Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of
the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x
|
Filed by a Party other than the Registrant o
|
Check
the appropriate box:
|
|
|
Preliminary
Proxy Statement
|
o
|
|
Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|
|
|
Definitive
Proxy Statement
|
o
|
|
Definitive
Additional Materials
|
o
|
|
Soliciting
Material Pursuant to
§240.14a-12
|
ADVANCED
CELL TECHNOLOGY, INC.
|
(Name
of Registrant as Specified In Its Charter)
|
|
|
(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
|
|
|
|
|
|
Payment
of Filing Fee (Check the appropriate box):
|
x
|
|
No
fee required.
|
o
|
|
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
|
|
|
(1)
|
|
Title
of each class of securities to which transaction applies:
|
|
|
(2)
|
|
Aggregate
number of securities to which transaction applies:
|
|
|
(3)
|
|
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
|
|
|
(4)
|
|
Proposed
maximum aggregate value of transaction:
|
|
|
(5)
|
|
Total
fee paid:
|
o
|
|
Fee
paid previously with preliminary materials.
|
o
|
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
|
|
|
(1)
|
|
Amount
Previously Paid:
|
|
|
(2)
|
|
Form,
Schedule or Registration Statement No.:
|
|
|
(3)
|
|
Filing
Party:
|
|
|
(4)
|
|
Date
Filed:
|
ADVANCED
CELL TECHNOLOGY, INC.
381
Plantation Street
Worcester,
MA 01605
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
September
10, 2009
To Our
Stockholders:
A Special
Meeting of Stockholders of Advanced Cell Technology, Inc., a Delaware
corporation (the "Company", “we”, “us” or “our”), will be held on September 10,
2009 at 10:00 a.m., Pacific Daylight Time, at the Westin Monache Hotel,
Mammoth, 50 Hillside Drive, Mammoth Lakes, California 93546, for the following
purposes:
1. To
consider and act upon a proposal to approve an amendment to the Company's 2005
Stock Incentive Plan (the "2005 Stock Plan") to increase the number of shares
issuable thereunder to a total of 145,837,250 shares; and
2. To
consider and act upon a proposal to approve an amendment to the Certificate of
Incorporation of the Company to effect an increase in the authorized shares of
common stock, par value $0.001 of the Company (“Common Stock”) from 500,000,000
to 1,750,000,000.
Only
holders of record of the Company's Common Stock as reflected on the stock
transfer books of the Company at the close of business on August 3, 2009, will
be entitled to notice of and to vote at the meeting. All stockholders are
cordially invited to attend the meeting.
YOUR VOTE
IS IMPORTANT. PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE
PROVIDED WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING IN PERSON. IF
YOU ATTEND THE MEETING, YOU MAY CONTINUE TO HAVE YOUR SHARES VOTED AS INSTRUCTED
IN THE PROXY OR YOU MAY WITHDRAW YOUR PROXY AT THE MEETING AND VOTE YOUR SHARES
IN PERSON.
This
proxy statement and form of proxy are being sent to our stockholders on or about
August 10, 2009.
IMPORTANT
NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING
TO BE HELD ON SEPTEMBER 10, 2009.
Pursuant
to rules adopted by the Securities and Exchange Commission, you may access a
copy of the proxy materials at www.advancedcell.com.
|
|
By
Order of the Board of Directors,
|
|
|
|
|
|
/s/
William M. Caldwell, IV |
|
|
William
M. Caldwell, IV
Chief Executive
Officer
|
|
|
|
Worcester,
MA
August
10, 2009
|
|
|
IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE SIGN, DATE AND
MAIL THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IN
THE UNITED STATES.
ADVANCED
CELL TECHNOLOGY, INC.
381
Plantation Street
Worcester,
MA 01605
PROXY
STATEMENT
The
Board of Directors of Advanced Cell Technology, Inc., a Delaware
corporation (the "Company", “we”, “us”, or “our”) is soliciting proxies in the
form enclosed with this proxy statement for use at the Company's Special Meeting
of Stockholders to be held on September 10, 2009 at 10:00 a.m., Pacific Daylight
Time, at the Westin Monache Hotel, Mammoth, 50 Hillside Drive, Mammoth
Lakes, California 93546, and any adjournments thereof (the
"Meeting").
GENERAL
INFORMATION ABOUT VOTING
How
Proxies Work
The
Company's Board of Directors is asking for your proxy. Giving us your proxy
means that you authorize us to vote your shares at the Meeting in the manner
that you direct, or if you do not direct us, in the manner as recommended by the
Board of Directors in this proxy statement.
Who
May Vote
Holders
of the Company's common stock, par value $0.001 per share (the "Common Stock"),
at the close of business on August 3, 2009 are entitled to receive notice of and
to vote their shares at the Meeting. As of July 15, 2009, there were
499,905,641shares of Common Stock outstanding. Each share of Common Stock is
entitled to one vote on each matter properly brought before the
Meeting.
How
to Vote Your Shares
Stockholders
of record may submit a proxy by mail or vote by attending the special meeting
and voting in person.
|
•
|
Submitting a
Proxy by Mail: If
you choose to submit a proxy by mail, simply mark the enclosed proxy card,
date and sign it, and return it in the postage paid envelope
provided.
|
|
•
|
Attending the
Special Meeting: If
you are a stockholder of record, you may attend the special meeting and
vote in person. If you plan to attend the special meeting, you must bring
a form of personal photo identification with you in order to be admitted.
We reserve the right to refuse admittance to anyone without proper proof
of share ownership and without proper photo
identification.
|
If your
shares of Advanced Cell Common Stock are held in the name of a broker, bank or
other nominee, you will receive instructions from the stockholder of record that
you must follow for your shares to be voted. Please follow their instructions
carefully. Also, please note that if the stockholder of record of your shares of
Advanced Cell Common Stock is a broker, bank or other nominee and you wish to
vote in person at the special meeting, you must request a legal proxy from your
broker, bank or other nominee that holds your shares and present that proxy and
proof of identification at the special meeting.
Revoking
a Proxy
You
may revoke your proxy before it is voted by:
|
·
|
providing
written notice to the corporate Secretary of the Company before or at the
Meeting;
|
|
·
|
submitting
a new proxy with a later date; or
|
|
·
|
voting by ballot at the
Meeting.
|
The
last vote you submit chronologically (by any means) will supersede your prior
vote(s). Your attendance at the Meeting will not, by itself, revoke your
proxy.
Quorum
In
order to carry on the business of the Meeting, we must have a quorum. This means
that at least a majority of the outstanding shares eligible to vote must be
represented at the Meeting, either by proxy or in person. Abstentions and broker
non-votes are counted as present and entitled to vote for purposes of
determining a quorum. Treasury shares, which are shares owned by the Company
itself, are not voted and do not count for this purpose.
Votes
Needed
A
majority of the votes cast by the holders of all of the shares of Common Stock
present or represented and voting on such matter is required to approve the
amendment to the 2005 Stock Plan. Broker non-votes and abstentions are not
considered to be shares voting on this matter and will, therefore, have no
effect on the outcome of the vote on the amendment to the 2005 Stock Incentive
Plan. The affirmative vote of a majority of the issued and outstanding shares of
Common Stock entitled to vote at the Meeting is required to approve the
amendment to our Certificate of Incorporation to effect the increase in our
authorized shares of Common Stock. Accordingly, shares which abstain from voting
as to such matter, and shares held in "street name" by brokers or nominees who
indicate on their proxies that they do not have discretionary authority to vote
such shares as to such matter, will have the effect of a vote against the
proposal to approve the amendment to our Certificate of Incorporation to effect
an increase in our authorized shares of Common Stock.
Dissenter’s
Right of Appraisal
No action
will be taken in connection with the proposals described in this Proxy Statement
for which Delaware law, ou Certificate of Incorporation or Bylaws provide a
right of a shareholder to dissent and obtain appraisal of or payment for such
shareholder's shares.
Householding
of Proxy Materials
Some
banks, brokers and other nominee record holders may be participating in the
practice of “householding” Proxy Statements and annual reports. This means
that only one copy of this Proxy Statement may have been sent to multiple
shareholders in your household. We will promptly deliver a separate copy
of either document to you if you call or write us at the following address or
phone number: 381 Plantation Street, Worcester, MA 01605, phone: 510-748-4900,
attention: William M. Caldwell, IV. If you want to receive separate copies
of our annual report and Proxy Statement in the future, or if you are receiving
multiple copies and would like to receive only one copy for your household, you
should contact your bank, broker or other nominee record holder, or you may
contact us at the above address and phone number.
Other
Matters
Our board
of directors knows of no other business which will be presented for
consideration at the special meeting other than those matters described above.
However, if any other business should come before the special meeting, it
is the intention of the person named in the enclosed proxy card to vote, or
otherwise act, in accordance with his best judgment on such
matters.
Solicitation
of Proxies
The
Company will pay the expenses of soliciting proxies, which we anticipate will
total approximately $12,000. Proxies may be solicited on our behalf by
directors, officers or employees of the Company, without additional
remuneration, in person or by telephone, by mail, electronic transmission and
facsimile transmission. Brokers, custodians and fiduciaries will be requested to
forward proxy soliciting material to the owners of Common Stock held in their
names and, as required by law, the Company will reimburse them for their
reasonable out-of-pocket expenses for this service.
INTEREST OF CERTAIN PERSONS IN
MATTERS TO BE ACTED UPON
No
director, executive officer, associate of any director, executive officer or any
other person has any substantial interest, direct or indirect, by security
holdings or otherwise, in the amendment to the 2005 Stock Plan or the approval
of the amendment to our Amended and Restated Certificate of Incorporation that
is not shared by all other stockholders, except that our directors and executive
officers are eligible to receive awards under the 2005 Stock Plan, as
amended.
VOTING
SECURITIES AND PRINCIPAL HOLDERS THEREOF
Voting
Securities
The
number of outstanding shares of our Common Stock at the close of business on
August 3, 2009, the record date for determining our stockholders who are
entitled to notice of and to vote on the amendment to our 2005 Stock Plan at the
Meeting, and the approval of the amendment to our Certificate of Incorporation,
is 499,905,641.
Beneficial
Ownership of Directors, Officers and 5% Stockholders
The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of June 15, 2009. On such date, 499,905,641
shares of Common Stock were outstanding. Beneficial ownership is determined in
accordance with the applicable rules of the Securities and Exchange Commission
and includes voting or investment power with respect to shares of our Common
Stock. The information set forth below is not necessarily indicative of
beneficial ownership for any other purpose, and the inclusion of any shares
deemed beneficially owned in this table does not constitute an admission of
beneficial ownership of those shares. Unless otherwise indicated, to our
knowledge, all persons named in the table have sole voting and investment power
with respect to their shares of Common Stock, except, where applicable, to the
extent authority is shared by spouses under applicable state community property
laws.
The following table sets forth
information regarding beneficial ownership of our capital stock as of June 15,
2009 by:
|
·
|
Each
person, or group of affiliated persons, known to us to be the beneficial
owner of more than 5% of the outstanding shares of our Common
Stock,
|
|
·
|
Each
of our directors and named executive officers,
and
|
|
·
|
All
of our directors and executive officers as a
group.
|
|
|
Number of
Shares
Beneficially Owned
|
|
|
Percentage
|
|
5%
or Greater Stockholders:
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
William
M. Caldwell, IV, Chief Executive Officer and Chairman of the Board of
Directors
|
|
|
2,801,021 |
(2) |
|
|
*
|
% |
Robert
P. Lanza, M.D., Chief Scientific Officer
|
|
|
2,686,135 |
(3) |
|
|
*
|
% |
Alan
C. Shapiro, Ph.D., Director
|
|
|
6,129,432 |
(4) |
|
|
1.22
|
% |
Erkki
Ruoslahti, M.D., Ph.D., Director
|
|
|
120,086 |
(5) |
|
|
* |
|
Gary
Rabin, Director
|
|
|
1,862,960 |
(6) |
|
|
*
|
% |
Directors
and Executive Officers as a Group (5 persons)
|
|
|
13,599,634 |
|
|
|
2.66
|
% |
(1)
|
Unless
otherwise indicated, the address of the beneficial owner is 381 Plantation
Street, Worcester,
Massachusetts 01605.
|
(2)
|
Includes
2,554,273 shares subject to stock options that are currently exercisable
or exercisable within 60 days of June 15, 2008 that are held directly
by Mr. Caldwell.
|
(3)
|
Includes
2,386,135 shares subject to stock options that are currently exercisable
or exercisable within 60 days of June 15,
2008.
|
(4)
|
Includes
(i) indirect ownership of 1,682,346 shares and 2,565,778 shares
subject to convertible debentures held by The Shapiro Family Trust and of
which Dr. Shapiro may be deemed the beneficial owner,
(ii) 1,694,245 shares subject to warrants held by The Shapiro Family
Trust and of which Dr. Shapiro may be deemed the beneficial owner,
and (iii) 100,000 shares subject to stock options that are currently
exercisable or exercisable within 60 days of June 15,
2008.
|
(5)
|
Includes
100,000 shares subject to stock options that are currently exercisable or
exercisable within 60 days of June 15,
2008.
|
(6)
|
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.
|
EXECUTIVE
COMPENSATION
The
following table summarizes the annual compensation paid to our named executive
officers for the two years ended December 31, 2008 and 2007:
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
M. Caldwell, IV
|
|
2008
|
|
|
350,000 |
(1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
995 |
(2) |
|
|
350,995 |
|
Chief
Executive Officer,
|
|
2007
|
|
|
348,374 |
|
|
|
150,000 |
|
|
|
- |
|
|
|
- |
|
|
|
2,376 |
(2) |
|
|
500,750 |
|
Principle
Financial Officer, and Chairman of the Board of
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. Lanza, M.D.,
|
|
2008
|
|
|
290,000 |
|
|
|
35,000 |
|
|
|
- |
|
|
|
168,237 |
|
|
|
636 |
(2) |
|
|
493,873 |
|
Chief
Scientific Officer
|
|
2007
|
|
|
342,805 |
|
|
|
50,000 |
|
|
|
- |
|
|
|
28,910 |
|
|
|
483 |
(2) |
|
|
422,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan
F. Atzen
|
|
2008
|
|
|
78,077 |
|
|
|
- |
|
|
|
93,669 |
|
|
|
1,598 |
|
|
|
3,001 |
(3) |
|
|
176,345 |
|
Sr.
Vice President, General Counsel
|
|
2007
|
|
|
338,537 |
|
|
|
60,000 |
|
|
|
- |
|
|
|
6,391 |
|
|
|
12,360 |
(4) |
|
|
417,288 |
|
(1) This
amount includes $80,130 in deferred compensation that was paid to Mr. Caldwell
in 2009.
(2) This
amount represents a life insurance premium paid by the Company for the named
executive officer.
(3)
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.
(4) 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
Contracts, Termination of Employment and Change-in-Control
Arrangements
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.
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 February 1, 2005, we entered
into an employment agreement with Robert P. Lanza, M.D., who was promoted to
Chief Scientific Officer effective October 6, 2007. The agreement provides
for annual compensation in the amount of $215,000, plus a performance-based
bonus of $35,000 for fiscal year 2005 upon the achievement of certain milestones
established by the Chief Scientific Officer. Dr. Lanza received 500,000
stock options under the 2005 Stock Plan, which vest in equal monthly
installments over 48 months. In addition, on September 16, 2005,
Dr. Lanza was awarded 250,000 options that were immediately vested. In the
event Dr. Lanza's employment is terminated following a change of control,
100% of any unvested options will become vested. In the event Dr. Lanza
continues in the employment of a successor company following a change of
control, the vesting of Dr. Lanza's unvested options will be accelerated by
one year. Dr. Lanza's agreement provides for severance in the amount of
twelve months' salary following termination of employment (1) as a result
of disability, (2) without cause, (3) by Dr. Lanza following a
material change in duties or a material breach by us, or (4) as a result of
a change of control.
Dr. Lanza's
agreement contains non-solicitation, confidentiality and non-competition
covenants, and a requirement that Dr. Lanza assign all invention and
intellectual property rights to us. The term of the agreement expires
February 1, 2009, which may be renewed by the parties in
writing.
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 $48,333.33 as a severance payment, (ii) issue a
fully vested option to purchase an aggregate of 400,000 shares of common stock
of the Company, (iii) issue an aggregate of 936,692 shares of the common
stock of the Company, (iv) provide for the vesting of all outstanding stock
options held by Mr. Atzen and (v) provide Mr. Atzen and his
family with full healthcare and dental coverage for a period of 6 months as
was provided to Mr. Atzen during his employment.
Outstanding
Equity Awards at Fiscal Year-End
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
($)
|
|
William M. Caldwell, IV
|
|
|
651,161 |
(1) |
|
|
- |
|
|
|
0.25 |
|
12/31/2014
|
|
Chief
Executive Officer and
|
|
|
1,903,112 |
(1) |
|
|
- |
|
|
|
0.85 |
|
1/31/2015
|
|
Chairman
of the Board of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. Lanza, M.D.,
|
|
|
750,000 |
(2) |
|
|
- |
|
|
|
0.05 |
|
8/12/2014
|
|
Chief
Scientific Officer
|
|
|
489,583 |
(3) |
|
|
10,417 |
|
|
|
0.85 |
|
1/31/2015
|
|
|
|
|
250,000 |
(2) |
|
|
- |
|
|
|
2.20 |
|
9/15/2015
|
|
|
|
|
896,552 |
(3) |
|
|
3,103,448 |
|
|
|
0.21 |
|
2/7/2018
|
|
(1)
|
These
options held by Mr. Caldwell vest as follows: 25% vested immediately
upon grant with the remainder vesting in equal monthly installments over
30 months.
|
(2)
|
These
options held by Dr. Lanza vested in full as of December 31,
2006.
|
(3)
|
These
options held by Dr. Lanza vest in equal monthly installments over
48 months.
|
DIRECTOR
COMPENSATION
Name and Principal Position
|
|
Year
|
|
Fees Earned
or Paid in Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Alan
C. Shapiro, Ph.D.
|
|
2008
|
|
|
70,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
70,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan
G. Walton, Ph.D., D.Sc.
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erkki
Ruoslahti, M.D., Ph.D.
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
West
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
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.
PROPOSAL ONE—AMENDMENT TO THE 2005
STOCK INCENTIVE PLAN
Our
Board of Directors adopted the 2005 Stock Plan on January 31, 2005. The
Board of Directors initially authorized the issuance of up to 9,000,000 shares
of Common Stock under this 2005 Stock Plan, plus an annual increase on the first
day of each of the Company's fiscal years beginning in 2006 equal to 5% of the
shares of common stock outstanding on the last day of the immediately preceding
fiscal year.
In
October 2007, the Board approved, upon the recommendation of the
Compensation Committee and subject to stockholder approval, an amendment to the
2005 Stock Plan to increase the total number of shares of the Company's common
stock available for issuance thereunder by 25,000,000. Shareholder approval for
the amendment was obtained on January 24, 2008.
In
June 2009, the Board approved, upon the recommendation of the Compensation
Committee and subject to shareholder approval, an amendment to the 2005 Stock
Plan to increase the total number of shares of the Company's Common Stock
available for issuance thereunder by 100,000,000 shares, to a total of
145,837,250 shares.
We
are seeking stockholder approval in order to amend the 2005 Stock Plan to
increase the total number of shares of the Company's Common Stock available for
issuance thereunder by 100,000,000 shares.
As
of July 15, 2009, 33,472,831 shares of Common Stock remained available for
issuance under the 2005 Stock Plan.
Reasons
for the Proposed Amendment
As
described above, we are seeking stockholder approval of the amendment to
increase the number of shares issuable pursuant to the 2005 Stock Plan by
100,000,000 shares. In determining the amount of the increase contemplated by
the proposed amendment to the 2005 Stock Plan, the Board has taken into
consideration the fact that, as of July 15, 2009, there were approximately
750,000,000 shares of our Common Stock outstanding on a fully-diluted basis, and
the Board believes that this fully-diluted number, rather than the number of
outstanding shares of the Company, is the relevant number in determining the
appropriate number of shares available under the 2005 Stock Plan. Assuming the
approval of this increase, the total number of shares of our Common Stock
available for issuance under the 2005 Stock Plan will be 145,837,250, which
represents approximately17.5% of our Common Stock as calculated on a
fully-diluted basis. In addition, pursuant to the Consent, Waiver, Amendment and
Exchange Agreement, dated as of July
29, 2009, among the Company and each of the holders identified on the
signature pages thereof (discussed under Proposal No. 2 below), the Company
agreed to seek shareholder approval for an amendment to the 2005 Stock Plan to
increase the number of shares available for issuance under the 2005 Stock Plan
by 100,000,000 shares.
The
purpose of this increase is to continue to be able to attract, retain and
motivate executive officers and other employees and certain consultants. Upon
stockholder approval, additional shares of Common Stock will be reserved for
issuance under the 2005 Stock Plan, which will enable us to continue to grant
equity awards to our officers, employees and consultants at levels determined by
the Compensation Committee to be necessary to attract, retain and motivate the
individuals who will be critical to the Company's success in achieving its
business objectives and thereby creating greater value for all our
stockholders.
Furthermore,
we believe that equity compensation aligns the interests of our management and
other employees with the interests of our other stockholders. Equity awards are
a key component of our incentive compensation program. We believe that option
grants have been critical in attracting and retaining talented employees and
officers, aligning their interests with those of stockholders, and focusing key
employees on the long-term growth of the Company. We anticipate that option
grants and other forms of equity awards such as restricted stock awards may
become an increasing component in similarly motivating our
consultants.
Approval
of the amendment to the 2005 Stock Plan will permit the Company to continue to
use stock-based compensation to align stockholder and employee interests and to
motivate employees and others providing services to the Company or any
subsidiary.
The
terms of the 2005 Stock Plan are summarized below, and the full text of the
proposed amendment to the 2005 Stock Plan is set forth as Appendix A to
this proxy statement. It is intended that the 2005 Stock Plan qualify as an
incentive stock option plan meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
Summary
of the 2005 Stock Plan
Officers,
employees and directors of, and consultants and advisors to the Company, and any
parent corporation, subsidiary or affiliated entity are eligible to receive
awards under the 2005 Stock Plan at the discretion of the Board of Directors or
its designated committee. Approximately33 employees, directors and consultants
are eligible to receive awards under the 2005 Stock Plan as of July 15,
2009.
The
Board, or a committee designated by the Board, has authority to, among other
things:
|
·
|
Determine
fair market value of the Common Stock in accordance with the terms of the
2005 Stock Plan;
|
|
·
|
Select
employees, directors and consultants to receive
awards;
|
|
·
|
Determine
whether and to what extent awards are
granted;
|
|
·
|
Determine
the number of shares to be covered by an
award;
|
|
·
|
Determine
the terms and conditions of the awards, including exercise price, vesting,
availability of cashless exercises, and implementation of the option
exchange program; and
|
|
·
|
Interpret the plan
document.
|
Officers,
employees and directors of the Company, and consultants and advisors to the
Company, and any parent corporation, subsidiary or affiliated entity are
eligible to receive nonstatutory stock options, stock purchase rights and other
stock-based awards under the 2005 Stock Plan. Only employees of the Company, and
any parent corporation or subsidiary, are eligible to receive incentive stock
options under the 2005 Stock Plan.
Incentive
stock options may not be priced at less than 100% of the fair market value of
our Common Stock on the date of grant (110% of fair market value in the case of
individuals holding 10% or more of our Common Stock). Except as otherwise
determined by the Board, in the case of nonstatutory options, the exercise price
may not be less than 100% of the fair market value on the date of grant in
accordance with applicable law. The fair market value of our Common Stock on
July 20, 2009, was $.185, based on the last sale price of our Common Stock as
reported by the Pink Sheets on that date. The 2005 Stock Plan provides that
stock options and similar awards may be issued with exercise periods of up to
10 years.
Payment
of the exercise price of options under the 2005 Stock Plan may be made in the
form of: (1) cash; (2) check; (3) delivery of a promissory note;
(4) cancellation of indebtedness; (5) surrender of other shares of
Common Stock owned by the recipient for longer than six months;
(6) cashless brokered exercise program; (7) or any combination
thereof, as determined by the Board of Directors.
In
the event of termination of employment or consulting relationship for any reason
other than disability, death or for cause, the award recipient may exercise his
or her vested options within 30 days of the date of such termination. In
the event of termination as a result of disability, the award recipient may
exercise his or her vested options within six months following the date of such
termination. In the event of death, the award recipient's estate may exercise
his or her vested options within 12 months following the date of death. In
the event of termination for cause, all options held by the recipient will
terminate immediately.
Awards
of stock purchase rights may also be made under the 2005 Stock Plan at an
exercise price of not less than 100% of the fair market value of the Common
Stock on the date of the offer. The Company may have the right to repurchase the
stock in the event of a voluntary or involuntary termination of employment with
the Company for any reason.
The
Board has discretion to grant other stock-based awards, provided, however, that
no such awards may be made unless the terms of the 2005 Stock Plan and the
awards are in compliance with Section 409A of the Code.
Transfers
of awards may not be made other than by will or by the laws of descent and
distribution. During the lifetime of a participant, an award may be exercised
only by the participant to whom the award is granted.
Subject
to the provisions of the 2005 Stock Plan or an award agreement, the Board may
not amend any outstanding award agreement without the participant's consent if
the action would adversely affect the participant's rights. The Board may assist
a participant in satisfying the participant's tax withholding obligations by
allowing the participant to elect to have the Company withhold shares that would
otherwise be delivered upon exercise or receipt of the award or by delivering to
the Company shares already owned with a value equal to the amount of the taxes.
Further, the Board may at any time implement an option exchange program whereby
outstanding options under the 2005 Stock Plan are exchanged for options with a
lower exercise price or are amended to decrease the exercise price as a result
of a decline in the fair market value of the Common Stock.
Federal
Income Tax Consequences
The
following is a summary of the principal U.S. federal income tax consequences
generally applicable to awards under the 2005 Stock Plan. This summary does not
purport to consider all of the possible U.S. federal tax consequences of the
awards and is not intended to reflect the particular tax position of any award
recipient. This summary is based upon the U.S. federal tax laws and regulations
now in effect and as currently interpreted and does not take into account
possible changes in such tax laws or such interpretations, any of which may be
applied retroactively. Award recipients are strongly advised to consult their
own tax advisors for additional information.
Grant
of an Option The grant of an option is not
expected to result in any taxable income for the recipient as of the date of the
grant, except that in the event non-statutory options are granted with an
exercise price lower than the then-current fair market value of the Common
Stock, the difference between the exercise price and the then-current fair
market value may be treated as deferred compensation income recognized as of the
date the non-statutory options are granted.
Exercise
of Incentive Stock Option The holder of an
incentive stock option generally will have no taxable income upon exercising the
option (except that a tax liability may arise pursuant to the alternative
minimum tax), and the Company will not be entitled to a tax
deduction.
Exercise
of Nonqualified Stock Option Generally, subject
to Code Section 409A, upon exercising a nonqualified stock option, the
award recipient must recognize ordinary income equal to the excess of the fair
market value of the shares of Common Stock acquired on the date of exercise over
the exercise price. The income will be treated as compensation income subject to
payroll and withholding tax obligations. The Company would be entitled to a
compensation deduction in the amount of income recognized by the award
recipient.
Disposition
of Shares Acquired Through an Option The tax
consequence to a holder of an option upon a disposition of shares acquired
through the exercise of an option will depend on how long the shares have been
held and upon whether such shares were acquired by exercising an incentive stock
option or by exercising a nonqualified stock option.
Generally,
the disposition of shares which were acquired by exercise of an incentive stock
option will be taxable as long-term capital gain or loss if the award recipient
disposes of the shares more than two years after the option was granted and at
least one year after exercising the option. If the award recipient fails to
satisfy the holding period requirements for treatment as an incentive stock
option, a disposition will result in any gain being treated as compensation
income subject to ordinary tax rates. If the award recipient is still an
employee of the Company at the time of the disposition, the amount of gain
treated as compensation will also be subject to payroll and withholding
taxes.
If
an award recipient disposes of shares acquired through the exercise of a
nonqualified option, any gain or loss will be treated as a capital gain or loss.
To the extent such shares have been held for at least one year after exercise of
the nonqualified option, the gain or loss will be treated as long-term capital
gain or loss.
Generally,
there will be no tax consequence to the Company in connection with the
disposition of shares acquired under an option, except that the Company may be
entitled to a tax deduction in the case of the disposition of shares acquired
under an incentive stock option before the applicable incentive stock option
holding periods set forth in the Code have been satisfied.
The
grant by the Board of other stock-based awards may have varying tax consequences
to award recipients. Grants made pursuant to the 2005 Stock Plan may be subject
to Code Section 409A and plan administration may have to conform to Code
Section 409A. Failure to comply with Code Section 409A, if applicable,
will result in acceleration of income and imposition of penalties and interest
to award recipients.
Application
of Section 16 of the Securities Exchange Act of
1934 Special rules may apply in the case of
individuals subject to Section 16 of the Securities Exchange Act of 1934,
as amended. In particular, unless a special election is made pursuant to the
Code, shares received pursuant to the exercise of a stock option may be treated
as restricted as to transferability and subject to a substantial risk of
forfeiture for a period of up to six months after the date of exercise.
Accordingly, the amount of any ordinary income recognized, and the amount of the
Company's tax deduction, are determined as of the end of such
period.
Delivery
of Shares to Satisfy Tax Obligation Under the
2005 Stock Plan, participants may deliver shares of Common Stock (either shares
received upon the receipt or exercise of the award or shares previously owned by
the holder of the option) to the Company to satisfy federal and state tax
obligations unless the Board provides to the contrary in the award
agreement.
New
Plan Benefits
Future
awards under the 2005 Stock Plan to our non-employee directors, executive
officers and employees are made at the discretion of the Compensation Committee.
At this time, therefore, the benefits that may be received by our executive
officers and other employees if our stockholders approve the proposed amendment
to the 2005 Stock Plan cannot be determined, and we have not included a table
reflecting such benefits and awards. By way of background, please see
compensation tables for information regarding equity awards to our named
executive officers in fiscal year 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
|
|
|
14,485,580 |
(1) |
|
$ |
0.55 |
|
|
|
33,826,831 |
(2) |
Equity
compensation plans not approved by security holders
|
|
|
6,080,391 |
|
|
|
0.59 |
|
|
|
- |
|
Total
|
|
|
20,565,971 |
|
|
|
0.56 |
|
|
|
33,826,831 |
|
(1)
|
Awards
for 820,000 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
12,364,419 options have been issued under the 2005 Stock
Plan.
|
(2)
|
This
number included 370,000 shares available under the 2004 Plan I and
33,456,831 shares available under the 2005 Stock
Plan.
|
Vote
Required
The
affirmative vote of a majority of the shares (by voting power) present in person
at the Meeting or represented by proxy and entitled to vote at the Meeting is
required to approve the amendment to the 2005 Stock Plan.
Board
Recommendation
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF AN AMENDMENT TO THE
COMPANY’S 2005 STOCK PLAN TO INCREASE THE NUMBER OF SHARES AVAILABLE FOR
ISSUANCE THEREUNDER.
* * *
PROPOSAL TWO—APPROVAL OF AMENDMENT TO
CERTIFICATE OF INCORPORATION TO EFFECT INCREASE IN AUTHORIZED SHARES OF COMMON
STOCK FROM 500,000,000 to 1,750,000,000
Background
The Board of Directors of the Company
has approved, subject to shareholder approval, an amendment to our Amended and
Restated Certificate of Incorporation to effect an increase in our authorized
shares of Common Stock from 500,000,000 to 1,250,000,000. The Company currently
has authorized 500,000,000 shares of Common Stock and 50,000,000 shares of
preferred stock, par value $0.001 (“Preferred Stock”), of which 499,905,641
shares of Common Stock and 0 shares of Preferred Stock are outstanding as of
July 15, 2009.
The terms
of the additional shares of Common Stock will be identical to those of the
currently outstanding shares of Common Stock. However, because holders of Common
Stock have no preemptive rights to purchase or subscribe for any unissued stock
of the Company, the issuance of additional shares of Common Stock will reduce
the current stockholders' percentage ownership interest in the total outstanding
shares of Common Stock. This amendment and the creation of additional shares of
authorized Common Stock will not alter the current number of issued shares.
The relative rights and limitations of the shares of Common Stock will
remain unchanged under this amendment.
As noted above, as of July 15, 2009, a
total of 499,905,641 shares of the Company's currently authorized 500,000,000
shares of Common Stock are outstanding. In addition, the Company currently
has outstanding Amended and Restated Debentures (defined below) convertible
into171,759,306 shares of Common Stock and Amended and Restated Warrants
(defined below) exercisable into 205,251,285 shares of Common Stock.
Accordingly, the Company currently does not have sufficient authorized but
unissued shares of Common Stock to permit conversion of the Amended and Restated
Debentures and exercise of the Amended and Restated Warrants. The increase in
the number of authorized but unissued shares of Common Stock would enable the
Company, without further shareholder approval, to issue shares to holders of the
Amended and Restated Debentures and the Amended and Restated Warrants upon the
conversion of their respective Amended and Restated Debentures and/or exercise
of their respective Amended and Restated Warrants. In addition, the increase in
the number of authorized but unissued shares of Common Stock would enable the
Company, without further stockholder approval, to issue shares from time to time
as may be required for other proper business purposes, such as raising
additional capital for ongoing operations, business and asset acquisitions,
stock splits and dividends, present and future employee benefit programs and
other corporate purposes.
The
proposed increase in the authorized number of shares of Common Stock could have
a number of effects on the Company's stockholders depending upon the exact
nature and circumstances of any actual issuances of authorized but unissued
shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued
by the Company that may dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company, even if the persons seeking to obtain
control of the Company offer an above-market premium that is favored by a
majority of the independent shareholders. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal. The Board is not aware of any attempt, or contemplated attempt,
to acquire control of the Company, and this proposal is not being presented with
the intent that it be utilized as a type of anti- takeover device.
Stockholders
should recognize that, as a result of this proposal, they will own a smaller
percentage of shares relative to the total authorized shares of the Company,
than they presently own, and will be diluted as a result of any issuances
contemplated by the Company in the future.
The
proposed amendment to the Amended and Restated Certificate of Incorporation to
increase the authorized Common Stock is set forth in Appendix B.
Except as
described below, there are currently no plans, arrangements, commitments or
understandings for the issuance of the additional shares of Common Stock which
are proposed to be authorized.
September
2005 Private Placement
On September 15, 2005, the Company
entered into a securities purchase agreement (the “September 2005 Purchase
Agreement”) with certain purchasers (the “September 2005 Purchasers”), pursuant
to which the Company issued and sold $22,276,250 principal amount of amortizing
convertible debentures (the “September 2005 Debentures”), for a cash purchase
price of $17,750,000, which was a 20.3187% discount to the principal amount of
the September 2005 Debentures. Upon issuance, the September 2005 Debentures had
a maturity date of three years from the closing date of September 15, 2005, did
not bear interest, and were to begin amortizing 180 days after closing with
1/30th of the
principal amount due monthly over thirty months in cash or stock. Upon issuance,
the September 2005 Debentures were convertible into 9,685,326 shares of Common
Stock at an initial conversion price of $2.30 per share. Pursuant to the
September 2005 Purchase Agreement, the Company also issued the September 2005
Purchasers warrants (the “September 2005 Warrants”) to purchase 4,842,663 shares
of Common Stock at an initial exercise price of $2.53 per share. Upon issuance,
the September 2005 Warrants had a term of five years.
Pursuant to and upon the satisfaction
of certain conditions set forth in the September 2005 Purchase Agreement, the
Company granted the September 2005 Purchasers an option (the “Additional
Investment Option”) to purchase up to $11,138,125 principal amount of additional
amortizing convertible debentures for a cash purchase price of up to $8,875,000,
for a period of six months following the earlier of the effective date of the
registration statement for the shares of Common Stock underlying the September
2005 Debentures and September 2005 Warrants, or 12 months from the date of
issuance of the Additional Investment Option.
Each September 2005 Purchaser agreed to
contractually restrict its ability to convert the September 2005 Debentures, and
exercise the September 2005 Warrants, such that the number of shares of the
Company’s Common Stock held by it and its affiliates after such conversion or
exercise does not exceed 4.99% of the Company’s Common Stock outstanding
immediately after giving effect to such conversion or exercise.
September
2006 Private Placement
On September 6, 2006, the Company
entered into a securities purchase agreement, dated August 30, 2006 (the “August
2006 Purchase Agreement”) with the September 2005 Purchasers exercising the
Additional Investment Option (the “September 2005 Purchasers”), pursuant to
which the Company issued and sold $10,981,250 principal amount of amortizing
convertible debentures (the “August 2006 Debentures”), for a cash purchase price
of $8,750,000, which was a 20.3187% discount to the principal amount of the
August 2006 Debentures. Upon issuance, the August 2006 Debentures had a maturity
date of three years from the closing date of September 6, 2006, did not bear
interest, and were to begin amortizing 180 days after closing with 1/30th of the
principal amount due monthly over thirty months in cash or stock. Upon issuance,
the August 2006 Debentures were convertible into 38,129,340 shares of Common
Stock at an initial conversion price of $0.288 per share. Pursuant to the August
2006 Purchase Agreement, the Company also issued the September 2005 Purchasers
exercising the Additional Investment Option warrants (the “August 2006
Warrants”) to purchase 4,541,672 shares of Common Stock at an initial exercise
price of $0.3186 per share. Upon issuance, the August 2006 Warrants had a term
of five years.
Each September 2005 Purchaser which
exercised the Additional Investment Option agreed to contractually restrict its
ability to convert the August 2006 Debentures, and exercise the August 2006
Warrants, such that the number of shares of the Company’s Common Stock held by
it and its affiliates after such conversion or exercise does not exceed 4.99% of
the Company’s Common Stock outstanding immediately after giving effect to such
conversion or exercise.
August
2007 Private Placement
On August 31, 2007, the Company entered
into a securities purchase agreement (the “August 2007 Purchase Agreement”) with
certain purchasers (the “August 2007 Purchasers”), pursuant to which the Company
issued and sold $12,250,000 principal amount of amortizing senior secured
convertible debentures (the “August 2007 Debentures”), for a cash purchase price
of $10,000,000, which was a 20.3187% discount to the principal amount of the
August 2007 Debentures. Upon issuance, the August 2007 Debentures had a maturity
date of three years from the closing date of August 31, 2007, did not bear
interest, and were to begin amortizing on the earlier of (i) September 1, 2008,
or (ii) the first trading day of the month following the effective date of the
initial registration statement for the shares of Common Stock underlying the
August 2007 Debentures and August 2007 Warrants, but in no event prior to
February 1, 2008. Upon issuance, the August 2007 Debentures were convertible
into 36,911,765 shares of common stock at an initial conversion price of $0.34
per share. Pursuant to the August 2007 Purchase Agreement, the Company also
issued the August 2007 Purchasers warrants (the “August 2007 Warrants”) to
purchase 36,911,765 shares of Common Stock at an initial exercise price of $0.38
per share. Upon issuance, the August 2007 Warrants had a term of five
years.
In connection with the August 2007
Purchase Agreement, the Company entered into a security agreement (the “August
2007 Security Agreement”) with the August 2007 Purchasers, pursuant to which the
Company granted the August 2007 Purchasers a senior security interest and lien
on all of the Company’s assets. The security interest granted under the August
2007 Security Agreement also secured the obligations to the September 2005
Purchasers under the September 2005 Debentures and the August 2006
Debentures.
Each August 2007 Purchaser agreed to
contractually restrict its ability to convert the August 2007 Debentures, and
exercise the August 2007 Warrants, such that the number of shares of the
Company’s Common Stock held by it and its affiliates after such conversion or
exercise does not exceed 4.99% of the Company’s Common Stock outstanding
immediately after giving effect to such conversion or exercise.
March
2008 Private Placement
On March 31, 2008, the Company entered
into a securities purchase agreement (the “March 2008 Purchase Agreement”) with
certain purchasers (the “March 2008 Purchasers”, and together with the September
2005 Purchasers and the August 2007 Purchasers, the “Purchasers”), pursuant to
which the Company issued and sold $3,823,145 principal amount of amortizing
senior secured convertible debentures (the “March 2008 Debentures”, and together
with the September 2005 Debentures, the August 2006 Debentures, and the August
2007 Debentures, the “Debentures” ) for a purchase price of $3,046,331
(including cash of $2,355,331 and in-kind payments and refinancing of bridge
debt incurred in anticipation of the March 2008 Purchase Agreement of an
aggregate of $691,000), which was a 20.3187% discount to the principal amount of
the March 2008 Debentures. Upon issuance, the March 2008 Debentures had a
maturity date of one year from the closing date of March 31, 2008, did not bear
interest, and were to begin amortizing on October 1, 2008. Upon issuance, the
March 2008 Debentures were convertible into 25,487,636 shares of Common Stock at
an initial conversion price of $0.15 per share. The Company also issued the
March 2008 Purchasers warrants (the “March 2008 Warrants”, and together with the
September 2005 Warrants, the August 2006 Warrants, and the August 2007 Warrants,
the “Warrants”) to purchase 25,487,636 shares of Common Stock at an initial
exercise price of $0.165. Upon issuance, the March 2008 Warrants had a term of
five years.
In connection with the March 2008
Purchase Agreement, the Company entered into a security agreement (the “March
2008 Security Agreement”) with the March 2008 Purchasers, pursuant to which the
Company granted the March 2008 Purchasers a senior security interest and lien on
all of the Company’s assets. The security interest granted under the March 2008
Security Agreement is pari
passu with the security interest held by the September 2005 Purchasers
and the August 2007 Purchasers.
Each March 2008 Purchaser agreed to
contractually restrict its ability to convert the March 2008 Debentures, and
exercise the March 2008 Warrants, such that the number of shares of the
Company’s Common Stock held by it and its affiliates after such conversion or
exercise does not exceed 4.99% of the Company’s Common Stock outstanding
immediately after giving effect to such conversion or exercise.
In connection with the closing under
the March 2008 Purchase Agreement, the conversion price of the September 2005
Debentures, the August 2006 Debentures, and the August 2007 Debentures, was
reduced to $0.15, and the exercise price of the September 2005 Warrants, the
August 2006 Warrants, and the August 2007 Warrants, was reduced to
$0.165.
June
2009 Consent, Waiver, Amendment and Exchange Agreement
On July
29, 2009, the Company entered into a consent, waiver, amendment and
exchange agreement (the “Consent and Waiver”) with the Purchasers. Pursuant to
the Consent and Waiver:
|
·
|
The
Company agreed to issue to each Purchaser in exchange for such Purchaser’s
Debenture an amended and restated Debenture (the “Amended and Restated
Debentures”) in a principal amount equal to the principal amount of such
Purchaser’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 begin to amortize on September 25,
2009 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 Purchaser in exchange for such Purchaser’s
Warrant an amended and restated 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 by
June 30, 2014.
|
|
·
|
Each
Purchaser agreed not to convert more than 20% of such Purchaser’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 hold a stockholders’ meeting to seek approval of and
amendment to the Company’s Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock
(the “Authorized Share Approval”). If the Company does not receive the
Authorized Share Approval by September 25, 2009, the Company shall pay to
the Purchasers, monthly commencing on September 25, 2009, until the
Authorized Share Approval is received, liquidated damages equal to 5% of
the purchase price of the Debentures.
|
|
·
|
The
Company agreed to seek shareholder approval for an increase in the number
of shares available for issuance under the 2005 Stock
Plan.
|
|
·
|
The
Purchasers agreed to waive any adjustment to the conversion price of the
Debentures 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
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
|
Shares
of Common Stock issuable upon conversion of the Amended and Restated Debentures
and exercise of the Amended and Restated Warrants
The
following tables summarize the number of shares of Common Stock issuable
upon conversion of the Amended and Restated Debentures and exercise of the
Amended and Restated Warrants as of July 29, 2009.
Amended
and Restated Debentures
Amended
and Restated Debentures
|
|
Amended
and Restated Principal amount outstanding
|
|
|
Conversion
price
|
|
|
Number
of shares of underlying Common Stock
|
|
|
Original
Principal Amount Outstanding
|
|
|
Original
amount of shares of Common stock
|
|
|
Additional
amount of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Debentures issued in exchange for September 2005 Debentures
|
|
$
|
121,421
|
|
|
$
|
0.10
|
|
|
|
1,214,213
|
|
|
$
|
89,942
|
|
|
|
294,301
|
|
|
|
919,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Debentures issued in exchange for August 2006 Debentures
|
|
$
|
2,504,082
|
|
|
$
|
0.10
|
|
|
|
25,040,817
|
|
|
$
|
1,854,875
|
|
|
|
8,815,492
|
|
|
|
16,225,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Debentures issued in exchange for August 2007 Debentures
|
|
$
|
8,949,440
|
|
|
$
|
0.10
|
|
|
|
89,494,396
|
|
|
$
|
6,629,214
|
|
|
|
41,662,206
|
|
|
|
47,832,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Debentures issued in exchange for March 2008 Debentures
|
|
$
|
5,600,988
|
|
|
$
|
0.10
|
|
|
|
56,009,880
|
|
|
$
|
4,148,880
|
|
|
|
27,659,200
|
|
|
|
28,350,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,175,931
|
|
|
$
|
0.10
|
|
|
|
171,759,306
|
|
|
$
|
12,722,9110
|
|
|
|
78,431,199
|
|
|
|
93,328,107
|
|
Amended
and Restated Warrants
Amended
and Restated Warrants
|
|
Exercise
price
|
|
|
Number
of shares of underlying Common Stock (REPORTED)
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Warrants issued in exchange for September 2005 Warrants
|
|
$
|
0.10
|
|
|
|
25,622,331
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Warrants issued in exchange for August 2006 Warrants
|
|
$
|
0.10
|
|
|
|
39,342,351
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Warrants issued in exchange for August 2007 Warrants
|
|
$
|
0.10
|
|
|
|
95,993,607
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Warrants issued in exchange for March 2008 Warrants
|
|
$
|
0.10
|
|
|
|
44,292,996
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.10
|
|
|
|
205,251,285
|
|
Vote
Required
Approval
of the proposal for the amendment to the Company’s Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock requires the affirmative vote of the holders of a majority of the
outstanding shares of our Common Stock. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum
but will have the same effect as a negative vote on this proposal. If there are
not sufficient votes to approve this proposal at the time of the meeting, the
meeting may be adjourned in order to permit further solicitation of proxies by
the Board of Directors. However, no proxy voted against this proposal will be
voted in favor of an adjournment or postponement of the meeting to solicit
additional votes in favor of this proposal.
Board
Recommendation
THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" APPROVAL OF AN AMENDMENT TO THE COMPANY’S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE COMPANY’S AUTHORIZED
SHARES OF COMMON STOCK.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the
Quarter Ended March 31, 2009
Certain
statements in this proxy statement that are not historical in fact
constitute “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides certain
“safe harbor” provisions for forward-looking statements. All forward-looking
statements made in this proxy statement are made pursuant to the
PSLRA. Words such as, but not limited to, “believe,” “expect,” “anticipate,”
“estimate,” “intend,” “plan,” and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors based on the Company’s estimates
and expectations concerning future events that may cause the actual results of
the Company to be materially different from historical results or from any
results expressed or implied by such forward-looking statements. These risks and
uncertainties, as well as the Company’s critical accounting policies, are
discussed in more detail under “Management’s Discussion and Analysis—Critical
Accounting Policies” and in periodic filings with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
The
following discussion should be read in conjunction with the financial statements
and notes thereto included in this Proxy Statement.
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.
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 36 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.
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, we have
determined that our outstanding options and warrants require liability
accounting and record the fair values as warrant and option derivatives.
On
January 1, 2008, we 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. We applied the accounting prescribed in FAS
133 to account for its 2005 Convertible Debenture. For practicality in the
valuation of the debentures and for ease of presentation, we applied the
accounting prescribed in FAS 155 to account for the 2006, 2007, February
2008, and April 2008 Convertible Debentures.
In
determining the appropriate fair value of the debentures, we used Level 2 inputs
for our valuation methodology. For the periods from January 1, 2008 through
March 31, 2008, we 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, we changed our
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
our valuations of 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 our 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.
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 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.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations (“SFAS 141R”).” SFAS 141R changes how a reporting enterprise
accounts for the acquisition of a business. SFAS 141R requires an acquiring
entity to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value, with limited exceptions, and
applies to a wider range of transactions or events. SFAS 141R is effective for
fiscal years beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited. We believe adopting SFAS
141R will significantly impact our financial statements for any business
combination completed after December 31, 2008.
In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), which is an amendment of
Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, we do not expect the
adoption of SFAS 160 to have a significant impact on our results of operations
or financial position.
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 adoption of SFAS 161 did not have a material impact on our
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 adoption of FSP EITF 03-6-1 did not have an impact
on the consolidated results of operations or consolidated financial position.
In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue 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 Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“FAS 133”) 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 No.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 FAS 133 paragraph 11(a) scope exception.
This statement did not have a material impact on the financial statements.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 “Determination of the
useful life of Intangible Assets”, (“FSP FAS 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 FAS 142. This Issue is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. FAS 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 FAS 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 FAS 142. This statement did not
have a material impact on the financial statements.
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. This
statement did not have a material impact on the financial statements.
In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5” (“EITF 08-4”). 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 FAS 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”. This Issue is effective for financial statements issued for fiscal
years ending after December 15, 2008. Early application is permitted. This
statement did not have a material impact on the 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”). This statement did not have a material impact on the financial
statements.
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 model of SFAS 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. This statement did not have a material impact on the financial
statements.
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 adoption of
FSP FAS 115-2 and FAS 124-2 did not have a material impact on our consolidated
financial statements.
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. We 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 will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the quarter ended
June 30, 2009. We do not anticipate the adoption of SFAS 165 will have an impact
on our consolidated results of operations or consolidated financial position.
In June 2009, the FASB issued SFAS No.
166 “Accounting for Transfers of Financial Assets” (“SFAS 166”). Statement 166 is a
revision to FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will require more
information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related
to transferred financial assets. It eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures. SFAS 166 enhances
information reported to users of financial statements by providing greater
transparency about transfers of financial assets and an entity’s continuing
involvement in transferred financial assets.
SFAS 166 will be effective at the start of a
reporting entity’s first fiscal year beginning after November 15, 2009. Early
application is not permitted. We are currently evaluating
the impact of adoption of SFAS 166 on the accounting for our convertible notes
and related warrant liabilities.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). Statement 167 is a
revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities,
and changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entity’s purpose and design and the reporting entity’s ability to direct
the activities of the other entity that most significantly impact the other
entity’s economic performance. SFAS 167 will require a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. A reporting entity will be required to disclose how its
involvement with a variable interest entity affects the reporting entity’s
financial statements. SFAS
167 will be effective at
the start of a reporting entity’s first fiscal year beginning after November 15,
2009. Early application is not permitted. We are currently evaluating
the impact, if any, of adoption of SFAS 167 on our financial statements.
In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of
FASB Statement No. 162” (“SFAS 168”). Statement 168 establishes the FASB Accounting Standards
CodificationTM
(Codification) as the single source of authoritative U.S. generally
accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after September 15,
2009. When effective, the
Codification will supersede all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included
in the Codification will become nonauthoritative. Following SFAS 168, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates,
which will serve only to: (a) update the Codification; (b) provide background information about
the guidance; and (c) provide the bases for conclusions on
the change(s) in the Codification. The adoption of SFAS 168 will not have
an impact on our consolidated financial statements.
RESULTS
OF OPERATIONS
Comparison
of Three Months March 31, 2009 and 2008
|
|
Three months ended March 31,
|
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
REVENUE
|
|
$
|
293,976
|
|
|
|
100.0
|
%
|
|
$
|
124,343
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
138,752
|
|
|
|
47.2
|
%
|
|
|
190,728
|
|
|
|
64.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
155,224
|
|
|
|
52.8
|
%
|
|
|
(66,385
|
)
|
|
|
-22.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSES AND GRANT REIMBURSEMENTS
|
|
|
299,767
|
|
|
|
102.0
|
%
|
|
|
3,862,383
|
|
|
|
1313.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GENERAL
AND ADMINSTRATIVE EXPENSES
|
|
|
747,078
|
|
|
|
254.1
|
%
|
|
|
1,725,822
|
|
|
|
587.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
ON SETTLEMENT
|
|
|
4,793,949
|
|
|
|
1630.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
(13,314,306
|
)
|
|
|
-4529.0
|
%
|
|
|
(3,865,069
|
)
|
|
|
-1314.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(18,999,876
|
)
|
|
|
-6463.1
|
%
|
|
$
|
(9,519,659
|
)
|
|
|
-3238.2
|
%
|
Revenues
Revenues
for the three months ended March 31, 2009 and 2008 were $293,976 and $124,343,
respectively. 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 March 31, 2009, was due to more new
licenses being granted as compared to the three months ended March 31, 2008.
Research
and Development Expenses and Grant Reimbursements
Research
and development expenses (“R&D”) for the three months ended March 31, 2009
and 2008 were $436,607 and $3,967,552, respectively, a decrease of
$3,530,945. 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 March 31, 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.
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 March 31, 2009 and 2008 were $136,840
and $105,169, respectively. The Company received one grant during the
three months ended March 31, 2009 and one grant during the three months ended
March 31, 2008, both from the National Institutes of Health.
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31, 2009 and 2008
were $747,078 and $1,725,822, respectively, a decrease of $978,744.
This expense decrease was primarily a result of management’s efforts to reduce
costs and streamline operations during the three months ended March 31, 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.
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.
Loss
on Settlement
Loss on
settlement for the three months ended March 31, 2009 and 2008 were $4,793,949
and $0, respectively. During the three months ended March 31, 2009, we were
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 our common stock. During the quarter, 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 three months ended March 31, 2009.
Other
Income (Loss)
Other
income (loss) for the three months ended March 31, 2009 and 2008 were
($13,314,306) and ($3,865,069), respectively. The change in other income (loss)
in the three months ended March 31, 2009, compared to that of the earlier
period, relates primarily to adjustments to fair value of derivatives related to
the Convertible Debenture financings, loss on modification of debentures, and
default interest charges on all debentures. Interest income was $1,621, and
$6,849 during the three months ended March 31, 2009 and 2008, respectively.
Interest income was lower in the three months ended March 31, 2009 than in the
three months ended March 31, 2008 due to the lower cash balances held in
interest-bearing deposits during the periods. Interest expense was $582,821 and
$4,206,616 for the three months ended March 31, 2009 and 2008, respectively,
which represents a decrease of $3,623,795. The decrease in interest expense in
the three months ended March 31, 2009, compared to the earlier period relates
primarily to amortization of all remaining debt discounts and deferred financing
costs being recorded during the third quarter of 2008 for all debentures upon
their default on August 6, 2008. Therefore, no additional interest expense arose
in 2009 from this amortization. Interest expense during the three months ended
March 31, 2009 relates primarily to debenture default interest.
The gain
(loss) on the fair value of derivatives was ($10,841,612) and $1,020,271, for
the three months ended March 31, 2009 and 2008, respectively. The
increase in our share price contributed most significantly to the loss on the
fair value of derivatives during the three months ended March 31, 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.
During
the three months ended March 31, 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.
Net
Loss
Net loss
for the three months ended March 31, 2009 and 2008 was $18,999,876 and
$9,519,659, respectively. The change in loss in the current period is the result
of changes to the fair value of derivatives, interest charges related to
convertible debentures, a loss on the court order settlement of accounts
payable, and loss on modification of debt.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
The
following table sets forth a summary of our cash flows for the periods indicated
below:
|
|
Three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash used in operating activities
|
|
$
|
(292,232
|
)
|
|
$
|
(1,583,755
|
)
|
Net
cash used in investing activities
|
|
|
(2,170
|
)
|
|
|
(142,588
|
)
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
1,161,350
|
|
Net
decrease in cash and cash equivalents
|
|
|
(294,402
|
)
|
|
|
(564,993
|
)
|
Cash
and cash equivalents at the end of the period
|
|
$
|
522,502
|
|
|
$
|
601,123
|
|
Operating
Activities
Our net
cash used in operating activities during the three months ended March 31, 2009
and 2008 was $292,232 and $1,583,755, respectively. Cash used operating
activities decreased during the current period primarily due to a decrease in
cash and cash equivalents available for use during the period.
Cash
Flows from Investing and Financing Activities
Cash used
in investing activities during the three months ended March 31, 2009 and 2008
was $2,170 and $142,588, respectively. Our cash used in investing activities
during the three months ended March 31, 2009 was attributed to payment of a
deposit on our leased space in Los Angeles, California. Cash provided by
investing activities during the three months ended March 31, 2008 was primarily
due to purchases of property and equipment. Cash flows provided by financing
activities during the three months ended March 31, 2009 was $0. During the
three months ended March 31, 2008, we made payments of $18,650 on notes and
leases. We also received proceeds of $550,000 from the issuance of a convertible
note payable as well as $630,000 from the issuance of notes payable during the
three months ended March 31, 2008.
We are
financing our operations primarily from the following activities:
|
·
|
On
December 1, 2008, we formed an international joint venture with CHA Bio
& Diostech Co., Ltd . (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies. CHA has agreed to contribute $500,000 in working capital for
the venture as well as paying the Company an up-front license fee of
$500,000. As of June 15, 2009, CHA has paid the Company the entire
$500,000 towards payment of the up-front license fee.
|
|
·
|
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
June 30, 2009, we have 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. As
of June 30, 2009, we have drawn down approximately $1,810,000 on this
facility.
|
|
·
|
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.
|
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 March 31, 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.
Management’s
Discussion and Analysis of Financial Condition and Results of Operation for the
year Ended December 31, 2008
You
should read the following discussion of our financial condition and results of
operations together with the audited financial statements and the notes to the
audited financial statements included in this proxy statement. This discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results may differ materially from those anticipated in
these forward-looking statements.
Executive
Level Overview
We are a
biotechnology company focused on developing and commercializing human stem cell
technology in the emerging fields of regenerative medicine and stem cell
therapy.
Critical
Accounting Estimates
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. The Company regularly
reviews its estimates and assumptions, which are based upon historical
experience, as well as current economic conditions and various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of certain assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates and assumptions.
The
Company believes that the following critical accounting policies are affected by
significant judgments and estimates used in the preparation of its consolidated
financial statements.
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 FAS 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. We applied the accounting prescribed in FAS
133 to account for our 2005 Convertible Debenture. For practicality in the
valuation of the debentures and for ease of presentation, we applied the
accounting prescribed in FAS 155 to account for the 2006, 2007, February
2008, and April 2008 Convertible Debentures.
In
determining the appropriate fair value of the debentures, we used Level 2 inputs
for our valuation methodology. For the periods from January 1, 2007 through
September 30, 2008, we 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, we changed our
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.
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. 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.
Stock Based
Compensation— Effective January 1, 2006, we 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.
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. We have adopted FAS 157
beginning January 1, 2008 and do not believe the adoption had a material
impact on our financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” FAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. FAS No. 141 (Revised
2007) requires an acquiring entity to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and applies to a wider range of transactions or events. FAS
No. 141 (Revised 2007) is effective for fiscal years beginning on or after
December 15, 2008 and early adoption and retrospective application is
prohibited. We believe adopting FAS No. 141R will significantly
impact our financial statements for any business combination completed after
December 31, 2008.
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. We 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.
Management is currently evaluating the effect of this pronouncement on financial
statements.
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 our 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 our 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.
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. We do not anticipate that the adoption of SFAS 161 will have a
material impact on our 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. We do not anticipate that the adoption of FSP
142-3 will have a material impact on our 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." We do not
expect the adoption of SFAS 162 will have a material impact on our 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. We are
currently evaluating the impact that FSP APB 14-1 will have on our 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. We are 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.
In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue 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 Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“FAS 133”) 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 No.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 FAS 133 paragraph 11(a) scope exception.
We believe adopting this statement will not have a material impact on the
financial statements.
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 FAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. We are currently
evaluating the impact that adopting EITF 08-4 will have on the financial
statements.
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 FAS 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 financial position or results for the year
ended December 31, 2008.
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
our 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”). We are in the process of evaluating the impact, if any, of
applying this FSP on its financial position, results of operations and cash
flows.
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. We 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 will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the quarter ended
June 30, 2009. We do not anticipate the adoption of SFAS 165 will have an impact
on our consolidated results of operations or consolidated financial position.
RESULTS
OF OPERATIONS
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
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.
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), 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.
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
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 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 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 the we be unable to continue its existence.
We are
financing our operations primarily from the following activities:
|
·
|
On
April 4, 2008, we released closing escrow on the issuance of
$4,038,880 of our amortizing senior secured convertible debentures and
associated warrants. The net cash and cash in-kind received by the Company
related to this financing was $2,212,431.
|
|
·
|
On
April 30, 2008 we 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
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 6 to the financial statements.
|
|
·
|
On
July 10, 2008, we 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, we received
an up-front payment of $470,000, and are eligible to receive an 8% royalty
on sales of products, services, and processes that utilize the licensed
technology.
|
|
·
|
Between
September 29, 2008 and January 20, 2009, we settled certain past due
accounts payable by the issuance of shares of its common stock. In
aggregate, we settled $1,108,673 in accounts payable through the issuance
of 260,116,283 shares of our common stock.
|
|
·
|
On
December 1, 2008, we formed an international joint venture with CHA Bio
& Diostech Co., Ltd. (“CHA”), a leading
Korean-based biotechnology company focused on the development of stem cell
technologies. CHA has agreed to contribute $500,000 in working capital for
the venture as well as paying the Company a license fee of $500,000. As of
June 15, 2009, CHA has paid the Company the entire $500,000 towards
payment of the license fee.
|
|
·
|
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
June 15, 2009, we have received the entire $3.5 million in cash under this
agreement. We expect to apply the proceeds towards its retinal epithelium
(“RPE”) cells program.
|
|
·
|
On
March 30, 2009, we entered into a second 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 $1,000,000. 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. As
of June 15, 2009, we have 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. We received an upfront license
fee of $300,000.
|
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 December 31, 2009 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.
Contractual
Obligations
At
December 31, 2008, our significant contractual obligations were as follows:
|
|
Payments due by Period
|
|
|
|
Less than
|
|
|
One to
|
|
|
Three to
|
|
|
More Than
|
|
|
|
|
|
|
One Year
|
|
|
Three Years
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
Operating
lease obligations
|
|
|
265,677 |
|
|
|
89,910 |
|
|
|
- |
|
|
|
- |
|
|
|
355,587 |
|
Total
|
|
$
|
265,677
|
|
|
$
|
89,910
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
355,587
|
|
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.
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
522,502
|
|
|
$
|
816,904
|
|
Accounts
receivable
|
|
|
1,100,000
|
|
|
|
261,504
|
|
Prepaid
expenses
|
|
|
-
|
|
|
|
32,476
|
|
Deferred
royalty fees, current portion
|
|
|
182,198 |
|
|
|
182,198 |
|
Total
current assets
|
|
|
1,804,700
|
|
|
|
1,293,082
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
319,637
|
|
|
|
400,008
|
|
Investment
in joint venture
|
|
|
83,925
|
|
|
|
225,200
|
|
Deferred
royalty fees, less current portion
|
|
|
583,236
|
|
|
|
659,488
|
|
Deposits
|
|
|
2,170
|
|
|
|
-
|
|
Deferred
issuance costs, net of amortization of $0 and $8,666,387
|
|
|
4,731,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,524,668
|
|
|
$
|
2,577,778
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,672,249
|
|
|
$
|
8,287,786
|
|
Accrued
expenses
|
|
|
1,771,808
|
|
|
|
2,741,591
|
|
Accrued
default interest
|
|
|
4,224,077
|
|
|
|
3,717,384
|
|
Deferred
revenue, current portion
|
|
|
875,017
|
|
|
|
834,578
|
|
Advances
payable, other
|
|
|
130,000
|
|
|
|
130,000
|
|
2005
Convertible debenture and embedded derivatives, net of discounts of $0 and
$0
|
|
|
101,865
|
|
|
|
85,997
|
|
2006
Convertible debenture and embedded derivatives (fair value $2,164,019 and
$1,993,354)
|
|
|
2,164,019
|
|
|
|
1,993,354
|
|
2007
Convertible debenture and embedded derivatives (fair value $11,275,803 and
$7,706,344)
|
|
|
11,275,803
|
|
|
|
7,706,344
|
|
February
2008 Convertible debenture and embedded derivatives (fair value $1,530,483
and $1,757,470)
|
|
|
1,530,483
|
|
|
|
1,757,470
|
|
April
2008 Convertible debenture and embedded derivatives (fair value $4,541,625
and $4,066,505)
|
|
|
4,541,625
|
|
|
|
4,066,505
|
|
Warrant
and option derivatives
|
|
|
10,957,902
|
|
|
|
2,655,849
|
|
Deferred
joint venture obligations, current portion
|
|
|
159,541
|
|
|
|
167,335
|
|
Short
term capital leases
|
|
|
12,955
|
|
|
|
12,955
|
|
Notes
payable, other
|
|
|
468,425 |
|
|
|
468,425 |
|
Total
current liabilities
|
|
|
45,885,769
|
|
|
|
34,625,573
|
|
|
|
|
|
|
|
|
|
|
Deferred
joint venture obligations, less current portion
|
|
|
29,675
|
|
|
|
63,473
|
|
Deferred
revenue, less current portion
|
|
|
6,083,301 |
|
|
|
3,817,716 |
|
Total
liabilities
|
|
|
51,998,745
|
|
|
|
38,506,762
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 50,000,000 shares authorized, 0 issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.01par value; 500,000,000 shares authorized, 499,905,641 and
429,448,381 issued and outstanding.
|
|
|
499,906
|
|
|
|
429,448
|
|
Additional
paid-in capital
|
|
|
63,843,497
|
|
|
|
53,459,172
|
|
Accumulated
deficit
|
|
|
(108,817,480 |
)
|
|
|
(89,817,604 |
)
|
Total
stockholders' deficit
|
|
|
(44,474,077
|
)
|
|
|
(35,928,984
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
7,524,668
|
|
|
$
|
2,577,778
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue (License fees
and royalties)
|
|
$
|
293,976
|
|
|
$
|
124,343
|
|
Cost
of Revenue
|
|
|
138,752 |
|
|
|
190,728 |
|
Gross
profit
|
|
|
155,224
|
|
|
|
(66,385
|
)
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
436,607
|
|
|
|
3,967,552
|
|
Grant
reimbursements
|
|
|
(136,840
|
)
|
|
|
(105,169
|
)
|
General
and administrative expenses
|
|
|
747,078
|
|
|
|
1,725,822
|
|
Loss
on settlement of litigation
|
|
|
4,793,949 |
|
|
|
- |
|
Total
operating expenses
|
|
|
5,840,794 |
|
|
|
5,588,205 |
|
Loss
from operations
|
|
|
(5,685,570 |
)
|
|
|
(5,654,590 |
)
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,621
|
|
|
|
6,849
|
|
Interest
expense and late fees
|
|
|
(582,821
|
)
|
|
|
(4,206,616
|
)
|
Charges
related to issuance of February 2008 convertible debentures
|
|
|
-
|
|
|
|
(685,573
|
)
|
Adjustments
to fair value of derivatives
|
|
|
(10,841,612
|
)
|
|
|
1,020,271
|
|
Losses
attributable to equity method investment
|
|
|
(95,126
|
)
|
|
|
-
|
|
Loss
on modification of debentures
|
|
|
(1,796,368 |
)
|
|
|
- |
|
Total
non-operating income (expense)
|
|
|
(13,314,306
|
)
|
|
|
(3,865,069
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income tax
|
|
|
(18,999,876
|
)
|
|
|
(9,519,659
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
- |
|
|
|
- |
|
Net
loss
|
|
$
|
(18,999,876
|
)
|
|
$
|
(9,519,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding :
|
|
|
|
|
|
|
|
|
Basic
|
|
|
476,926,873 |
|
|
|
95,870,879 |
|
Diluted
|
|
|
476,926,873 |
|
|
|
95,870,879 |
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR
THE THREE MONTHS ENDED MARCH 31, 2009
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance December 31,
2008
|
|
|
429,448,381
|
|
|
$
|
429,448
|
|
|
$
|
53,459,172
|
|
|
$
|
(89,817,604
|
)
|
|
$
|
(35,928,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures Conversions
|
|
|
6,176,413
|
|
|
|
6,177
|
|
|
|
325,625
|
|
|
|
-
|
|
|
|
331,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
compensation charges
|
|
|
|
|
|
|
|
|
|
|
92,833
|
|
|
|
|
|
|
|
92,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three months ended March 31, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,999,876
|
)
|
|
|
(18,999,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2009
|
|
|
499,905,641
|
|
|
$
|
499,906
|
|
|
$
|
63,843,497
|
|
|
$
|
(108,817,480
|
)
|
|
$
|
(44,474,077
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(18,999,876
|
)
|
|
$
|
(9,519,659
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
126,520
|
|
|
|
109,904
|
|
Amortization
of deferred charges
|
|
|
76,252
|
|
|
|
338,227
|
|
Amortization
of deferred revenue
|
|
|
(293,976
|
)
|
|
|
(124,342
|
)
|
Stock
based compensation
|
|
|
92,833
|
|
|
|
378,853
|
|
Amortization
of deferred issuance costs
|
|
|
-
|
|
|
|
825,612
|
|
Amortization
of discounts
|
|
|
-
|
|
|
|
3,372,267
|
|
Loss
on modification of debentures
|
|
|
1,796,368
|
|
|
|
-
|
|
Adjustements
to fair value of derivatives
|
|
|
10,841,612
|
|
|
|
(1,020,271
|
)
|
Charges
related to issuance of February 2008 convertible notes
|
|
|
-
|
|
|
|
685,573
|
|
Warrants
issued for consulting services
|
|
|
-
|
|
|
|
155,281
|
|
Charges
related to settlement of anti-dilution provision
|
|
|
-
|
|
|
|
15,581
|
|
Loss
on settlement of litigation
|
|
|
4,793,949
|
|
|
|
-
|
|
Loss
attributable to investment in joint venture
|
|
|
95,126
|
|
|
|
-
|
|
Amortization
of deferred joint venture obligations
|
|
|
(41,592
|
)
|
|
|
-
|
|
(Increase)
/ decrease in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
261,504
|
|
|
|
(4,767
|
)
|
Prepaid
expenses
|
|
|
32,476
|
|
|
|
(44,673
|
)
|
Increase
/ (decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(1,080,121
|
)
|
|
|
3,243,846
|
|
Accrued
default interest
|
|
|
506,693
|
|
|
|
4,813
|
|
Deferred
revenue
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(292,232 |
)
|
|
|
(1,583,755 |
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
-
|
|
|
|
(142,588
|
)
|
Payment
of deposits
|
|
|
(2,170
|
)
|
|
|
-
|
|
Charges
related to Mytogen acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,170 |
)
|
|
|
(142,588 |
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible notes
|
|
|
-
|
|
|
|
550,000
|
|
Payments
on notes and leases
|
|
|
-
|
|
|
|
(18,650
|
)
|
Proceeds
from notes payable
|
|
|
-
|
|
|
|
630,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
- |
|
|
|
1,161,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(294,402
|
)
|
|
|
(564,993
|
)
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
816,904 |
|
|
|
1,166,116 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
|
|
$
|
522,502
|
|
|
$
|
601,123
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
2,504
|
|
Income
taxes
|
|
$
|
499
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance
of 13,736,111 shares of common stock in redemption of convertible
debentures
|
|
$
|
-
|
|
|
$
|
2,109,105
|
|
Issuance
of 6,176,413 and 1,368,460 shares of common stock in conversion of
convertible debentures
|
|
$
|
331,802
|
|
|
$
|
405,639
|
|
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 862,522 shares of common stock in payment of consulting services
|
|
$
|
-
|
|
|
$
|
204,352
|
|
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.
ADVANCED
CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
1.
ORGANIZATIONAL MATTERS
Organization
and Nature of Business
Advanced
Cell Technology, Inc. (the “Company”) is a biotechnology company, incorporated
in the state 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 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.
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:
|
|
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 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. During the three months ended March 31, 2009, the Company
received $1.5 million in cash under this agreement. The Company expects to
apply the proceeds towards its retinal epithelium (“RPE”) cells program.
|
|
|
On
March 30, 2009, the Company entered into a 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 $1,100,000 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 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 $1,810,000 on this facility.
|
|
|
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.
|
|
|
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.
|
2.
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 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 —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.
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 March 31, 2009 and December 31, 2008, the
Company had deposits in excess of federally-insured limits totaling $151,227 and
$655,074, 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 three months ended March 31, 2009 and 2008, no
impairment loss was recognized.
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 9. 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 5, 6, 7, and 8.
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, 2008
through March 31, 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.
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 March
31, 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
|
|
|
March
31, 2009
|
|
|
|
As
of
|
|
|
Using
Fair Value Hierarchy
|
|
Derivative
Liabilities
|
|
March
31, 2009
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Conversion
feature - 2005 debenture
|
|
|
19,943
|
|
|
|
-
|
|
|
|
19,943
|
|
|
|
-
|
|
2006
Convertible debenture and embeded derivatives
|
|
|
2,164,019
|
|
|
|
-
|
|
|
|
2,164,019
|
|
|
|
-
|
|
2007
Convertible debenture and embedded derivatives
|
|
|
11,275,803
|
|
|
|
-
|
|
|
|
11,275,803
|
|
|
|
-
|
|
February
2008 Convertible debentures and embedded derivatives
|
|
|
1,530,483
|
|
|
|
-
|
|
|
|
1,530,483
|
|
|
|
-
|
|
April
2008 Convertible debenture and embedded derivatives
|
|
|
4,541,625
|
|
|
|
-
|
|
|
|
4,541,625
|
|
|
|
-
|
|
Warrant
and option derivatives
|
|
|
10,957,902
|
|
|
|
-
|
|
|
|
10,957,902
|
|
|
|
-
|
|
|
|
|
30,489,775
|
|
|
|
-
|
|
|
|
30,489,775
|
|
|
|
-
|
|
For the
three months ended March 31, 2009 and 2008, the Company recognized a gain (loss)
of ($10,841,612) and $1,020,271, 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.
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 three months ended March 31, 2009 and
2008:
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Expected life in years
|
|
|
4.0 |
|
|
|
4.0 |
|
Volatility
|
|
|
148 |
%
|
|
|
148 |
%
|
Risk
free interest rate
|
|
|
2.50 |
%
|
|
|
2.50 |
%
|
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.
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 March
31, 2009 and 2008, approximately 248,806,000 and 172,346,000 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.
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Genzyme
Transgenics Corporation
|
|
|
11
|
%
|
|
|
26
|
%
|
Exeter
Life Sciences, Inc.
|
|
|
10
|
%
|
|
|
25
|
%
|
Lifeline
Cell Technology
|
|
|
*
|
|
|
|
13
|
%
|
Start
Licensing, Inc.
|
|
|
*
|
|
|
|
20
|
%
|
Terumo
Corporation
|
|
|
26
|
%
|
|
|
**
|
|
International
Stem Cell Corporation
|
|
|
13
|
%
|
|
|
**
|
|
Transition
Holdings, Inc.
|
|
|
15
|
%
|
|
|
**
|
|
*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.
Recent
Accounting Pronouncements
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 did not have
an impact on the Company’s consolidated financial statements.
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 adoption of SFAS 161 did not have a material impact on the
Company’s 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 adoption of FSP EITF 03-6-1 did not have an impact
on the consolidated results of operations or consolidated financial position.
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 adoption of EITF 07-5 did not have an impact on the
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 adoption of FSP 142-3 did not have a material
impact on the 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
adoption of FSP APB 14-1 did not have an impact on the 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.” The
adoption of EITF 08-4 did not have an impact on the consolidated results of
operations or consolidated financial position.
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 adoption of FSP FAS 157-4 did not have an impact on the
Company’s financial position, results of operations and cash flows.
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 did not have a material impact on the
Company’s consolidated financial statements.
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 adoption of
FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s
consolidated financial statements.
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 periods ending after June 15, 2009 and will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the quarter ended
June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will
have an impact on its consolidated results of operations or consolidated
financial position.
In June 2009, the FASB issued SFAS No.
166 “Accounting for Transfers of Financial Assets” (“SFAS 166”). Statement 166 is a revision to FASB
Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 enhances information reported to
users of financial statements by providing greater transparency about transfers
of financial assets and an entity’s continuing involvement in transferred
financial assets.
SFAS 166
will be effective at the start of a reporting entity’s first fiscal year
beginning after November 15, 2009. Early application is not permitted. The
Company is currently evaluating the impact of adoption of SFAS 166 on the
accounting for its convertible notes and related warrant liabilities.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”). Statement 167 is a revision to FASB Interpretation No. 46 (Revised
December 2003), Consolidation
of Variable Interest Entities, and changes how a reporting entity
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. SFAS 167 will require a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. A reporting entity
will be required to disclose how its involvement with a variable interest entity
affects the reporting entity’s financial statements. SFAS 167 will be effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009. Early application is not permitted. The Company is currently
evaluating the impact, if any, of adoption of SFAS 167 on its financial
statements.
In June
2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of
FASB Statement No. 162” (“SFAS 168”). Statement 168 establishes the FASB Accounting Standards
CodificationTM
(Codification) as the single source of authoritative U.S. generally
accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. SFAS 168 and the Codification are effective for financial
statements issued for interim and annual periods ending after September 15,
2009. When effective, the Codification will supersede all existing non-SEC
accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will
serve only to: (a)
update the Codification; (b) provide background
information about the guidance; and (c) provide the bases for
conclusions on the change(s) in the Codification. The adoption of SFAS 168 will
not have an impact on the Company’s consolidated financial statements.
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 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 in license fee revenue for the
three months ended March 31, 2009 in its accompanying consolidated statements of
operations, and the remainder of the license fee has been accrued in deferred
revenue at March 31, 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
three months ended March 31, 2009. The Company expects to apply the proceeds
towards its retinal epithelium (“RPE”) cells program. The Company has recorded
$44,117 in license fee revenue for the three months ended March 31, 2009 in its
accompanying consolidated statements of operations, and the remainder of the
license fee has been accrued in deferred revenue at March 31, 2009. The Company
is recognizing revenue from this agreement over its 17-year patent useful life.
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 not recorded any license fee revenue for the three months ended
March 31, 2009 in its accompanying consolidated statements of operations. The
full $1,100,000 license fee has been included in accounts receivable and accrued
in deferred revenue at March 31, 2009. The Company will recognize 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 . (“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 $7,353 in license fee
revenue for the three months ended March 31, 2009 in its accompanying
consolidated statements of operations, and the balance of unamortized license
fee of $491,422 has been accrued in deferred revenue in the accompanying
consolidated balance sheet at March 31, 2009.
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
three months ending March 31, 2009 was $46,149.
The
following table is a summary of key financial data for the joint venture as of
and for the year ended March 31, 2009:
Current
assets
|
|
$
|
46,255
|
|
Noncurrent
assets
|
|
$
|
477,695
|
|
Current
liabilities
|
|
$
|
205,827
|
|
Noncurrent
liabilities
|
|
$
|
461,600
|
|
Net
revenue
|
|
$
|
7,350
|
|
Net
loss
|
|
$
|
(285,379
|
)
|
The
following table is a summary of the activity from December 31, 2008 to March 31,
2009 in the Company’s investment in the joint venture:
Balance,
December 31, 2008
|
|
$
|
225,200
|
|
Losses
attributable to investment
|
|
|
(95,126
|
)
|
Amortization
of premium
|
|
|
(46,149
|
)
|
Balance,
March 31, 2009
|
|
$
|
83,925
|
|
5.
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 at the option
of the holders beginning on the six-month anniversary of the effective date into
26,206,333 and 5,396,500 shares of common stock at a fixed conversion price of
$0.15 per share and $0.02 per share, respectively, 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 July 15, 2009,
the entire debenture balance remains outstanding.
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 concluded that the change in conversion price and
warrant exercise price did 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 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 total of 31,189,829 warrants were
again valued at $3,193,108 at March 31, 2009 at fair value using the
Black-Scholes model, representing an increase in the fair value of the liability
of $2,371,065 during the three months ended March 31, 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 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 March 31, 2009 for all warrants issued in
connection with this Debenture are as follows: (1) dividend yield of 0%; (2)
expected volatility of 190%, (3) risk-free interest rate of 0.17%, and (4)
expected life of 4.01 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 were amortized in full
during the year ended December 31, 2008 due to the August 6, 2008 default as
discussed below.
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 March 31, 2009, no note amortization had occurred and the
note was in default, effective August 6, 2008, 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 31,602,833 shares, 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 $4,541,625 at March 31, 2009,
which includes the face value of the note of $4,038,880, plus the $502,745 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 March 31, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.17%, and (4) expected life of 0.01 years. The decrease in fair value
of the embedded conversion option of $1,893 is recorded through the results of
operations as an adjustment to the fair value of derivatives for the three
months ended March 31, 2009. Additionally, $477,013 was recorded in loss on
modification of convertible debenture during the three months ended March 31,
2009 as a result of a settlement with a debenture holder in February 2009. See
Note 13.
At March
31, 2009, the note and related embedded derivatives outstanding were again
valued at fair value using a binomial option pricing model, resulting in the
changes shown in the following table in the fair values of the respective
liabilities versus the values at December 31, 2008. The changes were
recorded through the results of operations as an adjustment to fair value of
derivatives.
|
|
March
31,
|
|
|
December
31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Principal
Due
|
|
$
|
4,038,880
|
|
|
$
|
4,038,880
|
|
|
$
|
-
|
|
Fair
Value
|
|
$
|
4,541,625
|
|
|
$
|
4,066,505
|
|
|
$
|
475,120
|
|
Interest
expense on the April 2008 debenture for the three months ended March 31, 2009
and 2008 was $179,260 and $0, 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 10 for the total default interest expense
recognized during the three months ended March 31, 2009.
6.
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 March 31, 2009, 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.
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 10,384,615 shares of common stock at a conversion
price of $0.069 per share at March 31, 2009, 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 $1,530,483 at March 31, 2009,
which includes the face value of the debentures of $720,000, plus the $810,483
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 March 31, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.57%, and (4) expected life of 0.88 years. The decrease in fair value
of the embedded conversion option of $226,987 is recorded through the results of
operations as an adjustment to the fair value of derivatives for the three
months ended March 31, 2009.
The
following table summarizes the changes in the fair values of the respective
liabilities versus the values at March 31, 2009 and December 31, 2008.
|
|
March
31,
|
|
|
December
31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Note
A:
|
|
|
|
|
|
|
|
|
|
Principal
Due
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
$
|
-
|
|
Fair
Value
|
|
|
1,275,402
|
|
|
|
1,464,558
|
|
|
|
(189,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
B:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Due
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
|
$
|
-
|
|
Fair
Value
|
|
|
255,081
|
|
|
|
292,912
|
|
|
|
(37,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
$
|
(226,987
|
)
|
Interest
expense on the February 2008 debenture for the three months ended March 31, 2009
was $31,956.
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 10 for the total default interest expense
recognized during the three months ended March 31, 2009.
7.
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 54,905,483 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 5. 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.
The April
2008 note (see Note 5) 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 concluded that the change in conversion
price and warrant exercise price did 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. 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; 38,471,546; and
14,434,550 shares of common stock at a fixed conversion price of $0.34 per
share, $0.15 per share, and $0.02 per share, respectively, subject to
anti-dilution and other customary adjustments. See Note 5.
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 $11,275,803 at March 31, 2009,
which includes the face value of the debentures of $6,739,215, plus the
$4,536,588 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 March 31, 2009 are as follows:
(1) dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free
interest rate of 0.57%, and (4) expected life of 1.42 years. The increase
(decrease) in the fair value of the embedded conversion option of $2,495,186 and
($217,489), respectively, is recorded through the results of operations as an
adjustment to the fair value of derivatives for the three months ended March 31,
2009 and 2008, respectively. Additionally, $1,319,355 was recorded in loss on
modification of convertible debenture during the three months ended March 31,
2009 as a result of a settlement with a debenture holder in February 2009. See
Note 13.
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 5). 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 March 31, 2009 at fair
value using the Black-Scholes model, resulting in an increase in the fair value
of the liability for the three months ended March 31, 2009 and 2008 of $470,153
and $51,623, respectively, 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 March 31, 2009 are as follows: (1) dividend yield of 0%;
(2) expected volatility of 190%, (3) risk-free interest rate of 1.15%, and (4)
expected life of 3.42 years. Cash fees paid, and the initial fair value of the
warrant, were capitalized on the date of the note, and were 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 March 31, 2009 and December 31, 2008:
|
|
March
31,
|
|
|
December
31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Principal
Due
|
|
$
|
6,739,215
|
|
|
$
|
6,984,297
|
|
|
$
|
(245,082
|
)
|
Fair
Value
|
|
$
|
11,275,803
|
|
|
$
|
7,706,344
|
|
|
$
|
3,569,459
|
|
Interest
expense on the 2007 debenture for the three months ended March 31, 2009 was
$232,932.
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 10 for the total default interest expense
recognized during the three months ended March 31, 2009.
8.
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 5) 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 March 31, 2009 are
as follows: (1) dividend yield of 0%; (2) expected volatility of 190%, (3)
risk-free interest rate of 0.81%, and (4) expected life of 2.44 years. The
increase in the fair value of the warrants of $1,304,254 is recorded through the
results of operations as an adjustment to the fair value of derivatives for the
three months ended March 31, 2009, respectively.
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 $2,164,019 at March 31, 2009,
which includes the face value of the debentures of $1,854,875, plus the $309,144
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 March 31, 2009 are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.43%, and (4) expected life of 0.44 years. The increase (decrease) in
fair value of the embedded conversion option of $257,385 and ($484,305) is
recorded through the results of operations as an adjustment to the fair value of
derivatives for the three months ended March 31, 2009 and 2008, respectively.
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 5) 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 concluded that the change in
conversion price and warrant exercise price did 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. 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 4,942,035 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 5.
The
following table summarizes the 2006 Convertible Debentures and discounts
outstanding at March 31, 2009 and December 31, 2008:
|
|
March
31,
|
|
|
December
31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Principal
Due
|
|
$
|
1,854,875
|
|
|
$
|
1,941,595
|
|
|
$
|
(86,720
|
)
|
Fair
Value
|
|
$
|
2,164,019
|
|
|
$
|
1,993,354
|
|
|
$
|
170,665
|
|
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 5). The broker-dealer
warrants were again valued at March 31, 2009 at fair value using the
Black-Scholes model. The increase (decrease) in the fair value of the liability
of approximately $293,471 and ($80,731) for the three months ended March 31,
2009 and 2008, respectively, was recorded through the results of operations as
an adjustment to fair value of derivatives. The assumptions used in the
Black-Scholes model at March 31, 2009 are as follows: (1) dividend yield of 0%;
(2) expected volatility of 190%, (3) risk-free interest rate of 0.81%, and (4)
expected life of approximately 2.5 years. Cash fees paid, and the initial fair
value of the warrant, were capitalized on the date of the note, and were
amortized in full during the year ended December 31, 2008 due to the August 6,
2008 default as discussed below.
Interest
expense for the three months ended March 31, 2009 was $58,909, 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 10 for the total default interest expense
recognized during the three months ended March 31, 2009.
9.
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 March 31, 2009 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 $0.11 (2) exercise price equal to the $0.15 and $0.34
conversion prices (3) volatility based upon the Company’s stock trading of 190%
(4) risk-free interest rate of 0.43%, and (5) expected life of 0.75 years.
During
the three months ended March 31, 2009 and 2008, respectively, an increase
(decrease) in the fair value of the embedded derivative amounts of approximately
$15,868 and ($98,453), 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 exercise price of $0.165 per share. The fair value of the warrant as of March
31, 2009 was estimated at approximately $149,213 using the Black-Scholes pricing
model. The assumptions used in the Black-Scholes model are as follows: (1)
dividend yield of 0%; (2) expected volatility of 190%, (3) risk-free interest
rate of 0.81%, and (4) expected life of 2.46 years. Cash fees paid, and the fair
value of the warrant, have been capitalized as debt issuance costs and are being
amortized over 36 months, and as redemptions occur the Company writes off the
proportional amount of the original deferred issuance cost to interest expense.
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 5.
Anti-dilution
Impact
As a
result of the 2007 and April 2008 Financings, described more fully in Notes 5
and 7, the exercise prices of certain of the warrants issued in connection with
the 2005 Financing were automatically diluted down to $0.34 and $0.165. 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
number of original warrants issued to investors totaled 2,335,005. The warrants
were again valued at March 31, 2009 at fair value using the Black-Scholes model.
The increase (decrease) in the fair value of the liability was $110,554 and
($14,607) for the three months ended March 31, 2009 and 2008, respectively,
which was recorded through the results of operations as adjustments to fair
value of derivatives. The assumptions used in the Black-Scholes model to value
the warrants at March 31, 2009 were as follows: (1) dividend yield of 0%; (2)
expected volatility of 190%, (3) risk-free interest rate of 0.57%, and (4)
expected life of 1.25 years.
The new
number of replacement warrants issued to investors and brokers totaled
12,689,966. The warrants were again valued at March 31, 2009 at fair value using
the Black-Scholes model. The increase (decrease) in the fair value of the
liability of was $843,893 and ($44,200) for the three months ended March 31,
2009 and 2008, respectively, which was recorded through the results of
operations as 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 190%, (3) risk-free interest rate of 0.81%, and (4) expected life
of 2.46 years.
The April
2008 note (see Note 5) 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 concluded that the change in
conversion price and warrant exercise price did 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. As a result of the change in the exercise
price of the warrants, 1,793,364 original warrants remained at the $0.34
exercise price and the remaining 541,641 original warrants were adjusted to the
$0.165 exercise price upon participation in the April 2008 debenture. Further,
3,239,810 replacement warrants remained at the $0.34 exercise price and the
remaining 9,450,156 replacement 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 159,951 and 237,056 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
5.
The
following table summarizes the 2005 Convertible Debentures and embedded
derivatives outstanding at March 31, 2009 and December 31, 2008:
|
|
March
31,
|
|
|
December
31,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
Principal
Due
|
|
$
|
81,922
|
|
|
$
|
81,922
|
|
|
$
|
-
|
|
Fair
Value
|
|
$
|
101,865
|
|
|
$
|
85,997
|
|
|
$
|
15,868
|
|
Interest
expense for the three months ended March 31, 2009 was $3,636.
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 10 for the total default interest expense
recognized during the three months ended March 31, 2009.
10.
|
ACCRUED
DEFAULT INTEREST
|
On August
6, 2008, the Company issued a moratorium on amortization of all outstanding
debentures at June 30, 2008. As of March 31, 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, during 2008 the Company
recognized the remaining balance of its debt discounts associated with this note
in interest expense, and classified the entire balance in short term at March
31, 2009 and December 31, 2008, respectively. The following table summarizes the
accrued default interest expense recognized in the accompanying consolidated
balance sheets at March 31, 2009 and December 31, 2008, respectively:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
2005
debenture
|
|
$
|
25,757
|
|
|
$
|
22,121
|
|
2006
debenture
|
|
|
583,193
|
|
|
|
524,284
|
|
2007
debenture
|
|
|
2,118,883
|
|
|
|
1,885,951
|
|
February
2008 debenture
|
|
|
226,376
|
|
|
|
194,420
|
|
April
2008 debenture
|
|
|
1,269,868
|
|
|
|
1,090,608
|
|
|
|
$
|
4,224,077
|
|
|
$
|
3,717,384
|
|
Warrant
Activity
A summary
of warrant activity for the three months ended March 31, 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
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(211,000
|
)
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
129,186,951
|
|
|
$
|
0.27
|
|
|
|
2.99
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2009
|
|
|
129,186,951
|
|
|
$
|
0.27
|
|
|
|
2.99
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2009
|
|
|
129,186,951
|
|
|
$
|
0.27
|
|
|
|
2.99
|
|
|
|
-
|
|
The
aggregate intrinsic value in the table above is before applicable income taxes
and is calculated based on the difference between the exercise price of the
warrants and the quoted price of the Company’s common stock as of the reporting
date.
The
following table summarizes information about warrants outstanding and
exercisable at March 31, 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
|
|
$
|
0.17
|
|
|
95,630,311
|
|
|
|
3.25
|
|
|
$
|
0.17
|
|
|
|
95,630,311
|
|
|
$
|
0.17
|
|
0.32
|
|
|
11,148,147
|
|
|
|
2.44
|
|
|
|
0.32
|
|
|
|
11,148,147
|
|
|
|
0.32
|
|
0.34
|
|
|
8,753,762
|
|
|
|
1.48
|
|
|
|
0.34
|
|
|
|
8,753,762
|
|
|
|
0.34
|
|
0.38
- 0.40
|
|
|
5,902,908
|
|
|
|
4.08
|
|
|
|
0.39
|
|
|
|
5,902,908
|
|
|
|
0.39
|
|
0.85
- 0.96
|
|
|
5,734,831
|
|
|
|
1.71
|
|
|
|
0.95
|
|
|
|
5,734,831
|
|
|
|
0.95
|
|
2.20
|
|
|
72,917
|
|
|
|
2.38
|
|
|
|
2.20
|
|
|
|
72,917
|
|
|
|
2.20
|
|
2.48
- 2.54
|
|
|
1,944,075
|
|
|
|
0.71
|
|
|
|
2.54
|
|
|
|
1,944,075
|
|
|
|
2.54
|
|
|
|
|
129,186,951
|
|
|
|
|
|
|
|
|
|
|
|
129,186,951
|
|
|
|
|
|
12.
|
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
three months ended March 31, 2009 and 2008. The table summarizes by category of
derivative liability the increase (decrease) in fair value from market changes
during the three months ended March 31, 2009 and 2008, the impact of additional
investments and repricing and exercise of certain warrants.
|
|
March
31, 2009
|
|
|
March
31, 2008
|
|
Embedded
Pipe derivatives - 9.05
|
|
$
|
15,868
|
|
|
$
|
89,548
|
|
Pipe
Hybrid instrument – 9.06
|
|
|
257,385
|
|
|
|
414,842
|
|
Pipe
Hybrid- FAS 155 – 8.07
|
|
|
2,495,186
|
|
|
|
217,498
|
|
Pipe
Hybrid- February 2008
|
|
|
(226,987
|
)
|
|
|
63,362
|
|
Pipe
Hybrid- April 2008
|
|
|
(1,893
|
)
|
|
|
-
|
|
Original
warrants PIPE 2005 , excluding replacement warrants
|
|
|
110,554
|
|
|
|
14,607
|
|
Replacement
Warrants
|
|
|
843,893
|
|
|
|
44,202
|
|
Warrants
– PIPE 2006-investors
|
|
|
1,304,254
|
|
|
|
80,731
|
|
Warrants
– PIPE 2007-investors
|
|
|
2,656,542
|
|
|
|
(51,623
|
)
|
Warrants
– PIPE 2008-investors
|
|
|
2,371,065
|
|
|
|
-
|
|
Other
Warrant Derivatives- 2005 and 2006
|
|
|
781,735
|
|
|
|
123,471
|
|
Other
Warrants Derivatives - 2007
|
|
|
234,010
|
|
|
|
23,633
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,841,612
|
|
|
$
|
1,020,271
|
|
13.
|
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 March 31, 2009 and had 499,905,641 shares
of Common Stock outstanding as of March 31, 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 March 31, 2009, the Company settled $1,108,673 in
accounts payable through the issuance of 260,116,283 shares of its common stock.
During the three months ended March 31, 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
statements of operations for the three months ended March 31, 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 three months ended March 31,
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 Emerging Issue Task Force statements, or EITFs 96 - 19—
Debtor’s Accounting for a
Modification or Exchange of Debt Instruments, 06-6— Debtor’s Accounting for a
Modification (or Exchange) of Convertible Debt Instruments on the
accounting treatment of the change in conversion price of the 2007 and 2008
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 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.
|
|
|
|
|
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
|
%
|
The
change in fair value of the conversion option on the 2007 debenture was
$1,319,355, 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 modification of debentures in the amount of
$1,796,368 during the three months ended March 31, 2009 as a result of this
modification.
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 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
into common stock at $0.75 per share. 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. 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. Company
shall have the right, at the Company’s option, to redeem all or a portion of the
shares of Series A-1 preferred stock, at any time at a price per share of Series
A-1 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. We may terminate this agreement and our 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 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 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. As
of March 31, 2009, the Company has not drawn down any money on this credit
facility and thus the balance was zero. As of June 30, 2009, the Company had
drawn down approximately $1,810,000 on this credit facility.
For
providing investor relations services in connection with the Series A-1
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 using the effective interest method. No interest expense
was incurred during the three months ended March 31, 2009.
14.
|
STOCK-BASED
COMPENSATION
|
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 March 31, 2009, the Company had
granted 890,000 common share purchase options under the plan. At March 31, 2009,
there were 1,910,000 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 March 31, 2009, ACT had granted 1,191,161 common share purchase
options under the plan. At March 31, 2009, there were 110,000 options available
for grant under this plan.
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
March 31, 2009, the Company had granted 11,676,601 common stock purchase options
and 1,497,263 shares of common stock under the plan. At March 31, 2009, there
were 34,160,649 options available for grant under this plan.
Stock
Option Activity
A summary
of option activity for the three months ended March 31, 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
|
|
|
14,127,690
|
|
|
$
|
0.51
|
|
|
|
7.71
|
|
|
$
|
-
|
|
Granted
|
|
|
2,878,072
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,248,000
|
)
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
13,757,762
|
|
|
$
|
0.54
|
|
|
|
7.00
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2009
|
|
|
13,222,547
|
|
|
$
|
0.55
|
|
|
|
6.94
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2009
|
|
|
9,640,720
|
|
|
$
|
0.68
|
|
|
|
6.31
|
|
|
$
|
53
|
|
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 March 31, 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
|
|
|
5,909,272
|
|
|
$
|
0.24
|
|
Granted
|
|
|
2,878,072
|
|
|
|
0.79
|
|
Vested
|
|
|
(3,016,716
|
)
|
|
|
0.75
|
|
Forfeited
|
|
|
(1,653,586
|
)
|
|
|
0.29
|
|
Unvested
at March 31, 2009
|
|
|
4,117,042
|
|
|
$
|
0.22
|
|
As of
March 31, 2009, total unrecognized stock-based compensation expense related to
nonvested stock options was approximately $747,000, which is expected to be
recognized over a weighted average period of approximately 8.82 years.
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 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
|
|
|
890,000
|
|
|
|
5.37
|
|
|
$
|
0.05
|
|
|
|
890,000
|
|
|
$
|
0.05
|
|
0.21
|
|
|
5,751,669
|
|
|
|
8.61
|
|
|
|
0.21
|
|
|
|
1,690,043
|
|
|
|
0.21
|
|
0.25
|
|
|
1,191,161
|
|
|
|
5.76
|
|
|
|
0.25
|
|
|
|
1,191,161
|
|
|
|
0.25
|
|
0.85
|
|
|
5,204,515
|
|
|
|
5.84
|
|
|
|
0.85
|
|
|
|
5,152,016
|
|
|
|
0.85
|
|
1.35
|
|
|
150,000
|
|
|
|
7.06
|
|
|
|
1.35
|
|
|
|
150,000
|
|
|
|
1.35
|
|
2.04
- 2.11
|
|
|
130,000
|
|
|
|
6.78
|
|
|
|
2.06
|
|
|
|
127,083
|
|
|
|
2.05
|
|
2.20
- 2.48
|
|
|
440,417
|
|
|
|
6.43
|
|
|
|
2.27
|
|
|
|
440,417
|
|
|
|
2.27
|
|
|
|
|
13,757,762
|
|
|
|
|
|
|
|
|
|
|
|
9,640,720
|
|
|
|
|
|
15.
|
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
|
|
$
|
271,754 |
|
Year
2
|
|
|
20,850
|
|
Total
|
|
$
|
292,604 |
|
Rent
expense recorded in the financial statements for the three months ended March
31, 2009 and 2008 was approximately $115,000 and $411,000, respectively.
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. See Note 13.
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.
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 itself
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 March 31, 2009. 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.
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 and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 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 FIN 48 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.
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 March 31, 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 March 31, 2009 and 2008. The Company does not expect that the
amounts of unrecognized tax benefits will change significantly within the next
12 months.
Subsequent
to March 31, 2009, the Company drew down approximately $1,810,000 on its
preferred stock credit facility. See Note 13.
On June
30, 2009, Alpha Capital submitted a conversion notice in the principle amount of
$150,000 into 7,500,000 shares of common stock at $0.02 per share. 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. Further, the Company agreed to provide Alpha Capital with an additional
$110,000 Debenture, which is to be upon the same terms and conditions as the
April 2008 Debenture.
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 $1,100,000. 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 in
May 2009.
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 exceeds 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.
We were
not engaged to examine management’s assessment of the effectiveness of Advanced
Cell Technology, Inc. and subsidiary’s internal control over financial reporting
as of December 31, 2008, included in the accompanying Management’s Report on
Internal Control over Financial Reporting and, accordingly, we do not express an
opinion thereon.
/s/
SingerLewak LLP
Los
Angeles, California
July 2,
2009
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.
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.
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
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.
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.
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.
|
|
·
|
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.
|
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 |
)
|
|
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 will be applied prospectively. The
Company will adopt the requirements of this pronouncement for the quarter ended
June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will
have an impact on its consolidated results of operations or consolidated
financial position.
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
|
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.
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.
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.
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.
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.
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.
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.
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:
|
|
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.
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.
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:
|
|
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.
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.
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.
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
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
During
our two most recent fiscal years and any subsequent interim period our
independent auditor, SingerLewak LLP, who we engaged to audit our financial
statements has not resigned (or indicated that it has declined to stand for
re-election after the completion of the current audit) or been dismissed.
A
representative of SingerLewak LLP will not be at the Special Meeting
of Stockholders.
AVAILABLE
INFORMATION
We are
currently subject to the information requirements of the Securities Exchange Act
of 1934, as amended, and in accordance therewith file periodic reports, Proxy
Statements and other information with the SEC relating to our business,
financial statements and other matters. Copies of such reports, Proxy
Statements and other information may be copied (at prescribed rates) at the
public reference room maintained by the Securities and Exchange Commission
at 100 F Street NE, Washington DC 20549. For further information
concerning the SEC's public reference room, you may call the SEC at
1-800-SEC-0330. Some of this information may also be accessed on the World
Wide Web through the SEC's Internet address at http://www.sec.gov.
Requests
for documents relating to the Company should be directed to:
Advanced
Cell Technology, Inc.
381
Plantation Street
Worcester,
MA 01605
Attention:
William M. Caldwell, IV
Our board
of directors hopes that shareholders will attend the special meeting.
Whether or not you plan to attend, you are urged to complete, date and
sign the enclosed proxy card and return it in the accompanying envelope.
Prompt response will greatly facilitate arrangements for the meeting, and
your cooperation is appreciated. Shareholders who attend the meeting may
vote their shares personally even though they have sent in their proxy
cards.
* * *
|
|
BY
ORDER OF THE BOARD OF DIRECTORS
|
|
|
|
|
|
/s/
William M. Caldwell, IV |
|
|
Chief Executive
Officer
|
|
|
|
Worcester,
Massachusetts
August 10,
2009
|
|
|
Appendix A
ADVANCED
CELL TECHNOLOGY, INC.
2005
STOCK INCENTIVE PLAN
1. Purposes
of the Plan. The purposes of this 2005 Stock
Incentive Plan are to attract and retain highly qualified personnel for
positions of substantial responsibility, to provide additional incentive to
Employees, Consultants and Directors and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant of an option and subject to the applicable provisions of Section 422
of the Code and the regulations and interpretations promulgated thereunder.
Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As
used herein, the following definitions shall apply:
(a)
"Administrator" means the Board or its Committee
appointed pursuant to Section 4 of the Plan.
(b)
"Affiliate" means an entity other than a
Subsidiary (as defined below) which, together with the Company, is under common
control of a third person or entity.
(c)
"Applicable Laws" means the legal requirements relating
to the administration of stock option and restricted stock purchase plans,
including under applicable U.S. state corporate laws, U.S. federal and
applicable state securities laws, other U.S. federal and state laws, the Code,
any Stock Exchange rules or regulations and the applicable laws, rules and
regulations of any other country or jurisdiction where Options or Stock Purchase
Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d)
"Board" means
the Board of Directors of the Company.
(e)
"Cause" for termination of a Participant's Continuous
Service Status will exist if the Participant is terminated by the Company for
any of the following reasons: a Participant's (i) failure to properly
perform his or her job responsibilities, as determined reasonably and in good
faith by the Board; (ii) commission of any act of fraud, gross misconduct
or dishonesty with respect to the Company; (iii) conviction of, or plea of
guilty or "no contest" to, any felony, or a crime involving moral turpitude;
(iv) breach of any proprietary information and inventions agreement with
the Company; or (v) failure to follow lawful directions of the Board. The
determination as to whether a Participant is being terminated for Cause shall be
made in good faith by the Company and shall be final and binding on the
Participant. The foregoing definition does not in any way limit the Company's
ability to terminate a Participant's employment or consulting relationship at
any time as provided in Section 5(d) below, and the term "Company" will be
interpreted to include any Subsidiary, Parent or Affiliate, as
appropriate.
(f)
"Change of Control" means (1) a sale
of all or substantially all of the Company's assets, or (2) any merger,
consolidation or other business combination transaction of the Company with or
into another corporation, entity or person, other than a transaction in which
the holders of at least a majority of the shares of voting capital stock of the
Company outstanding immediately prior to such transaction continue to hold
(either by such shares remaining outstanding or by their being converted into
shares of voting capital stock of the surviving entity) a majority of the total
voting power represented by the shares of voting capital stock of the Company
(or the surviving entity) outstanding immediately after such transaction, or
(3) the direct or indirect acquisition (including by way of a tender or
exchange offer) by any person, or persons acting as a group, of beneficial ownership or a right to
acquire beneficial ownership of shares representing a majority of the voting
power of the then outstanding shares of capital stock of the
Company.
(g)
"Code" means the Internal Revenue Code of 1986, as
amended.
(h)
"Committee" means one or more committees or subcommittees of
the Board appointed by the Board to administer the Plan in accordance with
Section 4 below.
(i)
"Common Stock" means the Common Stock of the
Company.
(j)
"Company" means A.C.T. Holdings, Inc., a
Nevada corporation.
(k)
"Consultant" means
any person, including an advisor, who is engaged by the Company or any Parent,
Subsidiary or Affiliate to render services and is compensated for such
services.
(l)
"Continuous
Service Status" means the absence of any interruption or
termination of service as an Employee or Consultant. Continuous Service Status
as an Employee or Consultant shall not be considered interrupted in the case of:
(i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Administrator, provided that such leave is for a period
of not more than ninety (90) days, unless reemployment upon the expiration
of such leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) in the case
of transfers between locations of the Company or between the Company, its
Parents, Subsidiaries, Affiliates or their respective successors. A change in
status from an Employee to a Consultant or from a Consultant to an Employee will
not constitute an interruption of Continuous Service Status.
(m)
"Corporate Transaction" means a sale of all or substantially
all of the Company's assets, or a merger, consolidation or other capital
reorganization or business combination transaction of the Company with or into
another corporation, entity or person, or the direct or indirect acquisition
(including by way of a tender or exchange offer) by any person, or persons
acting as a group, of beneficial ownership or a right to acquire beneficial
ownership of shares representing a majority of the voting power of the then
outstanding shares of capital stock of the Company.
(n)
"Director" means a member of the Board.
(o)
"Employee" means any person employed by the Company or any
Parent, Subsidiary or Affiliate, with the status of employment determined based
upon such factors as are deemed appropriate by the Administrator in its
discretion, subject to any requirements of the Code or the Applicable Laws. The
payment by the Company of a director's fee to a Director shall not be sufficient
to constitute "employment" of such Director by the Company.
(p)
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(q)
"Fair Market Value" means, as of any date, the fair market
value of the Common Stock, as determined by the Administrator in good faith on
such basis as it deems appropriate and applied consistently with respect to
Participants. Whenever possible, the determination of Fair Market Value shall be
based upon the closing price for the Shares on a national securities exchange or
interdealer quotation system.
(r)
"Incentive Stock Option" or "ISO" means
an Option intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code, as designated in the applicable Option
Agreement.
(s)
"Listed Security" means any security of the
Company that is listed or approved for listing on a national securities exchange
or designated or approved for designation as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc.
(t)
"Named Executive" means any individual who, on the last day
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four most highly compensated officers
of the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act.
(u)
"Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(v)
"Option" means a stock option granted pursuant to the
Plan.
(w)
"Option Agreement" means a written document, the form(s) of
which shall be approved from time to time by the Administrator, reflecting the
terms of an Option granted under the Plan and includes any documents attached to
or incorporated into such Option Agreement, including, but not limited to, a
notice of stock option grant and a form of exercise notice.
(x)
"Option Exchange Program" means a program approved by the
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price or are amended to decrease the exercise price as a result of a
decline in the Fair Market Value of the Common Stock.
(y)
"Optioned Stock" means the Common Stock subject to an
Option.
(z)
"Optionee" means an Employee, Director or Consultant who
receives an Option.
(aa)
"Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any
successor provision.
(bb)
"Participant" means
any holder of one or more Options or Stock Purchase Rights, or the Shares
issuable or issued upon exercise of such awards, under the Plan.
(cc)
"Plan" means this 2005 Stock Incentive Plan.
(dd)
"Reporting
Person" means an officer, Director, or greater than ten
percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
(ee)
"Restricted Stock" means Shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11
below.
(ff)
"Restricted Stock Purchase Agreement" means a written
document, the form(s) of which shall be approved from time to time by the
Administrator, reflecting the terms of a Stock Purchase Right granted under the
Plan and includes any documents attached to such agreement.
(gg) "Rule 16b-3" means
Rule 16b-3 promulgated under the Exchange Act, as amended from time to
time, or any successor provision.
(hh) "Share" means
a share of the Common Stock, as adjusted in accordance with Section 14 of
the Plan.
(ii)
"Stock
Exchange" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(jj)
"Stock
Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 below.
(kk) "Subsidiary" means
a "subsidiary corporation," whether now or hereafter existing, as defined in
Section 424(f) of the Code, or any successor provision.
(ll)
"Ten
Percent Holder" means a person who owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3.
Stock Subject to the Plan.
(a) Subject
to the provisions of Section 3(b) and Section 15 of the Plan, the
maximum aggregate number of Shares under the Plan that may be awarded as
Incentive Stock Options or otherwise is 145,837,250 Shares of Common Stock.
Such authorized share reserve consists of (i) the nine
million (9,000,000) shares initially authorized in connection with the
adoption of the Plan, (ii) the number of shares added to the Plan on
January 1, 2006, January 1, 2007, and January 1, 2008 under the automatic share
increase provision of the Plan, (iii) an increase of nine
million (9,000,000) shares authorized by the board and approved by the
shareholders at the Corporation's 2005 annual meeting of stockholders, (iv) an
increase of twenty five million (25,000,000) shares authorized by the
board and approved by the shareholders at the Corporation's 2008 annual
meeting of stocholders, plus (v) an increase of one-hundred million
(100,000,000) shares authorized by the Board subject to stockholder approval on
September 10, 2009. The Shares may be authorized, but unissued, or reacquired
Common Stock. If an award should expire or become unexercisable for any reason
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares that were subject thereto shall, unless
the Plan shall have been terminated, become available for future grant under the
Plan. In addition, any Shares of Common Stock which are retained by the Company
upon exercise of an award in order to satisfy the exercise or purchase price for
such award or any withholding taxes due with respect to such exercise or
purchase shall be treated as not issued and shall continue to be available under
the Plan. Shares issued under the Plan and later repurchased by the Company
pursuant to any repurchase right which the Company may have shall be available
for future grant under the Plan.
(b) The
number of shares of Common Stock available for issuance under the Plan shall
automatically increase on the first day of each of the Company's fiscal years
beginning in 2008 equal to 5% of the Shares outstanding on the last day of the
immediately preceding fiscal year.
4.
Administration of the Plan.
(a) General. The
Plan shall be administered by the Board or a Committee, or a combination
thereof, as determined by the Board. The Plan may be administered by different
administrative bodies with respect to different classes of Participants and, if
permitted by the Applicable Laws, the Board may authorize one or more officers
to make awards under the Plan.
(b) Committee
Composition. If a Committee has been appointed
pursuant to this Section 4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) and remove all members of
a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee administering
the Plan in accordance with the requirements of Rule 16b-3 or
Section 162(m) of the Code, to the extent permitted or required by such
provisions. The Committee shall in all events conform to any requirements of the
Applicable Laws.
(c) Powers
of the Administrator. Subject to the provisions
of the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
|
(i)
|
to
determine the Fair Market Value of the Common Stock, in accordance with
Section 2(q) of the Plan, provided that such determination shall be
applied consistently with respect to Participants under the
Plan;
|
|
(ii)
|
to
select the Employees, Consultants and Directors to whom Plan awards may
from time to time be granted;
|
|
(iii)
|
to
determine whether and to what extent Plan awards are
granted;
|
|
(iv)
|
to
determine the number of Shares of Common Stock to be covered by each award
granted;
|
|
(v)
|
to
approve the form(s) of agreement(s) used under the
Plan;
|
|
(vi)
|
to
determine the terms and conditions, not inconsistent with the terms of the
Plan, of any award granted hereunder, which terms and conditions include
but are not limited to the exercise or purchase price, the time or times
when awards may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, any pro
rata adjustment to vesting as a result of a Participant's transitioning
from full- to part-time service (or vice versa), and any restriction or
limitation regarding any Option, Optioned Stock, Stock Purchase Right or
Restricted Stock, based in each case on such factors as the Administrator,
in its sole discretion, shall
determine;
|
|
(vii)
|
to
determine whether and under what circumstances an Option may be settled in
cash under Section 10(c) instead of Common
Stock;
|
|
(viii)
|
to
implement an Option Exchange Program on such terms and conditions as the
Administrator in its discretion deems appropriate, provided that no
amendment or adjustment to an Option that would materially and adversely
affect the rights of any Optionee shall be made without the prior written
consent of the Optionee;
|
|
(ix)
|
to
adjust the vesting of an Option held by an Employee, Consultant or
Director as a result of a change in the terms or conditions under which
such person is providing services to the
Company;
|
|
(x)
|
to
construe and interpret the terms of the Plan and awards granted under the
Plan, which constructions, interpretations and decisions shall be final
and binding on all Participants;
and
|
|
(xi)
|
in
order to fulfill the purposes of the Plan and without amending the Plan,
to modify grants of Options or Stock Purchase Rights to Participants who
are foreign nationals or employed outside of the United States in order to
recognize differences in local law, tax policies or
customs.
|
5. Eligibility.
(a)
Recipients
of Grants. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees, Consultants and Directors.
Incentive Stock Options may be granted only to Employees, provided that
Employees of Affiliates shall not be eligible to receive Incentive Stock
Options.
(b)
Type
of Option. Each Option shall be designated in the
Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option.
(c)
ISO
$100,000 Limitation. Notwithstanding any
designation under Section 5(b), to the extent that the aggregate Fair
Market Value of Shares with respect to which Options designated as Incentive
Stock Options are exercisable for the first time by any Optionee during any
calendar year (under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5(c), Incentive Stock Options shall
be taken into account in the order in which they were granted, and the Fair
Market Value of the Shares subject to an Incentive Stock Option shall be
determined as of the date of the grant of such Option.
(d)
No
Employment Rights. The Plan shall not confer upon
any Participant any right with respect to continuation of an employment or
consulting relationship with the Company, nor shall it interfere in any way with
such Participant's right or the Company's right to terminate the employment or
consulting relationship at any time for any reason.
6. Term
of Plan. The Plan shall become effective upon its
adoption by the Board of Directors. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 17 of the
Plan.
7. Term
of Option. The term of each Option shall be the
term stated in the Option Agreement; provided that the term shall be no more
than ten years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to a person who at the time of such grant is a
Ten Percent Holder, the term of the Option shall be five years from the date of
grant thereof or such shorter term as may be provided in the Option
Agreement.
8. Limitation
on Grants to Employees. Subject to adjustment as
provided in Section 15 below, the maximum number of Shares that may be
subject to Options and Stock Purchase Rights granted to any one Employee under
this Plan for any fiscal year of the Company shall be 145,837,250, provided
that this Section 8 shall apply only after such time, if any, as the Common
Stock becomes a Listed Security.
9. Option
Exercise Price and Consideration.
(a)
Exercise
Price. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator and set forth in the Option Agreement, but shall
be subject to the following:
|
(i)
|
In
the case of an Incentive Stock
Option
|
(A) granted
to an Employee who at the time of grant is a Ten Percent Holder, the per Share
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant; or
(B) granted
to any other Employee, the per Share exercise price shall be no less than 100%
of the Fair Market Value per Share on the date of grant.
|
(ii)
|
In
the case of a Nonstatutory Stock
Option
|
(A) granted
on any date on which the Common Stock is not a Listed Security to a person who
is at the time of grant a Ten Percent Holder, the per Share exercise price shall
be no less than 110% of the Fair Market Value per Share on the date of grant if
required by the Applicable Laws and, if not so required, shall be such price as
is determined by the Administrator;
(B) granted
on any date on which the Common Stock is not a Listed Security to any other
eligible person, the per Share exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant if required by the Applicable
Laws and, if not so required, shall be such price as is determined by the
Administrator; or
(C) granted
on any date on which the Common Stock is a Listed Security to any eligible
person, the per Share exercise price shall be such price as determined by the
Administrator, which shall be no less than 100% of the Fair Market Value on the
date of grant, and, if such person is, at the time of grant of such Option, a
Named Executive of the Company, the per Share exercise price shall be no less
than 100% of the Fair Market Value on the date of grant if such Option is
intended to qualify as performance-based compensation under Section 162(m)
of the Code.
|
(iii)
|
Notwithstanding
the foregoing, Options may be granted with a per Share exercise price
other than as required above pursuant to a merger or other corporate
transaction.
|
(b)
Permissible
Consideration. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash; (2) check; (3) subject to any
requirements of the Applicable Laws (including without limitation
Section 153 of the Delaware General Corporation Law), delivery of
Optionee's promissory note having such recourse, interest, security and
redemption provisions as the Administrator determines to be appropriate after
taking into account the potential accounting consequences of permitting an
Optionee to deliver a promissory note; (4) cancellation of indebtedness;
(5) other Shares that have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which the Option is
exercised, provided that in the case of Shares acquired, directly or indirectly,
from the Company, such Shares must have been owned by the Optionee for more than
six months on the date of surrender (or such other period as may be required to
avoid the Company's incurring an adverse accounting charge); (6) if, as of
the date of exercise of an Option the Company then is permitting employees to
engage in a "same-day sale" cashless brokered exercise program involving one or
more brokers, through such a program that complies with the Applicable Laws
(including without limitation the requirements of Regulation T and other
applicable regulations promulgated by the Federal Reserve Board) and that
ensures prompt delivery to the Company of the amount required to pay the
exercise price and any applicable withholding taxes; or (7) any combination
of the foregoing methods of payment. In making its determination as to the type
of consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company and the
Administrator may, in its sole discretion, refuse to accept a particular form of
consideration at the time of any Option exercise.
10. Exercise
of Option.
(a)
General.
(i) Exercisability. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, consistent with the term of the
Plan and reflected in the Option Agreement, including vesting requirements
and/or performance criteria with respect to the Company and/or the Optionee;
provided however that, if required under the Applicable Laws, the Option (or
Shares issued upon exercise of the Option) shall comply with the requirements of
Section 260.140.41(f) and (k) of the Rules of the California
Corporations Commissioner.
(ii) Leave
of Absence. The Administrator shall have the
discretion to determine whether and to what extent the vesting of Options shall
be tolled during any unpaid leave of absence; provided, however, that in the
absence of such determination, vesting of Options shall be tolled during any
such unpaid leave (unless otherwise required by the Applicable Laws). In the
event of military leave, vesting shall toll during any unpaid portion of such
leave, provided that, upon a Participant's returning from military leave (under
conditions that would entitle him or her to protection upon such return under
the Uniform Services Employment and Reemployment Rights Act), he or she shall be
given vesting credit with respect to Options to the same extent as would have
applied had the Participant continued to provide services to the Company
throughout the leave on the same terms as he or she was providing services
immediately prior to such leave.
(iii) Minimum
Exercise Requirements. An Option may not be
exercised for a fraction of a Share. The Administrator may require that an
Option be exercised as to a minimum number of Shares, provided that such
requirement shall not prevent an Optionee from exercising the full number of
Shares as to which the Option is then exercisable.
(iv) Procedures
for and Results of Exercise. An Option shall be
deemed exercised when written notice of such exercise has been given to the
Company in accordance with the terms of the Option by the person entitled to
exercise the Option and the Company has received full payment for the Shares
with respect to which the Option is exercised. Full payment may, as authorized
by the Administrator, consist of any consideration and method of payment
allowable under Section 9(b) of the Plan, provided that the Administrator
may, in its sole discretion, refuse to accept any form of consideration at the
time of any Option exercise.
Exercise
of an Option in any manner shall result in a decrease in the number of Shares
that thereafter may be available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is
exercised.
(v) Rights
as Stockholder. Until the issuance of the Shares
(as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 15 of the
Plan.
(b)
Termination
of Employment or Consulting Relationship. Except
as otherwise set forth in this Section 10(b), the Administrator shall
establish and set forth in the applicable Option Agreement the terms and
conditions upon which an Option shall remain exercisable, if at all, following
termination of an Optionee's Continuous Service Status, which provisions may be
waived or modified by the Administrator at any time. Unless the Administrator
otherwise provides in the Option Agreement, to the extent that the Optionee is
not vested in Optioned Stock at the date of termination of his or her Continuous
Service Status, or if the Optionee (or other person entitled to exercise the
Option) does not exercise the Option to the extent so entitled within the time
specified in the Option Agreement or below (as applicable), the Option shall
terminate and the Optioned Stock underlying the unexercised portion of the
Option shall revert to the Plan. In no event may any Option be exercised after
the expiration of the Option term as set forth in the Option Agreement (and
subject to Section 7).
The
following provisions (1) shall apply to the extent an Option Agreement does
not specify the terms and conditions upon which an Option shall terminate upon
termination of an Optionee's Continuous Service Status, and (2) establish
the minimum post-termination exercise periods that may be set forth in an Option
Agreement:
(i) Termination
other than Upon Disability or Death or for
Cause. In the event of termination of Optionee's
Continuous Service Status other than under the circumstances set forth in
subsections (ii) through (iv) below, such Optionee may exercise an
Option for 30 days following such termination to the extent the Optionee
was vested in the Optioned Stock as of the date of such termination. No
termination shall be deemed to occur and this Section 10(b)(i) shall
not apply if (i) the Optionee is a Consultant who becomes an Employee, or
(ii) the Optionee is an Employee who becomes a Consultant.
(ii) Disability
of Optionee. In the event of termination of an
Optionee's Continuous Service Status as a result of his or her disability
(including a disability within the meaning of Section 22(e)(3) of the
Code), such Optionee may exercise an Option at any time within six months
following such termination to the extent the Optionee was vested in the Optioned
Stock as of the date of such termination.
(iii) Death
of Optionee. In the event of the death of an
Optionee during the period of Continuous Service Status since the date of grant
of the Option, or within thirty days following termination of Optionee's
Continuous Service Status, the Option may be exercised by Optionee's estate or by
a person who acquired the right to exercise the Option by bequest or inheritance
at any time within twelve months following the date of death, but only to the
extent the Optionee was vested in the Optioned Stock as of the date of death or,
if earlier, the date the Optionee's Continuous Service Status
terminated.
(iv) Termination
for Cause. In the event of termination of an
Optionee's Continuous Service Status for Cause, any Option (including any
exercisable portion thereof) held by such Optionee shall immediately terminate
in its entirety upon first notification to the Optionee of termination of the
Optionee's Continuous Service Status. If an Optionee's employment or consulting
relationship with the Company is suspended pending an investigation of whether
the Optionee shall be terminated for Cause, all the Optionee's rights under any
Option likewise shall be suspended during the investigation period and the
Optionee shall have no right to exercise any Option. This
Section 10(b)(iv) shall apply with equal effect to vested Shares
acquired upon exercise of an Option granted on any date on which the Common
Stock is not a Listed Security to a person other than an officer, Director or
Consultant, in that the Company shall have the right to repurchase such Shares
from the Participant upon the following terms: (A) the repurchase is made
within 90 days of termination of the Participant's Continuous Service
Status for Cause at the Fair Market Value of the Shares as of the date of
termination, (B) consideration for the repurchase consists of cash or
cancellation of purchase money indebtedness, and (C) the repurchase right
terminates upon the effective date of the Company's initial public offering of
its Common Stock. With respect to vested Shares issued upon exercise of an
Option granted to any officer, Director or Consultant, the Company's right to
repurchase such Shares upon termination of the Participant's Continuous Service
Status for Cause shall be made at the Participant's original cost for the Shares
and shall be effected pursuant to such terms and conditions, and at such time,
as the Administrator shall determine. Nothing in this
Section 10(b)(iv) shall in any way limit the Company's right to
purchase unvested Shares issued upon exercise of an Option as set forth in the
applicable Option Agreement.
(c) Buyout
Provisions. The Administrator may at any time
offer to buy out for a payment in cash or Shares an Option previously granted
under the Plan based on such terms and conditions as the Administrator shall
establish and communicate to the Optionee at the time that such offer is
made.
11.
Stock
Purchase Rights.
(a) Rights
to Purchase. When the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer. In the case of a Stock Purchase Right granted prior to the
date, if any, on which the Common Stock becomes a Listed Security and if
required by the Applicable Laws at that time, the purchase price of Shares
subject to such Stock Purchase Rights shall not be less than 100% of the Fair
Market Value of the Shares as of the date of the offer. If the Applicable Laws
do not impose the requirements set forth in the preceding sentence and with
respect to any Stock Purchase Rights granted after the date, if any, on which
the Common Stock becomes a Listed Security, the purchase price of Shares subject
to Stock Purchase Rights shall be as determined by the Administrator. The offer
to purchase Shares subject to Stock Purchase Rights shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form determined by the
Administrator.
(b) Repurchase
Option.
(i) General. Unless
the Administrator determines otherwise, the Restricted Stock Purchase Agreement
shall grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). Subject to any requirements of the
Applicable Laws (including without limitation Section 260.140.42(h) of the
Rules of the California Corporations Commissioner), the terms of the Company's
repurchase option (including without limitation the price at which, and the
consideration for which, it may be exercised, and the events upon which it shall
lapse) shall be as determined by the Administrator in its sole discretion and
reflected in the Restricted Stock Purchase Agreement.
(ii) Leave
of Absence. The Administrator shall have the
discretion to determine whether and to what extent the lapsing of Company
repurchase rights shall be tolled during any unpaid leave of absence; provided,
however, that in the absence of such determination, such lapsing shall be tolled
during any such unpaid leave (unless otherwise required by the Applicable Laws).
In the event of military leave, the lapsing of Company repurchase rights shall
toll during any unpaid portion of such leave, provided that, upon a
Participant's returning from military leave (under conditions that would entitle
him or her to protection upon such return under the Uniform Services Employment
and Reemployment Rights Act), he or she shall be given "vesting" credit with
respect to Shares purchased pursuant to the Restricted Stock Purchase Agreement
to the same extent as would have applied had the Participant continued to
provide services to the Company throughout the leave on the same terms as he or
she was providing services immediately prior to such leave.
(iii) Termination
for Cause. In the event of termination of a
Participant's Continuous Service Status for Cause, the Company shall have the
right to repurchase from the Participant vested Shares issued upon exercise of a
Stock Purchase Right granted to any person other than an officer, Director or
Consultant prior to the date, if any, upon which the Common Stock becomes a
Listed Security upon the following terms: (A) the repurchase must be made
within 90 days of termination of the Participant's Continuous Service
Status for Cause at the Fair Market Value of the Shares as of the date of
termination, (B) consideration for the repurchase consists of cash or
cancellation of purchase money indebtedness, and (C) the repurchase right
terminates upon the effective date of the Company's initial public offering of
its Common Stock. With respect to vested Shares issued upon exercise of a Stock
Purchase Right granted to any officer, Director or Consultant, the Company's
right to repurchase such Shares upon termination of such Participant's
Continuous Service Status for Cause shall be made at the Participant's original
cost for the Shares and shall be effected pursuant to such terms and conditions,
and at such time, as the Administrator shall determine. Nothing in this
Section 11(b)(ii) shall in any way limit the Company's right to
purchase unvested Shares as set forth in the applicable Restricted Stock
Purchase Agreement.
(c)
Other
Provisions. The Restricted Stock Purchase
Agreement shall contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Administrator in its sole
discretion. In addition, the provisions of Restricted Stock Purchase Agreements
need not be the same with respect to each purchaser.
(d)
Rights
as a Stockholder. Once the Stock Purchase Right
is exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in
Section 15 of the Plan.
12. Other
Stock-Based Awards.
The Board
shall have the right to grant other awards based upon the Common Stock having
such terms and conditions as the Board may determine, including the grant of
shares based upon certain conditions, the grant of securities convertible into
Common Stock, the grant of stock appreciation rights and other awards that are
comprised of, valued in whole or in part by reference to, or are otherwise based
on, shares of Common Stock or other property, may be granted hereunder to
Participants ("Other Stock Unit Awards"), including without limitation awards
entitling recipients to receive shares of Common Stock to be delivered in the
future; provided, however, that no Other Stock Unit Awards shall be made unless
and until the terms the Plan and of any such award are in compliance with
Section 409A of the Code. Such Other Stock Unit Awards shall also be
available as a form of payment in the settlement of other awards granted under
the Plan or as payment in lieu of compensation to which a Participant is
otherwise entitled. Other Stock Unit Awards may be paid in shares of Common
Stock or cash, as the Board shall determine. Subject to the provisions of the
Plan, the Board shall determine the conditions of each Other Stock Unit Awards,
including any purchase price applicable thereto. At the time any award is
granted, the Board may provide that, at the time Common Stock would otherwise be
delivered pursuant to the award, the Participant will instead receive an
instrument evidencing the Participant's right to future delivery of the Common
Stock.
13. Taxes.
(a) As
a condition of the grant, vesting or exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option or Stock Purchase Right)
shall make such arrangements as the Administrator may require for the
satisfaction of any applicable federal, state, local or foreign withholding tax
obligations that may arise in connection with such grant, vesting or exercise of
the Option or Stock Purchase Right or the issuance of Shares. The Company shall
not be required to issue any Shares under the Plan until such obligations are
satisfied. If the Administrator allows the withholding or surrender of Shares to
satisfy a Participant's tax withholding obligations under this Section 13
(whether pursuant to Section 13(c), (d) or (e), or otherwise), the
Administrator shall not allow Shares to be withheld in an amount that exceeds
the minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes.
(b) In
the case of an Employee and in the absence of any other arrangement, the
Employee shall be deemed to have directed the Company to withhold or collect
from his or her compensation an amount sufficient to satisfy such tax
obligations from the next payroll payment otherwise payable after the date of an
exercise of the Option or Stock Purchase Right.
(c) This
Section 13(c) shall apply only after the date, if any, upon which the
Common Stock becomes a Listed Security. In the case of Participant other than an
Employee (or in the case of an Employee where the next payroll payment is not
sufficient to satisfy such tax obligations, with respect to any remaining tax
obligations), in the absence of any other arrangement and to the extent
permitted under the Applicable Laws, the Participant shall be deemed to have
elected to have the Company withhold from the Shares to be issued upon exercise
of the Option or Stock Purchase Right that number of Shares having a Fair Market
Value determined as of the applicable Tax Date (as defined below) equal to the
amount required to be withheld. For purposes of this Section 13, the Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined under the Applicable Laws
(the "Tax Date").
(d) If
permitted by the Administrator, in its discretion, a Participant may satisfy his
or her tax withholding obligations upon exercise of an Option or Stock Purchase
Right by surrendering to the Company Shares that have a Fair Market Value
determined as of the applicable Tax Date equal to the amount required to be
withheld. In the case of shares previously acquired from the Company that are
surrendered under this Section 13(d), such Shares must have been owned by
the Participant for more than six (6) months on the date of surrender (or
such other period of time as is required for the Company to avoid adverse
accounting charges).
(e) Any
election or deemed election by a Participant to have Shares withheld to satisfy
tax withholding obligations under Section 13(c) or (d) above shall be
irrevocable as to the particular Shares as to which the election is made and
shall be subject to the consent or disapproval of the Administrator. Any
election by a Participant under Section 13(d) above must be made on or
prior to the applicable Tax Date.
(f) In
the event an election to have Shares withheld is made by a Participant and the
Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Participant shall receive the
full number of Shares with respect to which the Option or Stock Purchase Right
is exercised but such Participant shall be unconditionally obligated to tender
back to the Company the proper number of Shares on the Tax Date.
14. Non-Transferability
of Options and Stock Purchase
Rights.
(a)
General. Except
as set forth in this Section 14, Options and Stock Purchase Rights may not
be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent or distribution. The
designation of a beneficiary by an Optionee will not constitute a transfer. An
Option or Stock Purchase Right may be exercised, during the lifetime of the
holder of an Option or Stock Purchase Right, only by such holder or a transferee
permitted by this Section 14.
(b)
Limited
Transferability Rights. Notwithstanding anything
else in this Section 14, the Administrator may in its discretion grant
Nonstatutory Stock Options that may be transferred by instrument to an inter
vivos or testamentary trust in which the Options are to be passed to
beneficiaries upon the death of the trustor (settlor) or by gift or pursuant to
domestic relations orders to "Immediate Family Members" (as defined below) of
the Optionee. "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law (including adoptive relationships), a trust in which these persons
have more than fifty percent of the beneficial interest, a foundation in which
these persons (or the Optionee) control the management of assets, and any other
entity in which these persons (or the Optionee) own more than fifty percent of
the voting interests.
15.
Adjustments
Upon Changes in Capitalization, Merger or Certain Other
Transactions.
(a)
Changes
in Capitalization. Subject to any action required
under Applicable Laws by the stockholders of the Company, the number of Shares
of Common Stock covered by each outstanding award, the numbers of Shares set
forth in Sections 3(a) and 8 above, and the number of Shares of Common Stock
that have been authorized for issuance under the Plan but as to which no awards
have yet been granted or that have been returned to the Plan upon cancellation
or expiration of an award, as well as the price per Share of Common Stock
covered by each such outstanding award, shall be proportionately adjusted for
any increase or decrease in the number of issued Shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of the Common Stock, or any other increase
or decrease in the number of issued Shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares of Common Stock subject to an
award.
(b)
Dissolution
or Liquidation. In the event of the dissolution
or liquidation of the Company, each Option and Stock Purchase Right will
terminate immediately prior to the consummation of such action, unless otherwise
determined by the Administrator.
(c)
Corporate
Transaction. In the event of a Corporate
Transaction (including without limitation a Change of Control), each outstanding
Option or Stock Purchase Right shall be assumed or an equivalent option or right
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation (the "Successor Corporation"), unless the Successor
Corporation does not agree to assume the award or to substitute an equivalent
option or right, in which case such Option or Stock Purchase Right shall
terminate upon the consummation of the transaction.
(d)
Certain
Distributions. In the event of any distribution
to the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
16. Time
of Granting Options and Stock Purchase Rights. The
date of grant of an Option or Stock Purchase Right shall, for all purposes, be
the date on which the Administrator makes the determination granting such Option
or Stock Purchase Right, or such other date as is determined by the
Administrator, provided that in the case of any Incentive Stock Option, the
grant date shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee, Consultant or Director to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
17. Amendment
and Termination of the Plan.
(a)
Authority
to Amend or Terminate. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation (other than an adjustment pursuant to
Section 15 above) shall be made that would materially and adversely affect
the rights of any Optionee or holder of Stock Purchase Rights under any
outstanding grant, without his or her consent. In addition, to the extent
necessary and desirable to comply with the Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b)
Effect
of Amendment or Termination. Except as to
amendments which the Administrator has the authority under the Plan to make
unilaterally, no amendment or termination of the Plan shall materially and
adversely affect Options or Stock Purchase Rights already granted, unless
mutually agreed otherwise between the Optionee or holder of the Stock Purchase
Rights and the Administrator, which agreement must be in writing and signed by
the Optionee or holder and the Company.
18. Conditions
Upon Issuance of Shares. Notwithstanding any
other provision of the Plan or any agreement entered into by the Company
pursuant to the Plan, the Company shall not be obligated, and shall have no
liability for failure, to issue or deliver any Shares under the Plan unless such
issuance or delivery would comply with the Applicable Laws, with such compliance
determined by the Company in consultation with its legal counsel. As a condition
to the exercise of an Option or Stock Purchase Right, the Company may require
the person exercising the award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law. Shares issued
upon exercise of awards granted prior to the date on which the Common Stock
becomes a Listed Security shall be subject to a right of first refusal in favor
of the Company pursuant to which the Participant will be required to offer
Shares to the Company before selling or transferring them to any third party on
such terms and subject to such conditions as is reflected in the applicable
Option Agreement or Restricted Stock Purchase Agreement.
19. Reservation
of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
20. Agreements. Options
and Stock Purchase Rights shall be evidenced by Option Agreements and Restricted
Stock Purchase Agreements, respectively, in such form(s) as the Administrator
shall from time to time approve.
21. Stockholder
Approval. If required by the Applicable Laws,
continuance of the Plan shall be subject to approval by the stockholders of the
Company within twelve (12) months before or after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under the Applicable Laws.
22. Information
and Documents to Optionees and Purchasers. Prior
to the date, if any, upon which the Common Stock becomes a Listed Security and
if required by the Applicable Laws, the Company shall provide financial
statements at least annually to each Optionee and to each individual who
acquired Shares pursuant to the Plan, during the period such Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding, and in
the case of an individual who acquired Shares pursuant to the Plan, during the
period such individual owns such Shares. The Company shall not be required to
provide such information if the issuance of Options or Stock Purchase Rights
under the Plan is limited to key employees whose duties in connection with the
Company assure their access to equivalent information.
23. Governing
Law. The provisions of this Plan and all awards
made hereunder shall be governed by and interpreted in accordance with the laws
of the State of California, without regard to any applicable conflicts of
law.
Appendix B
Certificate
of Amendment
of
Certificate
of Incorporation
of
Advanced
Cell Technology, Inc.
Under
Section 242 of the Delaware General Corporation Law
Advanced
Cell Technology, Inc., a corporation organized and existing under the laws of
the State of Delaware (the “Corporation”) hereby certifies as
follows:
1.
The
Amended and Restated Certificate of Incorporation of the Corporation is hereby
amended by changing ARTICLE V, Section 2, so that, as amended, said ARTICLE V,
Section 2 shall be and read as follows:
Section 2.
Number
of Authorized Shares. The total number of shares
of stock which the Corporation shall have the authority to issue shall be Two
Billion Five Hundred Fifty Million (2,550,000,000) shares. The Corporation shall
be authorized to issue two classes of shares of stock, designated "Common Stock"
and "Preferred Stock." The Corporation shall be authorized to issue One Billion
Two Hundred Fifty Million (1,250,000,000) shares of Common Stock, each share to
have a par value of $.001 per share, and Fifty Million (50,000,000) shares of
Preferred Stock, each share to have a par value of $.001 per share.
2.
The
foregoing amendment has been duly adopted in accordance with the provisions of
Section 242 of the General Corporation law of the State of Delaware by the vote
of a majority of each class of outstanding stock of the Corporation entitled to
vote thereon.
IN
WITNESS WHEREOF, I have signed this Certificate this _th day of ______,
2009
|
William
M. Caldwell, IV
|
Chairman
& Chief Executive
Officer
|
PROXY
ADVANCED
CELL TECHNOLOGY, INC.
Proxy
for the Special Meeting of Stockholders to be held on September 10,
2009
This
Proxy is solicited on behalf of the Board of Directors
of
Advanced Cell Technology, Inc.
The
undersigned, revoking all prior proxies, hereby appoint(s) William M. Caldwell,
IV, with full power of substitution, as proxy to represent and vote, as
designated herein, all shares of stock of Advanced Cell Technology, Inc., a
Delaware corporation (the "Company"), which the undersigned would be entitled to
vote if personally present at the Special Meeting of Stockholders of the Company
to be held at 10:00 a.m. on September 10, 2009 at the Westin Monache Hotel,
Mammoth, 50 Hillside Drive, Mammoth Lakes, California 93546,
Pacific Daylight Time, and at any adjournment thereof (the
"Meeting").
This proxy, when properly executed,
will be voted in the manner directed herein by the undersigned stockholder. If
no direction is given, this proxy will be voted FOR all proposals. Attendance of
the undersigned at the Meeting or at any adjournment thereof will not be deemed
to revoke this proxy unless the undersigned shall revoke this proxy in writing
or shall deliver a subsequently dated proxy to the Secretary of the Company or
shall vote in person at the Meeting.
(Continued,
and to be signed, on reverse side)
Please
date, sign and mail your
proxy
card back as soon as possible!
Special
Meeting of Stockholders
ADVANCED
CELL TECHNOLOGY, INC.
September
10, 2009
Please
detach and mail in the envelope provided.
x
Please
mark votes as in this example.
1.
|
|
To
amend the Company's 2005 Stock Incentive Plan (the "2005 Stock Plan") to
increase the number of shares thereunder by 100,000,000
shares.
|
|
FOR
the amendment to the 2005 Stock Plan
|
|
WITHHOLD
AUTHORITY to vote in
favor of the amendment
to the 2005 Stock Plan
|
|
|
2.
|
|
To
consider and approve an amendment to the Amended and Restated Certificate
of Incorporation of the Company to effect an increase the number of
authorized shares of Common Stock of the Company from 500,000,000 to
1,750,000,000.
|
|
FOR
the amendment to the Amended and Restated Certificate of
Incorporation
|
|
WITHHOLD
AUTHORITY to vote in
favor of the amendment
to the Amended and
Restated Certificate of
Incorporation
|
|
|
In their discretion,
the proxies are authorized to vote upon such other matters as may properly come
before the Meeting or any adjournment thereof.
Check here if the
Securities and Exchange Commission's "householding" rule applies to you and you
wish to continue receiving separate proxy materials without participating in the
rule. o
PLEASE FILL IN,
DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID RETURN
ENVELOPE.
Signature:
|
|
|
|
Date:
|
|
|
|
|
|
|
|
|
|
Signature:
|
|
|
|
Date:
|
|
|
|
|
|
|
|
|
|
NOTE:
|
Please
sign exactly as name appears hereon. If the stock is registered in the
names of two or more persons, each should sign. Executors, administrators,
guardians, attorneys and corporate officers should add their
titles.
|