path to revenues, and an increased likelihood of raising
additional financing.
|
|||
·
|
Management will continue to pursue licensing opportunities of the Company’s extensive intellectual property portfolio. |
F -
6
2. 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 FASB
finalized the Codification effective for periods ending on or after September
15, 2009. Prior FASB standards are no longer being issued by the
FASB.
The
accompanying consolidated unaudited financials statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and with instructions
to Form 10-Q pursuant to the rules and regulations of Securities and Exchange
Act of 1934 (the “Exchange Act”) and Article 8-03 if Regulation S-X under the
Exchange Act. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments considered necessary (consisting of normal recurring
adjustments) for a fair presentation are included herein. Operating results for
the three and nine months ended September 30, 2009 are not indicative of the
results that may be expected for the fiscal year ending December 31, 2009. These
unaudited consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31, 2008.
Principles of
Consolidation —The accounts of the Company and its wholly-owned
subsidiary Mytogen, Inc. (“Mytogen”) are included in the accompanying
consolidated financial statements. All intercompany balances and transactions
were eliminated in consolidation.
Segment
Reporting —FASB 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 accounting principles generally accepted in the United States
and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Specifically, the Company’s management has estimated
variables used to calculate the Black-Scholes option pricing model used to value
derivative instruments as discussed below under “Fair Value Measurements”. In
addition, 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 and its accounts receivable allowance. Actual results could differ from
those estimates.
Reclassifications
—Certain prior year financial statement balances have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on the recorded net loss.
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 September 30, 2009 and December 31, 2008, the
Company had deposits in excess of federally-insured limits totaling $589,077 and
$655,074, respectively.
F -
7
Accounts
Receivable —The Company periodically assesses its accounts receivable for
collectability on a specific identification basis. Past due status on accounts
receivable is based on contractual terms. 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
account receivable against the allowance it has already created. The Company
does not require collateral for its trade accounts receivable.
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
|
Equity Method
Investment — The Company follows FASB 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 Issuance
Costs —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. The weighted average amortization period for deferred debt
issuance costs is 48 months.
Intangible and
Long-Lived Assets — The Company follows FASB 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 September 30, 2009, the Company had not experienced impairment losses on
its long-lived assets.
Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
On
January 1, 2008, the Company 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:
F -
8
·
|
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 FASB ASC 480, “Distinguishing Liabilities From
Equity” and FASB 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’s warrant derivative liabilities are carried at fair value totaling
$25,003,235 and $2,655,849, as of September 30, 2009 and December 31, 2008,
respectively. The Company’s embedded conversion option liabilities
are carried at fair value totaling $17,605,348 and $1,842,976 as of September
30, 2009 and December 31, 2008, respectively. The Company used Level
2 inputs for its valuation methodology for the warrant derivative liabilities
and embedded conversion option liabilities as their fair values were determined
by using the Black-Scholes option pricing model based on various assumptions.
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.
At
September 30, 2009, the Company identified the following assets and liabilities
that are required to be presented on the balance sheet at fair
value:
Fair Value Measurements at
|
||||||||||||||||
|
Fair Value
|
September 30, 2009
|
||||||||||||||
|
As of
|
Using Fair Value Hierarchy
|
||||||||||||||
Derivative Liabilities
|
September 30, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
Warrant
derivative liabilities
|
$
|
25,003,235
|
$
|
-
|
25,003,235
|
-
|
||||||||||
Embedded
conversion option liabilities
|
17,605,348
|
-
|
17,605,348
|
-
|
||||||||||||
$
|
42,608,583
|
$
|
-
|
42,608,583
|
-
|
For the
three months ended September 30, 2009 and 2008, the Company recognized a gain of
$36,754,306 and $3,762,539, respectively, for the changes in the valuation of
the aforementioned liabilities. For the nine months ended September 30, 2009 and
2008, the Company recognized a gain (loss) of ($788,680) and $11,989,715,
respectively, for the changes in the valuation of the aforementioned
liabilities.
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with FASB ASC 815.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” now known as ASC Topic 825-10 “Financial Instruments.” ASC
Topic 825-10 permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. FASB ASC
825-10 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company adopted FASB ASC 825-10 on January
1, 2008. The Company chose not to elect the option to measure the fair value of
eligible financial assets and liabilities.
F -
9
Revenue
Recognition — The Company’s revenues are 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.
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 —Effective January 1, 2006, the Company adopted the
fair value recognition provisions of FASB ASC 718 “Compensation-Stock
Compensation,” using the modified-prospective transition method. Under
this method, stock-based compensation expense is recognized in the consolidated
financial statements for stock options granted, modified or settled after the
adoption date. In accordance with FASB ASC 718, the unamortized portion of
options granted prior to the adoption date is recognized into earnings after
adoption. Results for prior periods have not been restated, as provided for
under the modified-prospective method.
Under
FASB ASC 718, stock-based compensation expense recognized is based on the value
of the portion of share-based payment awards that are ultimately expected to
vest during the period. Based on this, our stock-based compensation is reduced
for estimated forfeitures at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. No options were granted during the nine
months ended September 30, 2009.
Assumptions
used in the Black-Scholes models are based upon the following data: (1) The
expected life of the option, estimated by considering the contractual term of
the option, the vesting period of the option, the employees’ expected exercise
behavior and the post-vesting employee turnover rate. (2) The expected
stock price volatility of the underlying shares over the expected term of the
option, based upon historical share price data. (3) The risk free interest
rate, based on published U.S. Treasury Department interest rates for the
expected terms of the underlying options. (4) Expected dividends, based on
historical dividend data and expected future dividend activity. (5) The
expected forfeiture rate, based on historical forfeiture activity and
assumptions regarding future forfeitures based on the composition of current
grantees.
In
accordance with FASB ASC 718, the benefits of tax deductions in excess of the
compensation cost recognized for options exercised during the period are
classified as financing cash inflows rather than operating cash
inflows.
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.
F -
10
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
accompanying 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
FASB 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
September 30, 2009 and 2008, approximately 406,476,000 and 222,302,000
potentially dilutive shares, respectively, were excluded from the shares used to
calculate diluted earnings per share as their inclusion would be
anti-dilutive.
Concentrations
and Other Risks —Currently, the Company’s revenues and accounts
receivable are concentrated on a small number of customers. The following table
shows the Company’s concentrations of its revenue for those customers comprising
greater than 10% of total license revenue for the three and nine months ended
September 30, 2009 and 2008.
3
Months Ended
|
9
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Genzyme
Transgenics Corporation
|
13%
|
13%
|
12%
|
18%
|
||||||||||||
Exeter
Life Sciences, Inc.
|
12%
|
13%
|
12%
|
17%
|
||||||||||||
Start
Licensing, Inc.
|
10%
|
10%
|
10%
|
14%
|
||||||||||||
Terumo
Corporation
|
**
|
31%
|
13%
|
23%
|
||||||||||||
International
Stem Cell Corporation
|
15%
|
15%
|
*
|
*
|
||||||||||||
Transition
Holdings, Inc.
|
21%
|
**
|
19%
|
**
|
||||||||||||
CHA
Biotech Co., Ltd.
|
11%
|
**
|
*
|
**
|
*License
revenue earned during the period was less than 10% of total license
revenue.
**No
license revenue earned from this customer during the period.
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.
Acts of God could also adversely affect the Company’s business.
F -
11
Recent
Accounting Pronouncements
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”) codified in FASB ASC 855-10-05, which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. FASB ASC 855-10-05 also requires entities to disclose
the date through which subsequent events were evaluated as well as the rationale
for why that date was selected. FASB ASC 855-10-05 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, the Company adopted
this pronouncement during the second quarter of 2009. FASB ASC 855-10-05
requires that public entities evaluate subsequent events through the date that
the financial statements are issued.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”),
codified as FASB ASC 860, which requires entities to provide more information
regarding sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. FASB ASC 860 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. FASB ASC 860 is effective
for fiscal years beginning after November 15, 2009. The adoption of FASB ASC 860
did not have an impact on the Company’s financial condition, results of
operations or cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”), codified as FASB ASC 810-10, which modifies how
a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. FASB ASC
810-10 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. FASB ASC 810-10 requires
an ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. FASB ASC 810-10 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. FASB ASC 810-10 is effective
for fiscal years beginning after November 15, 2009. The adoption of FASB ASC
810-10 did not have an impact on the Company’s financial condition, results of
operations or cash flows.
In June
2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles,
which establishes the FASB Accounting Standards Codification as the sole source
of authoritative generally accepted accounting principles. Pursuant to the
provisions of FASB ASC 105, the Company has updated references to GAAP in its
financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC 105 did not impact the Company’s financial position or
results of operations.
3. LICENSE
REVENUE
In
connection with the joint venture agreement discussed in Note 4, on December 1,
2008, the Company entered into a license agreement with CHA Bio & Diostech
Co., Ltd., a leading Korean-based biotechnology company focused on the
development of stem cell technologies, for the exclusive, worldwide license to
the Hemangioblast Program. Under the agreement, CHA agreed to acquire the
Company’s core technology for an up-front payment of $500,000 in cash. The
Company received $250,000 in December 2008 and the remaining $250,000 in January
2009. The Company has recorded $7,353 and $22,059 in license fee revenue for the
three and nine months ended September 30, 2009, respectively, in its
accompanying consolidated statements of operations, and the remainder of the
license fee has been accrued in deferred revenue at September 30, 2009. The
Company is recognizing revenue from this agreement over its 17-year patent
useful life.
On
December 18, 2008, the Company entered into a license agreement with Transition
for certain of its non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. The Company
received $2,000,000 during December 2008 and the remaining $1,500,000 during the
nine months ended September 30, 2009. The Company expects to apply the proceeds
towards its retinal epithelium (“RPE”) cells program. The Company has recorded
$51,470 and $147,058 in license fee revenue for the three and nine months ended
September 30, 2009 in its accompanying consolidated statements of operations,
and the remainder of the license fee has been accrued in deferred revenue at
September 30, 2009. The Company is recognizing revenue from this agreement over
its 17-year patent useful life.
F -
12
On March
30, 2009, the Company entered into a second license agreement with CHA under
which the Company will license its RPE technology, for the treatment of diseases
of the eye, to CHA for development and commercialization exclusively in Korea.
The Company is eligible to receive up to a total of $1.9 million in fees based
upon the parties achieving certain milestones, including the Company making an
IND submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the amount
of $1,100,000 during the second quarter of 2009. Under the agreement, CHA will
incur all of the costs associated with the RPA clinical trials in Korea. The
Company has recorded $16,176 and $32,353 in license fee revenue for the three
and nine months ended September 30, 2009, respectively, in its accompanying
consolidated statements of operations, and the remainder of the license fee has
been accrued in deferred revenue at September 30, 2009. The Company is
recognizing revenue from this agreement over its 17-year patent useful
life.
On May
13, 2009, the Company entered into a third license agreement with CHA under
which the Company will license its proprietary “single blastomere technology,”
which has the potential to generate stable cell lines, including RPE for the
treatment of diseases of the eye, for development and commercialization
exclusively in Korea. The Company received an upfront license fee of $300,000 on
May 8, 2009. The Company has recorded $4,412 and $5,882 in license fee revenue
for the three and nine months ended September 30, 2009, respectively, in its
accompanying consolidated statements of operations, and the remainder of the
license fee has been accrued in deferred revenue at September 30, 2009. The
Company is recognizing revenue from this agreement over its 17-year patent
useful life.
4. INVESTMENT
IN JOINT VENTURE
On
December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. 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 67% interest, CHA has agreed to
contribute $150,000 cash and to fund all operational costs in order to conduct
the hemangioblast program.
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 has recorded $7,353 and $22,059 in
license fee revenue for the three and nine months ended September 30, 2009 in
its accompanying consolidated statements of operations, and the balance of
unamortized license fee of $476,716 has been accrued in deferred revenue in the
accompanying consolidated balance sheet at September 30, 2009.
FASB ASC
323 “Investments-Equity Method
and Joint Ventures” requires that the difference between the cost of an
investment and the amount of underlying equity in net assets of an investee
should be accounted for as if the investee were a consolidated subsidiary. The
Company has calculated the difference between the cost of the investment and the
amount of underlying equity in net assets of the joint venture to be $196,130,
based on the Company’s initial cost basis in the investment of $246,130, less
its 33.3% of the initial equity in net assets of the joint venture of
$50,000. The Company will amortize the $196,130 over the term of the
shorter of the equipment usage or lease term (through April 2010, or 17 months
from December 1, 2008). The amortization will be applied against the value of
the Company’s investment. Amortization expense for the three and nine months
ending September 30, 2009 was $0 and $80,762.
F -
13
The
following table is a summary of key financial data for the joint venture as of
and for the nine months ended September 30, 2009:
Current
assets
|
$
|
152,902
|
||
Noncurrent
assets
|
$
|
509,310
|
||
Current
liabilities
|
$
|
296,762
|
||
Noncurrent
liabilities
|
$
|
494,990
|
||
Net
revenue
|
$
|
20,082
|
||
Net
loss
|
$
|
(1,028,792
|
)
|
The
following table is a summary of the activity from December 31, 2008 to September
30, 2009 in the Company’s investment in the joint venture:
Balance,
December 31, 2008
|
$
|
225,200
|
||
Losses
attributable to investment
|
(144,438
|
)
|
||
Amortization
of premium
|
(80,762
|
)
|
||
Balance,
September 30, 2009
|
$
|
-
|
5. AMENDED
AND RESTATED CONVERTIBLE DEBENTURES
On July
29, 2009, the Company entered into a consent, amendment and exchange agreement
(the “Consent and Amendment”) with holders (the “Holders”) of the Company’s
outstanding convertible debentures and warrants to purchase shares of the
Company’s common stock (the “Warrants”), which were issued in private placements
to the 2005, 2006, 2007 and 2008 debentures.
Amendment
and Forbearance to 2005, 2006, 2007 and 2008 Debentures
Pursuant
to the Consent and Amendment, the Company agreed to issue to each Holder in
exchange for such Holder’s Debenture an amended and restated Debenture (the
“Amended and Restated Debentures”) in a principal amount equal to the principal
amount of such Holder’s Debenture times 1.35 minus any interest paid thereon.
The conversion price under the Amended and Restated Debentures was reduced to
$0.10, subject to further adjustment as provided therein (including for stock
splits, stock dividends, and certain subsequent equity sales). The maturity date
under the Amended and Restated Debentures was extended until December 31, 2010.
The Amended and Restated Debentures bear interest at the rate of 12% per annum,
which shall accrete to, and increase the principal amount payable upon maturity.
The Amended and Restated Debentures will amortize on September 25, 2009 and the
first day of each month thereafter until maturity at a rate of 6.25% of the
outstanding principal amount per month, valued at the lesser of the then
conversion price and 90% of the average volume weighted average price for the
ten prior trading days. The Company agreed to issue to each holder in exchange
for the holder’s warrants and amended and restated warrants (the “Amended and
Restated Warrants”), as well as additional warrants exercisable into 79,076,873
shares of the Company’s common stock for a total of warrants exercisable into
192,172,519 shares of common stock, both warrants containing a reduced exercise
price of $0.10, subject to certain customary anti-dilution adjustments
(including for stock splits, stock dividends, and certain subsequent equity
sales). The termination date under the Amended and Restated Warrants was
extended until June 30, 2014. Each Holder agreed not to convert more than 20% of
such Holder’s outstanding principal amount of Amended and Restated Debenture in
any month during the period from September 1, 2009 through January 31, 2010,
provided, however, that this limitation will terminate if (i)(a) the volume
weighted average price of the Company’s common stock for each of 5 consecutive
trading days is greater than $0.15 per share, and (b) the trading volume on such
days exceeds 7,500,000 shares per trading day, or (ii)(a) the volume weighted
average price for any one trading day is greater than $0.20 per share and (b)
the trading volume on such day exceeds 10,000,000 shares. The Company agreed to
amend its articles of incorporation to increase the number of authorized shares
of Common Stock (the “Amendment”). The Company agreed to increase the number of
shares available for issuance under the Company’s 2005 Stock Incentive Plan to
129,000,000 shares. The Holders agreed to waive any event of default under the
Debentures resulting solely from (i) any adjustment to the conversion price of
the Debenture and exercise price of the Warrants that would result from the
reduction of the conversion price of certain securities of the Company pursuant
to the Stipulation of Settlement, dated March 11, 2009, between the Company and
Alpha Capital, and (ii) any failure by the Company to reserve such number of
authorized but unissued shares of common stock issuable upon conversion of the
Debentures and exercise of the Warrants.
F -
14
Simultaneously
with the execution of Consent and Amendment, and as a condition of the Consent
and Amendment, the Company and the Holders entered into a Standstill and
Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance
Agreement, the Company acknowledged certain defaults that have occurred under
the Debentures and documents executed in connection therewith (the “Transaction
Documents”). The Holders agreed to forbear from exercising their rights and
remedies under the Debentures and the Transaction Documents, and the Company
provided a general release in favor of the Holders. The obligation of the
Holders to forbear from exercising their rights and remedies under the
Debentures and the Transaction Documents will terminate on the earliest of (i)
the date, if any, on which a petition for relief under the date, if any, on
which a petition for relief under the United States Bankruptcy Code or any
similar state or Canadian law is filed by or against the Company or any of its
subsidiaries or (ii) the date the Forbearance Agreement is otherwise terminated
or expires, it being understood that the Holders holding 67% of the then
outstanding principal amount of the Debentures have the right to terminate the
Forbearance Agreement on 3 business days’ prior notice to the
Company.
Other
than as amended in the Transaction Documents, the rights and obligations of the
holders and the Company with respect to the amended and restated debentures are
identical in all respects to the rights and obligations of the holders and the
Company with respect to the debentures and the underlying shares issued and
issuable pursuant to each purchase agreement.
The
original 2005, 2006, 2007 and 2008 debenture agreements entered into provides
that the Company will pay certain cash amounts as liquidated damages in the
event that the Company does not maintain an effective registration statement, or
if the Company fails to timely execute stock trading activity. Additionally,
penalties will be incurred by the Company in the event of certain default
conditions.
As long
as any portion of the amended and restated debentures remain outstanding, unless
the holders of at least 67% in principal amount of the then outstanding
debentures otherwise give prior written consent, the Company is not permitted to
(a) guarantee or borrow any indebtedness, (b) enter into any liens, (c) amend
its charter documents in any manner that materially and adversely affects any
rights of the holders, (d) acquire more than a de minimis number of shares of
its common stock equivalents other than as to conversion shares of warrant
shares as permitted or required and repurchases of common stock or common stock
equivalents of departing officers and directors of the Company, provided that
such purchases do not exceed certain specified amounts, (e) repay any
indebtedness, other than the debentures already issued on a pro-rata basis,
other than regularly scheduled principal payments as such terms are in effect
under this debenture, (f) pay cash dividends or distributions on any equity
securities of the Company, (g) enter into any material transaction with any
affiliate of the Company, unless such transaction is made on an arm’s-length
basis, or (h) enter into any agreement with respect to any of the
above.
The
Company has considered the impact of FASB ASC 470-50 “Debt-Modifications and
Extinguishments” on the accounting treatment of the change in conversion
price of the 2005, 2006, 2007 and 2008 convertible debentures. FASB ASC 470-50
states that a transaction resulting in a significant change in the nature of a
debt instrument should be accounted for as an extinguishment of debt. The
difference between the reacquisition price and the net carrying amount of the
extinguished debt should be recognized currently in income of the period of
extinguishment. The Company has concluded that the issuance of the amended and
restated debentures constitutes a substantial modification. During the three
months ended September 30, 2009, the Company recognized a loss on extinguishment
of convertible debentures of $34,679,545 representing the difference between the
fair value of the amended and restated convertible debentures and the carrying
value of the original 2005, 2006, 2007 and 2008 convertible debentures. The fair
value of the amended and restated convertible debentures at July 29, 2009 was
$18,192,813, net of debt discounts of $2,011,065 that will be amortized over the
remaining life of the amended and restated convertible debentures. The following
table summarizes the convertible debentures:
F -
15
December
31, 2008
|
||||
2005
Convertible debenture and embedded derivatives, net of discounts of
$0
|
$
|
85,997
|
||
2006
Convertible debenture and embedded derivatives, fair value
|
1,993,354
|
|||
2007
Convertible debenture and embedded derivatives, fair value
|
7,706,344
|
|||
April
2008 Convertible debenture and embedded derivatives
|
4,066,505
|
|||
Fair
value 2005, 2006, 2007 and 2008 convertible debentures
|
$
|
13,852,200
|
||
Nine
months ended September 30, 2009
|
||||
Convertible
debenture conversions
|
$
|
(3,376,229
|
)
|
|
Change
in fair value of embedded derivatives through July 29,
2009
|
6,823,641
|
|||
Adjustment
to bifurcate embedded derivatives upon adoption of FASB ASC
815
|
||||
on
July 29, 2009
|
(7,629,147
|
)
|
||
Addition
to principal to Alpha Capital
|
110,000
|
|||
Accrued
default interest on 2005, 2006, 2007 and 2008 convertible
debentures,
|
||||
December
31, 2008
|
3,522,964
|
|||
Additional
accrual of default interest through July 29, 2009
|
1,227,181
|
|||
Loss
on extinguishment on July 29, 2009
|
767,778
|
|||
Amortization
of debt discounts
|
487,025
|
|||
September
30, 2009 Balance, Amended and restated convertible
debentures
|
$
|
15,785,413
|
||
Less:
current portion
|
(12,849,395
|
)
|
||
Non-current
portion
|
$
|
2,936,018
|
Interest
expense from amortization of debt discounts for the three and nine months ended
September 30, 2009 was $487,025 and $0, respectively. Default interest expense
recognized for the three and nine months ended September 30, 2009 was $181,840
and $1,227,181, respectively.
In
connection with the amended and restated convertible debentures, the Company
issued an additional 79,076,873 warrants to all holders. The warrants are in
addition to the 113,095,646 warrants held by the holders just before the
issuance of the amended and restated convertible debentures, for a total of
192,172,519 issued to the holders of the amended and restated convertible
debentures. The terms of the amended and restated warrants include a reduced
exercise price of $0.10, subject to certain customary anti-dilution adjustments.
The termination date under the amended and restated warrants was extended until
June 30, 2014. The fair value of the 113,095,646 warrants immediately prior to
the July 29, 2009 modification was estimated at $14,396,487 representing a
decrease in the fair value of the liability of $9,521,469 during the three
months ended September 30, 2009, which was recorded through the results of
operations as an adjustment to fair value of derivatives. The assumptions used
in the Black-Scholes option pricing model at July 29, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.50% - 1.72%, and (4) expected life of 1.09 – 3.68 years. The July 29,
2009 fair value of the 192,172,519 warrants was estimated at $29,956,246 using
the Black-Scholes pricing model. The total of 192,172,519 warrants were again
valued at $24,068,048 at September 30, 2009 at fair value using the
Black-Scholes model, representing a decrease in the fair value of the liability
of $14,397,252 during the three months ended September 30, 2009, which was
recorded through the results of operations as an adjustment to fair value of
derivatives. The assumptions used in the Black-Scholes option pricing model at
September 30, 2009 are as follows: (1) dividend yield of 0%; (2) expected
volatility of 185%, (3) risk-free interest rate of 2.31%, and (4) expected life
of 4.75 years.
F -
16
The
Company has complied with the provisions of FASB ASC 815 “Derivatives and Hedging”,
and recorded the fair value of the embedded conversion option liability
associated with the amended and restated convertible debentures. The fair value
of the embedded conversion option was valued using the Black-Scholes model,
resulting in a fair value of $7,629,146 immediately prior to the July 29, 2009
modification. As of July 29, 2009, the convertible debentures were convertible
at the option of the holders into a total of 101,213,921 shares, subject to
anti-dilution and other customary adjustments. The decrease in fair value of
$8,550,020 was recorded through the results of operations as an adjustment to
fair value of derivatives during the three months ended September 30, 2009. The
assumptions used in the Black-Scholes option pricing model at July 29, 2009 are
as follows: (1) dividend yield of 0%; (2) expected volatility of 190%, (3)
risk-free interest rate of 0.14% – 0.50%, and (4) expected life of 0.01 – 1.09
years. As of September 30, 2009, the convertible debentures were convertible at
the option of the holders into a total of 173,094,530 shares, subject to
anti-dilution and other customary adjustments. The fair value of the embedded
conversion option was $16,609,866 at September 30, 2009, representing a decrease
in the fair value of the liability of $19,131,327 during the three months ended
September 30, 2009. The assumptions used in the Black-Scholes option pricing
model at September 30, 2009 are as follows: (1) dividend yield of 0%; (2)
expected volatility of 185%, (3) risk-free interest rate of 0.40%, and (4)
expected life of 1.25 years. Additionally, $1,796,368 was recorded in loss on
extinguishment of the 2008 convertible debenture during the nine months ended
September 30, 2009, prior to the July 29, 2009 modification, as a result of a
settlement with a debenture holder in February 2009. See Note 12.
6. AMENDED
CONVERTIBLE PROMISSORY NOTES
On August
25, 2009, the Company entered into an amendment to its convertible promissory
notes with JMJ Financial, originally executed on February 14, 2008. The note has
been amended as follows:
·
|
Note A: The original issue discount has
been increased by 10%, or $60,000, such that the new principal amount is
$660,000.
|
|
·
|
Note B: The original issue discount has
been increased by 10%, or $120,000, such that the new principal amount is
$1,320,000.
|
All other
terms and conditions of the original convertible promissory note remain in full
force and effect.
Terms
of the Original Note
The
Company issued and sold a $600,000 unsecured convertible note dated as of
February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of
$500,000 (reflecting a 16.66% original issue discount) in a private placement.
Note A bears interest at the rate of 12% per annum, and is due by February 15,
2010. At any time after the 180th day following the effective date of Note A,
the holder may at its election convert all or part of Note A plus accrued
interest into shares of the Company's common stock at the conversion rate of the
lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest
trade prices in the 20 trading days prior to the conversion. Pursuant to the Use
of Proceeds Agreement entered into in connection with the issuance of Note A,
the Company is required to use the proceeds from Note A solely for research and
development dedicated to adult stem cell research.
Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, the Company issued and sold an unsecured convertible note (“Note B”) to
JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may
be paid towards the balance of the JMJ Note. Note B bears interest at the rate
of 10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of the Company’s common stock at the
conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average
of the three lowest trade prices in the 20 trading days prior to the conversion.
In connection with the issuance of Note B, the Company entered into a Collateral
and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant
to which the Company granted JMJ Financial a security interest in certain of its
assets securing the JMJ Note. As of September 30, 2009, the Company had drawn
down and received the following amounts under Note B:
F -
17
·
|
On
March 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a
16.66% original issue discount).
|
·
|
On
June 17, 2008 — $60,000 for a net purchase price of $50,000 (reflecting a
16.66% original issue discount).
|
·
|
On
September 8, 2009 — $316,964 for a net purchase price of $250,000
(reflecting a 21.13% original issue
discount).
|
·
|
On
September 30, 2009 — $976,250 for a net purchase price of $770,000
(reflecting a 21.13% original issue
discount).
|
As long
as any portion of this Notes remain outstanding, unless the holders of at least
67% in principal amount of the then outstanding debentures otherwise give prior
written consent, the Company is not permitted to (a) guarantee or borrow any
indebtedness, (b) enter into any liens, (c) amend its charter documents in any
manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) repay any indebtedness, other than the
debentures already issued on a pro-rata basis, other than regularly scheduled
principal payments as such terms are in effect under this debenture, (f) pay
cash dividends or distributions on any equity securities of the Company, (g)
enter into any material transaction with any affiliate of the Company, unless
such transaction is made on an arm’s-length basis, or (h) enter into any
agreement with respect to any of the above.
The Note
agreement does not limit the number of shares that the Company could be required
to issue. The convertible debenture is convertible at the option of the holders
into a total of 10,420,077 shares of common stock at a conversion price of $0.10
per share at September 30, 2009, subject to anti-dilution and other customary
adjustments.
Impact
of Modification
The
Company has considered the impact of FASB ASC 470-50 “Debt-Modifications and
Extinguishments” on the accounting treatment of the change in conversion
price of the Notes. FASB ASC 470-50 states that a transaction resulting in a
significant change in the nature of a debt instrument should be accounted for as
an extinguishment of debt. The difference between the reacquisition price and
the net carrying amount of the extinguished debt should be recognized currently
in income of the period of extinguishment. The Company has concluded that the
issuance of the amendment to the February 15, 2008 convertible promissory notes
constitutes a substantial modification. During the three months ended September
30, 2009, the Company recognized a gain on extinguishment of convertible
debentures of $199,418 representing the difference between the fair value of the
amended and restated convertible promissory notes and the carrying value of the
original convertible promissory notes. The fair value of the amended convertible
debentures at August 25, 2009 was $828,818, net of debt discounts of $29,968
that will be amortized over the remaining life of the amended and restated
convertible debentures. The following table summarizes the convertible
promissory notes:
F -
18
December
31, 2008
|
||||
Fair
value convertible promissory notes, December 31, 2008
|
$
|
1,757,470
|
||
Nine
months ended September 30, 2009
|
||||
Convertible
promissory note conversions
|
$
|
(1,068,312
|
)
|
|
Additional
procceds from convertible promissory notes
|
1,020,000
|
|||
Change
in fair value of embedded derivatives through August 15,
2009
|
(478,521
|
)
|
||
Adjustment
to bifurcate embedded derivatives upon adoption of FASB ASC
815
|
||||
on
August 15, 2009
|
(558,949
|
)
|
||
Accrued
default interest on convertible promissory notes, December 31,
2008
|
194,420
|
|||
Additional
accrual of default interest through August 15, 2009
|
84,151
|
|||
Accrued
convertible promissory note interest through August 15,
2009
|
79,720
|
|||
Gain
on extinguishment on August 15, 2009
|
(249,473
|
)
|
||
Amortization
of debt discounts
|
77,355
|
|||
September
30, 2009 Balance, Amended convertible promissory notes
|
$
|
857,861
|
||
Less:
current portion
|
(857,861
|
)
|
||
Non-current
portion
|
$
|
-
|
Interest
expense from amortization of debt discounts for the three and nine months ended
September 30, 2009 was $77,355 and $77,355, respectively. Interest expense from
promissory note interest for the three and nine months ended September 30, 2009
was $25,357 and $45,663, respectively. Default interest expense recognized for
the three and nine months ended September 30, 2009 was $19,884 and $84,151,
respectively.
The
Company has complied with the provisions of FASB ASC 815 “Derivatives and Hedging”,
and recorded the fair value of the embedded conversion option liability
associated with the amended convertible promissory notes. The fair value of the
embedded conversion option was valued using the Black-Scholes model, resulting
in a fair value of $558,949 immediately prior to the August 15, 2009
modification. As of August 15, 2009, the convertible promissory notes were
convertible at the option of the holders into a total of 7,934,211 shares just
prior to modification and into a total of 8,644,737 shares just after the
modification, subject to anti-dilution and other customary adjustments. The
decrease in fair value of $496,955 was recorded through the results of
operations as an adjustment to fair value of derivatives during the three months
ended September 30, 2009. The assumptions used in the Black-Scholes option
pricing model at August 15, 2009 are as follows: (1) dividend yield of 0%; (2)
expected volatility of 185%, (3) risk-free interest rate of 0.26%, and (4)
expected life of 0.48 years. As of September 30, 2009, the convertible
promissory notes were convertible at the option of the holders into a total of
10,420,077 shares, subject to anti-dilution and other customary adjustments. The
fair value of the embedded conversion option was $669,529 at September 30, 2009,
representing a decrease in the fair value of the liability of $436,430 during
the three months ended September 30, 2009. The assumptions used in the
Black-Scholes option pricing model at September 30, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 185%, (3) risk-free interest
rate of 0.18%, and (4) expected life of 0.38 years.
During
the three months ended September 30, 2009, the Company converted the entire
$732,000 of Note A into 8,061,264 shares of its common stock, and $336,312 of
Note B into 3,553,600 shares of its common stock.
7.
WARRANT
DERIVATIVE LIABILITIES
The
following tables summarize the components of the warrant derivative liabilities
at September 30, 2009 and December 31, 2008.
F -
19
|
September 30,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Warrants
- 2005 debenture
|
$
|
3,210,163
|
$
|
29,322
|
||||
Warrants
- 2006 debenture
|
4,920,310
|
274,593
|
||||||
Warrants
- 2007 debenture
|
12,026,820
|
737,745
|
||||||
Warrants
- 2008 debenture
|
3,910,760
|
822,043
|
||||||
Other
warrant derivatives
|
935,182
|
792,146
|
||||||
$
|
25,003,235
|
$
|
2,655,849
|
8.
EMBEDDED
CONVERSION OPTION LIABILITIES
The
following tables summarize the components of the embedded conversion option
liabilities at September 30, 2009 and December 31, 2008.
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Amended
and restated 2005 debenture
|
$
|
126,090
|
$
|
-
|
||||
Amended
and restated 2006 debenture
|
2,430,531
|
-
|
||||||
Amended
and restated 2007 debenture
|
8,505,258
|
-
|
||||||
Amended
and restated 2008 debenture
|
5,547,987
|
-
|
||||||
Amended
and restated 2008 convertible promissory note
|
669,529
|
-
|
||||||
Series
A-1 convertible preferred stock
|
325,953
|
-
|
||||||
$
|
17,605,348
|
$
|
-
|
9.
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
The
following table summarizes by category of derivative liability the increase
(decrease) in fair value from market changes during the three months ended
September 30, 2009 and 2008.
Three Months Ended
September 30, 2009
|
Three Months Ended
September 30, 2008
|
|||||||
Embedded conversion option liability –
2005 debenture
|
$
|
(86,036
|
)
|
$
|
1,030
|
|||
Embedded
conversion option liability – 2006 debenture
|
(1,972,378
|
)
|
68,832
|
|||||
Embedded
conversion option liability – 2007 debenture
|
(10,730,207
|
)
|
(168,902
|
)
|
||||
Embedded
conversion option liability – 2008 convertible promissory
note
|
(436,430
|
)
|
119,913
|
|||||
Embedded
conversion option liability – 2008 debenture
|
(6,342,706
|
)
|
220,290
|
|||||
Embedded
conversion option liability – Series A-1 convertible preferred
stock
|
(295,670
|
)
|
-
|
|||||
Original
warrants 2005 debenture, excluding replacement warrants
|
(956,796
|
)
|
(59,919
|
)
|
||||
2005
debenture - replacement warrants
|
(497,679
|
)
|
(379,198
|
)
|
||||
Warrants
– 2006 debenture
|
(1,603,254
|
)
|
(600,929
|
)
|
||||
Warrants
– 2007 debenture
|
(6,485,510
|
)
|
(1,497,367
|
)
|
||||
Warrants
– 2008 debenture
|
(3,698,252
|
)
|
(991,988
|
)
|
||||
Other
warrant derivatives
|
(3,649,387
|
)
|
(474,301
|
)
|
||||
$
|
(36,754,306
|
)
|
$
|
(3,762,539
|
)
|
F -
20
The
following table summarizes by category of derivative liability the increase
(decrease) in fair value from market changes during the nine months ended
September 30, 2009 and 2008.
Nine Months Ended
September 30, 2009
|
Nine Months Ended
September 30, 2008
|
|||||||
Embedded
conversion option liability – 2005 debenture
|
$
|
(36,214
|
)
|
$
|
(167,827
|
)
|
||
Embedded
conversion option liability – 2006 debenture
|
(1,145,667
|
)
|
(626,959
|
)
|
||||
Embedded
conversion option liability – 2007 debenture
|
(1,651,491
|
)
|
1,132,374
|
|||||
Embedded
conversion option liability – 2008 convertible promissory
note
|
(417,996
|
)
|
(138,719
|
)
|
||||
Embedded
conversion option liability – 2008 debenture
|
(2,720,663
|
)
|
79,185
|
|||||
Embedded
conversion option liability – Series A-1 convertible preferred
stock
|
(26,916
|
)
|
-
|
|||||
Original
warrants 2005 debenture, excluding replacement warrants
|
(588,763
|
)
|
(215,933
|
)
|
||||
2005
debenture - replacement warrants
|
1,930,125
|
(1,336,716
|
)
|
|||||
Warrants
– 2006 debenture
|
2,070,038
|
(2,079,265
|
)
|
|||||
Warrants
– 2007 debenture
|
1,146,755
|
(4,784,154
|
)
|
|||||
Warrants
– 2008 debenture
|
2,878,442
|
(1,808,220
|
)
|
|||||
Other
warrant derivatives
|
(648,969
|
)
|
(2,044,021
|
)
|
||||
$
|
788,680
|
$
|
(11,989,715
|
)
|
10. SERIES
A-1 REDEEMABLE CONVERTIBLE PREFERRED STOCK
Effective
March 3, 2009, the Company entered into a $5 million credit facility
(“Facility”) with a life sciences fund. Under the terms of the agreement, the
Company may draw down funds, as needed, from the investor through the issuance
of Series A-1 redeemable convertible preferred stock, par value $.001, at a
basis of 1 share of Series A-1 redeemable convertible preferred stock for every
$10,000 invested.
Conversion
Rights
Any
shares of Series A-1 redeemable convertible preferred stock may, at the option
of the holder, be converted at any time into shares of common stock. The
conversion price for the preferred stock is equal to $0.75 per share of common
stock. The Company must keep available out of its authorized but unissued shares
of common stock, such number of shares sufficient to effect a conversion of all
then outstanding shares of the Series A-1 redeemable convertible preferred
stock. If at any time the number of authorized but unissued shares of common
stock is not sufficient to effect a conversion of all then outstanding shares of
the Series A-1 redeemable convertible preferred stock, the Company must take
necessary action to increase its authorized but unissued shares of common stock
to such number of shares as is sufficient for conversion.
F -
21
Dividends
The
preferred stock pays dividends, in kind of preferred stock, at an annual rate of
10%, matures in four years from the initial drawdown date, and is convertible
into common stock at $0.75 per share.
Redemption
Rights
Upon the
earlier of (i) the fourth anniversary of the issuance date, and (ii) the
occurrence of a major transaction, each holder shall have the right, at such
holder’s option, to require the Company to redeem all or a portion of such
holder’s share of Series A-1 preferred stock, at a price per share equal to the
Series A-1 liquidation value. The Company has the option to pay the redemption
price in cash or in shares of its common stock. A major transaction includes (i)
the consolidation, merger, or other business combination of the Company with or
into another entity, (ii) the sale or transfer of more than 50% of the Company’s
assets other than inventory in the ordinary course of business in one or more
related series of transactions, or (iii) closing of a purchase, tender or
exchange offer made to the holders of more than 50% of the
outstanding shares of common stock in which more than 50% of the outstanding
shares of common stock were tendered and accepted. The Company shall have the
right, at its own option, to redeem all or a portion of the shares of Series A-1
redeemable preferred stock, at any time at a price per share of Series A-1
redeemable preferred stock equal to 100% of the Series A-1 liquidation value. In
the event the closing price of the our common stock during the 5 trading days
following the put notice falls below 75% of the average of the closing bid price
in the 5 trading days prior to the put closing date, the investor may, at its
option, and without penalty, decline to purchase the applicable put shares on
the put closing date.
Termination
and Liquidation Rights
The
Company may terminate this agreement and its right to initiate future draw-downs
by providing 30 days advanced written notice to the investor. Upon any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of debts and other
liabilities of the Corporation, before any distribution or payment shall be made
to the holders of any other equity securities of the Company by reason of their
ownership thereof, the holders of the Series A-1 redeemable convertible
preferred stock shall first be 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 A-1 redeemable convertible preferred stock equal to
$10,000, plus any accrued by unpaid dividends. If, upon dissolution or winding
up of the Company, the assets of the Company shall be insufficient to make
payment in full to all holders, then such assets shall be distributed among the
holders at the time outstanding, ratably in proportion to the full amounts to
which they would otherwise be respectively entitled. During the nine months
ended September 30, 2009, the Company drew down $2,288,000 on this credit
facility.
Because
this instrument is redeemable, the Company determined that the Series A-1
redeemable preferred stock should be classified within the mezzanine section
between liabilities and equity in its consolidated balance sheets. The embedded
conversion option has been recorded as a derivative liability in the Company’s
consolidated balance sheets, and changes in the fair value each reporting period
will be reported in adjustments to fair value of derivatives in the consolidated
statements of operations.
The
outstanding balance at September 30, 2009 of $2,288,000 is convertible into
3,050,667 shares of the Company’s common stock. The Company values the
conversion option initially when each draw takes place. The following table
summarizes the assumptions used in the Black-Scholes model to value the
conversion option associated with each draw, along with the fair value of the
embedded conversion option.
F -
22
|
|
Black-Scholes Assumptions
|
|||||||||||||||||||||
|
|
at Draw Date
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
Draw
|
Draw
|
Dividend
|
Expected
|
Risk-Free
|
Expected
|
Fair
|
|||||||||||||||||
Amount
|
Date
|
Yield
|
Volatility
|
Rate
|
Life (Yrs)
|
Value
|
|||||||||||||||||
$
|
1,100,000
|
4/6/2009
|
0
|
%
|
190
|
%
|
1.90
|
%
|
4.00
|
$
|
139,985
|
||||||||||||
87,000
|
4/28/2009
|
0
|
%
|
190
|
%
|
1.83
|
%
|
3.94
|
9,951
|
||||||||||||||
105,000
|
5/1/2009
|
0
|
%
|
190
|
%
|
2.03
|
%
|
3.93
|
12,007
|
||||||||||||||
81,036
|
5/19/2009
|
0
|
%
|
190
|
%
|
2.12
|
%
|
3.88
|
12,204
|
||||||||||||||
162,624
|
6/9/2009
|
0
|
%
|
190
|
%
|
2.86
|
%
|
3.83
|
28,428
|
||||||||||||||
131,644
|
6/15/2009
|
0
|
%
|
190
|
%
|
2.75
|
%
|
3.81
|
26,237
|
||||||||||||||
67,457
|
6/26/2009
|
0
|
%
|
190
|
%
|
2.53
|
%
|
3.78
|
20,145
|
||||||||||||||
75,000
|
6/29/2009
|
0
|
%
|
190
|
%
|
2.53
|
%
|
3.77
|
22,386
|
||||||||||||||
54,811
|
7/23/2009
|
0
|
%
|
185
|
%
|
2.60
|
%
|
3.71
|
10,658
|
||||||||||||||
34,224
|
7/23/2009
|
0
|
%
|
185
|
%
|
2.60
|
%
|
3.71
|
6,655
|
||||||||||||||
54,340
|
7/23/2009
|
0
|
%
|
185
|
%
|
2.60
|
%
|
3.71
|
10,566
|
||||||||||||||
40,755
|
7/24/2009
|
0
|
%
|
185
|
%
|
2.57
|
%
|
3.70
|
7,424
|
||||||||||||||
25,000
|
8/3/2009
|
0
|
%
|
185
|
%
|
2.66
|
%
|
3.68
|
4,544
|
||||||||||||||
75,000
|
8/5/2009
|
0
|
%
|
185
|
%
|
2.73
|
%
|
3.67
|
11,806
|
||||||||||||||
75,000
|
8/14/2009
|
0
|
%
|
185
|
%
|
2.73
|
%
|
3.65
|
12,686
|
||||||||||||||
119,109
|
8/28/2009
|
0
|
%
|
185
|
%
|
2.46
|
%
|
3.61
|
17,186
|
||||||||||||||
$
|
2,288,000
|
$
|
352,869
|
The
embedded conversion option was again valued at $325,953 at September 30, 2009 at
fair value using the Black-Scholes model. The decrease in the fair value of the
embedded conversion option liability of $295,670 and $26,916 for the three and
nine months ended September 30, 2009, respectively, was recorded through the
results of operations as an adjustment to fair value of derivatives. The
assumptions used in the Black-Scholes model to value the embedded conversion
option at September 30, 2009 were as follows: (1) dividend yield of 0%;
(2) expected volatility of 185%, (3) risk-free interest rate of 1.45%,
and (4) expected life of 3.52 years.
The
following table summarizes the Series A-1 redeemable convertible preferred stock
and embedded derivative outstanding at September 30, 2009 and at initial draw
dates:
September 30,
|
Inception
|
Increase
|
||||||||||
|
2009
|
Dates*
|
(Decrease)
|
|||||||||
Principal
due
|
$
|
2,288,000
|
$
|
2,288,000
|
$
|
-
|
||||||
Accrued
dividend
|
84,209
|
-
|
84,209
|
|||||||||
Debt
discount
|
(321,738
|
)
|
(352,869
|
)
|
31,131
|
|||||||
2,050,471
|
1,935,131
|
115,340
|
||||||||||
Less
current portion
|
-
|
-
|
-
|
|||||||||
Non-current
portion
|
$
|
2,050,471
|
$
|
1,935,131
|
$
|
115,340
|
||||||
Aggregate
liquidation value**
|
2,372,209
|
$
|
2,288,000
|
$
|
199,549
|
*Represents
the sum of values from various draw dates on the Series A-1 redeemable
convertible preferred stock facility.
** Represents
the sum of principal due and accrued dividends.
The
dividends are accrued at a rate of 10% per annum, and the Company records the
accrual as interest expense in its consolidated statements of operations in the
period incurred. The Company recorded accrued dividends on the Series A-1
redeemable convertible preferred stock of $52,861 and $84,209 for the three and
nine months ended September 30, 2009, respectively.
F -
23
For
providing investor relations services in connection with the Series A-1
redeemable convertible preferred stock credit facility, the Company issued a
consultant 24,900,000 shares of its common stock on February 9, 2009. The
Company valued the issuance of these shares at $4,731,000 based on a closing
price of $0.19 on February 9, 2009 and recorded the value of the shares as
deferred financing costs associated with the financing on the date they were
issued. Beginning on the date of the first draw-down on April 6, 2009 (the loan
maturity date is 4 years after the initial draw-down), each quarter the Company
will amortize the deferred issuance costs ratably over the term of the Series
A-1 redeemable convertible preferred stock facility.
The
Company also incurred a non-refundable commitment fee to the holder of this
convertible preferred stock facility in the amount of $250,000. The fee is
payable by the Company in either (a) cash, or (b) common stock. If paid in
common stock, the Company will issue a number of shares valued at 97% of the
volume-weighted average price of its common stock for the five trading days
immediately preceding the effective date of the facility, or March 3, 2009.
Based on this, the Company would be required to issue approximately 2,152,000
shares of the Company’s common stock. Beginning on the date of the first
draw-down on April 6, 2009 (the loan maturity date is 4 years after the initial
draw-down), each quarter the Company amortizes the deferred issuance costs
ratably over the term of the Series A-1 redeemable convertible preferred stock
facility.
Interest
expense from amortization of the debt discount and deferred issuance costs for
the three and nine months ended September 30, 2009 was $334,560 and $634,580,
respectively.
11. WARRANT
SUMMARY
Warrant
Activity
A summary
of warrant activity for the nine months ended September 30, 2009 is presented
below:
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
|||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
|||||||||||||
|
Number of
|
Exercise
|
Contractual
|
Value
|
||||||||||||
|
Warrants
|
Price
|
Life (in years)
|
(000)
|
||||||||||||
Outstanding, December
31, 2008
|
129,397,951
|
$
|
0.26
|
3.23
|
$
|
-
|
||||||||||
Granted
|
79,076,872
|
-
|
||||||||||||||
Exercised
|
-
|
-
|
||||||||||||||
Forfeited
|
(3,049,258
|
)
|
$
|
1.35
|
||||||||||||
Outstanding,
September 30, 2009
|
205,425,565
|
$
|
0.14
|
4.56
|
5,765
|
|||||||||||
Vested
and expected to vest at September 30, 2009
|
205,425,565
|
$
|
0.14
|
4.56
|
5,765
|
|||||||||||
Exercisable,
September 30, 2009
|
205,425,565
|
$
|
0.14
|
4.56
|
5,765
|
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.
F -
24
The
following table summarizes information about warrants outstanding and
exercisable at September 30, 2009:
Warrants Outstanding
|
Warrants Exercisable
|
||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||
Exercise
|
Number
|
Remaining
|
Exercise
|
Number
|
Exercise
|
||||||||||||||||
Price
|
of Shares
|
Life (Years)
|
Price
|
of Shares
|
Price
|
||||||||||||||||
$
|
0.10
|
192,172,518
|
4.75
|
$
|
0.10
|
192,172,518
|
$
|
0.10
|
|||||||||||||
0.34
|
3,720,588
|
1.01
|
0.34
|
3,720,588
|
0.34
|
||||||||||||||||
0.38
- 0.40
|
3,080,636
|
4.19
|
0.39
|
3,080,636
|
0.39
|
||||||||||||||||
0.85
- 0.96
|
5,734,831
|
1.21
|
0.95
|
5,734,831
|
0.95
|
||||||||||||||||
2.20
|
72,917
|
1.88
|
2.20
|
72,917
|
2.20
|
||||||||||||||||
2.48
- 2.54
|
644,075
|
0.81
|
2.54
|
644,075
|
2.54
|
||||||||||||||||
205,425,565
|
205,425,565
|
12.
STOCKHOLDERS’ EQUITY TRANSACTIONS
On
September 10, 2009, upon approval by a vote of the Company’s stockholders, the
Company increased its authorized shares of common stock, par value $0.001 from
500,000,000 to 1,750,000,000 shares, effective immediately.
The
Company is authorized to issue two classes of capital stock, to be designated,
respectively, preferred stock and common stock. The total number of shares of
Series A-1 redeemable convertible preferred stock the Company is authorized to
issue is 50,000,000, par value $0.001 per share. The total number of shares of
common stock the Company is authorized to issue is 1,750,000,000, par value
$0.001 per share. The Company had 229 shares of Series A-1 redeemable
convertible preferred Stock outstanding as of September 30, 2009 and 547,964,766
shares of common stock outstanding as of September 30, 2009.
Between
September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit
Court of the Twelfth Judicial District Court for Sarasosa County, Florida to
settle certain past due accounts payable, for previous professional services and
other operating expenses incurred, by the issuance of shares of its common
stock. In aggregate, through September 30, 2009, the Company settled $1,108,673
in accounts payable through the issuance of 260,116,283 shares of its common
stock. During the nine months ended September 30, 2009, the Company settled
$505,199 in accounts payable through the issuance of 39,380,847 shares of its
common stock. The Company recorded a loss on settlement of $4,793,949 in its
accompanying statement of operations for the nine months ended September 30,
2009. The losses were calculated as the difference between the amount of
accounts payable relieved and the value of the shares (based on the closing
share price on the settlement date) that were issued to relieve the accounts
payable.
On March
5, 2009, the Company settled a lawsuit originally brought by an investor in
January 2009, who is an investor in the 2007 and 2008 debentures, and associated
with the default on August 6, 2008 on all debentures. As a result of the
lawsuit, the Company was required by court order to reduce the conversion price
on convertible debentures held by this investor to $0.02 per share, effective
immediately, so long as the Company has a sufficient number of authorized shares
to honor the request for conversion. During the nine months ended September 30,
2009, the Company issued 4,847,050 shares of its common stock to this investor
in conversion of approximately $97,000 of its 2006 debenture at $0.02 per share,
and 1,252,950 shares of its common stock to this investor in conversion of
approximately $25,000 of its 2007 debenture at $0.02 per share. The Company has
considered the impact of FASB ASC 470-50 “Debt-Modifications and
Extinguishments” on the accounting treatment of the change in conversion
price of the 2007 and 2008 convertible debentures. FASB ASC 470-50 states that a
transaction resulting in a significant change in the nature of a debt instrument
should be accounted for as an extinguishment of debt. The difference between the
reacquisition price and the net carrying amount of the extinguished debt should
be recognized currently in income of the period of extinguishment. The Company
calculated the fair value of the conversion option for the 2007 and April 2008
debentures immediately prior to and after the change in the conversion price,
and evaluated the impact of the change in conversion price. The Company has
concluded that the change in conversion price for this investor constitutes a
substantial modification in the terms of the 2007 and 2008 debenture agreements.
Based on the Company’s evaluation, the below table summarizes the impact
relative to the debentures’ face value on March 5, 2009.
F -
25
Debenture
|
||||||||||||
Impact on Debentures
|
Change
|
Face Value
|
% Change
|
|||||||||
2007 Debenture
|
$
|
1,319,354
|
$
|
6,739,214
|
20
|
%
|
||||||
April
2008 Debenture
|
$
|
477,014
|
$
|
4,038,880
|
12
|
%
|
||||||
1,796,368
|
$
|
10,778,094
|
The
change in fair value of the conversion option on the 2007 debenture was
$1,319,354, or a 20% change relative to the face value of the debenture. The
change in fair value of the conversion option on the April 2008 debenture was
$477,014, or a 12% change relative to the face value of the debenture. The
Company recorded a loss on extinguishment of debentures in the amount of
$1,796,368 during the nine months ended September 30, 2009 as a result of this
modification, representing the difference between the fair value of the new debt
and the carrying value of the original debt.
On June
30, 2009, Alpha Capital submitted a conversion notice in the principal amount of
$150,000 into 7,500,000 shares of common stock at $0.02 per share. At that time,
the Company did not have sufficient authorized shares to satisfy this conversion
notice. On July 6, 2009, by means of a settlement between the 2 parties, the
Company agreed to deliver the 7,500,000 shares of its common stock no later than
September 25, 2009. The Company delivered the 7,500,000 shares on
September 25, 2009. Further, the Company agreed to provide Alpha Capital with an
additional $110,000 principal, which is to be upon the same terms and conditions
as the original April 2008 debenture. Accordingly, the Company recognized a loss
on settlement in the amount of $110,000 during the three months ended September
30, 2009 for the amount of principal that was added to the April 2008
convertible debenture. Additionally, the Company recognized interest expense in
the amount of $1,210,021, representing the fair value of the conversion option
of the $110,000 on July 6, 2009. The full amount of $1,210,021 was recognized in
interest expense as a result of the debenture’s default at the
time.
13.
STOCK-BASED COMPENSATION
Stock
Plans
On August
12, 2004, ACT’s Board of Directors approved the establishment of the 2004 Stock
Option Plan (the “2004 Stock Plan”). Stockholder approval was received on
December 13, 2004. The total number of common shares available for grant and
issuance under the plan may not exceed 2,800,000 shares, subject to adjustment
in the event of certain recapitalizations, reorganizations and similar
transactions. Common stock purchase options may be exercisable by the payment of
cash or by other means as authorized by the Board of Directors or a committee
established by the Board of Directors. At September 30, 2009, the Company had
820,000 common share purchase options outstanding under the plan. At September
30, 2009, there were 370,000 options available for grant under this
plan.
On
December 13, 2004, ACT’s Board of Directors and stockholders approved the
establishment of the 2004 Stock Option Plan II (the “2004 Stock Plan II”). The
total number of common shares available for grant and issuance under the plan
may not exceed 1,301,161 shares, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. Common stock
purchase options may be exercisable by the payment of cash or by other means as
authorized by the Board of Directors or a committee established by the Board of
Directors. At September 30, 2009, ACT had granted 1,301,161 common share
purchase options under the plan. At September 30, 2009, no options were
available for grant under this plan.
F -
26
On
January 31, 2005, the Company’s Board of Directors approved the establishment of
the 2005 Stock Incentive Plan (the “2005 Plan”) for its employees, subject to
approval of our shareholders. Under the original 2005 Plan, the total number of
common shares available for grant and issuance under the plan could not exceed 9
million shares, plus an annual increase on the first day of each of the
Company’s fiscal years beginning in 2006 equal to 5% of the number of shares of
our common stock outstanding on the last day of the immediately preceding fiscal
year, subject to adjustment in the event of certain recapitalizations,
reorganizations and similar transactions. On January 24, 2008, the Company’s
shareholders approved an increase of 25,000,000 shares to the 2005 Plan. Common
stock purchase options may be exercisable by the payment of cash or by other
means as authorized by the Board of Directors or a committee established by the
Board of Directors. On September 10, 2009, upon approval by a vote of the
Company’s stockholders, the Company increased the number of shares of common
stock issuable under the 2005 Plan to a total of 145,837,250 shares, issuable as
options or shares of common stock. At September 30, 2009, 12,364,419 common
stock purchase options were outstanding and the Company issued 1,497,263 shares
of common stock under the plan. At September 30, 2009, there were 133,456,831
shares of common stock available for issuance under this plan.
Stock
Option Activity
A summary
of option activity for the nine months ended September 30, 2009 is presented
below:
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
|||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
|||||||||||||
|
Number of
|
Exercise
|
Contractual
|
Value
|
||||||||||||
|
Options
|
Price
|
Life (in years)
|
(000)
|
||||||||||||
Outstanding,
January 1, 2009
|
14,485,580
|
$
|
0.55
|
7.25
|
$
|
-
|
||||||||||
Granted
|
-
|
-
|
||||||||||||||
Exercised
|
-
|
-
|
||||||||||||||
Forfeited
|
-
|
-
|
||||||||||||||
Outstanding,
September 30, 2009
|
14,485,580
|
$
|
0.55
|
6.50
|
$
|
66
|
||||||||||
Vested
and expected to vest at September 30, 2009
|
14,066,932
|
0.56
|
6.44
|
66
|
||||||||||||
Exercisable,
September 30, 2009
|
11,265,207
|
0.64
|
5.97
|
66
|
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.
A summary
of the status of unvested employee stock options as of September 30, 2009 and
changes during the period then ended, is presented below:
Weighted
|
||||||||
Average
|
||||||||
Grant
Date
|
||||||||
Fair
Value
|
||||||||
Shares
|
Per
Share
|
|||||||
Unvested
at January 1, 2009
|
4,769,159
|
$
|
0.23
|
|||||
Granted
|
-
|
-
|
||||||
Vested
|
(1,548,786
|
)
|
0.27
|
|||||
Forfeited
|
-
|
-
|
||||||
Unvested
at September 30, 2009
|
3,220,373
|
$
|
0.21
|
As of
September 30, 2009, total unrecognized stock-based compensation expense related
to nonvested stock options was approximately $586,000, which is expected to be
recognized over a weighted average period of approximately
8.35 years.
F -
27
The
following table summarizes information about stock options outstanding and
exercisable at September 30, 2009.
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||
Exercise
|
Number
|
Remaining
|
Exercise
|
Number
|
Exercise
|
||||||||||||||||
Price
|
of Shares
|
Life (Years)
|
Price
|
of Shares
|
Price
|
||||||||||||||||
$
|
0.05
|
820,000
|
4.87
|
$
|
0.05
|
820,000
|
$
|
0.05
|
|||||||||||||
0.21
|
6,007,403
|
8.12
|
0.21
|
2,794,946
|
0.21
|
||||||||||||||||
0.25
|
1,301,161
|
5.25
|
0.25
|
1,301,161
|
0.25
|
||||||||||||||||
0.85
|
5,604,099
|
5.34
|
0.85
|
5,596,600
|
0.85
|
||||||||||||||||
1.35
|
150,000
|
6.56
|
1.35
|
150,000
|
1.35
|
||||||||||||||||
2.04
- 2.11
|
165,000
|
6.25
|
2.07
|
164,583
|
2.07
|
||||||||||||||||
2.20
- 2.48
|
437,917
|
5.93
|
2.27
|
437,917
|
2.27
|
||||||||||||||||
14,485,580
|
11,265,207
|
14.
COMMITMENTS AND CONTINGENCIES
The
Company entered into a lease for office and laboratory space in Worcester,
Massachusetts commencing December 2004 and expiring April 2010, and for office
space in Los Angeles, California commencing November 2005 and expiring May 2008.
The Company’s rent at its Los Angeles, California site was on a month-to-month
basis after May 2008. On March 1, 2009, the Company vacated its site in Los
Angeles, California and moved to another site in Los Angeles. The term on this
new lease is through February 28, 2010. Monthly base rent is $2,170. Annual
minimum lease payments are as follows:
Year
1
|
$
|
156,800
|
||
Total
|
$
|
156,800
|
Rent
expense recorded in the financial statements for the three months ended
September 30, 2009 and 2008 was approximately $99,000 and $103,000,
respectively. Rent expense recorded in the financial statements for the nine
months ended September 30, 2009 and 2008 was approximately $397,000 and
$825,000, respectively.
On
October 1, 2007 Gary D. Aronson brought suit against the Company with respect to
a dispute over the interpretation of the anti-dilution provisions of our
warrants issued to Mr. Aronson on or about September 14, 2005. John S. Gorton
initiated a similar suit on October 10, 2007. The two cases have been
consolidated. The plaintiffs allege that we breached warrants to purchase
securities issued by us to these individuals by not timely issuing stock after
the warrants were exercised, failing to issue additional shares of stock in
accordance with the terms of the warrants and failing to provide proper notice
of certain events allegedly triggering Plaintiffs' purported rights to
additional shares. Plaintiffs assert monetary damages in excess of
$14 million. Plaintiffs may alternatively seek additional shares in the
Company with a value potentially in excess of $14 million, or may seek a
combination of monetary damages and shares in the Company. Plaintiffs
also seek prejudgment interest and attorney fees. Discovery is not
complete and no conclusions have been reached as to the potential exposure to us
or whether we have liability.
The
Company and its subsidiary Mytogen, Inc. are currently defending themselves
against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their
former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a
property vacated by us and Mytogen effective May 31, 2008. In that action,
Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging that it
has been unable to relet the premises and therefore seeking rent for the vacated
premises since September 2008. Alexandria is also seeking certain clean-up
and storage expenses. The Company is defending against the suit, claiming
that ARE had breached the covenant of quiet enjoyment as of when Mytogen
vacated, and that had ARE used reasonable diligence in its efforts to secure a
new tenant, it would have been more successful. No trial date has been
set. No conclusions have been reached as to the potential exposure to the
Company or whether the Company has a liability.
F -
28
The
Company has been named as a third party defendant in this action, filed
September 16, 2009, in which the plaintiff alleges that Alexandria Real Estate
(“Alexandria”) improperly charged a trustee holding approximately $146,000 of
funds in a Company account that Bristol claimed as collateral. Alexandria
brought a third party complaint against the Company for indemnification. No
conclusions have been reached as to the potential exposure to the Company or
whether the Company has a liability.
On March
9, 2009, plaintiffs filed a complaint and summons in the Supreme Court of the
State of New York, County of New York against the Company and its subsidiary
Mytogen, Inc. Plaintiffs’ complaint alleges, among other things, that the
Company has breached the terms of certain contracts with plaintiffs; namely,
convertible debentures and a consulting agreement. Plaintiffs seek preliminary
and permanent injunctive relief directing the Company to deliver to plaintiff
Bristol Investment Fund, Ltd. (“Bristol”) 2.5 million shares of its common
stock, declaring a conversion price of $0.02 for the convertible debentures held
by plaintiffs, and directing the Company to honor plaintiff’s future conversion
requests. Plaintiffs also seek compensatory damages in an amount to be
determined at trial, but alleged in the complaint to exceed $1.5 million. On May
1, 2009, the Company filed an answer to plaintiffs’ complaint. On May 13, 2009,
the Company filed a motion to stay the action and to compel arbitration of all
claims by Bristol. The court has not yet ruled on the Company’s motion to stay
the action and to compel arbitration. On or about September 16, 2009, plaintiffs
filed an order to show cause, seeking the issuance of a preliminary injunction
directing the Company to deliver to Bristol 2.5 shares of its common stock
pursuant to a convertible debenture and 47.4 million shares of its common
stock pursuant to common stock purchase warrants, declaring a
conversion price of $0.02 for the convertible debenture held by plaintiffs, and
enjoining or restraining the Company from issuing shares of its common stock to
any entity other than plaintiffs or the other holders of convertible debentures.
On September 25, 2009, the Company submitted its response in opposition to
plaintiffs’ motion and moved by cross-motion for dismissal of the complaint,
based on the terms of the consent, waiver, amendment and exchange agreement
entered into between the Company and the holders of over 95% of the outstanding
principal amount of the Amended and Restated Debentures. The court has not yet
ruled on the respective motions. The Company intends to continue to contest the
case vigorously. Management believes the Company will prevail, and accordingly,
the Company did not recognize a liability in its accompanying consolidated
balance sheet at September 30, 2009.
The
Company has entered into employment contracts with certain executives and
research personnel. The contracts provide for salaries, bonuses and stock option
grants, along with other employee benefits. The employment contracts generally
have no set term and can be terminated by either party. There is a provision for
payments of three months to one year of annual salary as severance if we
terminate a contract without cause, along with the acceleration of certain
unvested stock option grants.
15.
INCOME TAXES
The
Company adopted the provisions of FASB ASC 740. FASB ASC 740 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FASB ASC 740 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Due to the fact that the Company has substantial net
operating loss carryforwards, adoption of FASB ASC 740 had no impact on the
Company’s beginning retained earnings, balance sheets, or statements of
operations.
The
Company files income tax returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years before 2001.
F -
29
The
Company recognizes accrued interest and penalties on unrecognized tax benefits
in income tax expense. The Company did not have any unrecognized tax benefits as
of September 30, 2009 and 2008. As a result, the Company did not recognize
interest expense, and additionally, did not record any penalties during the
three and nine months ended September 30, 2009 and 2008. The Company does not
expect that the amounts of unrecognized tax benefits will change significantly
within the next 12 months.
16.
SUBSEQUENT
EVENTS
The
Company has evaluated subsequent events through the time of filing these
financial statements with the SEC on November 16, 2009.
On October
19, 2009, the Company entered into two letter agreements with Volation Life
Sciences Capital Partners, LLC (“Volation”) (See Note 10), pursuant to which (i)
the Company reduced the conversion price of its outstanding Series A-1
convertible preferred stock issued to Volation to $.10 per share resulting in
22,880,000 shares of Common Stock upon conversion, (ii) issued Volation
2,500,000 shares of its Common Stock at $0.10 per share in payment of an
outstanding commitment fee, and (iii) Volation waived the delinquency
in non-payment of the $250,000 commitment fee required pursuant to
the preferred stock purchase agreement between the Company and
Volation.
In
connection with an amendment to an agreement between the Company and JMJ
Financial (See Note 6), on October 1, 2009, the Company borrowed $1,000,000 and
issued a convertible promissory note for $1,200,000. The Company
shall pay a one-time interest payment of 10% of the principal of the promissory
note which is due on the maturity date of the promissory note, which is October
1, 2012. The promissory note is convertible into shares of the
Company’s common stock at a conversion price of the lesser of (i) $.25 per share
or (ii) eighty percent of the average of the three lowest trade prices in the 20
trading days prior to the conversion.
In
connection with an amendment to an agreement between the Company and JMJ
Financial (See Note 6), on October 1, 2009, the Company borrowed $1,000,000 and
issued a secured & collateralized promissory note. The Company shall pay a
one-time interest payment of 12% of the principal of the promissory note which
is due on the maturity date of the promissory note, which is October 1,
2012. The promissory note is secured by $1,000,000 of a money
market fund or other assets of the Company.
On
November 2, 2009 (“Effective Date”), the Company entered into a preferred stock
purchase agreement with Optimus Life Sciences Capital Partners, LLC
(“Investor”). 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 (“Tranches”) in the Company’s sole
discretion (subject to the conditions set forth therein), (i) up to 1,000
shares of Series B preferred stock (the “Preferred Shares”) 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 equal to the closing bid price of the Company’s common stock on
the date the Company provides notice of such Tranche. The Warrants will be
issued in replacement of a five-year warrant to purchase 119,469,027
shares of common stock with an exercise price per share of $0.113 the
Company issued on the Effective
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
Company agreed to use its best efforts to file within 60 days of the
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 purchase agreement, including the shares of common stock underlying
the Warrants, and shares issuable in payment of the commitment
fee.
|
F -
30
·
|
On
November 3, 2009, the Company filed a certificate of designations for the
Series B preferred stock (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, 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. In addition, the preferred shares (a) shall accrue dividends
at a rate of 10% per annum, payable in preferred shares, (ii)
shall not have voting rights, and (iii) 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.
|
On
November 12, 2009, the Company entered into a subscription agreement (the
“Subscription Agreement”) with the subscribers identified on the signature pages
thereto (the “Subscribers”). Pursuant to the Subscription Agreement, the Company
agreed to sell, and the Subscribers agreed to purchase, subject to the terms and
conditions therein, original issue discount promissory notes in the principal
amount of a minimum of $2,400,000, for a purchase price of a minimum of
$2,000,000 (the “Notes”). The Notes will be convertible into shares of the
Company’s common stock at a conversion price of $0.10. Pursuant to the
Subscription Agreement, the Company also agreed to issue (i) one-and-one third
Class A warrants (“Class A Warrants”) for each two shares of common stock
underlying the Notes, to purchase shares of the Company’s common stock with a
term of five years and an exercise price of $0.108, (ii) additional investment
rights, exercisable until 9 months after the initial closing date of the
Subscription Agreement (“Additional Investment Rights”), to purchase (a)
original issue discount promissory notes (“AIR Notes”), with the same terms as
the Notes, in the principal amount of up to the principal amount of the Notes to
be purchased by the Subscribers, for a purchase price of up to the purchase
price paid by the Subscribers for the Notes, with a conversion price of $0.10,
and (b) one-and-one third Class B warrants (“Class B Warrants”) for each two
shares of common stock underlying the AIR Notes, to purchase shares of the
Company’s common stock with a term of five years and an exercise price of
$0.108.
The
Company will be required to redeem the Notes monthly commencing in May 2010, in
the amount of 14.28% of the initial principal amount of the Notes, in cash or
common stock at the Company’s option (subject to the conditions set forth in the
Notes), until the Notes are paid in full.
The
initial closing under the Subscription Agreement occurred on November 12, 2009,
pursuant to which, the Company sold Notes in the principal amount of $1,662,000
for a purchase price of $1,385,000. In addition, on November 13, 2009, the
Company sold Notes in the principal amount of $441,000 for a purchase price of
$367,500 (including $67,500 paid for by forgiveness of legal fees owed to a
subscriber). The closing that occurred on November 13, 2009 was deemed part of
the initial closing, such that, pursuant to the initial closing under the
Subscription Agreement, the Company sold Notes in the aggregate principal amount
of $2,103,000 for an aggregate purchase price of $1,752,500. Pursuant to the
initial closing under the Subscription Agreement, the Company also issued an
aggregate of (i) 14,020,000 Class A Warrants, and (ii) Additional Investment
Rights for the purchase of up to (a) $4,206,000 principal amount of AIR Notes
for a purchase price of up to $3,505,000 and (b) 28,040,000 Class B
Warrants.
The
Subscribers also agreed to purchase, subject to customary conditions, additional
Notes in the principal amount of $2,103,000, for a purchase price of $1,720,000,
in a second closing to occur within 90 days of the initial closing.
Immediately
after the initial closing under the Subscription Agreement, the Company had
613,885,468 shares of common stock issued and outstanding.
F -
31
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors
Advanced
Cell Technology, Inc.
Los
Angeles, CA
We have
audited the accompanying consolidated balance sheets of Advanced Cell
Technology, Inc. and subsidiary as of December 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ deficit and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Cell Technology,
Inc. and subsidiary as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring net losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and its total liabilities exceed its total assets. This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
SingerLewak LLP
Los
Angeles, California
July 2,
2009
F -
32
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
(restated)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
816,904
|
$
|
1,166,116
|
||||
Accounts
receivable
|
261,504
|
27,026
|
||||||
Prepaid
expenses
|
32,476
|
68,416
|
||||||
Deferred
royalty fees, current portion
|
182,198
|
341,274
|
||||||
Total
current assets
|
1,293,082
|
1,602,832
|
||||||
Property
and equipment, net
|
400,008
|
914,504
|
||||||
Investment
in joint venture
|
225,200
|
-
|
||||||
Deferred
royalty fees, less current portion
|
659,488
|
1,202,430
|
||||||
Deposits
|
-
|
115,192
|
||||||
Deferred
issuance costs, net of amortization of $8,666,387 and
$3,874,300
|
-
|
4,772,087
|
||||||
TOTAL
ASSETS
|
$
|
2,577,778
|
$
|
8,607,045
|
||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
8,287,786
|
$
|
5,517,876
|
||||
Accrued
expenses
|
2,741,591
|
1,120,781
|
||||||
Accrued
default interest
|
3,717,384
|
-
|
||||||
Deferred
revenue, current portion
|
834,578
|
497,374
|
||||||
Advances
payable - other
|
130,000
|
130,000
|
||||||
2005
Convertible debenture and embedded derivatives, net of discounts of $0 and
$600,246
|
85,997
|
1,276,871
|
||||||
2006
Convertible debenture and embedded derivatives (fair value $1,993,354 and
$3,939,862)
|
1,993,354
|
1,625,327
|
||||||
2007
Convertible debenture and embedded derivatives (fair value $7,706,344 and
$3,874,026)
|
7,706,344
|
1,160,847
|
||||||
February
2008 Convertible debenture and embedded derivatives (fair value $1,757,470
and $0)
|
1,757,470
|
-
|
||||||
April
2008 Convertible debenture and embedded derivatives (fair value $4,066,505
and $0)
|
4,066,505
|
-
|
||||||
Warrant
and option derivatives, current portion
|
2,655,849
|
14,574
|
||||||
Deferred
joint venture obligations, current portion
|
167,335
|
-
|
||||||
Short
term capital leases
|
12,955
|
31,605
|
||||||
Notes
payable, other
|
468,425
|
468,425
|
||||||
Total
current liabilities
|
34,625,573
|
11,843,680
|
||||||
2006
Convertible debenture and embedded derivatives, less current portion (fair
value $0 and $3,447,230)
|
-
|
1,422,164
|
||||||
2007
Convertible debenture and embedded derivatives, less current portion (fair
value $0 and $7,748,052)
|
-
|
2,321,695
|
||||||
Warrant
and option derivatives, less current portion
|
-
|
13,011,751
|
||||||
Deferred
joint venture obligations, less current portion
|
63,473
|
-
|
||||||
Deferred
revenue, less current portion
|
3,817,716
|
1,534,485
|
||||||
Total
liabilities
|
38,506,762
|
30,133,775
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
STOCKHOLDERS'
DEFICIT:
|
||||||||
Preferred
stock, $0.001 par value; 50,000,000 shares authorized, 0 issued and
outstanding
|
-
|
-
|
||||||
Common
stock, $0.001par value; 500,000,000 shares
authorized, 429,448,381 and 85,027,461 issued and
outstanding
|
429,448
|
85,027
|
||||||
Additional
paid-in capital
|
53,459,172
|
34,302,334
|
||||||
Accumulated
deficit
|
(89,817,604
|
)
|
(55,914,091
|
)
|
||||
Total
stockholders' deficit
|
(35,928,984
|
)
|
(21,526,730
|
)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
2,577,778
|
$
|
8,607,045
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
33
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
(restated)
|
||||||||
Revenue (License fees
and royalties)
|
$
|
787,106
|
$
|
647,349
|
||||
Cost
of Revenue
|
765,769
|
428,913
|
||||||
Gross
profit
|
21,337
|
218,436
|
||||||
Operating
expenses:
|
||||||||
Research
and development
|
8,635,577
|
12,744,913
|
||||||
In-process
R&D expense - Mytogen
|
-
|
4,094,736
|
||||||
Grant
reimbursements
|
(105,169
|
)
|
(67,179
|
)
|
||||
General
and administrative expenses
|
5,009,418
|
6,781,705
|
||||||
Total
operating expenses
|
13,539,826
|
23,554,175
|
||||||
Loss
from operations
|
(13,518,489
|
)
|
(23,335,739
|
)
|
||||
Non-operating
income (expense):
|
||||||||
Interest
income
|
7,933
|
162,091
|
||||||
Interest
expense and late fees
|
(26,614,761
|
)
|
(21,023,663
|
)
|
||||
Finance
cost
|
(806,079
|
)
|
(15,400
|
)
|
||||
Charges
related to issuance of 2008 convertible debentures
|
(1,217,342
|
)
|
-
|
|||||
Charges
related to issuance of 2007 convertible debenture and
warrants
|
-
|
(3,871,656
|
)
|
|||||
Charges
related to repricing of 2005 convertible debenture and
warrants
|
-
|
(843,277
|
)
|
|||||
Income
related to repricing of 2006 and 2007 convertible debentures and
warrants
|
847,588
|
-
|
||||||
Adjustments
to fair value of derivatives
|
13,082,247
|
32,835,057
|
||||||
Losses
attributable to equity method investment
|
(20,930
|
)
|
-
|
|||||
Loss
on disposal of fixed assets
|
(227,543
|
)
|
-
|
|||||
Gain
(loss) on settlement
|
(5,436,137
|
)
|
193,862
|
|||||
Total
non-operating income (expense)
|
(20,385,024
|
)
|
7,437,014
|
|||||
Loss
before income tax
|
(33,903,513
|
)
|
(15,898,725
|
)
|
||||
Income
tax
|
-
|
-
|
||||||
Net
loss
|
$
|
(33,903,513
|
)
|
$
|
(15,898,725
|
)
|
||
Weighted
average shares outstanding :
|
||||||||
Basic
|
245,279,135
|
61,115,618
|
||||||
Diluted
|
245,279,135
|
61,115,618
|
||||||
Loss
per share:
|
||||||||
Basic
|
$
|
(0.14
|
)
|
$
|
(0.26
|
)
|
||
Diluted
|
$
|
(0.14
|
)
|
$
|
(0.26
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
34
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
Additional
|
Total
|
|||||||||||||||||||
Common Stock
|
Paid in
|
Accumulated
|
Stockholders'
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
Balance
December 31, 2006 (Restated)
|
39,318,070
|
39,318
|
12,291,873
|
(40,015,366
|
)
|
(27,684,175
|
)
|
|||||||||||||
Convertible
debentures redemptions
|
19,243,386
|
19,243
|
6,879,914
|
-
|
6,899,157
|
|||||||||||||||
Convertible
debentures conversions
|
16,625,579
|
16,626
|
11,069,317
|
-
|
11,085,943
|
|||||||||||||||
Issuance
of stock in payment of board fees
|
35,909
|
36
|
20,716
|
-
|
20,752
|
|||||||||||||||
Option
compensation charges
|
-
|
-
|
531,113
|
-
|
531,113
|
|||||||||||||||
Issuance
of stock in payment of license fees
|
800,000
|
800
|
607,200
|
-
|
608,000
|
|||||||||||||||
Issuance
of stock in payment of employee bonuses
|
515,000
|
515
|
406,335
|
-
|
406,850
|
|||||||||||||||
Issuance
of stock to employees
|
340,000
|
340
|
16,660
|
-
|
17,000
|
|||||||||||||||
Issuance
of stock in payment of legal fees
|
85,000
|
85
|
67,915
|
-
|
68,000
|
|||||||||||||||
Issuance
of stock in acquisition of Mytogen
|
9,064,517
|
8,064
|
2,411,291
|
-
|
2,419,355
|
|||||||||||||||
Net
loss for the year ended December 31, 2007 (Restated)
|
-
|
-
|
-
|
(15,898,725
|
)
|
(15,898,725
|
)
|
|||||||||||||
Balance
December 31, 2007 (Restated)
|
85,027,461
|
$
|
85,027
|
$
|
34,302,334
|
$
|
(55,914,091
|
)
|
$
|
(21,526,730
|
)
|
|||||||||
Convertible
debentures redemptions
|
65,463,111
|
65,463
|
5,390,989
|
-
|
5,456,452
|
|||||||||||||||
Convertible
debentures conversions
|
39,741,987
|
39,743
|
6,121,900
|
-
|
6,161,643
|
|||||||||||||||
Issuance
of stock for debenture financing costs
|
14,710,329
|
14,710
|
791,369
|
-
|
806,079
|
|||||||||||||||
Option
compensation charges
|
-
|
-
|
527,243
|
-
|
527,243
|
|||||||||||||||
Adjustment
to fair value of derivatives
|
-
|
-
|
78,367
|
-
|
78,367
|
|||||||||||||||
Issuance
in respect of anti-dilution provision of convertible
debenture
|
70,503
|
71
|
15,510
|
-
|
15,581
|
|||||||||||||||
Issuance
of stock in payment of professional fees
|
1,002,291
|
1,002
|
212,847
|
-
|
213,849
|
|||||||||||||||
Issuance
of stock in settlement of accounts payable
|
220,735,436
|
220,735
|
5,818,877
|
-
|
6,039,612
|
|||||||||||||||
Issuance
of stock under stock incentive plan
|
1,497,263
|
1,497
|
140,936
|
-
|
142,433
|
|||||||||||||||
Issuance
of stock upon exercise of options
|
1,200,000
|
1,200
|
58,800
|
-
|
60,000
|
|||||||||||||||
Net
loss for the year ended December 31, 2008
|
-
|
-
|
-
|
(33,903,513
|
)
|
(33,903,513
|
)
|
|||||||||||||
Balance
December 31, 2008
|
429,448,381
|
$
|
429,448
|
$
|
53,459,172
|
$
|
(89,817,604
|
)
|
$
|
(35,928,984
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
35
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008
|
2007
|
|||||||
(restated)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$
|
(33,903,513
|
)
|
$
|
(15,898,725
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
402,867
|
386,643
|
||||||
Write-off
of uncollectible accounts receivable
|
30,782
|
-
|
||||||
Amortization
of deferred charges
|
702,018
|
407,391
|
||||||
Amortization
of deferred revenue
|
(798,310
|
)
|
(497,349
|
)
|
||||
Stock
based compensation
|
889,269
|
531,113
|
||||||
Amortization
of deferred issuance costs
|
4,792,087
|
3,874,300
|
||||||
Amortization
of discounts
|
17,871,392
|
17,052,016
|
||||||
Gain
on extinguishment of debt
|
-
|
(193,862
|
)
|
|||||
Adjustements
to fair value of derivatives
|
(13,082,247
|
)
|
(32,835,057
|
)
|
||||
Charges
related to issuance of February 2008 convertible
notes
|
685,573
|
-
|
||||||
Mytogen
acquisition
|
-
|
4,094,736
|
||||||
Charges
related to issuance of April 2008 convertible notes
|
531,769
|
-
|
||||||
Charges
related to issuance of 2007 convertible debentures
|
-
|
3,871,656
|
||||||
Repricing
of 2005 convertible debentures and warrants
|
-
|
843,277
|
||||||
Repricing
of 2006 and 2007 convertible debentures and warrants
|
(847,588
|
)
|
-
|
|||||
Shares
of common stock issued for professional services
|
759,496
|
1,307,828
|
||||||
Shares
of common stock issued for board fees
|
-
|
20,752
|
||||||
Shares
of common stock issued for financing costs
|
806,079
|
-
|
||||||
Warrants
issued for consulting services
|
155,281
|
-
|
||||||
Charges
related to settlement of anti-dilution provision
|
15,581
|
-
|
||||||
Forfeiture
of rent deposits
|
88,504
|
-
|
||||||
Loss
on disposal of fixed assets
|
227,543
|
-
|
||||||
Loss
on settlement of litigation
|
5,436,138
|
-
|
||||||
Loss
attributable to investment in joint venture
|
20,930
|
-
|
||||||
Amortization
of deferred joint venture obligations
|
(15,322
|
)
|
-
|
|||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivable
|
(265,260
|
)
|
39,293
|
|||||
Prepaid
expenses
|
35,940
|
42,812
|
||||||
Deferred
charges
|
-
|
(55,000
|
)
|
|||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
5,355,228
|
976,712
|
||||||
Interest
Payable
|
3,722,198
|
-
|
||||||
Deferred
revenue
|
3,418,745
|
-
|
||||||
Net
cash used in operating activities
|
(2,964,820
|
)
|
(16,031,464
|
)
|
||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(174,514
|
)
|
(158,522
|
)
|
||||
Return
of deposits
|
-
|
18,649
|
||||||
Net
cash used in investing activities
|
(174,514
|
)
|
(139,873
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from exercise of stock options
|
-
|
17,000
|
||||||
Proceeds
from issuance of convertible notes, net of cost
|
2,182,432
|
8,848,200
|
||||||
Payments
on convertible debentures
|
-
|
(139,123
|
)
|
|||||
Payments
on notes and leases
|
(18,650
|
)
|
(77,960
|
)
|
||||
Proceeds
from notes payable
|
630,000
|
-
|
||||||
Payment
for issuance costs on note payable
|
(3,660
|
)
|
-
|
|||||
Net
cash provided by financing activities
|
2,790,122
|
8,648,117
|
||||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(349,212
|
)
|
(7,523,220
|
)
|
||||
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
|
1,166,116
|
8,689,336
|
||||||
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
|
$
|
816,904
|
$
|
1,166,116
|
||||
CASH
PAID FOR:
|
||||||||
Interest
|
$
|
-
|
$
|
10,016
|
||||
Income
taxes
|
$
|
1,549
|
$
|
-
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
||||||||
Issuance
of 65,463,111 and 19,243,386 shares of common stock in redemption of
convertible debentures
|
$
|
5,456,452
|
$
|
7,038,000
|
||||
Issuance
of 39,741,987 and 16,625,579 shares of common stock in conversion of
convertible debentures
|
$
|
6,161,643
|
$
|
8,391,000
|
||||
Issuance
of 70,503 shares of common stock to settle an anti-dilution provision
feature of convertible debenture
|
$
|
15,581
|
$
|
-
|
||||
Issuance
of 1,200,000 shares of common stock upon exercise of employee stock
options
|
$
|
60,000
|
$
|
-
|
||||
Issuance
of 220,735,436 shares of common stock in settlement of
litigation
|
$
|
6,039,612
|
$
|
-
|
||||
Issuance
of 35,909 shares of common stock in payment of board
fees
|
$
|
$
|
21,000
|
|||||
Issuance
of 800,000 shares of common stock in payment of license
fees
|
$
|
$
|
608,000
|
|||||
Issuance
of 515,000 shares of common stock in payment of employee
bonuses
|
$
|
$
|
407,000
|
|||||
Issuance
of 85,000 shares of common stock in settlement of legal
fees
|
$
|
$
|
68,000
|
|||||
Issuance
of 8,064,517 shares of common stock in acquisition of
Mytogen
|
$
|
-
|
$
|
2,419,000
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
36
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
1.
|
ORGANIZATIONAL
MATTERS
|
Organization
On
January 31, 2005, Advanced Cell Technology, Inc. (formerly known as
A.C.T. Holdings, Inc.) (the “Company”) completed a merger with Advanced
Cell, Inc. (formerly known as Advanced Cell Technology, Inc.), a
Delaware corporation (“ACT”), pursuant to which a wholly-owned subsidiary of the
Company merged with and into ACT, with ACT remaining as the surviving
corporation and a wholly-owned subsidiary of the Company. Upon the completion of
the merger, the Company ceased all of its pre-merger operations and adopted the
business of ACT.
Prior to
the merger, the Company had minimal business, operations, revenues and assets,
and had been involved in an industry entirely unrelated to the business of ACT.
Therefore, the acquisition of ACT by the Company represented a complete change
in the nature of the Company’s business and operations, and changed the nature
of any prior investment in the Company.
The
transaction has been accounted for as a recapitalization of ACT, the accounting
acquirer. The historical financial statements presented for periods prior to the
merger are those of ACT.
On
November 18, 2005, a majority of the Company’s stockholders approved the
reincorporation of the Company from the state of Nevada to the state of Delaware
pursuant to a merger of the Company with and into a newly formed Delaware
corporation, followed by a “roll up” merger to combine the operating subsidiary
with the Company.
Nature
of Business
The
Company is a biotechnology company focused on developing and commercializing
human embryonic and adult stem cell technology in the emerging fields of
regenerative medicine. Principal activities to date have included obtaining
financing, securing operating facilities, and conducting research and
development. The Company has no therapeutic products currently available for
sale and does not expect to have any therapeutic products commercially available
for sale for a period of years, if at all. These factors indicate that the
Company’s ability to continue its research and development activities is
dependent upon the ability of management to obtain additional financing as
required.
Going
Concern
As
reflected in the accompanying financial statements, the Company has losses from
operations, negative cash flows from operations, a substantial stockholders’
deficit and current liabilities exceed current assets. The Company may thus not
be able to continue as a going concern and fund cash requirements for operations
through the next 12 months with current cash reserves. As discussed below, the
Company was able to raise additional cash in the second half of 2008 and the
first quarter of 2009. Notwithstanding success in raising capital, there
continues to be substantial doubt about the Company’s ability to continue as a
going concern.
In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon continued operations of the Company, which, in
turn, is dependent upon the Company’s ability to continue to raise capital and
ultimately generate positive cash flows from operations. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue its
existence.
F -
37
Management
has taken or plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
·
|
On
April 4, 2008, the Company released closing escrow on the issuance of
$4,038,880 of its amortizing senior secured convertible debentures and
associated warrants. The purchasers purchased from the Company senior
secured convertible debentures and warrants to purchase shares of the
Company’s common stock. The net cash and cash in-kind received by the
Company related to this financing was
$2,212,432.
|
·
|
On
April 30, 2008 the Company received a one time payment of $300,000 from
Terumo International which extended their ability to commence a Phase I
Clinical Trial in Japan by one year.
|
·
|
On
May 31, 2008, the Company closed its Alameda, California and Charlestown,
Massachusetts facilities in an effort to streamline and focus on its most
advanced clinical programs as part of a cost reduction program designed to
reduce annual operating expenses by $5-6 million. In conjunction with the
cost reduction activities, the Company has not renewed its Alameda,
California sublease and has vacated its Charlestown, Massachusetts
facility.
|
·
|
On
June 17, 2008, the Company drew down $60,000 and received $50,000
(reflecting a 16.66% original issue discount) under Note B described in
Note 8 to the financial statements.
|
·
|
On
July 10, 2008, the Company granted an exclusive license to Embryome
Sciences, Inc., a wholly owned subsidiary of BioTime, Inc., to use its
“ACTCellerate” embryonic stem cell technology and a bank of over 140
diverse progenitor cell lines derived using that technology. Under the
agreement, the Company received an up-front payment of $470,000, and is
eligible to receive an 8% royalty on sales of products, services, and
processes that utilize the licensed technology. However, as discussed in
more detail in Note 18, in connection with unpaid rents ordered to be paid
to a landlord, the Company has assigned the landlord rights and interest
to 62.5% of all royalties on this contract, and 65% of all other
consideration payable under this license agreement until such time that
the Company has repaid amounts owed to the landlord that total
$475,000.
|
·
|
Between
September 29, 2008 and January 20, 2009, the Company settled certain past
due accounts payable by the issuance of shares of its common stock. In
aggregate, the Company settled $1,108,673 in accounts payable through the
issuance of 260,116,283 shares of its common
stock.
|
·
|
On
December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies, 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.
CHA has agreed to contribute $150,000 cash and to fund operational costs
in order to conduct the hemangioblast program. Additionally, SCRMI has
agreed to pay the Company a fee of $500,000 for an exclusive, worldwide
license to the Hemangioblast Program. As of June 30, 2009, SCRMI has paid
the Company the entire $500,000 towards payment of the license fee. See
Note 6 for additional details of the joint
venture.
|
·
|
On
December 18, 2008, the Company entered into a license agreement with an
Ireland-based investor, Transition Holdings Inc. (“Transition”), for
certain of its non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. Through
December 31, 2008, the Company had received $2 million in cash under this
agreement. As of June 30, 2009, the Company has received the entire $3.5
million in cash under this agreement. The Company expects to apply the
proceeds towards its retinal epithelium (“RPE”) cells
program.
|
F -
38
·
|
On
March 30, 2009, the Company entered into a second license agreement with
CHA under which the Company will license its retinal pigment epithelium
(“RPE”) technology, for the treatment of diseases of the eye, to CHA for
development and commercialization exclusively in Korea. The Company is
eligible to receive up to a total of $1.9 million in fees based upon the
parties achieving certain milestones, including the Company making an IND
submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the
amount of $1,000,000 on April 1, 2009. Under the agreement, CHA will incur
all of the costs associated with the RPA clinical trials in Korea. The
agreement is part of continuing cooperation and collaboration between the
two companies.
|
·
|
On
March 11, 2009, the Company entered into a $5 million credit facility
(“Facility”) with a life sciences fund. Under the agreement, the proceeds
from the Facility must be used exclusively for the Company to file an
investigational new drug (“IND”) for its retinal pigment epithelium
(“RPE”) program, and will allow the Company to complete both Phase I and
Phase II studies in humans. An IND is required to commence clinical
trials. Under the terms of the agreement, the Company may draw down funds,
as needed for clinical development of the RPE program, from the investor
through the issuance of Series A-1 convertible preferred stock. The
preferred stock pays dividends, in kind of preferred stock, at an annual
rate of 10%, matures in four years from the initial issuance date, and is
convertible into common stock at $0.75 per share. As of June 30, 2009, the
Company has drawn down approximately $1,505,000 on this
facility.
|
·
|
On
May 13, 2009, the Company entered into a third license agreement with CHA
under which the Company will license its proprietary “single blastomere
technology,” which has the potential to generate stable cell lines,
including RPE for the treatment of diseases of the eye, for development
and commercialization exclusively in Korea. The Company received an
upfront license fee of $300,000.
|
·
|
Management
anticipates raising additional future capital from its current convertible
debenture holders, or other financing sources, that will be used to fund
any capital shortfalls. The terms of any financing will likely be
negotiated based upon current market terms for similar financings. No
commitments have been received for additional investment and no assurances
can be given that this financing will ultimately be
completed.
|
·
|
Management
has focused its scientific operations on product development in order to
accelerate the time to market products which will ultimately generate
revenues. While the amount or timing of such revenues cannot be
determined, management believes that focused development will ultimately
provide a quicker path to revenues, and an increased likelihood of raising
additional financing.
|
·
|
Management
will continue to pursue licensing opportunities of the Company’s extensive
intellectual property
portfolio.
|
F -
39
2.
|
RESTATEMENT
|
As
indicated in Notes 7 through 11, the Company has issued a series of complex
convertible debentures over the past several years. The convertible
debentures are issued for less than face value, thus generating significant
original issue discounts. In conjunction with the instruments, the Company
has issued substantial numbers of warrants, and the value of these warrants as
of the issue date is treated in the same manner as an original issue
discount. These discounts are amortized into interest expense over the
life of the debenture, which is a complex calculation due to the planned monthly
redemptions after a certain point included in the debenture agreements.
Further, the Debentures are converted into shares at the holder’s option, the
timing of which depends on the price of the Company’s stock. The Company
also gives brokers and other intermediaries considerable value via cash and
warrants in order to assist in selling the debentures. The costs
associated with issuing the debt are capitalized and amortized over the life of
the debt.
On
September 6, 2006, the Company entered into a securities purchase agreement
in which the purchasers purchased from the Company amortizing convertible
debentures and warrants to purchase shares of the Company’s common stock. In
connection with that transaction, and for each quarter thereafter, the Company
performed a valuation of the debentures and warrants
(see Note 10).
On
March 24, 2008, the Company discovered that it had been using an incorrect
number of warrants in calculating the appropriate fair value. The Company had
been using 4,541,672 warrants instead of the correct number of
19,064,670 warrants. Upon learning of the error, the Company recalculated
the correct fair value and noted that this change in warrant valuation had no
impact on the value of the related convertible debentures and all the related
embedded derivatives.
In
mid-May 2008, the Company discovered that the Deferred Issuance costs and
discounts had been amortized over a period longer than the weighted average life
of the instruments, with the result that the discounts and debt issuance costs
should have been charged to interest expense on a faster basis than had been the
case. Upon learning of the error the Company has recalculated the amortization
and resulting interest expense. The Company also discovered that its
calculation of the weighted average shares used in calculating basic and diluted
earnings per share for the year ended December 31, 2007 was in error. The actual
basic and diluted weighted average shares outstanding for the year ended
December 31, 2007 was approximately 20,238,000 shares higher than
reported.
In
accordance with Statement of Accounting Standards No. 154, the Company has
determined that these were errors, and has therefore restated the accompanying
statements of operations, and cash flows for the year ended December 31, 2007
and the balance sheet as of December 31, 2007.
As Originally
Reported
|
Restated
|
Difference
|
||||||||||
December 31, 2007
|
||||||||||||
Balance
Sheet
|
||||||||||||
Deferred
issuance costs
|
$
|
5,107,599
|
$
|
4,772,087
|
$
|
(335,512
|
)
|
|||||
2005
Convertible debenture and embedded derivatives – current
portion
|
$
|
1,040,156
|
$
|
1,276,871
|
$
|
236,715
|
||||||
2006
Convertible debenture and embedded derivatives – current
portion
|
$
|
906,860
|
$
|
1,625,327
|
$
|
718,467
|
||||||
2007
Convertible debenture and embedded derivatives – current
portion
|
$
|
363,805
|
$
|
1,160,847
|
$
|
797,042
|
||||||
2006
Convertible debenture and embedded derivatives, less current
portion
|
$
|
793,504
|
$
|
1,422,164
|
$
|
628,660
|
||||||
2007
Convertible debenture and embedded derivatives, less current
portion
|
$
|
2,364,731
|
$
|
2,321,695
|
$
|
(43,036
|
)
|
|||||
Accumulated
deficit
|
$
|
(53,240,732
|
)
|
$
|
(55,914,091
|
)
|
$
|
(2,673,359
|
)
|
|||
Total
stockholders’ deficit at December 31, 2007
|
$
|
(18,853,371
|
)
|
$
|
(21,526,730
|
)
|
$
|
(2,673,359
|
)
|
F -
40
As Originally
Reported
|
Restated
|
Difference
|
||||||||||
Year Ended December 31,
2007
|
||||||||||||
Statement
of Operations
|
||||||||||||
Interest
expense
|
$
|
(18,350,304
|
)
|
$
|
($21,023,663
|
)
|
$
|
(2,673,359
|
)
|
|||
Net
loss
|
$
|
(13,225,366
|
)
|
$
|
(15,898,725
|
)
|
$
|
(2,673,359
|
)
|
|||
Basic
and diluted loss per share
|
$
|
(0.32
|
)
|
$
|
(0.26
|
)
|
$
|
(0.06
|
)
|
|||
Weighted
average shares – basic and diluted
|
40,877,145
|
61,115,618
|
20,238,473
|
|||||||||
Statement of Cash
Flows
|
||||||||||||
Net
loss
|
$
|
(13,225,366
|
)
|
$
|
(15,898,725
|
)
|
$
|
(2,673,359
|
)
|
|||
Amortization
of deferred issuance cost
|
$
|
3,538,788
|
$
|
3,874,300
|
$
|
335,512
|
||||||
Amortization
of discount
|
$
|
14,714,169
|
$
|
17,052,016
|
$
|
2,337,847
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Presentation—The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”).
Principles of
Consolidation —The accounts of the Company and Mytogen, Inc.
(“Mytogen”) are included in the accompanying consolidated financial statements
for the period from September 20, 2007 to December 31, 2007. On
September 20, 2007, a newly formed subsidiary of the Company merged into
Mytogen to effect a reorganization of Mytogen. As a result of the merger, the
Company became the owner of 100% of the outstanding shares of Mytogen. During
the period from September 20, 2007 to December 31, 2008, all
intercompany balances and transactions were eliminated in
consolidation.
Segment Reporting
—SFAS No. 131, “Disclosure about Segments of an Enterprise and Related
Information” 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 accounting principles generally accepted in the United States
and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Specifically, the Company’s management has estimated
variables used to calculate the Black-Scholes and binomial lattice model
calculations used to value derivative instruments as discussed below under “Fair
Value Measurements”. In addition, 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 and its accounts receivable allowance. Actual results
could differ from those estimates.
Reclassifications—Certain
prior year financial statement balances have been reclassified to conform to the
current year presentation. These reclassifications had no effect on the recorded
net loss.
F -
41
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 December 31, 2008 and 2007, the Company had
deposits in excess of federally-insured limits totaling $655,074 and $965,042,
respectively. The Company has not experienced any losses in such
accounts.
Accounts
Receivable —The Company periodically assesses its accounts receivable for
collectability on a specific identification basis. Past due status on accounts
receivable is based on contractual terms. 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
account receivable against the allowance it has already created. The Company
does not require collateral for its trade accounts receivable.
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
|
Equity Method
Investment — The Company follows Accounting Principles Board Opinion No.
18 The Equity Method of
Accounting for Investments in Common Stock (“APB No. 18”) 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 Issuance
Costs —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. The weighted average amortization period for deferred debt
issuance costs is 36 months.
Intangible and
Long-Lived Assets— The Company follows Statement of Financial Accounting
Standards (“FAS”) No. 144, “Accounting for Impairment of Disposal of
Long-Lived Assets,” 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. During the years ended December 31, 2008 and 2007, no impairment
loss was recognized.
F -
42
Fair Value
Measurements — For certain financial instruments, including accounts
receivable, accounts payable, accrued expenses, interest payable, advances
payable and notes payable, the carrying amounts approximate fair value due to
their relatively short maturities.
Emerging
Issues Task Force (“EITF”) No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19”), provides a criteria for determining whether freestanding contracts that
are settled in a company’s own stock, including common stock options and
warrants, should be designated as either an equity instrument, an asset or as a
liability under SFAS No. 133 “Accounting for Derivative Instruments
and Hedging Activities.” Under the provisions of EITF 00-19, a contract
designated as an asset or a liability must be carried at fair value on a
company’s balance sheet, with any changes in fair value recorded in a company’s
results of operations. Using the criteria in EITF 00-19, the Company
has determined that its outstanding options and warrants require liability
accounting and records the fair values as warrant and option
derivatives.
On
January 1, 2008, the Company adopted FAS No. 157, “Fair Value Measurements”
(“FAS 157”). FAS 157 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.
|
FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” requires
bifurcation of embedded derivative instruments and measurement of fair value for
accounting purposes. In addition, FAS 155, “Accounting for Certain Hybrid
Financial Instruments” requires measurement of fair values of hybrid financial
instruments for accounting purposes. The Company applied the accounting
prescribed in FAS 133 to account for its 2005 Convertible Debenture as described
in Note 11. For practicality in the valuation of the debentures and for ease of
presentation, the Company applied the accounting prescribed in FAS 155 to
account for the 2006, 2007, February 2008, and April 2008 Convertible Debentures
as described below in Notes 7, 8, 9, and 10.
In
determining the appropriate fair value of the debentures, the Company used Level
2 inputs for its valuation methodology. For the periods from January 1, 2007
through September 30, 2008, the Company applied the Black-Scholes models,
Binomial Option Pricing models, Standard Put Option Binomial models and the net
present value of certain penalty amounts to value the debentures and their
embedded derivatives. At December 31, 2008, to achieve greater cost
efficiencies, the Company changed its application of the Income Approach as
defined under paragraph 18 of FAS 157, by applying the Black-Scholes option
pricing model in valuing all debentures and their embedded derivatives. This
change did not materially impact the results of the Company’s valuations of its
debentures and embedded derivatives. The impact of the change in the application
of the Income Approach was approximately 1.4% of the fair value of the Company’s
debentures and their embedded derivatives. FAS 157, paragraph 20 states that the
disclosure provisions of Statement of Financial Accounting Standards No. 154
Accounting Changes and Error
Corrections (“FAS 154”) for a change in accounting estimate are not
required for revisions resulting from a change in a valuation technique or its
application.
F -
43
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.
At
December 31, 2008, the Company identified the following assets and liabilities
that are required to be presented on the balance sheet at fair
value:
Fair Value Measurements at
|
||||||||||||||||
Fair Value
|
December 31, 2008
|
|||||||||||||||
As of
|
Using Fair Value Hierarchy
|
|||||||||||||||
Derivative Liabilities
|
December 31, 2008
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
Conversion
feature - 2005 debenture
|
4,075
|
-
|
4,075
|
-
|
||||||||||||
2006
Convertible debenture and embeded derivatives
|
1,993,354
|
-
|
1,993,354
|
-
|
||||||||||||
2007
Convertible debenture and embedded derivatives
|
7,706,344
|
-
|
7,706,344
|
-
|
||||||||||||
February
2008 Convertible debentures and embedded derivatives
|
1,757,470
|
-
|
1,757,470
|
-
|
||||||||||||
April
2008 Convertible debenture and embedded derivatives
|
4,066,505
|
-
|
4,066,505
|
-
|
||||||||||||
Warrant
and option derivatives
|
2,655,849
|
-
|
2,655,849
|
-
|
||||||||||||
18,183,597
|
-
|
18,183,597
|
-
|
For the
year ended December 31, 2008 and 2007, the Company recognized a gain of
$13,082,247 and $32,835,057, respectively, for the changes in the valuation of
the aforementioned liabilities.
The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented in the consolidated balance sheets at fair value in
accordance with FAS 157.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The Company
adopted FAS 159 on January 1, 2008. The Company chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.
Revenue
Recognition — The Company’s revenues are 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.
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.
F -
44
Share-Based
Compensation —Effective January 1, 2006, the Company adopted the
fair value recognition provisions of FAS 123(R), using the
modified-prospective transition method. Under this method, stock-based
compensation expense is recognized in the consolidated financial statements for
stock options granted, modified or settled after the adoption date. In
accordance with FAS 123(R), the unamortized portion of options granted
prior to the adoption date is recognized into earnings after adoption. Results
for prior periods have not been restated, as provided for under the
modified-prospective method.
Under
FAS 123(R), stock-based compensation expense recognized is based on the
value of the portion of share-based payment awards that are ultimately expected
to vest during the period. Based on this, our stock-based compensation is
reduced for estimated forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. Assumptions relative to volatility and
anticipated forfeitures are determined at the time of grant with the following
weighted average assumptions used in the years ended December 31, 2008 and
2007:
Year
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Expected life in years
|
4.0 | 4.0 | ||||||
Volatility
|
148 | % | 163 | % | ||||
Risk
free interest rate
|
2.50 | % | 4.74 | % | ||||
Expected
dividends
|
None
|
None
|
||||||
Expected
forfeitures
|
13 | % | 13 | % |
The
assumptions used in the Black-Scholes models referred to above are based upon
the following data: (1) The expected life of the option is estimated by
considering the contractual term of the option, the vesting period of the
option, the employees’ expected exercise behavior and the post-vesting employee
turnover rate. (2) The expected stock price volatility of the underlying
shares over the expected term of the option is based upon historical share price
data. (3) The risk free interest rate is based on published U.S. Treasury
Department interest rates for the expected terms of the underlying options.
(4) Expected dividends are based on historical dividend data and expected
future dividend activity. (5) The expected forfeiture rate is based on
historical forfeiture activity and assumptions regarding future forfeitures
based on the composition of current grantees.
In
accordance with FAS 123(R), the benefits of tax deductions in excess of the
compensation cost recognized for options exercised during the period are
classified as financing cash inflows rather than operating cash
inflows.
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
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.
F -
45
Applicable
interest and penalties associated with unrecognized tax benefits are classified
as additional income taxes in the statement of income.
Net Loss Per
Share— Earnings per share is calculated in accordance with the SFAS
No. 128, “Earnings Per Share” (“SFAS 128”). 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
December 31, 2008 and 2007, approximately 270,206,000 and 67,000,000 potentially
dilutive shares, respectively, were excluded from the shares used to calculate
diluted earnings per share as their inclusion would be
anti-dilutive.
Concentrations
and Other Risks —Currently, the Company’s revenues and accounts
receivable are concentrated on a small number of customers. The following table
shows the Company’s concentrations of its revenue for those customers comprising
greater than 10% of total revenue.
2008
|
2007
|
|||||||
Genzyme
Transgenics Corporation
|
17 | % | 20 | % | ||||
START
Licensing, Inc.
|
13 | % | 15 | % | ||||
Exeter
Life Sciences, Inc.
|
16 | % | 19 | % | ||||
Terumo
Corporation
|
25 | % | N/A | |||||
International
Stem Cell Corporation
|
11 | % | N/A |
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.
Acts of God could also adversely affect the Company’s business.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued FAS 157 “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including financial statements for an
interim period within that fiscal year. The Company has adopted
FAS 157 beginning January 1, 2008 and does not believe the adoption
had a material impact on our financial position, results of operations or cash
flows.
F -
46
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”. This Statement permits entities to choose to
measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. The
Company adopted FAS No. 159 on January 1, 2008. The Company chose not to elect
the option to measure the fair value of eligible financial assets and
liabilities.
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed. The
implementation of EITF 07-3 did not have an impact on the Company’s consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141R”), which replaced SFAS 141. SFAS 141R retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase accounting as
well as requiring the expensing of acquisition-related costs as incurred.
Furthermore, SFAS 141R provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective for fiscal
years beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company believes adopting FAS No. 141R will significantly impact its
financial statements for any business combination completed after December 31,
2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS
160”). SFAS 160 amends ARB 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It is intended to eliminate the diversity in
practice regarding the accounting for transactions between equity and
noncontrolling interests by requiring that they be treated as equity
transactions. Further, it requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. SFAS 160 also establishes a single method of accounting
for changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation, requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated, requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent’s owners and the interests of the noncontrolling
owners of a subsidiary, among others. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, with early adoption permitted, and it
is to be applied prospectively. SFAS 160 is to be applied prospectively as of
the beginning of the fiscal year in which it is initially applied, except for
the presentation and disclosure requirements, which must be applied
retrospectively for all periods presented. The adoption of SFAS 160 will not
have an impact on the Company’s consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position No. 157-1 ("FSP 157-1"),
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13." FSP 157-1 is
effective upon initial adoption of SFAS 157, and indicates that it does not
apply under SFAS 13, "Accounting for Leases" and other accounting
pronouncements that address fair value measurements for purposes of lease
classification or measurement under SFAS 13. This scope exception does not apply
to assets acquired and liabilities assumed in a business combination that are
required to be measured at fair value under SFAS 141 or SFAS 141R, regardless of
whether those assets and liabilities are related to leases. The adoption of FSP
157-1 did not have an impact on the Company’s consolidated financial
statements.
Also in
February 2008, the FASB issued FASB Staff Position No. 157-2 ("FSP 157-2"),
"Effective Date of FASB Statement No. 157." With the issuance of FSP
157-2, the FASB agreed to: (a) defer the effective date in SFAS No. 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), and (b) remove certain leasing transactions
from the scope of SFAS 157. The deferral is intended to provide the FASB time to
consider the effect of certain implementation issues that have arisen from the
application of SFAS 157 to these assets and liabilities.
F -
47
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" (“SFAS 161”). SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company does not anticipate that the adoption of SFAS 161 will
have a material impact on its consolidated results of operations or consolidated
financial position.
In April
2008, the FASB issued FASB Staff Position No. 142-3 “Determination of the useful
life of Intangible Assets” (“FSP 142-3”), which amends the factors a company
should consider when developing renewal assumptions used to determine the useful
life of an intangible asset under SFAS142. This Issue is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. SFAS 142 requires companies to
consider whether renewal can be completed without substantial cost or material
modification of the existing terms and conditions associated with the asset. FSP
142-3 replaces the previous useful life criteria with a new requirement—that an
entity consider its own historical experience in renewing similar arrangements.
If historical experience does not exist then the Company would consider market
participant assumptions regarding renewal including 1) highest and best use of
the asset by a market participant, and 2) adjustments for other entity-specific
factors included in SFAS 142. The Company does not anticipate that the adoption
of FSP 142-3 will have a material impact on its consolidated results of
operations or consolidated financial position.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS 162”). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles." The Company
does not expect the adoption of SFAS 162 will have a material impact on its
consolidated results of operations or consolidated financial
position.
On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1
clarifies that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) are not addressed by paragraph 12
of APB Opinion No. 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP
APB14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact that FSP APB 14-1 will have on its
consolidated results of operations or consolidated financial
position.
On June
16, 2008, the FASB issued FSP No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards
that contain rights to dividend payments should be included in earnings per
share calculations. The guidance will be effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the requirements of
FSP EITF 03-6-1 and the impact that its adoption will have on the consolidated
results of operations or consolidated financial position.
F -
48
In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted. Paragraph 11(a)
of SFAS No. 133 “Accounting for Derivatives and Hedging
Activities,” specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own stock
and (b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all options and warrants exercisable at strike
prices denominated in any currency other than the functional currency of the
operating entity. The Company does not expect the adoption of EITF 07-5 will
have an impact on its consolidated results of operations or consolidated
financial position.
In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5.” The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,” that result from EITF 00-27 “
Application of Issue No. 98-5 to Certain Convertible
Instruments,” and SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.” EITF 08-4 is effective for financial statements issued for
fiscal years ending after December 15, 2008. Early application is permitted. The
Company is currently evaluating the impact of adoption of EITF 08-4 on the
accounting for the convertible notes and related warrants
transactions.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP 157-3 became effective on October 10, 2008, and its adoption did not
have a material impact on the Company’s consolidated results of operations or
consolidated financial position.
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment models of FAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 will not have a material impact on
the Company’s consolidated financial statements.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating
fair value measurements in accordance with FASB Statement No. 157 when
there is not an active market or where the price inputs being used represent
distressed sales. FSP FAS 157-4 provides additional guidance on the major
categories for which equity and debt securities disclosures are to be presented
and amends the disclosure requirements of FASB Statement No. 157 to require
disclosure in interim and annual periods of the inputs and valuation
technique(s) used to measure fair value and a discussion of changes in valuation
techniques and related inputs, if any, during the period. FSP FAS 157-4
shall be applied prospectively and is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP must
also early adopt FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairment (“FSP FAS 115-2 and
FAS 124-2”). The Company is in the process of evaluating the impact, if
any, of applying this FSP on its financial position, results of operations and
cash flows.
F -
49
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. The Company is
currently evaluating this new FSP but does not believe that it will have a
significant impact on the determination or reporting of the financial
results.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and
APB 28-1”). FSP FAS 107-1 and APB 28-1 requires companies to disclose in
interim financial statements the fair value of financial instruments within the
scope of FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments. However, companies are not required to provide in interim periods
the disclosures about the concentration of credit risk of all financial
instruments that are currently required in annual financial statements. The
fair-value information disclosed in the footnotes must be presented together
with the related carrying amount, making it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the balance sheet. FSP FAS 107-1 and APB
28-1 also requires that companies disclose the method or methods and significant
assumptions used to estimate the fair value of financial instruments and a
discussion of changes, if any, in the method or methods and significant
assumptions during the period. The FSP shall be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. An entity
early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP
FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company
will adopt the disclosure requirements of this pronouncement for the quarter
ended June 30, 2009, in conjunction with the adoption of FSP
FAS 157-4, FSP FAS 115-2 and FAS 124-2.
In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”). SFAS 165
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 will be effective for interim or
annual period ending after June 15, 2009, and accordingly, the Company adopted
this standard during the second quarter of 2009. Subsequent events have been
evaluated as of the date of this filing and no further disclosures were required
and its adoption does not impact its consolidated results of operations and
financial condition.
F -
50
4.
|
LICENSE
REVENUE
|
On April
30, 2008 the Company received a one time payment of $300,000 from Terumo
International which extended their ability to commence a Phase I Clinical Trial
in Japan by one year. All other terms and conditions for the license
agreement between Terumo and the Company remain the same. The Company has
recorded $200,000 in license fee revenue for the year ended December 31, 2008 in
its accompanying consolidated statements of operations, and the remainder of the
license fee has been accrued in deferred revenue in the accompanying
consolidated balance sheet at December 31, 2008. The Company is recognizing
revenue from this agreement over the one-year extension period.
On May
23, 2008, the Company received $150,000 from International Stem Cells, Inc. as a
continuing annual payment to renew its license fee for use of certain of the
Company’s technologies. The Company has recorded $87,500 in license fee revenue
for the year ended December 31, 2008 in its accompanying consolidated
statements of operations, and the remainder of the license fee has been accrued
in deferred revenue in the accompanying consolidated balance sheet at December
31, 2008. The Company is recognizing revenue from this agreement over a one-year
period.
On July
10, 2008, the Company granted an exclusive license to Embryome Sciences, Inc., a
wholly owned subsidiary of BioTime, Inc., to use its “ACTCellerate” embryonic
stem cell technology and a bank of over 140 diverse progenitor cell lines
derived using that technology. Under the agreement, the Company received an
up-front payment of $470,000, and is eligible to receive an 8% royalty on sales
of products, services, and processes that utilize the licensed technology.
However, in connection with the rent judgment discussed in Note 18, in
connection with unpaid rents owed with its landlord, the Company has assigned
the landlord rights and interest to 62.5% of all royalties on this contract, and
65% of all other consideration payable under this license agreement until such
time that the Company has repaid amounts owed to the landlord that total
$475,000. The Company has recorded $12,288 in license fee revenue for the year
ended December 31, 2008 in its accompanying consolidated statements of
operations, and the remainder of the license fee has been accrued in deferred
revenue in the accompanying consolidated balance sheet at December 31, 2008. The
Company is recognizing revenue from this agreement over its 17-year patent
useful life.
On
December 18, 2008, the Company entered into a license agreement with Transition
for certain of the Company’s non-core technology. Under the agreement,
Transition agreed to acquire a license to the technology for a total of $3.5
million in cash. As of December 31, 2008, the Company had received $2,000,000,
less wire fees, in cash under this agreement. The Company received the remaining
$1,500,000 in 2009. The Company expects to apply the proceeds towards its
retinal epithelium (“RPE”) cells program. The Company has not recorded license
fee revenue for the year ended December 31, 2008 as the effective date of the
agreement was December 18, 2008 and the Company’s policy is to begin recognition
of revenue in the first full month following the effective date of the license
agreement. The license fee has been accrued in deferred revenue in the
accompanying consolidated balance sheet at December 31, 2008. The Company is
recognizing revenue from this agreement over its 17-year patent useful
life.
In
connection with the joint venture agreement discussed in Note 6, on December 1,
2008, the Company entered into a license agreement with CHA for the exclusive,
worldwide license to the Hemangioblast Program. Under the agreement, CHA agreed
to acquire the Company’s core technology for $500,000 in cash. As of December
31, 2008, the Company had received $250,000. The Company received the remaining
$250,000 in January 2009. Accordingly, the Company has recorded $250,000 in
accounts receivable in its consolidated balance sheets at December 31, 2008. The
Company has recorded $2,450 in license fee revenue for the year ended December
31, 2008 in its accompanying consolidated statements of operations, and the
remainder of the license fee has been accrued in deferred revenue at December
31, 2008. The Company is recognizing revenue from this agreement over its
17-year patent useful life.
5.
|
PROPERTY
AND EQUIPMENT
|
F -
51
Property
and equipment consisted of the following at December 31, 2008 and
2007:
2008
|
2007
|
|||||||
Machinery
& equipment
|
$
|
1,470,141
|
$
|
1,552,642
|
||||
Computer
equipment
|
436,541
|
424,612
|
||||||
Office
furniture
|
76,201
|
76,201
|
||||||
Leasehold
improvements
|
127,197
|
127,197
|
||||||
Capital
leases
|
51,235
|
238,754
|
||||||
Accumulated
depreciation
|
(1,761,307
|
)
|
(1,504,902
|
)
|
||||
Property
and equipment, net
|
$
|
400,008
|
$
|
914,504
|
Depreciation
expense for the years ended December 31, 2008 and 2007 amounted to $402,867 and
$386,643, respectively.
6.
|
INVESTMENT
IN JOINT VENTURE
|
On
December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies, 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 67% interest, CHA has
agreed to contribute $150,000 cash and to fund all operational costs in order to
conduct the hemangioblast program.
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 has recorded $2,450 in license fee
revenue for the year ended December 31, 2008 in its accompanying consolidated
statements of operations, and the remainder of the license fee has been accrued
in deferred revenue in the accompanying consolidated balance sheet at December
31, 2008.
Accounting
Principles Board Opinion 18 The Equity Method of Accounting for
Investments in Common Stock (“APB 18”), paragraph 19a requires that the
difference between the cost of an investment and the amount of underlying equity
in net assets of an investee should be accounted for as if the investee were a
consolidated subsidiary. The Company has calculated the difference between the
cost of the investment and the amount of underlying equity in net assets of the
joint venture to be $196,130, based on the Company’s initial cost basis in the
investment of $246,130, less its 33.3% of the initial equity in net assets of
the joint venture of $50,000. The Company will amortize the $196,130
over the term of the shorter of the equipment usage or lease term (through April
2010, or 17 months from December 1, 2008). The amortization will be applied
against the value of the Company’s investment. Amortization expense for the
month of December 2008 was $11,537.
The
following table is a summary of key financial data for the joint venture as of
and for the year ended December 31, 2008:
Current
assets
|
$
|
179,400
|
||
Noncurrent
assets
|
$
|
468,150
|
||
Current
liabilities
|
$
|
76,869
|
||
Noncurrent
liabilities
|
$
|
468,150
|
||
Net
revenue
|
$
|
2,450
|
||
Net
loss
|
$
|
(62,791
|
)
|
7.
|
CONVERTIBLE
NOTE PAYABLE—APRIL 2008
|
On April
4, 2008, the Company entered into a Securities Purchase Agreement with
accredited investors for the issuance of an aggregate of $4,038,880 principal
amount of senior secured convertible debentures with an original issue discount
of $820,648 representing approximately 20.32%. The amortizing senior secured
convertible debentures issued at the closing of the 2008 financing will be due
and payable one (1) year from the closing, and will not bear interest. The cash
purchase price excluding refinancing of bridge debt and in-kind payments was
$2,212,432. Refinanced bridge debt consisted of the aggregate $130,000 in
unsecured convertible notes previously issued and sold to PDPI LLC and The
Shapiro Family Trust on March 21, 2008. The net outstanding amount of principal
plus interest of the Notes was converted into the debt within the April 2008
debenture on a dollar-for-dollar basis. Dr. Shapiro, one of the Company’s
directors, may be deemed the beneficial owner of the securities owned by The
Shapiro Family Trust. The convertible debentures are convertible beginning on
the six-month anniversary of the effective date of the note at the option of the
holders into 26,925,867 shares of common stock at a fixed conversion price of
$0.15 per share, subject to anti-dilution and other customary adjustments. The
Company has classified the note as short term in the accompanying consolidated
balance sheet as of December 31, 2008. The debenture contains no restrictions as
to the use of the proceeds, and is intended to fund the Company’s working
capital obligations. As of June 30, 2009, the entire debenture balance remains
outstanding.
F -
52
Under the
terms of the agreements, principal amounts owed under the debentures become due
and payable commencing six months following closing of the transaction. At that
time, and each month thereafter, the Company is required to either repay 1/30 of
the outstanding balance owed in common stock at the lesser of the then
conversion price or 80% of the weighted average price for common shares for the
10 trading days prior to the amortization payment date. The debenture agreement
does not limit the number of shares that the Company could be required to
issue.
The note
contains a provision that modifies the conversion rate to $0.15 per common share
and the warrant exercise price to $0.165 per common share, issued to the April
2008 note payable subscribers who are also participants in the 2005, 2006, and
2007 debentures. The Company has considered the impact of Emerging Issue Task
Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a
Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of
FASB No. 15, and 05 -
7—Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues on the accounting treatment of the change
in conversion price of the 2005, 2006, and 2007 Convertible Debentures described
above. EITF 96 - 19 states that a transaction resulting in a significant change
in the nature of a debt instrument should be accounted for as an extinguishment
of debt. The Company has concluded that the change in conversion price and
warrant exercise price does not constitute a significant change in the nature of
the debt and that the transaction should not be treated as an extinguishment of
that debt.
In
connection with this financing, the Company accrued cash fees to a placement
agent of $20,000 and issued warrants to purchase 26,925,867 shares of Common
Stock at an exercise price of $0.165 per share. The term of the warrants is five
years and is subject to anti-dilution and other customary adjustments. The
initial fair value of the warrants was estimated at $2,587,521 using the
Black-Scholes pricing model. The warrants were again valued at $709,384 at
December 31, 2008 at fair value using the Black-Scholes model, representing a
decrease in the fair value of the liability of $1,878,137 from the debenture’s
inception date, which was recorded through the results of operations as an
adjustment to fair value of derivatives. The Company issued warrants to purchase
an aggregate of 4,263,962 shares of common stock of the Company at an exercise
price of $0.165 to T.R. Winston & Company, LLC as consideration for
placement agent services provided in connection with the Debenture. The term of
the warrants is five years and is subject to anti-dilution and other customary
adjustments. The initial fair value of the warrants was estimated at $412,732
using the Black-Scholes pricing model. The warrants were again valued at
$112,659 at December 31, 2008 at fair value using the Black-Scholes model,
representing a decrease in the fair value of the liability of $300,073 from the
debenture’s inception date, which was recorded through the results of operations
as an adjustment to fair value of derivatives. The assumptions used in the
Black-Scholes option pricing model at April 4, 2008 for all warrants issued in
connection with this Debenture are as follows: (1) dividend yield of 0%; (2)
expected volatility of 145%, (3) risk-free interest rate of 2.63%, and (4)
expected life of 5.0 years. The assumptions used in the Black-Scholes option
pricing model at December 31, 2008 for all warrants issued in connection with
this Debenture are as follows: (1) dividend yield of 0%; (2) expected volatility
of 185%, (3) risk-free interest rate of 0.37%, and (4) expected life of 4.3
years. Cash fees accrued in the amount of $20,000, the initial fair value of the
original issue discount in the amount of $820,649, and the initial fair value of
the warrant discount in the amount of $3,000,253 were capitalized as debt
issuance costs (cash paid) and debt discounts (original issue discount and
warrant discount), respectively, and have been amortized in full during the year
ended December 31, 2008 due to the August 6, 2008 default as discussed
below.
F -
53
Under the
terms of the agreement, beginning October 1, 2008, the Company is to amortize
the note resulting in complete repayment by the maturity date. The Company may
make the amortization payment in either cash or equity. If the payment is made
in common stock, the stock will be issued at a price per share equal to the
lesser of (i) the then conversion price, and (ii) 80% of the weighted average
price for common shares for the 10 trading days prior to the amortization
payment date. As of June 30, 2009, no note amortization has occurred and the
note is in default as discussed below.
The
agreement entered into provides that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity. Additionally, penalties will be incurred by the Company
in the event of potential default conditions.
As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) repay any indebtedness, other than the
debentures already issued on a pro-rata basis, other than regularly scheduled
principle payments as such terms are in effect under this debenture, (f) pay
cash dividends or distributions on any equity securities of the Company, (g)
enter into any material transaction with any affiliate of the Company, unless
such transaction is made on an arm’s-length basis, or (h) enter into any
agreement with respect to any of the above.
The
Company has complied with the provisions of FAS 155 “Accounting for Certain
Hybrid Financial Instruments”, and recorded the fair value of the convertible
debentures and related embedded conversion option. The initial fair value of the
debentures and embedded conversion option was valued using a combination of
Binomial and Black-Scholes models, resulting in a fair value of $4,570,649 at
April 4, 2008. The convertible debenture is convertible at the option of the
holders into a total of 26,925,867 shares of common stock at a conversion price
of $0.15 per share, subject to anti-dilution and other customary adjustments.
The excess of $531,769 of this value over the face value of the note was
recorded through the results of operations as charges related to issuance of
April 2008 convertible note payable. The fair value of the debentures and
embedded conversion option was $4,066,505 at December 31, 2008, which includes
the face value of the note of $4,038,880, plus the $27,625 fair value of the
embedded conversion option. The embedded conversion option was valued using the
Black-Scholes option pricing model. The assumptions used in the Black-Scholes
option pricing model at December 31, 2008 are as follows: (1) dividend yield of
0%; (2) expected volatility of 185%, (3) risk-free interest rate of 0.37%, and
(4) expected life of 4.3 years. The change in fair value of the embedded
conversion option of $504,144 is recorded through the results of operations as
an adjustment to the fair value of derivatives for the year ended December 31,
2008.
The
following table summarizes the changes in the fair values of the respective
liabilities versus the values at April 4, 2008:
Fair
Value at
|
||||||||||||||||||
April
4,
|
December
31,
|
Increase
|
||||||||||||||||
Face
Amount
|
Net
Purchase Price
|
2008
|
2008
|
(Decrease)
|
||||||||||||||
$ | 4,038,880 | $ | 3,218,232 | $ | 4,570,649 | $ | 4,066,505 | $ | (504,144 | ) |
As of
December 31, 2008, the outstanding principal amount for the 2008 Convertible
Debentures is $4,038,880. Interest expense for the year ended December 31, 2008
was $3,840,902.
F -
54
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 12 for the default interest expense
recognized during the year ended December 31, 2008.
8.
|
CONVERTIBLE
NOTES PAYABLE—FEBRUARY 2008
|
The
Company issued and sold a $600,000 unsecured convertible note dated as of
February 15, 2008 (“Note A”) to JMJ Financial, for a net purchase price of
$500,000 (reflecting a 16.66% original issue discount) in a private placement.
Note A bears interest at the rate of 12% per annum, and is due by February 15,
2010. At any time after the 180th day following the effective date of Note A,
the holder may at its election convert all or part of Note A plus accrued
interest into shares of the Company's common stock at the conversion rate of the
lesser of: (a) $0.38 per share, or (b) 80% of the average of the three lowest
trade prices in the 20 trading days prior to the conversion. Pursuant to the Use
of Proceeds Agreement entered into in connection with the issuance of Note A,
the Company is required to use the proceeds from Note A solely for research and
development dedicated to adult stem cell research.
Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, the Company issued and sold an unsecured convertible note (“Note B”) to
JMJ Financial in the aggregate principal amount of $1,200,000 or so much as may
be paid towards the balance of the JMJ Note. Note B bears interest at the rate
of 10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of the Company’s common stock at the
conversion rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average
of the three lowest trade prices in the 20 trading days prior to the conversion.
In connection with the issuance of Note B, the Company entered into a Collateral
and Security Agreement dated as of February 15, 2008 with JMJ Financial pursuant
to which the Company granted JMJ Financial a security interest in certain of its
assets securing the JMJ Note. As of December 31, 2008, the Company had drawn
down and received the following amounts under Note B:
· On March 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
· On June 17, 2008 —
$60,000 for a net purchase price of $50,000 (reflecting a 16.66% original issue
discount).
As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) repay any indebtedness, other than the
debentures already issued on a pro-rata basis, other than regularly scheduled
principle payments as such terms are in effect under this debenture, (f) pay
cash dividends or distributions on any equity securities of the Company, (g)
enter into any material transaction with any affiliate of the Company, unless
such transaction is made on an arm’s-length basis, or (h) enter into any
agreement with respect to any of the above.
F -
55
The
debenture agreement does not limit the number of shares that the Company could
be required to issue. The convertible debenture is convertible at the option of
the holders into a total of 45,000,000 shares of common stock at a conversion
price of $0.016 per share, subject to anti-dilution and other customary
adjustments. The conversion options included in Note A and Note B represent
embedded derivative instruments. Accordingly, the Company has complied with the
provisions of FAS 155 “Accounting for Certain Hybrid Financial Instruments”. The
fair values of Note A and Note B and the related embedded derivatives, valued
using a Monte Carlo simulation model, were recorded as of February 15, 2008. The
excess of these values over the face values of Note A and Note B was recorded
through the results of operations as charges related to the issuance of the
February 2008 convertible notes payable. The fair value of the debentures and
embedded conversion options was $1,757,470 at December 31, 2008, which includes
the face value of the debentures of $720,000, plus the $1,037,470 fair value of
the embedded conversion options. The embedded conversion options were valued
using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes option pricing model at December 31, 2008 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 185%, (3) risk-free interest
rate of 0.37%, and (4) expected life of 1.1 years. The change in fair value of
the embedded conversion option of $301,256 is recorded through the results of
operations as an adjustment to the fair value of derivatives for the year ended
December 31, 2008.
The
following table summarizes the changes in the fair values of the respective
liabilities versus the values at February 15, 2008, March 17, 2008, and June 17,
2008.
Fair
Value at
|
||||||||||||||||||||
February
15,
|
December
31,
|
Increase
|
||||||||||||||||||
Face
Amount
|
Net
Purchase Price
|
2008
|
2008
|
(Decrease)
|
||||||||||||||||
Note
A
|
$
|
600,000
|
$
|
500,000
|
$
|
1,229,466
|
$
|
1,464,558
|
$
|
235,092
|
||||||||||
Note
B, Tranche 1
|
60,000
|
50,000
|
116,107
|
*
|
146,456
|
30,349
|
||||||||||||||
Note
B, Tranche 2
|
60,000
|
50,000
|
110,641
|
**
|
146,456
|
35,815
|
||||||||||||||
Total
|
$
|
720,000
|
$
|
600,000
|
$
|
1,456,214
|
$
|
1,757,470
|
$
|
301,256
|
*
|
Fair
value at March 17, 2008
|
**
|
Fair
value at June 17, 2008
|
As of
December 31, 2008, the outstanding principal amount for the 2008 Convertible
Debentures is $720,000. Interest expense for the year ended December 31, 2008
was $144,972.
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 12 for the default interest expense
recognized during the year ended December 31, 2008.
9.
|
CONVERTIBLE
DEBENTURES—2007
|
On August
31, 2007, to fund its continuing operations, the Company entered into a
Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $12,550,000 principal amount of convertible debentures with an
original issue discount of $2,550,000 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $10,000,000. The convertible debentures are convertible at the
option of the holders into 36,911,765 shares of common stock at a fixed
conversion price of $0.34 per share, subject to anti-dilution and other
customary adjustments. In connection with the Securities Purchase Agreement, the
Company also issued warrants to purchase an aggregate of 43,240,655 shares of
its common stock. The term of the warrants is five years and the exercise price
is $0.38 per share, subject to anti-dilution and other customary adjustments.
The conversion price and warrant exercise price have each been modified for
those subscribers who also participated in the April 2008 convertible note. See
Note 7. The investors have contractually agreed to restrict their ability to
convert the convertible debentures, exercise the warrants and exercise the
additional investment right and receive shares of the Company’s common stock
such that the number of shares of the Company’s common stock held by them and
their affiliates after such conversion or exercise does not exceed 4.99% of the
Company’s then issued and outstanding shares of its common stock.
F -
56
The April
2008 note (see Note 7) contains a provision that modifies the conversion rate to
$0.15 per common share and the warrant exercise price to $0.165 per common
share, issued to the April 2008 debenture subscribers who are also participants
in the 2007 debentures. The Company has considered the impact of Emerging Issue
Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a
Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of
FASB No. 15, and 05 -
7—Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues on the accounting treatment of the change
in conversion price of the 2007 Convertible Debentures. EITF 96 - 19 states that
a transaction resulting in a significant change in the nature of a debt
instrument should be accounted for as an extinguishment of debt. The Company has
concluded that the change in conversion price and warrant exercise price does
not constitute a significant change in the nature of the debt and that the
transaction should not be treated as an extinguishment of that debt. The Company
initially recorded an additional debt discount in the amount of $451,389 to
income related to repricing of 2006 and 2007 convertible debentures and warrants
at April 4, 2008 for the impact of the change in the conversion price. As a
result of the change in the exercise price of the warrants, 2,399,264 warrants
remained at $0.38 exercise price and the remaining 34,512,501 warrants were
adjusted to the $0.165 exercise price as a result of participation in the April
2008 debenture. The convertible debentures are convertible at the option of the
holders into 1,999,387 and 42,554,652 shares of common stock at a fixed
conversion price of $0..34 per share and $0.15 per share, respectively, subject
to anti-dilution and other customary adjustments. See Note 7.
The
agreements entered into provide that the Company will pay certain cash amounts
as liquidated damages in the event that the Company does not maintain an
effective registration statement, or if the Company fails to timely execute
stock trading activity.
Under the
terms of the agreements, principal amounts owed under the debentures become due
and payable commencing six months following closing of the transaction. At that
time, and each month thereafter, the Company is required to either repay 1/30 of
the outstanding balance owed in common stock at the lesser of $0.34 per share or
80% of the prior ten day’s average closing stock price, immediately preceding
the redemption. The agreements also provide that the Company may force
conversion of outstanding amounts owed under the debentures into common stock,
if the Company has met certain conditions and milestones, and additionally, has
a stock price for 20 consecutive trading days that exceeds 200% of the
conversion price. The debenture agreement does not limit the number of shares
that the Company could be required to issue.
As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) pay cash dividends or distributions on any
equity securities of the Company, (f) enter into any material transaction with
any affiliate of the Company, unless such transaction is made on an arm’s-length
basis, or (g) enter into any agreement with respect to any of the
above.
The
agreement included an embedded conversion option, and the Company has complied
with the provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”, and recorded the fair value of the convertible debentures, and the
related embedded derivatives, as of August 31, 2007. The fair value of the
debentures and embedded conversion option was $7,706,344 at December 31, 2008,
which includes the face value of the debentures of $6,986,297, plus the $722,047
fair value of the embedded conversion option. The embedded conversion option was
valued using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes option pricing model at December 31, 2008 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 185%, (3) risk-free interest
rate of 0.76%, and (4) expected life of 1.7 years. The change in fair value of
the embedded conversion option of $1,649,969 is recorded through the results of
operations as an adjustment to the fair value of derivatives for the year ended
December 31, 2008.
F -
57
In
connection with this financing, the Company paid cash fees to a placement agent
of $1,001,800 and issued a warrant to purchase 6,328,890 shares of common stock
at an exercise price of $0.38 per share (modified to $0.165 for holders who are
also subscribers of the April 2008 note payable – see Note 7). The initial fair
value of the warrant was estimated at $2,025,000 using the Black-Scholes pricing
model. The broker-dealer warrants were again valued at December 31, 2008 at fair
value using the Black-Scholes model, resulting in a decrease in the fair value
of the liability from December 31, 2007 of approximately $750,864, which was
recorded through the results of operations as an adjustment to fair value of
derivatives. The assumptions used in the Black-Scholes model at December 31,
2008 are as follows: (1) dividend yield of 0%; (2) expected volatility of 184%,
(3) risk-free interest rate of 1.6%, and (4) expected life of 3.8 years. Cash
fees paid, and the initial fair value of the warrant, were capitalized on the
date of the note, and have been amortized in full during the year ended December
31, 2008 due to the August 6, 2008 default as discussed below.
The
following table summarizes the 2007 Convertible Debentures and discounts
outstanding at December 31, 2008 and December 31, 2007:
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
2007
convertible debentures at fair value
|
$
|
7,706,344
|
$
|
11,622,078
|
||||
Original
issue discount
|
-
|
(6,063,955
|
)
|
|||||
Warrant
derivative discount
|
-
|
(2,075,581
|
)
|
|||||
Net
convertible debentures
|
$
|
7,706,344
|
$
|
3,482,542
|
||||
Less
current portion
|
(7,706,344
|
)
|
(1,160,847
|
)
|
||||
2007
convertible debenture and embedded derivatives - long
term
|
$
|
-
|
$
|
2,321,695
|
As of
December 31, 2008 and 2007, the outstanding principal amount for the 2007
Convertible Debentures is $6,984,297 and $12,550,000, respectively. Interest
expense for the years ended December 31, 2008 and 2007 was $10,830,351 and
$336,353, respectively.
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 12 for the default interest expense
recognized during the year ended December 31, 2008.
10.
|
CONVERTIBLE
DEBENTURES—2006
|
On
September 6, 2006, to fund its continuing operations, the Company entered into a
Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $10,981,250 principal amount of convertible debentures with an
original issue discount of $2,231,250 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $8,750,000. The Company may make the amortization payment in
either cash or equity. If the payment is made in common stock, the stock will be
issued at a price per share equal to the lesser of (i) the then conversion
price, and (ii) 70% of the weighted average price for common shares for the 10
trading days prior to the amortization payment date. The debenture agreement
does not limit the number of shares that the Company could be required to issue.
In connection with the issuance of the debenture, the Company also issued
warrants to purchase 19,064,670 shares of common stock at an initial price of
$0.3168 per share (modified to $0.165 for holders who are also subscribers of
the April 2008 note payable – see Note 7) and exercisable for five years. The
warrants were valued using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes option pricing model at December 31, 2008
are as follows: (1) dividend yield of 0%; (2) expected volatility of 185%, (3)
risk-free interest rate of 1.00%, and (4) expected life of 2.7 years. The change
in fair value of the embedded conversion option of $2,238,905 is recorded
through the results of operations as an adjustment to the fair value of
derivatives for the year ended December 31, 2008.
F -
58
The
agreement included an embedded conversion option, and the Company has complied
with the provisions of FAS 155 “Accounting for Certain Hybrid Financial
Instruments”, and recorded the fair value of the convertible debentures, and
related embedded derivatives, as of September 6, 2006. The fair value of the
debentures and embedded conversion option was $1,993,354 at December 31, 2008,
which includes the face value of the debentures of $1,941,595, plus the $51,759
fair value of the embedded conversion option. The embedded conversion option was
valued using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes option pricing model at December 31, 2008 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 185%, (3) risk-free interest
rate of 0.37%, and (4) expected life of 0.7 years. The change in fair value of
the embedded conversion option of $937,712 is recorded through the results of
operations as an adjustment to the fair value of derivatives for the year ended
December 31, 2008.
As long
as any portion of this debenture remains outstanding, unless the holders of at
least 67% in principal amount of the then outstanding debentures otherwise give
prior written consent, the Company is not permitted to (a) guarantee or borrow
any indebtedness, (b) enter into any liens, (c) amend its charter documents in
any manner that materially and adversely affects any rights of the holders, (d)
acquire more than a de minimis number of shares of its common stock equivalents
other than as to conversion shares of warrant shares as permitted or required
and repurchases of common stock or common stock equivalents of departing
officers and directors of the Company, provided that such purchases do not
exceed certain specified amounts, (e) pay cash dividends or distributions on any
equity securities of the Company, or (f) enter into any agreement with respect
to any of the above.
The April
2008 note (see Note 7) contains a provision that modifies the conversion rate to
$0.15 per common share and the warrant exercise price to $0.165 per common
share, issued to the April 2008 note payable subscribers who are also
participants in the 2006 debentures. The Company has considered the impact of
Emerging Issue Task Force statements, or EITFs 96 - 19— Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 02 - 4—Determining Whether a
Debtor’s Modification or Exchange of Debt Instruments is Within the Scope of
FASB No. 15, and 05 -
7—Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues on the accounting treatment of the change
in conversion price of the 2006 Convertible Debentures. EITF 96 - 19 states that
a transaction resulting in a significant change in the nature of a debt
instrument should be accounted for as an extinguishment of debt. The Company has
concluded that the change in conversion price and warrant exercise price does
not constitute a significant change in the nature of the debt and that the
transaction should not be treated as an extinguishment of that debt. The Company
initially recorded an additional debt discount in the amount of $396,199 to
income related to the repricing of the 2006 and 2007 convertible debentures and
warrants at August 6, 2008 for the impact of the change in the conversion price.
As a result of the change in the exercise price of the warrants, 6,572,626
warrants remained at the $0.3168 exercise price and the remaining 12,492,044
warrants were adjusted to the $0.165 exercise price upon participation in the
April 2008 debenture. The convertible debentures are convertible at the option
of the holders into 3,866,563 and 5,936,924 shares of common stock at a fixed
conversion price of $0.288 per share and $0.15 per share, respectively, subject
to anti-dilution and other customary adjustments. See Note 7.
The
following table summarizes the 2006 Convertible Debentures and discounts
outstanding at December 31, 2008 and 2007:
F -
59
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
2006
convertible debentures at fair value
|
$
|
1,993,354
|
$
|
7,386,912
|
||||
Original
issue discount
|
-
|
(3,777,403
|
)
|
|||||
Warrant
derivative discount
|
-
|
(562,018
|
)
|
|||||
Net
convertible debentures
|
$
|
1,993,354
|
$
|
3,047,491
|
||||
Less
current portion
|
(1,993,354
|
)
|
(1,625,327
|
)
|
||||
2006
convertible debenture and embedded derivatives - long
term
|
$
|
-
|
$
|
1,422,164
|
In
connection with this financing, the Company paid cash fees to a broker-dealer of
$525,000 and issued a warrant to purchase 4,575,521 shares of common stock at an
exercise price of $0.3168 per share (modified for holders who are also
subscribers of the April 2008 note payable – see Note 7). The broker-dealer
warrants were again valued at December 31, 2008 at fair value using the
Black-Scholes model, resulting in a decrease in the fair value of the liability
of approximately $517,539 and $1,901,059 for the years ended December 31, 2008
and 2007, respectively, which was recorded through the results of operations as
a debit to Adjustments to Fair Value of Derivatives. The assumptions used in the
Black-Scholes model at December 31, 2008 are as follows: (1) dividend yield of
0%; (2) expected volatility of 184%, (3) risk-free interest rate of 0.08%, and
(4) expected life of approximately 2.75 years. Cash fees paid, and the initial
fair value of the warrant, were capitalized on the date of the note, and have
been amortized in full during the year ended December 31, 2008 due to the August
6, 2008 default as discussed below.
As of
December 31, 2008, the outstanding principal amount for the 2006 Convertible
Debentures is $1,941,595. Interest expense for the years ended December 31, 2008
and 2007 was $6,420,695 and $2,692,931, respectively.
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 12 for the default interest expense
recognized during the year ended December 31, 2008.
11.
|
CONVERTIBLE
DEBENTURES—2005
|
On
September 15, 2005, to fund its continuing operations, the Company entered into
a Securities Purchase Agreement with accredited investors for the issuance of an
aggregate of $22,276,250 principal amount of convertible debentures with an
original issue discount of $4,526,250 representing approximately 20.3%. In
connection with the closing of the sale of the debentures, the Company received
gross proceeds of $17,750,000. The Company may make the amortization payment in
either cash or equity, beginning six months from the closing date of this
debenture. If the payment is made in common stock, the stock will be issued at a
price per share equal to the lesser of (i) the then conversion price, and (ii)
85% of the weighted average price for common shares for the 10 trading days
prior to the amortization payment date. The debenture agreement does not limit
the number of shares that the Company could be required to issue.
The
agreement included a an embedded conversion option that required separate
valuation in accordance with the requirements of FAS 133, EITF –00-27 and
related accounting literature. The fair value at December 31, 2008 of the
derivative for the conversion feature was valued as an American call option
using the Black-Scholes option pricing model with the following inputs: (1)
closing stock price from $0.03 (2) exercise price equal to the $0.15 conversion
price (3) volatility based upon the Company’s stock trading of 185% (4)
risk-free interest rate of 1.00%, and (5) expected life of 1 year.
F -
60
During
years ended December 31, 2008 and 2007, a decrease in the fair value of the
embedded derivative amounts of approximately $195,140 and $2,872,000,
respectively, was recorded through results of operations as adjustment to fair
value of derivatives.
In
connection with this financing, we paid cash fees to a broker-dealer of
$1,065,000 and issued a warrant to purchase 1,623,718 shares of Common Stock at
an adjusted exercise price of $0.165 per share. The fair value of the warrant as
of December 31, 2008 was estimated at approximately $7,000 using the
Black-Scholes option pricing model. The assumptions used in the Black-Scholes
model are as follows: (1) dividend yield of 0%; (2) expected volatility of 184%,
(3) risk-free interest rate of 0.04, and (4) expected life of 1 year. Cash fees
paid, and the initial fair value of the warrant, were capitalized on the date of
the note, and have been amortized in full during the year ended December 31,
2008 due to the August 6, 2008 default as discussed below. During the years
ended December 31, 2008 and 2007, the Company recorded approximately $600,278
and $4,007,113, respectively, as interest expense in its accompanying
consolidated statements of operations.
In
January 2007, the Company’s Board of Directors agreed to reduce the exercise
price of the warrants issued in connection with the 2005 debentures to $0.95 per
share and to reduce the conversion price of the debentures to $0.90 per share.
The conversion price and warrant exercise price have each been further modified
in April 2008 for those subscribers who also participated in the April 2008
convertible note. See Note 7.
The
Company has considered the impact of Emerging Issue Task Force statements, or
EITFs 96 - 19— Debtor’s
Accounting for a Modification or Exchange of Debt Instruments, 02 -
4—Determining Whether a Debtor’s Modification or Exchange of Debt Instruments is
Within the Scope of FASB No. 15, and 05 - 7—Accounting for Modifications
to Conversion Options Embedded in Debt Instruments and Related Issues on
the accounting treatment of the change in conversion price of the 2005
Convertible Debentures described in the paragraph above. EITF 96 - 19 states
that a transaction resulting in a significant change in the nature of a debt
instrument should be accounted for as an extinguishment of debt. The Company has
concluded that the change in conversion price and warrant exercise price does
not constitute a significant change in the nature of the debt and that the
transaction should not be treated as an extinguishment of that
debt.
Anti-dilution
Impact
As a
result of the 2007 Financing, described more fully in Note 9, the warrants
issued in connection with the 2005 Financing were automatically diluted down to
$0.34. The result of this was to impact both the number and price of the
original warrants and replacement warrants issued to both the investors and the
brokers.
The new
number of original warrants issued to investors totaled 2,335,005. The
broker-dealer warrants were again valued at December 31, 2008 at fair value
using the Black-Scholes model, resulting in a decrease in the fair value of the
liability of $234,392 for the year ended December 31, 2008, which was recorded
through the results of operations as a credit to Adjustments to Fair Value of
Derivatives. The assumptions used in the Black-Scholes model to value the
warrants as of December 31, 2008 were as follows: (1) dividend yield of 0%; (2)
expected volatility of 184%, (3) risk-free interest rate of 0.08%, and (4)
expected life of 1.5 years.
The new
number of replacement warrants issued to investors and brokers totaled
12,689,966. As a result of the change in the exercise price of the warrants,
3,239,810 warrants remained at the $0.34 exercise price and the remaining
9,450,156 warrants were adjusted to the $0.165 exercise price upon participation
in the April 2008 debenture. The warrants were again valued at December 31, 2008
at fair value using the Black-Scholes model, resulting in a decrease in the fair
value of the liability of approximately $1,402,947 for the year ended December
31, 2008, which was recorded through the results of operations as a credit to
Adjustments to Fair Value of Derivatives. The assumptions used in the
Black-Scholes model are as follows: (1) dividend yield of 0%; (2) expected
volatility of 184%, (3) risk-free interest rate of 0.08%, and (4) expected life
of 2.71 years.
F -
61
The
following table summarizes the 2005 Convertible Debentures and embedded
derivatives outstanding at December 31, 2008 and 2007:
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
2005
convertible debenture at face value
|
$
|
81,922
|
$
|
1,677,904
|
||||
Discounts
on debentures
|
||||||||
Original
issue discount
|
-
|
(152,073
|
)
|
|||||
Conversion
feature derivative
|
-
|
(193,084
|
)
|
|||||
Warrant
derivative
|
-
|
(245,825
|
)
|
|||||
Other
derivatives
|
-
|
(9,266
|
)
|
|||||
Net
convertible debentures
|
81,922
|
1,077,656
|
||||||
Embedded
derivatives
|
4,075
|
199,215
|
||||||
2005
convertible debentures and embedded derivatives
|
85,997
|
1,276,871
|
||||||
less
current portion
|
(85,997
|
)
|
(1,276,871
|
)
|
||||
2005
convertible debenture and embedded derivatives - long term
portion
|
$
|
-
|
$
|
-
|
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. Under the terms of the debenture agreements, the moratorium
constitutes an event of default and thus the debentures all incur default
interest penalties. As a result of the default, the Company has recognized
additional penalty interest, and has recognized the remaining balance of its
debt discounts associated with this note in interest expense, and classified the
entire balance as short term. See Note 12 for the default interest expense
recognized during the year ended December 31, 2008.
12.
|
ACCRUED
DEFAULT INTEREST
|
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures. As of June 30, 2009, the moratorium remains in effect. Under the
terms of the debenture agreements, the moratorium constitutes an event of
default and thus the debentures all incur default interest penalties. The
debenture agreements require in the event of default that the full principle
amount of the debentures, together with other amounts owing in respect thereof,
to the date of acceleration shall become, at the Holder’s election, immediately
due and payable in cash. The aggregate amount payable upon event of default
shall be equal to the mandatory default amount. The mandatory default amount
equals the sum of (i) the greater of: (A) 120% of the principle amount of the
debentures to be repaid plus 100% of the accrued and unpaid interest, or (B) the
principle amount of the debentures to be repaid, divided by the conversion price
on (x) the date the mandatory default amount came due or (y) the date the
mandatory default amount is paid in full, whichever is less, multiplied by the
closing price on (x) the date the mandatory default amount is demanded or
otherwise due or (y) the date the mandatory default amount is paid in full,
whichever is greater, and (ii) all other amounts, costs, expenses and liquidated
damages due in respect to the debentures. Commencing 5 days after the occurrence
of any event of default that results in the eventual acceleration of the
debentures, the interest rate on the debentures shall accrue at the rate of 18%
per annum. Further, as a result of the default, the Company has recognized the
remaining balance of its debt discounts associated with this note in interest
expense, and classified the entire balance in short term. The following table
summarizes the accrued default interest expense recognized in the accompanying
consolidated statements of operations for the year ended December 31, 2008, as
well as the consolidated balance sheet at December 31, 2008:
F -
62
Accrued
|
||||
Penalty
|
||||
Interest
|
||||
2005
debenture
|
$
|
22,121
|
||
2006
debenture
|
524,284
|
|||
2007
debenture
|
1,885,951
|
|||
February
2008 debenture
|
194,420
|
|||
April
2008 debenture
|
1,090,608
|
|||
$
|
3,717,384
|
13.
|
WARRANT
DERIVATIVES—OTHER
|
In
January 2008 the Company issued 680,636 warrants to purchase common stock at
$0.39 per share in connection with consulting services provided during the
previous quarter. The warrants were initially valued at $112,492 using the
Black-Scholes option pricing model. These warrants are classified as a warrant
derivative liability. The warrants were again valued at December 31, 2008 at
fair value using the Black-Scholes pricing model resulting in a decrease in the
fair value of the liability of $90,397 for the year ended December 31, 2008,
which was recorded through the results of operations as adjustments to fair
value of derivatives. The assumptions used in the Black-Scholes model as of
December 31, 2008 are as follows: (1) dividend yield of 0%; (2) expected
volatility of 184%, (3) risk-free interest rate of 1.55%, and (4) expected life
of 9.1 years.
14.
|
WARRANT
SUMMARY
|
Warrant
Activity
A summary
of warrant activity for the year ended December 31, 2008 is presented
below:
Weighted
|
||||||||||||||||
Weighted
|
Average
|
Aggregate
|
||||||||||||||
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
Number of
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
Warrants
|
Price
|
Life
(in years)
|
(000)
|
|||||||||||||
Outstanding,
December 31, 2007
|
104,700,522
|
$
|
0.29
|
3.55
|
$
|
495
|
||||||||||
Granted
|
31,870,465
|
0.15
|
||||||||||||||
Exercised
|
-
|
-
|
||||||||||||||
Forfeited
|
(7,173,036
|
)
|
0.25
|
|||||||||||||
Outstanding,
December 31, 2008
|
129,397,951
|
$
|
0.26
|
3.23
|
-
|
|||||||||||
Vested
and expected to vest at December 31, 2008
|
129,397,951
|
0.26
|
3.23
|
-
|
||||||||||||
Exercisable,
December 31, 2008
|
129,397,951
|
$
|
0.26
|
3.23
|
-
|
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.
F -
63
A summary
of the status of unvested warrants as of December 31, 2008 and changes during
the year then ended, is presented below:
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||
Average
|
Average
|
Average
|
|||||||||||||||||||
Exercise
|
Number
|
Remaining
|
Exercise
|
Number
|
Exercise
|
||||||||||||||||
Price
|
of
Shares
|
Life
(Years)
|
Price
|
of
Shares
|
Price
|
||||||||||||||||
$
|
0.17
|
107,450,081
|
3.30
|
$
|
0.17
|
107,450,081
|
$
|
0.17
|
|||||||||||||
0.32
|
4,575,521
|
2.68
|
0.32
|
4,575,521
|
0.32
|
||||||||||||||||
0.38
- 0.40
|
9,409,526
|
4.08
|
0.38
|
9,409,526
|
0.38
|
||||||||||||||||
0.85
- 0.96
|
5,869,831
|
1.92
|
0.95
|
5,869,831
|
0.95
|
||||||||||||||||
2.20
|
72,917
|
2.63
|
2.20
|
72,917
|
2.20
|
||||||||||||||||
2.48
- 2.54
|
2,020,075
|
0.93
|
2.54
|
2,020,075
|
2.54
|
||||||||||||||||
129,397,951
|
129,397,951
|
15.
|
ADJUSTMENT
TO FAIR VALUE OF DERIVATIVES
|
The
following table summarizes the components of the adjustment to fair value of
derivatives which were recorded as charges to results of operations for the
years ended December 31, 2008 and 2007. The table summarizes by category of
derivative liability the (increase) decrease in fair value from market changes
during the years ended December 31, 2008 and 2007, the impact of additional
investments and repricing and exercise of certain warrants.
December
31,
|
||||||||
2008
|
2007
|
|||||||
Embedded
Pipe derivatives - 9.05
|
$
|
(195,140
|
)
|
$
|
(795,772
|
)
|
||
Pipe
Hybrid instrument – 9.06
|
(937,712
|
)
|
(5,808,165
|
)
|
||||
Pipe
Hybrid- FAS 155 – 8.07
|
1,649,969
|
(374,039
|
)
|
|||||
Pipe
Hybrid- February 2008
|
351,897
|
-
|
||||||
Pipe
Hybrid- April 2008
|
(504,144
|
)
|
-
|
|||||
Original
warrants PIPE 2005 , excluding replacement warrants
|
(234,392
|
)
|
(891,167
|
)
|
||||
Replacement
Warrants
|
(1,402,947
|
)
|
(633,699
|
)
|
||||
Warrants
– PIPE 2006-investors
|
(2,238,905
|
)
|
(7,924,612
|
)
|
||||
Warrants
– PIPE 2007-investors
|
(5,262,623
|
)
|
(6,784,225
|
)
|
||||
Warrants
– PIPE 2008-investors
|
(2,178,210
|
)
|
-
|
|||||
Other
Warrant Derivatives- 2005 and 2006
|
(1,805,990
|
)
|
(7,182,045
|
)
|
||||
Other
Warrants Derivatives - 2007
|
(324,050
|
)
|
(1,598,056
|
)
|
||||
$
|
(13,082,247
|
)
|
$
|
(31,991,780
|
)
|
16.
|
STOCKHOLDERS’
EQUITY TRANSACTIONS
|
The
Company is authorized to issue two classes of capital stock, to be designated,
respectively, Preferred Stock and Common Stock. The total number of shares of
Preferred Stock the Company is authorized to issue is 50,000,000 par value
$0.001 per share. The total number of shares of Common Stock the Company is
authorized to issue is 500,000,000, par value $0.001 per share. The Company had
no Preferred Stock outstanding as of December 31, 2008 and had 429,448,381
shares of Common Stock outstanding as of December 31, 2008.
F -
64
Effective
as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior Vice President,
General Counsel and Secretary, resigned from his positions with the Company and
terminated his employment arrangement with the Company. Pursuant to the terms of
an agreement between the Company and Mr. Atzen effective April 1, 2008, the
Company agreed to (i) pay Mr. Atzen $48,333.33 in cash as a severance payment,
(ii) issue a fully vested option to purchase an aggregate of 400,000 shares of
common stock pursuant to the Company’s 2005 Stock Incentive Plan, as amended
(the “2005 Plan”), (iii) issue an aggregate of 936,692 shares of the common
stock pursuant to the 2005 Plan, (iv) provide for the vesting of all outstanding
stock options held by Mr. Atzen and (v) provide Mr. Atzen and his family with
full healthcare and dental coverage for a period of 6 months as was provided to
Mr. Atzen during his employment.
Effective
as of March 17, 2008, Ivan Wolkind, the Company's Senior Vice President—Finance,
Administration & Chief Accounting Officer, resigned from all positions with
the Company and voluntarily terminated his employment arrangement with the
Company for personal reasons. On April 2, 2008, the Company entered into a
Consulting Agreement with Mr. Wolkind. Pursuant to the Consulting Agreement, Mr.
Wolkind agreed for a period of 90 days to provide up to 20 hours per week of
financial consulting services to the Company including but not limited to (i)
assisting with general accounting and investor diligence, (ii) commenting on the
structure of proposed financial transactions, (iii) responding to queries
regarding ACT's corporate structure, and (iv) reviewing strategic and financial
documents as appropriate. As consideration for the services to be provided, the
Company agreed to pay Mr. Wolkind an aggregate of $45,834 of which was paid on
April 2, 2008. As additional consideration for the services to be provided, the
Company agreed to issue to Mr. Wolkind 238,719 shares of common stock pursuant
to the 2005 Plan. On May 2, 2008, the consulting contract was terminated with no
future payments due.
Between
September 29, 2008 and January 20, 2009, the Company was ordered by the Circuit
Court of the Twelfth Judicial District Court for Sarasosa County, Florida to
settle certain past due accounts payable, for previous professional services and
other operating expenses incurred, by the issuance of shares of its common
stock. In aggregate, as of January 30, 2009, the Company settled $1,108,673 in
accounts payable through the issuance of 260,116,283 shares of its common stock.
In 2008, the Company settled $603,474 in accounts payable through the issuance
of 220,735,436 shares of its common stock. The Company recorded a loss on
settlement of $5,436,137 in its accompanying statements of operations for the
year ended December 31, 2008, which includes losses on settlement of $4,695,289
during the fourth quarter ended December 31, 2008. The losses were calculated as
the difference between the amount of accounts payable relieved and the value of
the shares (based on the closing share price on the settlement date) that were
issued to relieve the accounts payable.
17.
|
STOCK-BASED
COMPENSATION
|
Stock
Plans
On August
12, 2004, ACT’s Board of Directors approved the establishment of the 2004 Stock
Option Plan (the “2004 Stock Plan”). Stockholder approval was received on
December 13, 2004. The total number of common shares available for grant and
issuance under the plan may not exceed 2,800,000 shares, subject to adjustment
in the event of certain recapitalizations, reorganizations and similar
transactions. Common stock purchase options may be exercisable by the payment of
cash or by other means as authorized by the Board of Directors or a committee
established by the Board of Directors. At December 31, 2008, ACT had granted
2,492,000 common share purchase options under the plan. At December 31, 2008,
there were 308,000 options available for grant under this plan.
On
December 13, 2004, ACT’s Board of Directors and stockholders approved the
establishment of the 2004 Stock Option Plan II (the “2004 Stock Plan II”). The
total number of common shares available for grant and issuance under the plan
may not exceed 1,301,161 shares, subject to adjustment in the event of certain
recapitalizations, reorganizations and similar transactions. Common stock
purchase options may be exercisable by the payment of cash or by other means as
authorized by the Board of Directors or a committee established by the Board of
Directors. At December 31, 2008, ACT had granted 1,301,161 common share purchase
options under the plan. At December 31, 2008, there were no options available
for grant under this plan.
F -
65
On
January 31, 2005, the Company’s Board of Directors approved the establishment of
the 2005 Stock Incentive Plan (the “2005 Plan”) for its employees, subject to
approval of our shareholders. The total number of common shares available for
grant and issuance under the plan may not exceed 9 million shares, plus an
annual increase on the first day of each of the Company’s fiscal years beginning
in 2006 equal to 5% of the number of shares of our common stock outstanding on
the last day of the immediately preceding fiscal year, subject to adjustment in
the event of certain recapitalizations, reorganizations and similar
transactions. On January 24, 2008, the Company’s shareholders approved an
increase of 25,000,000 shares to the 2005 Plan. Common stock purchase options
may be exercisable by the payment of cash or by other means as authorized by the
Board of Directors or a committee established by the Board of Directors. At
December 31, 2008, we had granted 11,875,734 (net of forfeitures) common stock
purchase options and 1,497,263 shares of common stock under the plan. At
December 31, 2008, there were 15,722,589 options available for grant under this
plan.
Stock
Option Activity
A summary
of option activity for the years ended December 31, 2008 and 2007 is presented
below:
Weighted
|
||||||||||||||||
Weighted
|
Average
|
Aggregate
|
||||||||||||||
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
Number of
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
Options
|
Price
|
Life
(in years)
|
(000)
|
|||||||||||||
Outstanding,
January 1, 2007
|
12,874,163
|
$
|
0.71
|
8.20
|
$
|
1,771
|
||||||||||
Granted
|
1,300,000
|
0.75
|
||||||||||||||
Exercised
|
(340,000
|
)
|
0.05
|
|||||||||||||
Forfeited
|
(2,213,192
|
)
|
0.83
|
|||||||||||||
Outstanding,
December 31, 2007
|
11,620,971
|
$
|
0.78
|
7.16
|
$
|
255
|
||||||||||
Granted
|
11,875,734
|
0.21
|
||||||||||||||
Exercised
|
(1,200,000
|
)
|
0.05
|
|||||||||||||
Forfeited
|
(8,169,015
|
)
|
0.53
|
|||||||||||||
Outstanding,
December 31, 2008
|
14,127,690
|
$
|
0.51
|
7.71
|
$
|
-
|
||||||||||
Vested
and expected to vest at December 31, 2008
|
13,359,485
|
0.52
|
7.64
|
-
|
||||||||||||
Exercisable,
December 31, 2008
|
8,218,418
|
$
|
0.70
|
6.75
|
$
|
-
|
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.
F -
66
A summary
of the status of unvested employee stock options as of December 31, 2008 and
changes during the period then ended, is presented below:
Weighted
|
||||||||
Average
|
||||||||
Grant
Date
|
||||||||
Fair
Value
|
||||||||
Shares
|
Per
Share
|
|||||||
Unvested
at January 1, 2008
|
783,814
|
$
|
0.46
|
|||||
Granted
|
11,875,734
|
0.21
|
||||||
Vested
|
(2,372,518
|
)
|
0.39
|
|||||
Forfeited
|
(4,377,758
|
)
|
0.26
|
|||||
Unvested
at December 31, 2008
|
5,909,272
|
$
|
0.24
|
As of
December 31, 2008, total unrecognized stock-based compensation expense related
to nonvested stock options was approximately $1,136,000, which is expected to be
recognized over a weighted average period of approximately 9.06
years.
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2008.
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||||
Average
|
Average
|
Average
|
|||||||||||||||||||
Exercise
|
Number
|
Remaining
|
Exercise
|
Number
|
Exercise
|
||||||||||||||||
Price
|
of
Shares
|
Life
(Years)
|
Price
|
of
Shares
|
Price
|
||||||||||||||||
$
|
0.05
|
922,000
|
5.62
|
$
|
0.05
|
922,000
|
$
|
0.05
|
|||||||||||||
0.21
|
7,440,000
|
9.11
|
0.21
|
1,667,586
|
0.21
|
||||||||||||||||
0.25
|
1,301,161
|
6.00
|
0.25
|
1,301,161
|
0.25
|
||||||||||||||||
0.35
|
65,000
|
7.53
|
0.35
|
39,271
|
0.35
|
||||||||||||||||
0.75
- 0.76
|
20,000
|
7.82
|
0.75
|
10,837
|
0.75
|
||||||||||||||||
0.85
|
3,197,112
|
6.09
|
0.85
|
3,173,779
|
0.85
|
||||||||||||||||
1.35
|
235,000
|
7.31
|
1.35
|
205,782
|
1.35
|
||||||||||||||||
2.04
- 2.11
|
295,000
|
6.99
|
2.07
|
251,352
|
2.07
|
||||||||||||||||
2.20
- 2.48
|
652,417
|
6.65
|
2.34
|
646,650
|
2.34
|
||||||||||||||||
14,127,690
|
8,218,418
|
18.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company entered into a lease for office and laboratory space in Worcester,
Massachusetts commencing December 2004 and expiring April 2010, and for office
space in Los Angeles, California commencing November 2005 and expiring May 2008.
The Company’s rent at its Los Angeles, California site was on a month-to-month
basis after May 2008. As discussed in Note 21, on March 1, 2009, the Company
vacated its site in Los Angeles, California and moved to another site in Los
Angeles. The term on this new lease is through February 28, 2010. Monthly base
rent is $2,170. Annual minimum lease payments are as follows:
Year
1
|
$
|
265,677
|
||
Year
2
|
89,910
|
|||
Total
|
$
|
355,587
|
Rent
expense recorded in the financial statements for the year ended December 31,
2008 and 2007 was $2,183,126 and $1,485,218, respectively.
F -
67
We have
entered into employment contracts with certain executives and research
personnel. The contracts provide for salaries, bonuses and stock option grants,
along with other employee benefits. The employment contracts generally have no
set term and can be terminated by either party. There is a provision for
payments of three months to one year of annual salary as severance if we
terminate a contract without cause, along with the acceleration of certain
unvested stock option grants.
Effective
as of April 1, 2008, Jonathan F. Atzen, the Company’s Senior Vice President,
General Counsel and Secretary, resigned from his positions with the Company and
terminated his employment arrangement with the Company. Mr. Atzen had no
disagreements with the Company, its Board of Directors or its management in any
matter relating to the Company’s operations, policies or practices.
Effective
as of March 17, 2008, Ivan Wolkind, the Company's Senior Vice President—Finance,
Administration & Chief Accounting Officer, resigned from all positions with
the Company and voluntarily terminated his employment arrangement with the
Company for personal reasons. Mr. Wolkind had no disagreements with the Company,
its Board of Directors or its management in any matter relating to the Company’s
operations, policies or practices.
On May
26, 2008, Alan G. Walton, Ph., D.Sc. announced his resignation from the Board of
Directors of the Company, effective immediately. Dr. Walton had no disagreements
with the Company, its Board of Directors or its management in any matter
relating to the Company’s operations, policies or practices.
On May
31, 2008, the Company settled a dispute as a subtenant to its Alameda,
California office for nonpayment of rent to its sublandlord. The sublease
expired on May 31, 2008. As of that date, $445,000 of base rent, additional
rent, and equipment payments, plus late fees and costs due under the sublease
for a grand total of approximately $475,000 remained unpaid during the period
from January 1, 2008 through May 31, 2008. On the date of the lease expiration,
the Company vacated the premises but failed to remove the equipment that
belonged to the Company. Consequently, the Company has agreed to assign all
rights to the equipment to the sublandlord in partial settlement of amounts
owed. Further, the Company has agreed to assign the sublandlord 62.5% of the
Company’s right, title, and interest in all royalties and 65% of subtenant’s
right, title, and interest in all other consideration payable to the Company
under a license agreement with Embryome Sciences, Inc., dated July 10, 2008,
until such time as the sublandlord has received royalty and other payments equal
to $475,000, including the value of the equipment assigned to the sublandlord.
Accordingly, the Company has recorded accrued rents relating to this matter in
the amount of $389,400, which is the $475,000 settlement amount net of the
withheld deposit of $27,000 and net of abandoned fixed assets of $58,600, in the
accompanying consolidated balance sheet at December 31, 2008. As of June 30,
2009, the entire balance was unpaid.
On
September 19, 2008, the Company was delivered judgment with respect to the
landlord of its Charlestown, Massachusetts site over unpaid lease amounts. The
Company failed to make its monthly lease payments after December 2007, which
constituted an event of default under the lease agreement. Accordingly, the
Company settled with the landlord in total of $1,751,543 for unpaid rent
expenses, attorney fees, interest and damages for unpaid rent incurred through
September 9, 2008. The Company abandoned its fixed assets at this site upon
vacating the space, and recorded a loss on disposal of fixed assets amounting to
$227,543 in its accompanying consolidated statement of operations during the
year ended December 31, 2008. The Company accrued the remaining balance for the
portion of damages incurred from January 1, 2008 through September 30, 2008 in
accrued expenses its accompanying balance sheet at December 31, 2008, net of one
payment of approximately $147,000. As of June 30, 2009, the Company had paid the
entire amount under the judgment, plus approximately $104,000 in interest, and
no longer has any obligations with respect to this judgment.
The
Company and its subsidiary Mytogen, Inc. are currently defending themselves
against a civil action brought in Suffolk Superior Court, No. 09-442-B, by their
former landlord at 79/96 Thirteenth Street, Charlestown, Massachusetts, a
property vacated by the Company and Mytogen effective May 31, 2008. In that
action, Alexandria Real Estate-79/96 Charlestown Navy Yard (“ARE”) is alleging
that it has been unable to relet the premises and therefore seeking rent for the
vacated premises since September 2008. Alexandria is also seeking certain
clean-up and storage expenses. The Company is vigorously defending against the
suit, claiming that ARE had breached certain convenants as of when Mytogen
vacated, and that had ARE used reasonable diligence in its efforts to secure a
new tenant, it would have been more successful. No trial date has been set. At
this time, management cannot determine the likelihood of an unfavorable outcome
from this lawsuit, and thus no amount has been accrued in its financial
statements at December 31, 2008. If the Company does not prevail in these
proceedings, losses for unpaid rents and other fees could be within a range
between $3.5 million and $4.5 million.
F -
68
Between
April 1, 2008 and December 31, 2008, ACT issued 6,619,072 shares of common stock
to several Holders of the 2005, 2006, 2007 and 2008 Debentures primarily for two
reasons: (a) duplicate pre-redemption shares at the time of true-up and (b)
negotiated shares with investors in settlement of various complaints from
Debenture holders. The Company’s policy is to expense the value of these shares
to financing costs in the period the shares were issued or the costs were
otherwise incurred. In 2008, the Company recorded $482,430 as financing costs
associated with the issuance of these shares. At this time, the Company cannot
determine potential legal ramifications arising from the issuance of these
shares, and the Company has concluded that the likelihood of unfavorable
ramifications from the issuance of these shares is remote and not
estimable.
19.
|
INCOME
TAXES
|
The items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes were as follows:
2008
|
2007
|
|||||||
Statutory
federal income tax rate
|
(34
|
)%
|
(34
|
)%
|
||||
State
income taxes, net of federal taxes
|
(6
|
)%
|
(6
|
)%
|
||||
Non-includable
items
|
8
|
%
|
(19
|
)%
|
||||
Increase
in valuation allowance
|
32
|
%
|
59
|
%
|
||||
Effective
income tax rate
|
-
|
-
|
Significant
components of deferred tax assets and (liabilities) are as follows:
2008
|
2007
|
|||||||
Deferred
tax assets:
|
(Restated)
|
|||||||
Net
operating loss carryforwards
|
$
|
39,265,458
|
$
|
25,312,676
|
||||
Employee
non-qualified stock options
|
1,008,424
|
797,000
|
||||||
Deferred
interest and finance charges
|
43,000
|
43,000
|
||||||
Deferred
revenue
|
1,250,210
|
-
|
||||||
Capitalized
R&D costs
|
441,000
|
441,000
|
||||||
Valuation
allowance
|
(42,008,092
|
)
|
(26,593,676
|
)
|
||||
Net
deferred tax asset
|
-
|
-
|
The
Company files income tax returns in the U.S. federal jurisdiction, and various
state jurisdictions. With few exceptions, the Company is no longer subject to
U.S. federal, state and local income tax examinations by tax authorities for
years before 2001.
At
December 31, 2008, the Company had federal and state net operating loss carry
forwards available to offset future taxable income of approximately $95 million
and $92 million respectively. These carry forwards will begin to expire in the
years ending December 31, 2022 and December 31, 2012, respectively. These net
operating losses are subject to various limitations on utilization based on
ownership changes in the prior years under Internal Revenue Code Section 382.
The Company is in the process of analyzing the impact of the ownership changes
but management does not believe they will have a material impact on the
Company’s ability to utilize the net operating losses in the
future.
F -
69
The
Company periodically evaluates the likelihood of the realization of deferred tax
assets, and adjusts the carrying amount of the deferred tax assets by the
valuation allowance to the extent the future realization of the deferred tax
assets is not judged to be more likely than not. The Company considers many
factors when assessing the likelihood of future realization of its deferred tax
assets, including its recent cumulative earnings experience by taxing
jurisdiction, expectations of future taxable income or loss, the carryforward
periods available to the Company for tax reporting purposes, and other relevant
factors.
At
December 31, 2008, based on the weight of available evidence, including
cumulative losses in recent years and expectations of future taxable income, the
Company determined that it was more likely than not that its deferred tax assets
would not be realized and have a $42.0 million valuation allowance associated
with its deferred tax assets.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition issues.
As a
result of the implementation of FIN 48, the Company reduced its net operating
loss carryforward by $1,550,000. This reduction of the net operating loss
carryforward translated into a reduction of the gross deferred tax asset of
$658,500, with a corresponding reduction of the valuation allowance against that
deferred tax asset. Due to the offsetting effect of the reduction of the
valuation allowance, the adoption of FIN 48 had no impact on the Company's
balance sheets or statements of operations.
The
following table summarizes the activity related to its unrecognized tax
benefits:
Total
|
||||
Balance
at January 1, 2008
|
$
|
658,500
|
||
Increase
related to prior period tax positions
|
-
|
|||
Increase
related to current year tax positions
|
-
|
|||
Expiration
of the statuts of limitations for the assessment of
taxes
|
-
|
|||
Other
|
-
|
|||
Balance
at December 31, 2008
|
$
|
658,500
|
The
components of income tax expense are as follows:
2008
|
2007
|
|||||||
Current
federal income tax
|
$
|
-
|
$
|
-
|
||||
Current
state income tax
|
-
|
-
|
||||||
Deferred
taxes
|
15,414,416
|
9,192,476
|
||||||
Valuation
allowance
|
(15,414,416
|
)
|
(9,192,476
|
)
|
||||
$
|
-
|
$
|
-
|
Future
changes in the unrecognized tax benefit will have no impact on the effective tax
rate due to the existence of the valuation allowance. The Company estimates that
the unrecognized tax benefit will not change significantly within the next
twelve months. The Company will continue to classify income tax penalties and
interest as part of general and administrative expense in its consolidated
statements of operations. There were no interest or penalties accrued as of
December 31, 2008 or 2007.
F -
70
The
following table summarizes the open tax years for each major
jurisdiction:
Open Tax
|
||
Jurisdiction
|
Years
|
|
Federal
|
2001 - 2006
|
|
States
|
2001
- 2006
|
For tax
years 2006 – 2008, the Company has not filed its state or federal tax returns;
thus, the statute of limitations has not yet begun its term. As the Company has
significant net operating loss carryforwards, even if certain of the Company's
tax positions were disallowed, it is not foreseen that the Company would have to
pay any taxes in the near future. Consequently, the Company does not calculate
the impact of interest or penalties on amounts that might be
disallowed.
20.
|
RELATED
PARTY TRANSACTIONS
|
As
discussed in Note 7, Dr. Shapiro, one of the Company’s directors, may be deemed
the beneficial owner of the securities owned by The Shapiro Family Trust.
Refinanced bridge debt consisted of $70,000 in unsecured convertible notes
previously issued and sold to The Shapiro Family Trust on March 21, 2008. The
net outstanding amount of principal plus interest of the Notes was converted
into the debt within the April 2008 debenture on a dollar-for-dollar
basis.
Gary
Rabin, a member of the Board of Directors may be deemed the beneficial owner of
the securities owned by PDPI, LLC, in which he holds a partnership interest.
Refinanced debt consisted of $60,000 in an unsecured note previously issued and
sold to PDPI, LLC, and another $61,000 assumed by PDPI, LLC, and consisted of
amounts owed by a third party which were rolled over into the April 2008
Debenture.
21.
|
SUBSEQUENT
EVENTS
|
As
discussed in Note 16, between October 3, 2008 and January 20, 2009, the Company
was ordered by the Circuit Court of the Twelfth Judicial District Circuit for
Sarasosa County, Florida to settle certain past due accounts payable. The
Company settled the accounts payable by the issuance of shares of its common
stock, based on a formula that divides the amount due in dollars by the
settlement date stock price, and multiplied by a specified factor. In January
2009, the Company settled the remaining $505,199 in accounts payable through the
issuance of 39,380,847 shares of its common stock. The Company has recorded a
loss on settlement of litigation in its consolidated statement of operations in
the amount of $4,793,949 in the first quarter 2009.
On
December 18, 2008, the Company entered into a license agreement with Transition
for certain of its non-core technology. Under the agreement, Transition agreed
to acquire a license to the technology for $3.5 million in cash. During 2008,
the Company received approximately $2 million under this agreement. In January
2009, the Company received the remaining $1.5 million in cash under this
agreement. The Company is recognizing revenue from this agreement over its
17-year patent useful life. The Company expects to apply the proceeds towards
its retinal epithelium (“RPE”) cells program.
On March
1, 2009, the Company vacated a site in Los Angeles, California and moved to
another site in Los Angeles. The lease term is through February 28, 2010.
Monthly base rent is $2,170.
On March
5, 2009, the Company settled a lawsuit originally brought by Alpha Capital on
February 11, 2009, who is an investor in the 2006, 2007, and 2008 debentures,
and associated with the default on August 6, 2008 on all debentures. In
settlement of the lawsuit, the Company agreed to reduce the conversion price on
convertible debentures held by Alpha Capital to $0.02 per share, effective
immediately, so long as the Company has a sufficient number of authorized shares
to honor the request for conversion.
F -
71
On March
11, 2009, the Company entered into a $5 million credit facility (“Facility”)
with a life sciences fund. Under the agreement, the proceeds from the Facility
must be used exclusively for the Company to file an investigational new drug
(“IND”) for its RPE program, and will allow the Company to complete both Phase I
and Phase II studies in humans. An IND is required to commence clinical trials.
Under the terms of the agreement, the Company may draw down funds, as needed for
clinical development of the RPE program, from the investor through the issuance
of Series A-1 convertible preferred stock. The preferred stock pays dividends,
in kind of preferred stock, at an annual rate of 10%, matures in four years from
the drawdown date, and is convertible into common stock at $0.75 per share. As
of June 30, 2009, the Company has drawn down $1,505,000 on this credit facility.
For providing investor relations services in connection with this credit
facility, the Company issued a consultant 24,900,000 shares of its common stock
on February 9, 2009. The Company valued the issuance of these shares at
$4,731,000 based on a closing price of $0.19 on February 9, 2009 and recorded
the value of the shares as deferred financing costs associated with the
financing on the date they were issued.
CHA
Bio & Diostech Co., Ltd.
On March
30, 2009, the Company entered into a second license agreement with CHA under
which the Company will license its RPE technology, for the treatment of diseases
of the eye, to CHA for development and commercialization exclusively in Korea.
The Company is eligible to receive up to a total of $1.9 million in fees based
upon the parties achieving certain milestones, including the Company making an
IND submission to the US FDA to commence clinical trials in humans using the
technology. The Company received an up-front fee under the license in the amount
of $1,000,000. Under the agreement, CHA will incur all of the costs associated
with the RPA clinical trials in Korea.
On May
13, 2009, the Company entered into a third license agreement with CHA under
which the Company will license its proprietary “single blastomere technology,”
which has the potential to generate stable cell lines, including RPE for the
treatment of diseases of the eye, for development and commercialization
exclusively in Korea. The Company received an upfront license fee of
$300,000.
F -
72
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
We will
pay all expenses in connection with the registration and sale of the common
stock by the selling shareholders. The estimated expenses of issuance
and distribution are set forth below.
SEC
filing fee
|
$
|
987
|
||
Legal
expenses
|
$
|
30,000
|
*
|
|
Accounting
expenses
|
$
|
20,000
|
*
|
|
Miscellaneous
|
$
|
5,000
|
*
|
|
Total
|
$
|
55,987
|
*
|
*
Estimate
Item
14. Indemnification of Directors and Officers
Our
directors and officers are indemnified by our bylaws against amounts actually
and necessarily incurred by them in connection with the defense of any action,
suit or proceeding in which they are a party by reason of being or having been
directors or officers of the Company. Our certificate of incorporation provides
that none of our directors or officers shall be personally liable for damages
for breach of any fiduciary duty as a director or officer involving any act or
omission of any such director or officer. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
permitted to such directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the
event that a claim for indemnification against such liabilities, other than the
payment by us of expenses incurred or paid by such director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Item 15. Recent Sales of Unregistered
Securities
On October
19, 2009, the Company entered into two letter agreements with Volation Life
Sciences Capital Partners, LLC (“Volation”) (See Note 10), pursuant to which (i)
the Company reduced the conversion price of its outstanding Series A-1
convertible preferred stock issued to Volation to $.10 per share resulting in
22,880,000 shares of Common Stock upon conversion, (ii) issued Volation
2,500,000 shares of its Common Stock at $0.10 per share in payment of an
outstanding commitment fee, and (iii) Volation waived the delinquency
in non-payment of the $250,000 commitment fee required pursuant to
the preferred stock purchase agreement between the Company and
Volation.
In
connection with an amendment to an agreement between the Company and JMJ
Financial (See Note 6), on October 1, 2009, the Company borrowed $1,000,000 and
issued a convertible promissory note for $1,200,000. The Company
shall pay a one-time interest payment of 10% of the principal of the promissory
note which is due on the maturity date of the promissory note, which is October
1, 2012. The promissory note is convertible into shares of the
Company’s common stock at a conversion price of the lesser of (i) $.25 per share
or (ii) eighty percent of the average of the three lowest trade prices in the 20
trading days prior to the conversion.
On
November 2, 2009 (“Effective Date”), the Company entered into a preferred stock
purchase agreement with Optimus Life Sciences Capital Partners, LLC
(“Investor”). 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 (“Tranches”) in the Company’s sole
discretion (subject to the conditions set forth therein), (i) up to 1,000
shares of Series B Preferred Stock (the “Preferred Shares”) 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 (the “Optimus 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 equal to the closing bid price of the Company’s
common stock on the date the Company provides notice of such
Tranche. The Optimus Warrants were issued on the Effective Date
to Optimus CG II Ltd., Optimus’s designee, and will vest and become
exercisable in replacement of a five-year warrant to purchase 119,469,027
shares of common stock with an exercise price per share of $0.113 the
Company issued on the Effective Date (which may only be exercised for such
number of shares of common stock equal in amount to 135% of the cumulative
purchase price paid by the Investor). The business purpose of exchanging
the warrants to be issued with each Tranche for the warrants originally
issued on November 2, 2009, is to enable the holder to have separate
instruments for the vested portion of the warrants, and to allow the
parties to more easily track the warrants that are
vested. Rather than being required to track these potential
multiple combinations of numbers, the parties believed that it would be
simpler to adopt the “replacement” warrant process. The process
is comparable to what happens when a warrant holder exercises only a
portion of an existing warrant, or anytime a holder divides a warrant into
two or more separate instruments that together represent all of the rights
embodied in the original instrument. For these reasons, we do
not believe that the “replacement warrant” should be viewed as a newly
issued warrant, but rather as a replacement issued as a substitute for a
portion of the previously issued warrant that was
surrendered.
|
69
·
|
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
Company agreed to use its best efforts to file within 60 days of the
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 purchase agreement, including the shares of common stock underlying
the Warrants, and shares issuable in payment of the commitment
fee.
|
·
|
On
November 3, 2009, the Company filed a certificate of designations for the
Series B preferred stock (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, 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. In addition, the preferred shares (a) shall accrue dividends
at a rate of 10% per annum, payable in preferred shares, (ii)
shall not have voting rights, and (iii) 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.
|
On
November 12, 2009, the Company entered into a subscription agreement (the
“Subscription Agreement”) with the subscribers identified on the signature pages
thereto (the “Subscribers”). Pursuant to the Subscription Agreement, the Company
agreed to sell, and the Subscribers agreed to purchase, subject to the terms and
conditions therein, original issue discount promissory notes in the principal
amount of a minimum of $2,400,000, for a purchase price of a minimum of
$2,000,000 (the “Notes”). The Notes will be convertible into shares of the
Company’s common stock at a conversion price of $0.10. Pursuant to the
Subscription Agreement, the Company also agreed to issue (i) one-and-one third
Class A warrants (“Class A Warrants”) for each two shares of common stock
underlying the Notes, to purchase shares of the Company’s common stock with a
term of five years and an exercise price of $0.108, (ii) additional investment
rights, exercisable until 9 months after the initial closing date of the
Subscription Agreement (“Additional Investment Rights”), to purchase (a)
original issue discount promissory notes (“AIR Notes”), with the same terms as
the Notes, in the principal amount of up to the principal amount of the Notes to
be purchased by the Subscribers, for a purchase price of up to the purchase
price paid by the Subscribers for the Notes, with a conversion price of $0.10,
and (b) one-and-one third Class B warrants (“Class B Warrants”) for each two
shares of common stock underlying the AIR Notes, to purchase shares of the
Company’s common stock with a term of five years and an exercise price of
$0.108.
The
Company will be required to redeem the Notes monthly commencing in May 2010, in
the amount of 14.28% of the initial principal amount of the Notes, in cash or
common stock at the Company’s option (subject to the conditions set forth in the
Notes), until the Notes are paid in full.
The
initial closing under the Subscription Agreement occurred on November 12, 2009,
pursuant to which, the Company sold Notes in the principal amount of $1,662,000
for a purchase price of $1,385,000. In addition, on November 13, 2009, the
Company sold Notes in the principal amount of $441,000 for a purchase price of
$367,500 (including $67,500 paid for by forgiveness of legal fees owed to a
subscriber). The closing that occurred on November 13, 2009 was deemed part of
the initial closing, such that, pursuant to the initial closing under the
Subscription Agreement, the Company sold Notes in the aggregate principal amount
of $2,103,000 for an aggregate purchase price of $1,752,500. Pursuant to the
initial closing under the Subscription Agreement, the Company also issued an
aggregate of (i) 14,020,000 Class A Warrants, and (ii) Additional Investment
Rights for the purchase of up to (a) $4,206,000 principal amount of AIR Notes
for a purchase price of up to $3,505,000 and (b) 28,040,000 Class B
Warrants.
The
Subscribers also agreed to purchase, subject to customary conditions, additional
Notes in the principal amount of $2,103,000, for a purchase price of $1,720,000,
in a second closing to occur within 90 days of the initial closing.
Effective
March 3, 2009, we entered into a $5 million credit facility (“Facility”) with a
life sciences fund. Under the terms of the agreement, we may draw down funds, as
needed, from the investor through the issuance of Series A-1 convertible
preferred stock, par value $.001, at a basis of 1 share of Series A-1
convertible preferred stock for every $10,000 invested. The preferred stock pays
dividends, in kind of preferred stock, at an annual rate of 10%, matures in four
years from the initial drawdown date, and is convertible at the option of the
holder into common stock at $0.75 per share. As of September 30, 2009, we had
drawn down approximately $2,288,000 on this credit facility.
On July
29, 2009, we entered into a consent, amendment and exchange agreement (the
“Consent and Amendment”) with holders (the “Holders”) of the Company’s
outstanding convertible debentures in the aggregate outstanding principal amount
of $20,353,878 (the “Debentures”) and warrants to purchase an aggregate of
192,148,119 shares of the Company’s common stock (the “Warrants”), which were
issued in private placements that closed in September 2005, August 2006, August
2007, and March 2008.
70
Pursuant
to the Consent and Amendment:
·
|
The
Company agreed to issue to each Holder in exchange for such Holder’s
Debenture an amended and restated Debenture (the “Amended and Restated
Debentures”) in a principal amount equal to the principal amount of such
Holder’s Debenture times 1.35 minus any interest paid
thereon.
|
·
|
The
conversion price under the Amended and Restated Debentures was reduced to
$0.10, subject to further adjustment as provided therein (including for
stock splits, stock dividends, and certain subsequent equity
sales).
|
·
|
The
maturity date under the Amended and Restated Debentures was extended until
December 31, 2010.
|
·
|
The
Company agreed to amend and restate each Holder’s Warrant (the “Amended
and Restated Warrants”).
|
·
|
The
exercise price under the Amended and Restated Warrants was reduced to
$0.10 subject to further adjustment as provided therein (including for
stock splits, stock dividends, and certain subsequent equity
sales).
|
·
|
The
termination date under the Amended and Restated Warrants was extended
until June 30, 2014.
|
71
We issued
and sold a $600,000 unsecured convertible note dated as of February 15, 2008
(“Note A”) to JMJ Financial, for a net purchase price of $500,000 (reflecting a
16.66% original issue discount) in a private placement. Note A bears interest at
the rate of 12% per annum, and is due by February 15, 2010. At any time after
the 180th day following the effective date of Note A, the holder may at its
election convert all or part of Note A plus accrued interest into shares of our
common stock at the conversion rate of the lesser of: (a) $0.38 per share, or
(b) 80% of the average of the three lowest trade prices in the 20 trading days
prior to the conversion. Pursuant to the Use of Proceeds Agreement entered into
in connection with the issuance of Note A, we are required to use the proceeds
from Note A solely for research and development dedicated to adult stem cell
research.
Effective
February 15, 2008, in exchange for $1,000,000 in the form of a Secured &
Collateralized Promissory Note (the “JMJ Note”) issued by JMJ Financial to the
Company, we issued and sold an unsecured convertible note (“Note B”) to JMJ
Financial in the aggregate principal amount of $1,200,000 or so much as may be
paid towards the balance of the JMJ Note. Note B bears interest at the rate of
10% per annum, and is due by February 15, 2010. At any time following the
effective date of Note B, the holder may at its election convert all or part of
Note B plus accrued interest into shares of our common stock at the conversion
rate of the lesser of: (a) $0.38 per share, or (b) 80% of the average of the
three lowest trade prices in the 20 trading days prior to the
conversion.
We issued
senior secured convertible debentures dated March 31, 2008 in the aggregate
principal amount of $4,038,880 with an original issue discount of
20.3187%. The closing escrow established in connection with the
transaction was released April 4, 2008. In connection with the closing of the
issuance and sale of convertible debentures, we received gross proceeds of
$2,332,431, excluding refinancing of bridge debt and in-kind payments incurred
in anticipation of the financing. The convertible debentures are due and payable
one year from the date of issuance, unless sooner converted into shares of our
common stock. At any time from the closing date until the maturity
date of the debentures, the Purchasers have the right to convert the debentures,
in whole or in part, into common stock of the Company at the then effective
conversion price. The debentures are initially convertible into 26,925,867
shares of common stock at a price of $0.15 per share. In connection with the
closing of the 2008 financing, we also issued to the investors warrants to
purchase an aggregate of 26,925,867 shares of our common stock. The term of the
warrants is five years and the exercise price is $0.165 per share, subject to
anti-dilution and other customary adjustments.
In
connection with the closing of the 2008 financing described above, we issued (i)
warrants to purchase an aggregate of 6,399,806 shares of common stock of the
Company at an exercise price of $0.165 to T.R. Winston & Company, LLC as
consideration for placement agent services provided in connection with the 2008
financing, (ii) a debenture in the principal amount of $250,000 to T.R. Winston
& Company, LLC in order to satisfy certain outstanding payables owed by the
Company, (iii) a debenture in the principal amount of $250,000 to Pierce Atwood
LLP in order to satisfy certain outstanding payables owed by the Company, and
(iv) a debenture in the principal amount of $61,000 to PDPI, LLC in order to
satisfy certain outstanding payables owed by the Company to one of their
partners (Green Mountain Finance LLC). The debentures and warrants described
above contained the same terms and conditions as those issued to the investors
in the 2008 financing.
On
March 21, 2008, we issued and sold an aggregate of $130,000 in unsecured
convertible notes (the “Bridge Notes”) to PDPI LLC and The Shapiro Family Trust.
Dr. Shapiro, one of the Company’s directors, may be deemed the beneficial
owner of the securities owned by The Shapiro Family Trust. The net outstanding
amount of principal plus interest of the Notes was converted into common stock
of the Company in connection with the 2008 Financing described
above.
On
December 28, 2007, we issued a warrant to purchase 500,000 shares of common
stock at an exercise price of $0.40 per share to Bristol Capital, LLC in
connection with consulting services provided to us. The warrant will become
fully vested on the first anniversary of the grant date, vesting in quarterly
installments.
On
October 17, 2007, we issued a warrant to purchase 1,250,000 shares of
common stock at an exercise price of $0.40 per share to Green Mountain Finance
in connection with consulting services provided to us.
On
August 31, 2007, we issued a warrant to purchase 680,036 shares of common
stock at an exercise price of $0.39 per share to Rodman &
Renshaw LLC in connection with broker services provided to us.
In
connection with our merger with Mytogen, Inc. which closed on
September 20, 2007, we issued the following securities to the former
stockholders of Mytogen in exchange for all of their shares of that company:
(i) 8,064,517 shares of our common stock having an aggregate value of
$5,000,000 based on a per share price of $0.62, and/or (ii) warrants to
purchase an aggregate of 1,500,000 shares of our common stock at an exercise
price of $0.75 per share. Of the 8,064,517 shares of our common stock issued in
connection with the closing, fifteen percent (15%) or 1,209,675, of such shares
were issued to Mellon Trust of New England, N.A., as escrow agent, and will be
held in escrow for a period of eighteen (18) months in accordance with the
terms of the escrow agreement executed in connection with the closing of the
transaction.
72
On
September 7, 2007, in connection with the closing of the exercise of the
additional investment right described in our Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 7, 2007, we
issued to certain accredited investors an aggregate of $12,550,000 principal
amount senior secured convertible debentures with an original issue discount of
20.3187%. In connection with the closing of the issuance and sale of convertible
debentures, we received gross proceeds of $10,000,000. The convertible
debentures are due and payable three years from the date of issuance, unless
sooner converted into shares of our common stock. The conversion price of the
debentures is $0.34, subject to anti-dilution and other customary adjustments.
In connection with the securities purchase agreement, we also issued warrants to
purchase an aggregate of 36,911,765 shares of our common stock. The term of the
warrants is five years and the exercise price is $0.38 per share, subject to
anti-dilution and other customary adjustments.
On
July 1, 2007, we issued a warrant to purchase 650,000 shares of common
stock at an exercise price of $0.38 per share to William Woodward in connection
with consulting services provided to us.
On
February 5, 2007, we issued a warrant to purchase 300,000 shares of common
stock at an exercise price of $0.96 per share to Steven Price in connection with
consulting services provided to us by Mr. Price.
On
February 5, 2007, the Company issued 800,000 shares of "restricted" common
stock to Infigen, Inc. at a per share price equal to $0.76 (the closing
price on February 5, 2007) in connection with the execution of that certain
Patent Assignment Agreement with Infigen, Inc.
In
connection with the foregoing, the Company relied upon the exemption from
securities registration afforded by Rule 506 of Regulation D as promulgated by
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The issuances were made to a limited number of persons, all of whom
were accredited investors, and transfer of the securities was restricted in
accordance with the requirements of the Securities Act of
1933.
73
Item
16. Exhibits
Exhibit
Number
|
Description
|
|
2.1
|
Agreement
and Plan of Merger between the Compny, A.C.T. Acquisition Corp. and ACT,
dated as of January 3, 2005 (previously filed as Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed on January 4,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
2.2
|
Agreement
and Plan of Merger between Advanced Cell Technology, Inc., a Nevada
corporation, and Advanced Cell Technology, Inc., a Delaware
corporation, dated as of November 18, 2005 (previously filed as
Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed
on November 21, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
2.2
|
Agreement
and Plan of Merger between Advanced Cell Technology, Inc., a Delaware
corporation, and ACT, dated as of November 18, 2005 (previously filed
as Exhibit 2.2 to the Registrant's Current Report on Form 8-K
filed on November 21, 2005 (File No. 000-50295) and incorporated
by reference herein).
|
|
3.1
|
Certificate
of Incorporation of the Company (previously filed as Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed on
November 21, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
3.1.1
|
Certificate
of Amendment to Articles of Incorporation dated April 1, 2004
(previously filed as Exhibit 3.1.1 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
3.1.2
|
Certificate
of Amendment to Articles of Incorporation dated December 30, 2004
(previously filed as Exhibit 3.1 to the Registrant's Current Report
on Form 8-K filed on January 4, 2005 (File No. 000-50295)
and incorporated by reference herein).
|
|
3.1.3
|
Certificate
of Amendment to Articles of Incorporation dated June 23, 2005
(previously filed as Exhibit 3.1 to the Registrant's Current Report
on Form 8-K filed on June 22, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
3.1.4
|
Certificate
of Amendment to Articles of Incorporation dated July 6, 2005
(previously filed as Exhibit 3.1 to the Registrant's Current Report
on Form 8-K filed on July 7, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
3.15
|
Certificate
of Amendment to Certificate of Incorporation dated September 15, 2009
(previously
filed)
|
|
3.16
|
Certificate
of Designation of Series B Preferred Stock 2005 (previously filed as
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed
on November 12, 2009 (File No. 000-50295) and incorporated by
reference herein).
|
|
3.2
|
Bylaws
of the Company (previously filed as Exhibit 3.2 to the Registrant's
Current Report on Form 8-K filed on November 21, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
3.2.1
|
Amendment
to Bylaws of the Company (previously filed as Exhibit 3.1 to the
Registrant's Current Report on Form 8-K filed on December 29,
2004 (File No. 000-50295) and incorporated by reference
herein).
|
|
4.1
|
Specimen
Stock Certificate (previously filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed on November 21,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
4.2
|
Form
of $0.05 Warrant to Purchase Common Stock of ACT. ACT issued warrants in
this form for the purchase of an aggregate of 900,000 shares, including a
warrant to purchase 250,000 shares of ACT common stock to
Andwell, LLC, an entity affiliated with William Caldwell, IV,
the Chief Executive Officer and a director of the Company (previously
filed as Exhibit 4.2 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
4.3
|
Form
of $0.25 Warrant to Purchase Common Stock of ACT. ACT issued warrants in
this form for the purchase of an aggregate of 1,954,000 shares, including
(i) a warrant to purchase 236,000 shares of ACT common stock to
Andwell, LLC, an entity affiliated with William Caldwell, IV, the
Chief Executive Officer and a director of the Company, (ii) a warrant
to purchase 75,000 shares of ACT common stock to Rocket Ventures, an
entity affiliated with Jonathan Atzen, a Senior Vice President and the
General Counsel of the Company (previously filed as Exhibit 4.3 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
4.4
|
$0.25
Warrant to Purchase Common Stock of the Company issued to Gunnar Engstrom
(previously filed as Exhibit 4.4 to the Registrant's Quarterly Report
on Form 10-QSB filed on May 23, 2005 (File No. 000-50295)
and incorporated by reference herein).
|
|
4.5
|
Form
of $0.85 Warrant to Purchase Common Stock of ACT (previously filed as
Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
4.6
|
Form
of $1.27 Warrant to Purchase Common Stock of ACT (previously filed as
Exhibit 4.6 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
4.7
|
Form
of $2.00 Warrant to Purchase Common Stock of ACT (previously filed as
Exhibit 4.7 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
4.8
|
Form
of Subscription Agreement to Purchase Series A Convertible Preferred
Units of ACT (previously filed as Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
4.9
|
Form
of Share Purchase Agreement to purchase common stock of Two Moons Kachinas
Corp. ("TMOO"), the predecessor to the Company (previously filed as
Exhibit 4.9 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
4.10
|
Form
of Lock-Up Agreement entered into by certain sellers of TMOO common stock
(previously filed as Exhibit 4.10 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
4.11
|
Form
of Lock-Up Agreement entered into by certain buyers of TMOO common stock
(previously filed as Exhibit 4.11 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
4.12
|
Investor's
Rights Agreement between ACT and Avian Farms, Inc. dated
December 31, 1998 (previously filed as Exhibit 4.12 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP (to be filed by
amendment)
|
|
9.1
|
Form
of Voting Agreement for shares of common stock of ACT held by certain
parties effective as of January 31, 2005 (previously filed as
Exhibit 9.1 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000- 50295) and incorporated by
reference herein).
|
|
10.1
|
Exclusive
Development and License Agreement between GTC Biotherapeutics (f/k/a as
Genzyme Transgenics Corporation) and ACT dated June 8, 1999
(previously filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File No. 000-
50295) and incorporated by reference
herein).
|
74
10.2
|
Exclusive
License Agreement dated April 16, 1996 between the University of
Massachusetts and ACT as amended on September 1, 1997, May 31,
2000 and September 19, 2002 (previously filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.3
|
Materials
and Research Data License Agreement dated January 26, 2001 between
Wake Forest University and ACT (previously filed as Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.3.1
|
July 1,
2002 Assignment to Wake Forest University Health Sciences (previously
filed as Exhibit 10.3.1 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.4
|
Exclusive
License Agreement dated February 1, 2002 between the University of
Massachusetts and ACT (previously filed as Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.5
|
Non-Exclusive
Sublicense Agreement between ACT and Infigen, Inc. dated
August 1, 2003 (previously filed as Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.6
|
Non-Exclusive
License Agreements, dated January 1, 2001 between ACT and PPL
Therapeutics (Scotland) Limited (previously filed as Exhibit 10.6 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.7
|
Nonexclusive
License Agreement dated May 1, 2001 between ACT and Immerge
BioTherapeutics, Inc. (previously filed as Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.8
|
Nonexclusive
License and Sponsored Research Agreement dated June 29, 2001 between
ACT and Charles River Laboratories, Inc. (previously filed as
Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.9
|
Non-Exclusive
Sublicense Agreement between Cyagra, Inc., ACT, ACT Group and
Goyaike, S.A. dated November 20, 2001 (previously filed as
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 23, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.10
|
Exclusive
Sublicense Agreement between ACT, ACT Group and Cyagra, Inc. dated
June 28, 2002 (previously filed as Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.11
|
Non-Exclusive
License Agreement dated November 8, 2002 between ACT and Merial
Limited (previously filed as Exhibit 10.11 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.12
|
Non-Exclusive
Sublicense Agreement between ACT and Infigen, Inc. dated
August 1, 2003 (previously filed as Exhibit 10.12 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.13
|
Exclusive
License Agreement dated October 22, 2003 between ACT and Exeter Life
Sciences, Inc. (previously filed as Exhibit 10.13 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.13.1
|
Letter
of Intent between ELS and ACT dated March 16, 2003 (previously filed
as Exhibit 10.13.1 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.13.2
|
Sponsored
Research Agreement (previously filed as Exhibit 10.13.2 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.14
|
Non-Exclusive
License Agreement dated January 4, 2002 between ACT and Genetic
Savings & Clone (previously filed as Exhibit 10.14 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.15
|
Non-Exclusive
License Agreement dated February 3, 2004 between ACT and Pureline
Genetics (previously filed as Exhibit 10.15 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.16
|
Non-Exclusive
License Agreement dated February 3, 2004 between ACT and First Degree
Genetics (previously filed as Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.17
|
Non-Exclusive
License Agreement dated February 3, 2004 between ACT and One Degree
Genetics (previously filed as Exhibit 10.17 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.18
|
Option
to License Intellectual Property dated December 31, 2003 between ACT
and PacGen Cellco, LLC (previously filed as Exhibit 10.18 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.18.1
|
First
Amendment to Option to License Intellectual Property dated
February 13, 2004 (previously filed as Exhibit 10.18.1 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.19
|
Exclusive
License Agreement (Infigen IP) dated May 14, 2004 between ACT and
PacGen Cellco, LLC (previously filed as Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.19.1
|
First
Amendment to Exclusive License Agreement (Infigen IP) dated
August 25, 2005.
|
|
10.20
|
Exclusive
License Agreement (UMass IP) dated May 14, 2004 between ACT and
PacGen Cellco, LLC (previously filed as Exhibit 10.20 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.20.1
|
First
Amendment to Exclusive License Agreement (UMass IP) dated August 25,
2005, previously filed and incorporated by reference
herein.
|
|
10.21
|
Exclusive
License Agreement (ACT IP) dated May 14, 2004 between ACT and PacGen
Cellco, LLC (previously filed as Exhibit 10.21 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.21.1
|
First
Amendment to Exclusive License Agreement (ACT IP) dated August 25,
2005, previously filed and incorporated by reference
herein.
|
|
10.22
|
Agreement
to Amend ACT/CELLCO License Agreements dated September 7, 2004 ACT
and PacGen Cellco, LLC (previously filed as Exhibit 10.22 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.23
|
Indemnification
Agreement of David Merrell to certain buyers of TMOO common stock dated
December 31, 2004 (previously filed as Exhibit 10.23 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
75
10.24
|
Convertible
Promissory Note to ACT Group, Inc. dated July 12, 2002 in the
amount of $1,000,000 (previously filed as Exhibit 10.24 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.25
|
Promissory
Note issued by ACT to Pierce Atwood LLP dated January 2005 in the
amount of $150,000 (previously filed as Exhibit 10.25 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.26
|
Promissory
Note issued by ACT to Pierce Atwood dated July 1, 2003 in the amount
of $339,000 (previously filed as Exhibit 10.26 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.27
|
Promissory
Note issued by ACT to Rothwell, Figg, Ernst & Manbeck, P.C. dated
July 8, 2003 in the amount of $272,108 (previously filed as
Exhibit 10.27 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.28
|
Forbearance
and Stock Purchase Agreement Among Avian Farms, Inc., ACT
Group, Inc., ACT and Cima Biotechnology, Inc., dated
July 16, 1999, as amended December 23, 1999 (previously filed as
Exhibit 10.28 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.29
|
Securityholders'
Agreement among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A.
dated November 20, 2001 (previously filed as Exhibit 10.29 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.30.1
|
Securityholders'
Agreement among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A.
dated July 1, 2002 (previously filed as Exhibit 10.30.1 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.30.2
|
Collaboration
Agreement and Technology License (previously filed as Exhibit 10.30.2
to the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.30.3
|
Separation
Agreement among ACT, ACT Group, Cyagra, Inc. and Goyaike S.A.
(previously filed as Exhibit 10.30.3 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.31
|
Membership
Interest Exchange and Asset Sale Agreement dated May 31, 2000, by and
among ACT and Hematech, LLC, et al. (previously filed as
Exhibit 10.31 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.31.1
|
Buyout
Option Agreement dated May 31, 2000 between Hematech, LLC and
ACT (previously filed as Exhibit 10.31.1 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.32
|
Space
Sublease Agreement dated November, 2004, between BioReliance and ACT, for
381 Plantation Street, Worcester, MA 01605 (previously filed as
Exhibit 10.32 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.33
|
Advanced
Cell Technology, Inc. 2004 Stock Option Plan. Pursuant to this option
plan, ACT issued options to purchase an aggregate 2,604,000 shares,
including (i) options to purchase 1,500,000 shares of ACT common
stock to Michael West, the Chairman of the Board of Directors and the
Chief Scientific Officer of the Company, and (ii) options to purchase
750,000 shares of ACT common stock to Robert Lanza, the Vice President of
Medical and Scientific Development of the Company (previously filed as
Exhibit 10.33 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000- 50295) and
incorporated by reference herein).
|
|
10.34
|
Advanced
Cell Technology, Inc. 2004 Stock Option Plan II. Pursuant to this
option plan, ACT issued options to purchase an aggregate 1,301,161 shares,
including (i) options to purchase 651,161 shares of ACT common stock
to William Caldwell, IV, the Chief Executive Officer and a director of the
Company, and (ii) options to purchase 240,000 shares of ACT common
stock to Robert Peabody, a director of the Company (previously filed as
Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-
QSB filed on May 23, 2005 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.35
|
A.C.T.
Holdings, Inc. 2005 Stock Option Plan (previously filed as
Appendix A to the Registrant's preliminary proxy statement on Form
PRE-14A filed on May 10, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.36
|
Form
of Incentive Stock Option Agreement (previously filed as
Exhibit 10.36 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.37
|
Form
of Nonqualified Stock Option Agreement (previously filed as
Exhibit 10.37 to the Registrant's Quarterly Report on Form 10-
QSB filed on May 23, 2005 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.38
|
Employment
Agreement between ACT and William M. Caldwell, IV dated December 31,
2004 (previously filed as Exhibit 10.38 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.39
|
Employment
Agreement between ACT and Michael D. West dated December 31, 2004
(previously filed as Exhibit 10.39 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.39.1
|
Amendment
No. 1 to Employment Agreement between ACT and Michael D. West dated
August 1, 2005 (previously filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on August 5, 2005
(File No. 000-50295) and incorporated by reference
herein).
|
|
10.40
|
Employment
Agreement between ACT and Robert Lanza dated February 1, 2005
(previously filed as Exhibit 10.40 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.41
|
Employment
Agreement between the Registrant, ACT and James G. Stewart dated
March 13, 2005 (previously filed as Exhibit 10.41 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.41.1
|
Amendment
to Employment Agreement between the Registrant and James G. Stewart dated
September 16, 2005 (previously filed as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on September 22,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.42
|
Employment
Agreement between ACT and Robert Peabody dated February 9, 2005
(previously filed as Exhibit 10.42 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.43
|
Employment
Agreement between ACT and Jonathan Atzen dated April 1, 2005
(previously filed as Exhibit 10.43 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.44
|
Employment
Agreement between ACT and Irina Klimanskaya dated October 1, 2003
(previously filed as Exhibit 10.44 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
76
10.45
|
Employment
Agreement between ACT and Sadhana Agarwal dated April 1, 2004
(previously filed as Exhibit 10.45 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.46
|
Employment
Agreement between ACT and James Murai dated February 17, 2005
(previously filed as Exhibit 10.46 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.47
|
Employment
Agreement between ACT and David Larocca dated February 9, 2005
(previously filed as Exhibit 10.47 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.48
|
Consulting
Agreement between ACT and William M. Caldwell, IV dated October 1,
2004 (previously filed as Exhibit 10.48 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.49
|
Consulting
Agreement between ACT and Jonathan Atzen dated January 14, 2005
(previously filed as Exhibit 10.49 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.50
|
Consulting
Agreement between ACT and Stephen Price dated December 31, 2004
(previously filed as Exhibit 10.50 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.50.1
|
Consulting
Agreement between ACT and Stephen Price dated April 28, 2005
(previously filed as Exhibit 10.50.1 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.51
|
Consulting
Agreement between ACT and Chad Griffin dated April 1, 2005
(previously filed as Exhibit 10.51 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.52
|
Consulting
Agreement between ACT and James Stewart dated January 14, 2005
(previously filed as Exhibit 10.52 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.53
|
Settlement
Agreement between ACT and Gunnar Engstrom dated January 28, 2005
(previously filed as Exhibit 10.53 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.54
|
Confidentiality
and Nondisclosure Agreement dated February 3, 1999 between ACT and
Robert Lanza, M.D. (previously filed as Exhibit 10.54 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.55
|
Consulting
Agreement dated September 29, 1997 between ACT and Dr. James
Robl (previously filed as Exhibit 10.55 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.56
|
Consulting
Agreement dated January 23, 1998 between ACT and Dr. James Robl
(previously filed as Exhibit 10.56 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.57
|
Final
Settlement Agreement dated August 6, 1999 between Infigen, Inc.,
ACT and Steven Stice (previously filed as Exhibit 10.57 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.58
|
Letter
Agreement dated April 20, 2000 between ACT and Dr. Steven L.
Stice (previously filed as Exhibit 10.58 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.59
|
Master
Laboratory Services Agreement dated as of January 4, 2001 between
White Eagle Laboratories, Inc. and ACT (previously filed as
Exhibit 10.59 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.60
|
Master
Study Agreement dated as of December 4, 2000 between Biomedical
Research Models, Inc. and ACT (previously filed as Exhibit 10.60
to the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.61
|
Agreement
Relating to the Transfer of Biological Materials dated as of
February 3, 2000 between Wake Forest University and ACT (previously
filed as Exhibit 10.61 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.62
|
Materials
Transfer Agreement dated February 16, 2000 between ACT, B.C. Cancer
Agency and Dr. Peter Lansdorp (previously filed as Exhibit 10.62
to the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.63
|
Materials
Transfer Agreement dated January 19, 2000 between ACT, IPK and Anna
Wobus (previously filed as Exhibit 10.63 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.64
|
Materials
Transfer Agreement dated February 23, 2000 between ACT, Philip
Damiani and Carlos T. Moraes (previously filed as Exhibit 10.64 to
the Registrant's Quarterly Report on Form 10-QSB filed on
May 23, 2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.65
|
Material
Transfer Agreement dated January 6, 1997 between ACT, University of
Massachusetts, University of Colorado and Curtis R. Freed (previously
filed as Exhibit 10.65 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File
No. 000- 50295) and incorporated by reference
herein).
|
|
10.66
|
Material
Transfer Agreement dated March 20, 2000 between ACT, Charlotte Farin
and Peter Farin (previously filed as Exhibit 10.66 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.67
|
Sponsored
Research Agreement dated as of May 15, 2000 between Carl H. Lindner,
Jr. Family Center for Research of Endangered Wildlife (CREW) and ACT
(previously filed as Exhibit 10.67 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.68
|
Sponsored
Research Agreement dated as of August 9, 2000 between Cornell
University and ACT (previously filed as Exhibit 10.68 to the
Registrant's Quarterly Report on Form 10-QSB filed on May 23,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.69
|
Sponsored
Research Agreement dated as of December 1, 1999 between ACT and the
University of Massachusetts Amherst (previously filed as
Exhibit 10.69 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.69.1
|
Amendment
No. 1 to Agreement dated December 1, 1999 (previously filed as
Exhibit 10.69.1 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference
herein).
|
77
10.70
|
Sponsored
Research Agreement dated August 1, 1999 between ACT and UMass (D.
Good) (previously filed as Exhibit 10.70 to the Registrant's
Quarterly Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.71
|
Term
Sheet for Non-Exclusive License Agreement dated as of December 23,
2000 between Immerge BioTherapeutics, Inc. and ACT, as amended by
First Amendment to Term Sheet dated March 14, 2001 (previously filed
as Exhibit 10.71 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.72
|
Withdrawal,
Termination, Assignment and Assumption Agreement dated March 14, 2001
by and among ACT, BioTransplant, Inc., Immerge
BioTherapeutics, Inc. and Infigen, Inc. (previously filed as
Exhibit 10.72 to the Registrant's Quarterly Report on
Form 10-QSB filed on May 23, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.73
|
Consulting
Agreement between ACT and Karen Chapman dated January 15, 2005
(previously filed as Exhibit 10.73 to the Registrant's Quarterly
Report on Form 10-QSB filed on May 23, 2005 (File
No. 000-50295) and incorporated by reference
herein).
|
|
10.74
|
Research
Collaboration Agreement between ACT and The Burnham Institute dated
May 23, 2005 (previously filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-QSB filed on August 15,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.75
|
Securities
Purchase Agreement dated September 15, 2005 (previously filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on September 19, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.76
|
Registration
Rights Agreement dated September 15, 2005 (previously filed as
Exhibit 10.2 to the Registrant's Current Report on Form 8-K
filed on September 19, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.77
|
Form
of Common Stock Purchase Warrant (previously filed as Exhibit 10.3 to
the Registrant's Current Report on Form 8-K filed on
September 19, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.78
|
Form
of Amortizing Convertible Debenture (previously filed as Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed on
September 19, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.79
|
Form
of Lock-up Agreement (previously filed as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed on September 19,
2005 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.80
|
Settlement
Agreement dated September 14, 2005 (previously filed as
Exhibit 10.6 to the Registrant's Current Report on Form 8-K
filed on September 19, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.81
|
Form
of Convertible Promissory Note (Unsecured) (previously filed as
Exhibit 10.7 to the Registrant's Current Report on Form 8- K
filed on September 19, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.82
|
Form
of Warrant to Purchase Securities (previously filed as Exhibit 10.8
to the Registrant's Current Report on Form 8-K filed on
September 19, 2005 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.83
|
Agreement
between Advanced Cell Technology, Inc., Advanced Cell, Inc. and
A.C.T. Group, Inc. dated September 15, 2005 (previously filed as
Exhibit 10.9 to the Registrant's Current Report on Form 8-K
filed on September 19, 2005 (File No. 000-50295) and
incorporated by reference herein).
|
|
10.84
|
Agreement
between Capital Financial Media, LLC and Advanced Cell
Technology, Inc., dated February 9, 2006 (previously filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 15, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.85
|
Sublease
Agreement between Avigen, Inc. and Advanced Cell
Technology, Inc., dated November 29, 2005. (previously filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 15, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.86
|
Exclusive
Sublicense Agreement between Advanced Cell Technology, Inc. and
TranXenoGen, Inc., dated March 29, 2006 (previously filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-QSB
filed on May 15, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.87
|
Non-Exclusive
License Agreement between Kirin Beer Kabushiki Kaisha, Aurox, LLC,
Hematech, LLC, and Kirin SD, Inc., and Advanced Cell
Technology, Inc., dated May 9, 2006 (previously filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB
filed on August 11, 2006 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.88
|
Exclusive
License Agreement between Kirin Beer Kabushiki Kaisha, Aurox, LLC,
Hematech, LLC, and Kirin SD, Inc., and Advanced Cell
Technology, Inc., dated May 9, 2006 (previously filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB
filed on August 11, 2006 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.89
|
Purchase
Agreement between Kirin SD, Inc. and Advanced Cell
Technology, Inc., dated May 9, 2006(previously filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-QSB
filed on August 11, 2006 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.90
|
Consulting
Agreement between Advanced Cell Technology, Inc. and James G.
Stewart, dated August 17, 2006 (previously filed as Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed on
August 18, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.91
|
Securities
Purchase Agreement dated August 30, 2006 (previously filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on September 8, 2006 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.92
|
Registration
Rights Agreement dated September 15, 2005 (previously filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on September 8, 2006 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.93
|
Form
of Common Stock Purchase Warrant (previously filed as Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed on
September 8, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.94
|
Form
of Amortizing Convertible Debenture (previously filed as Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed on
September 8, 2006 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.95
|
Form
of Lock-up Agreement (previously filed as Exhibit 10.5 to the
Registrant's Current Report on Form 8-K filed on September 8,
2006 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.96
|
Amendment
No. 1, dated as of January 11, 2007, to the Securities Purchase
Agreement, dated August 30, 2006, the Amortizing Convertible
Debenture, dated September 6, 2006, and the Registration Rights
Agreement, dated August 30, 2006 (previously filed as
Exhibit 10.97 to the Registrant's Registration Statement on
Form SB-2 filed on January 26, 2007 (File No. 333-140265)
and incorporated by reference
herein).
|
78
10.97
|
Amendment
No. 1, dated as of January 11, 2007, to the Securities Purchase
Agreement, the Amortizing Convertible Debenture, and the Registration
Rights Agreement, each dated August 30, 2006 (previously filed as
Exhibit 10.97 to the Registrant's Registration Statement on
Form SB-2 filed on January 26, 2007 (File No. 333-140265)
and incorporated by reference herein).
|
|
10.98
|
Patent
Assignment Agreement between Advanced Cell Technology, Inc. and
Infigen, Inc., dated February 5, 2007 (previously filed as
Exhibit 10.98 to the Registrant's Post-Effective Amendment No. 3
to its Registration Statement on Form SB-2 filed on March 28,
2007 and incorporated by reference herein).
|
|
10.99
|
Employment
Agreement between Advanced Cell Technology, Inc. and Pedro Huertas,
M.D., Ph.D., dated February 5, 2007 (previously filed as
Exhibit 10.99 to the Registrant's Post-Effective Amendment No. 3
to its Registration Statement on Form SB-2 filed on March 28,
2007 and incorporated by reference herein).
|
|
10.100
|
Research
Services Agreement between Advanced Cell Technology, Inc. and Oregon
Health & Science University, dated February 5, 2007
(previously filed as Exhibit 10.100 to the Registrant's
Post-Effective Amendment No. 3 to its Registration Statement on
Form SB-2 filed on March 28, 2007 and incorporated by reference
herein).
|
|
10.101
|
Agreement
and Plan of Merger by and among Advanced Cell technology, Inc., ACT
Acquisition Sub, Inc., Mytogen, Inc. and certain shareholders of
Mytogen, Inc., dated as of July 31, 2007 (previously filed as
exhibit 10.101 to the Amendment No. 1 to the Registrant’s 10-KSB for the
year ended December 31, 2007 filed with the SEC on June 30, 2008 and
incorporated by reference herein).
|
|
10.102
|
Escrow
Agreement by and among Advanced Cell Technology, Inc. and certain
former shareholders of Mytogen, Inc., dated as of September 20,
2007 (previously filed as exhibit 10.102 to the Amendment No. 1 to the
Registrant’s 10-KSB for the year ended December 31, 2007 filed with the
SEC on June 30, 2008 and incorporated by reference
herein)
|
|
10.103
|
Securities
Purchase Agreement dated August 31, 2007 (previously filed as
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on September 7, 2007 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.104
|
Registration
Rights Agreement dated August 31, 2007 (previously filed as
Exhibit 10.2 to the Registrant's Current Report on Form 8-K
filed on September 7, 2007 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.105
|
Form
of Common Stock Purchase Warrant (previously filed as Exhibit 10.3 to
the Registrant's Current Report on Form 8-K filed on
September 7, 2007 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.106
|
Form
of Amortizing Convertible Debenture (previously filed as Exhibit 10.4
to the Registrant's Current Report on Form 8-K filed on
September 7, 2007 (File No. 000-50295) and incorporated by
reference herein).
|
|
10.107
|
Form
of Security Agreement dated August 31, 2007 (previously filed as
Exhibit 10.5 to the Registrant's Current Report on Form 8-K
filed on September 7, 2007 (File No. 000-50295) and incorporated
by reference herein).
|
|
10.108
|
Form
of Subsidiary Guaranty dated August 31, 2007 (previously filed as
Exhibit 10.6 to the Registrant's Current Report on Form 8-K
filed on September 7, 2007 (File No. 000-50295) and incorporated
by reference herein).
|
79
10.109
|
Form
of Lock-up Agreement (previously filed as Exhibit 10.7 to the
Registrant's Current Report on Form 8-K filed on September 7,
2007 (File No. 000-50295) and incorporated by reference
herein).
|
|
10.110
|
Amended
and Restated Consulting Agreement, dated as of September 19, 2007 by
and between Advanced Cell Technology, Inc., through its wholly owned
subsidiary Mytogen, Inc., and Dib, LLC. (previously filed as
Exhibit 10.110 to the Registrant's Registration Statement on
Form SB-2 filed on October 1, 2007 and incorporated by reference
herein).
|
|
10.111
|
Employment
Agreement, dated as of September 20, 2007, by and between Advanced
Cell technology, Inc., and Jonathan Dinsmore. (previously filed as
Exhibit 10.111 to the Registrant's Registration Statement on
Form SB-2 filed on October 1, 2007 and incorporated by reference
herein).
|
|
10.112
|
Nomination
Agreement, dated September 20, 2007, by and between Advanced Cell
Technology, Inc. and Anthem Ventures Fund, LP. (previously filed
as Exhibit 10.112 to the Registrant's Registration Statement on
Form SB-2 filed on October 1, 2007 and incorporated by reference
herein).
|
|
10.113
|
Securities
Purchase Agreement dated March 31, 2008, by and among the Company and
the investors party thereto (previously filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed on July 15, 2008 and
incorporated herein by reference).
|
|
10.114
|
Security
Agreement dated March 31, 2008, by and among the Company and the
investors party thereto (previously filed as Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q filed on July 15, 2008 and
incorporated herein by reference).
|
|
10.115
|
Form of
Common Stock Purchase Warrant issued in connection with March 31,
2008 Securities Purchase Agreement (previously filed as Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q filed on July 15, 2008 and
incorporated herein by reference).
|
|
10.116
|
Form of
Amortizing Convertible Debenture issued in connection with March 31,
2008 Securities Purchase Agreement (previously filed as Exhibit 10.4 to
the Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.117
|
Subsidiary
Guarantee dated March 31, 2008 (previously filed as Exhibit 10.5 to
the Registrant’s Quarterly Report on Form 10-Q filed on July 15, 2008 and
incorporated herein by reference).
|
|
10.118
|
Convertible
Note, dated as of March 17, 2008, issued by the Company to PDPI LLC
(previously filed as Exhibit 10.6 to the Registrant’s Quarterly Report on
Form 10-Q filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.119
|
Bridge
Note, dated as of March 17, 2008, issued by the Company to The
Shapiro Family Trust Dated September 25, 1989 (previously filed as
Exhibit 10.7 to the Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.120
|
License
Agreement, dated as of February 25, 2008, by and between the Company
and Pharming Technologies B.V (previously filed as Exhibit 10.8 to the
Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.121
|
Convertible
Promissory Note A, dated as of February 15, 2008, issued by the
Company to JMJ Financial (previously filed as Exhibit 10.9 to the
Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.122
|
Convertible
Promissory Note B , dated as of February 15, 2008, issued by the Company
to JMJ Financial, and Amendment to Convertible Promissory Note B, dated as
of March 17, 2008 (previously filed as Exhibit 10.10 to the Registrant’s
Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
10.123
|
Secured
& Collateralized Promissory Note, dated as of February 15, 2008,
issued by JMJ Financial to the Company (previously filed as Exhibit 10.11
to the Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.124
|
Collateral
& Security Agreement, dated as of February 15, 2008, by and between
the Company and JMJ Financial (previously filed as Exhibit 10.12 to the
Registrant’s Quarterly Report on Form
10-Q
filed on July 15, 2008 and incorporated herein by
reference).
|
|
10.125
|
Consent,
Amendment and Exchange Agreement, dated as of July 29, 2009, by and
between the Company and the holders named on the signature pages thereto
(previously filed as Exhibit 10.1 to the Registrant’s Current Report on
Form
8-K
filed on August 4, 2009 and incorporated herein by
reference).
|
|
10.126
|
Consent,
Amendment and Exchange Agreement, dated as of July 29, 2009, by and
between the Company and the senior noteholders named on the signature
pages thereto (previously filed as Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed on August 4, 2009 and incorporated herein
by reference).
|
|
10.127
|
Preferred
Stock Purchase Agreement, dated November 2, 2009, between Advanced Cell
Technology, Inc, and Optimus Capital Partners, LLC, dba Optimus Life
Sciences Capital Partners, LLC (previously
filed)
|
|
10.128
|
Warrant,
dated November 2, 2009 (previously
filed)
|
|
10.129
|
Subscription
Agreement, dated November 12, 2009 (previously
filed)
|
|
10.130
|
Form
of Class A Warrant (previously
filed)
|
|
10.131
|
Form
of Class B Warrant (previously
filed)
|
|
10.132
|
Form
of Additional Investment Right*
|
|
10.133 |
Employment
Agreement, dated October 1, 2009, between the Company and Robert P. Lanza
(previously filed as Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on November 17, 2009 and incorporated herein by
reference).
|
|
10.134 | Form of Note (previously filed) | |
23.1
|
Consent
of Independent Registered Public Accounting Firm*
|
|
23.2
|
Consent
of Sichenzia Ross Friedman Ference LLP (to be filed by
amendment)
|
|
* Filed
herewith.
80
Item 17.
Undertakings
1. The
undersigned registrant hereby undertakes to file, during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933.
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
Provided,
however, that paragraphs (B)(1)(i) and (B)(1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference
in the registration statement.
2. The
undersigned registrant hereby undertakes that, for the purpose of determining
any liability under the Securities Act of 1933, as amended, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
3. The
undersigned registrant hereby undertakes to remove from registration by means of
a post-effective amendment any of the securities being registered that remain
unsold at the termination of the offering.
4. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant’s annual
report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan’s
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
81
5. The
undersigned registrant hereby undertakes that, for the purposes of determining
liability to any purchaser:
(i) If
the registrant is relying on Rule 430B:
(A) For
purposes of determining liability under the Securities Act of 1933, each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section
10(a) of the Securities Act of 1933 shall be deemed to be part of and
included in the registration statement as of the earlier of the date such form
of prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the securities in the
registration statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such effective date; or
(ii) If
the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other
than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
6. Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of the
undersigned registrant according the foregoing provisions, or otherwise, the
undersigned registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
82
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Worcester,
State of Massachusetts, on December 23,
2009.
ADVANCED
CELL TECHNOLOGY, INC.
|
|||
A
Delaware corporation
|
|||
By:
|
/s/
William M. Caldwell, IV
|
||
William
M. Caldwell, IV
|
|||
Its:
|
CEO
and Chairman
|
||
(Principal
Executive Officer, Principal Financial Officer and Principal Accounting
Officer)
|
In
accordance with the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
/s/
William M. Caldwell, IV
|
||||
William
M. Caldwell, IV
|
December 23 , 2009
|
|||
CEO
and Chairman (Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer)
|
||||
/s/
Erkki Rouslahti
|
||||
Erkki
Ruoslahti, M.D., Ph.D.
|
December 23, 2009
|
|||
Director
|
||||
/s/
Gary Rabin
|
||||
Gary
Rabin
|
December 23, 2009
|
|||
Director
|
||||
/s/
Alan C. Shapiro
|
||||
Alan
C. Shapiro
|
December 23, 2009
|
|||
Director
|
||||
*
By
|
/s/
William M. Caldwell, IV
|
William
M. Caldwell, IV
|
|
Attorney-in-fact
|
83