The accompanying notes are an integral part
of these consolidated financial statements.
ADVANCED CELL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATIONAL MATTERS
The unaudited consolidated financial statements have been prepared
by Advanced Cell Technology, Inc. and Subsidiary (collectively the “Company”), pursuant to the rules and regulations
of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of
normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have
been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 1, 2014. The results for the three months ended March 31, 2014 are not necessarily
indicative of the results to be expected for the full year ending December 31, 2014.
Organization and Nature of Business
The Company is a life science company, incorporated in the state
of Delaware, focused on the emerging field of regenerative medicine. The Company’s core business strategy is to develop and
ultimately commercialize stem cell derived cell therapies and biologics that will deliver safe and efficacious patient therapies,
and which can be manufactured at scale and are reimbursable at attractive levels. The Company is conducting several ongoing clinical
trials for treating macular degeneration, and it has a preclinical development pipeline focused on products for eye diseases, autoimmune
and inflammatory diseases, and wound healing. 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.
2. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL
STATEMENTS
On March 10, 2014, we concluded that our previously
issued consolidated financial statements required a restatement for the years ended December 31, 2012 and 2011. We determined that
a misapplication of accounting guidance relating to certain warrants and an associated full-ratchet anti-dilution feature that
was included in these warrants occurred. Additionally we concluded that we had an error with our stock compensation accounting
as a result of having inadequate authorized, unissued shares available for our outstanding options in certain periods. As a result
of these errors we determined that our financial statements for the following periods (the “Applicable Periods”) required
a restatement and could no longer be relied upon: the fiscal years ended December 31, 2009, December 31, 2010, December 31, 2011
and December 31, 2012; each quarterly period in 2011 and 2012; and the first three quarterly periods in its fiscal year ended December
31, 2013.
Warrant Accounting Issue
Two separate warrant agreements entered into
in September 2005 contained a full ratchet, anti-dilution feature which entitled the holders to automatic adjustments in the number
and purchase price of their shares, if the Company issued lower-priced shares between May 1, 2005 and January 15, 2009, ( the “Pricing
Period”). From the original date of the warrant until the exercise of the warrants in September 2006, the anti-dilution embedded
derivative feature was properly accounted for and recorded at its fair value. From the date of exercise through the end of the
pricing period, the full ratchet feature remained in effect but was not accounted for or recorded at its fair value, which resulted
in an accounting error. In determining the proper accounting management performed a valuation of this full ratchet embedded derivative
using a Monte Carlo simulation model.
Management further determined that as of the
end of the pricing period an adjustment to the shares and purchase price of the shares should have taken place per the full ratchet
anti-dilution feature of the agreement. As the matter went to litigation this contractual obligation was never settled and became
fixed at 63.2 million shares with a floor price of $0.06. This unsettled warrant contractual obligation should have been recorded
from the end of the pricing period until settlement with accounting treatment, under ASC 815, requiring mark-to-market adjustments
at each reporting date. Management also continues to evaluate the application of ASC 450, Contingencies, for the year ended December
31, 2013, as it relates to the ongoing, previously disclosed, legal dispute between the Company and the warrant holders.
Due to the resulting financial statement impact
within the years impacted, the Company has determined it is necessary to restate its financial statements for the Applicable Periods.
Stock Compensation Issue related to inadequate authorized
and unissued shares to settle share based awards in shares
The Company examined periods being restated
for the warrant liability issue to determine if authorized, unissued share availability was an issue in relation to instruments
that have share based settlement requirements. Through this analysis it was determined that stock options were impacted in certain
periods while other instruments such as warrants, convertible debt and preferred stock already had liability classification and
therefore would not be impacted by inadequate authorized, unissued shares available.
It was determined that in Q1 2009, Q2 2009
and Q4 2011 options outstanding were impacted by the lack of authorized, unissued shares available. It was further determined that
the date in which committed shares exceeded unauthorized was February 9, 2009 and that shortage of available shares ran through
September 10, 2009, when additional authorized shares were approved. As for 2011, the share issue began on November 2, 2011 and
ran through January 24, 2012, when additional authorized shares were approved.
As per the accounting requirements of ASC
718, the inadequate share issue caused the accounting to change from equity based to liability based accounting, with the vested
options to be measured at fair value as a liability until such time as adequate shares were approved and the accounting for the
stock compensation would revert back to equity based accounting.
This accounting error in treating the stock
compensation as equity throughout these periods with inadequate authorized unissued shares, led the Company to re-measure all stock
options impacted during these periods to effect the proper accounting treatment.
Due to the resulting financial statement impact
within the years impacted, the Company has determined it is necessary to restate its financial statements for the Applicable Periods.
The following tables summarize the effects
of the restatement on our previously issued condensed consolidated financial statements:
Summary
of increases (decreases) in net loss (unaudited)
|
|
Three months ended March 31, 2013
|
|
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(6,413,041
|
)
|
Net adjustments
|
|
|
|
|
Research and development
|
|
|
(106,559
|
)
|
General and administrative expenses
|
|
|
(8,005
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
16,968
|
|
Net loss, restated
|
|
$
|
(6,510,637
|
)
|
Basic loss per share:
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(0.00
|
)
|
Net adjustments
|
|
|
|
|
Research and development
|
|
|
(0.00
|
)
|
General and administrative expenses
|
|
|
(0.00
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
0.00
|
|
Net loss, restated
|
|
$
|
(0.00
|
)
|
Diluted loss per share:
|
|
|
|
|
Net loss, as previously reported
|
|
$
|
(0.00
|
)
|
Net adjustments
|
|
|
|
|
Research and development
|
|
|
(0.00
|
)
|
General and administrative expenses
|
|
|
(0.00
|
)
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
0.00
|
|
Net loss, restated
|
|
$
|
(0.00
|
)
|
Weighted average shares used in computing net loss per share:
|
|
|
|
|
Basic
|
|
|
2,251,585,598
|
|
Diluted
|
|
|
2,251,585,598
|
|
Consolidated Statements of Operations
(unaudited) for the three months ended March 31, 2013
|
|
|
|
|
|
Three months ended March 31, 2013
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
87,781
|
|
|
|
|
|
|
$
|
87,781
|
|
Cost of revenue
|
|
|
34,359
|
|
|
|
|
|
|
|
34,359
|
|
Gross profit
|
|
|
53,422
|
|
|
|
–
|
|
|
|
53,422
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,992,000
|
|
|
|
106,559
|
|
|
|
3,098,559
|
|
General and administrative expenses
|
|
|
2,825,864
|
|
|
|
8,005
|
|
|
|
2,833,869
|
|
Total operating expenses
|
|
|
5,817,864
|
|
|
|
114,564
|
|
|
|
5,932,428
|
|
Loss from operations
|
|
|
(5,764,442
|
)
|
|
|
(114,564
|
)
|
|
|
(5,879,006
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,777
|
|
|
|
|
|
|
|
1,777
|
|
Interest expense and late fees
|
|
|
(524,189
|
)
|
|
|
|
|
|
|
(524,189
|
)
|
Finance gain (cost)
|
|
|
(293,120
|
)
|
|
|
630,000
|
|
|
|
336,880
|
|
Fines and penalties
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
Gain on extinguishment of debt
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
–
|
|
|
|
(613,032
|
)
|
|
|
(613,032
|
)
|
Adjustments to fair value of derivatives
|
|
|
166,933
|
|
|
|
|
|
|
|
166,933
|
|
Total non-operating expense
|
|
|
(648,599
|
)
|
|
|
16,968
|
|
|
|
(631,631
|
)
|
Loss before provision for income tax
|
|
|
(6,413,041
|
)
|
|
|
(97,596
|
)
|
|
|
(6,510,637
|
)
|
Provision for income tax
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(6,413,041
|
)
|
|
$
|
(97,596
|
)
|
|
$
|
(6,510,637
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Diluted
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,251,585,598
|
|
|
|
2,251,585,598
|
|
|
|
2,251,585,598
|
|
Diluted
|
|
|
2,251,585,598
|
|
|
|
2,251,585,598
|
|
|
|
2,251,585,598
|
|
Consolidated Statement of Cash Flows Impact
The following table includes selected
information from our consolidated statements of cash flows presenting previously reported and restated cash flows, for the three
months ended March 31, 2013:
|
|
For the three months ended
|
|
|
|
March 31, 2013
|
|
|
|
As Previously Reported
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,413,041
|
)
|
|
$
|
(6,510,637
|
)
|
Stock based compensation
|
|
|
1,018,060
|
|
|
|
1,132,624
|
|
Adjustments to fair value of unsettled warrant obligation
|
|
|
–
|
|
|
|
613,032
|
|
Non-cash financing costs
|
|
|
(389,700
|
)
|
|
|
(1,019,700
|
)
|
Net cash used in operating activities
|
|
|
(8,276,448
|
)
|
|
|
(8,276,448
|
)
|
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
—The
Company follows accounting standards set by the Financial Accounting Standards Board , FASB. The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America, GAAP.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,™ sometimes referred
to as the Codification or ASC.
The accompanying consolidated financial statements
have been prepared in conformity with GAAP which contemplate continuation of the company as a going concern. However, as of March
31, 2014, the Company has an accumulated deficit of $322.6 million. This and other factors, such as the Company’s cash balance,
raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern
is dependent upon many factors, including the Company’s ability to raise additional capital in a timely manner. The accompanying
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Principles of Consolidation
— The accounts
of the Company and its wholly-owned subsidiary Mytogen, Inc. are included in the accompanying consolidated financial statements.
All intercompany balances and transactions were eliminated in consolidation.
Segment Reporting
—ASC 280,
“Segment
Reporting”
requires use of the “management approach” model for segment reporting. The management approach
model is based on the way a company’s management organizes segments within the company for making operating decisions and
assessing performance. The Company determined it has one operating segment. Disaggregation of the Company’s operating results
is impracticable, because the Company’s research and development activities and its assets overlap, and management reviews
its business as a single operating segment. Thus, discrete financial information is not available by more than one operating segment.
Use of Estimates
— These consolidated financial
statements have been prepared in accordance with GAAP and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Specifically, the Company’s management has estimated loss contingencies related
to outstanding litigation. In addition, Management has estimated variables used to calculate the Black-Scholes option pricing model
used to value derivative instruments and the Company estimates the fair value of the embedded conversion option associated with
the senior secured convertible debentures using a binomial lattice model as discussed below under “Fair Value Measurements”.
Also, management has estimated the expected economic life and value of the Company’s licensed technology, the Company’s
net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment
banks, and the useful lives of the Company’s fixed assets and its accounts receivable allowance. Actual results could differ
from those estimates.
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, 2014 and December 31, 2013, the Company had deposits in excess of federally-insured
limits totaling $3,787,842 and $1,668,232, respectively.
Commitments and Contingencies
— We are subject
to various claims and contingencies related to lawsuits as well as commitments under contractual and other obligations. We recognize
liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated.
Relating to loss contingencies we accrue the best estimate of
a loss within a range. If no estimate in a range is better than any other, the minimum amount is accrued. We disclose a reasonably
possible loss in excess of the amount accrued, if applicable. For reasonably possible loss contingencies we disclose the nature
of the loss contingency and give a range of the estimate of possible loss or state that an estimate cannot be made.
Grant Received
— From time to time the Company
participates in research grants both as an initiator of grants as well as a sub-recipient of grant funds. The Company incurs costs
for the grant and is subsequently reimbursed for these expenses by grant receipts. The Company records such receipts as a reduction
in research and development costs. For the three months ended March 31, 2014 and 2013, the Company recorded as a reduction in research
and development costs, $0, and $60,022 respectively.
Grants Receivable
— The Company periodically
assesses its grants receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely,
the Company records an allowance for that doubtful account. Once the Company has exhausted efforts to collect, management writes
off the grants receivable against the allowance it has already created.
Property and Equipment
— The Company records
its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon disposition of property
and equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net
book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets
are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged
as collateral for the related lease.
The Company provides for depreciation over the assets’
estimated useful lives as follows:
Machinery & equipment
|
|
4 years
|
Computer equipment
|
|
3 years
|
Office furniture
|
|
4 years
|
Leasehold improvements
|
|
Lesser of lease life or economic life
|
Capital leases
|
|
Lesser of lease life or economic life
|
Patents
— The Company follows ASC 350-30,
“General Intangibles Other than Goodwill,”
in accounting for its patents. ASC 350-30 provides that costs of
internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate
lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when
incurred. The Company has expensed as research and development expense all costs associated with developing its patents.
Equity Method Investment
— The Company follows
ASC 323,
“Investments-Equity Method and Joint Ventures,”
in accounting for its investment in the joint venture.
In the event the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero,
the Company will discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed
obligations of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint
venture subsequently reports net income, the Company will resume applying the equity method only after its share of that net income
equals the share of net losses not recognized during the period the equity method was suspended.
Deferred Costs
— Consist of the following:
(a) Payments, either in cash or share-based, made in connection
with the sale of debentures which are amortized using the effective interest method over the lives of the related debentures.
These deferred issuance costs are charged to financing costs when and if the related debt instrument is retired or converted early.
The weighted average amortization period for deferred debt issuance costs is 48 months.
(b) Payments made to secure commitments under certain financing
arrangements. These amounts are recognized in financing costs ratably over the period of the financing arrangements, and are recognized
in financing costs immediately if the arrangement is cancelled, forfeited or the utility of the arrangement to the company is otherwise
compromised.
(c) Payments made to financial institutions and consulting firms
in order to provide financing related services. These costs are being amortized over the terms of the related agreements.
Long-Lived Assets
— The Company follows ASC
360-10,
“Property, Plant, and Equipment,”
which established a “primary asset” approach to determine
the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset
to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Through March 31, 2014,
the Company had not experienced impairment losses on its long-lived assets.
Fair Value Measurements
—
The Company applies
the provisions of ASC 820-10,
“Fair Value Measurements and Disclosures.”
ASC 820-10 defines fair value, and
establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for
fair value measures. For certain financial instruments, including cash and cash equivalents, grants receivable, prepaid expenses,
accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. The
carrying amount of senior secured convertible debentures approximates fair value as the interest rate charged on the debentures
is based on the prevailing rate. The three levels of valuation hierarchy are defined as follows:
|
·
|
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
·
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company analyzes all financial instruments with features
of both liabilities and equity under ASC 480,
“Distinguishing Liabilities From Equity,”
and ASC 815,
“Derivatives
and Hedging.”
Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease
in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions
between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.
In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the
Black-Scholes model.
The Company uses Level 2 inputs for its valuation methodology
for certain warrant derivative liabilities. The Company’s derivative liabilities are adjusted to reflect fair value at each
period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value
of derivatives.
The Company uses Level 3 inputs for its valuation methodology
for the fair value of certain embedded conversion options and warrant and option derivative liabilities.
The Company estimates the fair value of the embedded conversion
option associated with its 8% convertible debentures using a binomial lattice, which estimates and compares the present value
of the principal and interest payments to the as converted value to determine whether the holder of the notes should convert the
notes into the Company’s common stock or continue to receive principal and interest payments. The Company uses this methodology
to determine the beneficial conversion features because there are no observable inputs available with respect to the fair value.
The
binomial lattice relies on the following Level 3 inputs: (1) expected volatility of our common stock; (2) potential discount for
illiquidity of large blocks of our common stock, and (3) discount rate for contractual debt principal and interest payments. The
fair value of the embedded beneficial conversion feature is estimated as the difference between the fair value of the notes with
and without the conversion feature. The fair value of the notes without the conversion feature is determined using one Level 3
input, the discount rate for contractual debt interest and principal payments.
|
·
|
The expected volatility of the Company’s common stock is estimated from the historical volatility of daily returns in
the Company’s common stock price. The Company monitors the volatility of its common stock on a quarterly basis to observe
trends that may impact the fair value of the notes.
|
|
·
|
The discount for illiquidity is measured using an average-strike option that calculates the discount as the opportunity cost
for not being able to sell a large block of the Company’s common stock immediately at prevailing observable market prices.
Inputs to the average-strike option model include the expected volatility of the Company’s common stock and time to sell
a large block of the Company’s stock as Level 3 inputs and other observable inputs. The time to sell the stock is estimated
considering the historical daily trading volume of our common stock and market maker estimates of the amount of shares that can
be offered for sale above the normal the daily trading volume without depressing the price of the Company’s common stock.
|
At March 31, 2014, the Company identified
the following assets and liabilities that are required to be presented on the balance sheet at fair value:
Description
|
|
Fair Value
As of
March 31, 2014
|
|
|
Fair Value Measurements at
March 31, 2014
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant and option derivative liabilities
|
|
$
|
373,771
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
373,771
|
|
Embedded conversion option liabilities
|
|
|
287,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
287,000
|
|
Unsettled warrant obligation
|
|
|
4,885,299
|
|
|
|
4,885,299
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
5,546,070
|
|
|
$
|
4,885,299
|
|
|
$
|
–
|
|
|
$
|
660,771
|
|
The following tables reconcile the change
in fair value for measurements categorized within Level 3 of the fair value hierarchy:
|
|
Embedded Conversion Option Liabilities
|
|
Balance at December 31, 2013
|
|
$
|
663,000
|
|
Total (gains) or losses for the period included in earnings
|
|
|
(376,000
|
)
|
Balance at March 31, 2014
|
|
$
|
287,000
|
|
|
|
Warrant and Option Derivative Liabilities
|
|
Balance at December 31, 2013
|
|
$
|
284,799
|
|
Total (gains) or losses for the period included in earnings
|
|
|
88,972
|
|
Balance at March 31, 2014
|
|
$
|
373,771
|
|
Gains and losses included in earnings for
the three months ended March 31, 2014 are reported as follows:
|
|
Adjustment to Fair Value of Derivatives
|
|
Total gain included in earnings
|
|
$
|
376,000
|
|
|
|
Warrant and Option Derivative Liabilities
|
|
Total loss included in earnings
|
|
$
|
88,972
|
|
The following table provides quantitative
information about measurements categorized within Level 3 of the fair value hierarchy:
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
March 31,
|
|
Valuation
|
|
|
|
|
Description
|
|
2014
|
|
Technique
|
|
Unobservable Input
|
|
Value
|
Embedded conversion option liability
|
|
287,000
|
|
Binomial Lattice Model
|
|
Expected volatility of the Company's common stock
|
|
71.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount for illiquidity of large blocks of the Company's common stock
|
|
2.0% to 6.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for contractual debt principal and interest payments
|
|
19.0%
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
March 31,
|
|
Valuation
|
|
|
|
|
Description
|
|
2014
|
|
Technique
|
|
Unobservable Input
|
|
Value
|
Warrant and Option derivative liabilities
|
|
373,771
|
|
Black Scholes Model
|
|
Expected volatility of the Company's common stock
|
|
65% - 95%
|
For the three months ended March 31, 2014
and March 31, 2013 the Company recognized a gain of $287,028 and $166,933, respectively,
for the changes in the valuation of derivative liabilities.
The Company did not identify any non-recurring
assets and liabilities that were recorded at fair value during the periods presented.
Revenue Recognition
and Deferred Revenue
—
The Company’s revenues are primarily generated from license and research agreements with collaborators. Licensing
revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the
patents related to the license.
License fee revenue begins to be recognized in the first full
month following the effective date of the license agreement. Deferred revenue represents the portion of the license and other payments
received that has not been earned. Costs associated with the license revenue are deferred and recognized over the same term as
the revenue. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement
becomes assured, because the reimbursements are subject to approval.
In some cases, the Company is entitled to receive royalty payments
from licensees. In such cases, the Company recognizes the royalties when they are earned and collectability of those royalty payments
is reasonably assured.
In connection with its license agreements, the Company recorded
$39,468 and $87,781 in license fee revenue for the three months ended March 31, 2014 and 2013, respectively, in its consolidated
statements of operations, and the remainder of the license fees have been accrued in deferred revenue at March 31, 2014 and December
31, 2013, respectively.
Research and Development Costs
— Research
and development costs consist of expenditures for the research and development of patents and technology, which cannot be capitalized.
The Company’s research and development costs consist mainly of payroll and payroll related expenses, research supplies and
research grants. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the
reimbursement becomes assured, because the reimbursements are subject to approval. Research and development costs are expensed
as incurred.
Share-Based Compensation
— The Company records
stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” ASC 718 requires companies
to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over
the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees and non-employees. There were 132,556,931 options outstanding
as of March 31, 2014.
Income Taxes
— Deferred income taxes are
provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment.
When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest
and penalties that would be payable to the taxing authorities upon examination.
Applicable interest and penalties associated with unrecognized
tax benefits are classified as additional income taxes in the statements of operations.
Net Loss Per Share
— Earnings per share
is calculated in accordance with the ASC 260-10,
“Earnings Per Share.”
Basic earnings-per-share is based upon
the weighted average number of common shares outstanding. Diluted earnings-per-share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
At March 31, 2014 and 2013, approximately 158,711,504 and 207,503,505
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 are concentrated on a small number of license agreements with customers. Revenues are based on amortizing
funds already received over contractual terms of agreements. Based on the insignificance of these revenues to the Company’s
operations and the nature of the agreements, any concentration of revenue among a small number of customers does not result in
a risk to the Company.
Other risks include the uncertainty of the regulatory environment
and the effect of future regulations on the Company’s business activities. As the Company is a biotechnology research and
development company, there is also the attendant risk that someone could commence legal proceedings over the Company’s discoveries.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(ASU 2013-11). ASU 2013-11 clarifies guidance and
eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for
fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is
not expected to have a material impact on consolidated results of operations, financial condition, or liquidity.
In February 2013, the FASB issued ASU No.
2013-02, Comprehensive Income (Topic 220) –
Reporting of Amounts Reclassified out of Accumulative Other Comprehensive
Income
(ASU 2013-02), which replaces the presentation requirements for reclassifications out of accumulated other comprehensive
income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 requires an entity to provide information about the amounts reclassified out
of accumulated other comprehensive income by component and to present significant amounts reclassified out of accumulated other
comprehensive income by respective line items of net income if the amount reclassified is required to be reclassified to net income
in its entirety. The adoption of this standard is not expected to have a material impact on consolidated results of operations,
financial condition, or liquidity.
4. INVESTMENT IN JOINT VENTURE
On December 1, 2008, the Company and CHA Bio & Diostech
Co., Ltd. (“CHA”), formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International,
Inc. (“SCRMI”), will develop human blood cells and other clinical therapies based on the Company’s hemangioblast
program, one of the Company’s core technologies. Under the terms of the agreement, the Company purchased upfront a 33% interest
in the joint venture, and will receive another 7% interest upon fulfilling certain obligations under the agreement over a period
of 3 years. The Company’s contribution includes (a) the uninterrupted use of a portion of its leased facility at the Company’s
expense, (b) the uninterrupted use of certain equipment in the leased facility, and (c) the release of certain of the Company’s
research and science personnel to be employed by the joint venture. In return, for a 60% interest, CHA has agreed to contribute
$150,000 cash and to fund all operational costs in order to conduct the hemangioblast program. Effective May 1, 2010, the Company
was no longer obligated to provide laboratory space to SCRMI. As of March 31, 2014, the Company holds a 40% interest in the joint
venture and CHA owns a 60% interest. The two partners to the joint venture are in negotiations on further funding of the joint
venture, but there can be no assurances that an agreement will be reached. Any financial statement impact at this time is unclear
should an agreement not be reached.
The Company has agreed to collaborate with the joint venture
in securing grants to further research and development of its technology. Additionally, SCRMI has agreed to pay the Company a fee
of $500,000 for an exclusive, worldwide license to the Hemangioblast Program. The Company recorded $7,353 and $7,353 in license
fee revenue for the three months ended March 31, 2014 and 2013, respectively, in its accompanying consolidated statements of operations,
and the balance of unamortized license fee of $344,363 and $351,715 is included in deferred revenue in the accompanying consolidated
balance sheets at March 31, 2014 and December 31, 2013, respectively.
On July 15, 2011, the Company and
CHA entered into a binding term sheet, with the expectation of entering into a future definitive agreement, in which the joint
venture was realigned around both product development rights and research responsibilities. Under the terms of the binding term
sheet, SCRMI exclusively licensed the rights to the Hemangioblast Program to the Company for United States and Canada and expanded
the jurisdictional scope of the license to CHA to include Japan (in addition to South Korea, which was already exclusively licensed
to CHA). As part of the agreement, the scientists at SCRMI involved in the Hemangioblast Program were transferred to the Company,
and SCRMI discontinued its research activity and became solely a licensing entity. The Company is obligated to meet a minimal research
spending requirement of $6.75 million by July 31, 2014 in order to maintain its exclusive license, up to the point of filing an
investigational new drug for a therapeutic product. Intellectual property rights created by the Company in the course of our research
are subject to a non-exclusive license to CHA for Japan and South Korea, and to SCRMI to be sub-licensable under certain circumstances
for countries other than the United States, Canada, Japan and South Korea. Pursuant to the agreement, the Company paid $820,000
to SCRMI which is recorded to “losses attributable to equity method investments.” By filing the investigational new
animal drug application on September 12, 2013 with the Federal Drug Administration, the Company has met the commitment required
to maintain its exclusive license.
The following table is a summary of key financial data for the
joint venture as of and for the three months ended March 31, 2014 and 2013:
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Current assets
|
|
$
|
279,824
|
|
|
$
|
213,375
|
|
Noncurrent assets
|
|
|
1,315,625
|
|
|
|
1,263,514
|
|
Current liabilities
|
|
|
313,042
|
|
|
|
310,267
|
|
Noncurrent liabilities
|
|
|
1,802,524
|
|
|
|
2,094,639
|
|
Net revenue
|
|
|
73,029
|
|
|
|
73,029
|
|
Net income
|
|
|
46,882
|
|
|
|
35,564
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following at March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Machinery & equipment(1)
|
|
$
|
1,125,321
|
|
|
$
|
1,086,800
|
|
Computer equipment
|
|
|
58,963
|
|
|
|
49,707
|
|
Office furniture
|
|
|
49,560
|
|
|
|
38,783
|
|
Leasehold improvements(1)
|
|
|
592,817
|
|
|
|
559,969
|
|
|
|
|
1,826,661
|
|
|
|
1,735,259
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(1,012,643
|
)
|
|
|
(981,683
|
)
|
Property and equipment, net
|
|
$
|
814,018
|
|
|
$
|
753,576
|
|
|
(1)
|
The 2014 balances include approximately $141,733 in machinery & equipment and $354,308 in leasehold improvements that were
not yet placed in service at March 31, 2014 and therefore had not started being depreciated as of that date.
|
Depreciation expense for the three months
ended March 31, 2014 and 2013 amounted to $30,960 and $17,852, respectively.
6. ACCRUED SETTLEMENT
The accrued settlement is comprised of the following at March
31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
SEC Civil Action
|
|
$
|
3,405,515
|
|
|
$
|
4,086,619
|
|
SEC Section 16 Investigation
|
|
|
375,000
|
|
|
|
–
|
|
Total
|
|
$
|
3,780,515
|
|
|
$
|
4,086,619
|
|
SEC Civil Action
In May 2012, the Company was named as a defendant
in a civil action brought by the Securities and Exchange Commission related to transactions involving the sale and issuance of
the Company’s securities. The Securities and Exchange Commission alleges that Company violated Section 5(a) and 5(c) of the
Securities Act of 1933 because certain sales of shares to outside organizations, completed in late 2008 and early 2009 under the
Company’s former management, resulted in $3.5 million in proceeds to the Company, were neither registered under the Securities
act nor subject to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. In addition,
the Company is alleged to have violated Section 13(a) of the Exchange Act of 1934 because the Company did not disclose the sale
and issuance of the shares to the Securities and Exchange Commission on a timely basis.
In December 2013, the Company settled the
civil action. Under the terms of the settlement accepted by the SEC, the Company consented to entry of judgment under which it
neither admits nor denies liability and has agreed to disgorgement of $3.5 million in proceeds from the transactions in question.
In addition, the Company will pay approximately $587,000 in pre-judgment interest. The total amount due, approximately $4.1 million,
will be paid over six equal quarterly installments. The first installment was placed into escrow in July 2013 and was applied immediately
to the aggregate amount due. The next installment was due and paid in late April 2014. In addition, the settlement permanently
restrains and enjoins the Company from violations of Sections 5(a) and 5(c) of the Securities Act, Section 13(a) of the Exchange
Act and Rule 13a-11 under the Exchange Act.
SEC Section 16 Investigation
The Company was advised that the SEC was investigating
transactions involving sales of shares of our common stock that the former Chief Executive Officer failed to report in a timely
manner on Form 4 under Section 16 of the Exchange Act. The Company has discussed a resolution to the matter with the
SEC and has recorded the $375,000 as the expected settlement amount.
7. CONVERTIBLE PROMISSORY NOTES
Senior Secured Convertible Debentures
The Debentures issued to the CAMOFI Parties pursuant to the
Settlement Agreement have an effective date of December 31, 2012, accrue interest at the rate of 8% per annum and mature on June
30, 2015. The Company may pre-pay all or a portion of the amounts due under the Debentures prior to maturity without penalty. Both
of the Debentures are convertible at the option of the holder at a price per share of common stock equal to 80% of VWAP of the
ten consecutive trading days prior to the conversion date. The Company must make quarterly payments under the Debentures on the
last day of each calendar quarter commencing on March 31, 2013 in the amount of $600,000. The quarterly payments may, at the option
of the Company and subject to the satisfaction of certain conditions, be paid in shares of Common Stock. In such case, the conversion
price for such payment will be based on the lesser of (i) the conversion price as defined in the agreement or (ii) 80% of the average
of the 10 closing prices immediately prior to the date the quarterly payment is due. To secure its obligations under the Debentures,
the Company granted a security interest in substantially all of the Company’s assets, including its intellectual property,
to the CAMOFI Parties. The Debentures contain certain covenants customary for debt instruments of its kind.
The Company received conversion notices during the period from
January 1, 2014 through March 31, 2014 for $2,400,000. The Company issued 43,373,609 shares of its common stock for these conversion
notices.
As of March 31, 2014, the remaining outstanding redemption dates
and amounts are as follows:
Redemption
|
|
|
|
|
Date
|
|
|
Amount
|
|
|
6/30/2014
|
|
|
|
600,000
|
|
|
9/30/2014
|
|
|
|
600,000
|
|
|
|
|
|
$
|
1,200,000
|
|
The Company determined that the Debentures contained an embedded
beneficial conversion feature as the Debentures are convertible at a price per share of common stock equal to 80% of VWAP of the
ten consecutive trading days prior to the conversion date. The embedded beneficial conversion feature was modeled using a binomial
lattice model, and the calculated value at March 31, 2014 and December 31, 2013 was $287,000 and $663,000, respectively. The Company
recorded a gain of $376,000 for the change in the fair value of the embedded conversion option liability for the three months ended
March 31, 2014.
At March 31, 2014, the Debentures could be converted into 18,324,690
shares of common stock based on a conversion price of $0.0655.
The Company recorded a debt discount of $725,000, which will
be amortized over the life of the note using the effective interest rate of 22.9%. For the three months ended March 31, 2014, the
Company amortized $154,648 of the debt discount and recorded it as interest expense. The unamortized discount at March 31, 2014
and December 31, 2013 was $108,229 and $262,877, respectively. The Company recorded interest expense of $51,440 for the three months
ended March 31, 2014 based on the contractual interest rate.
8. LOSS CONTINGENCY ACCRUAL
The loss contingency accrual is comprised of the following at
March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Warrant holder litigation
|
|
$
|
8,130,159
|
|
|
$
|
6,228,621
|
|
Miscellaneous settlements
|
|
|
254,084
|
|
|
|
203,358
|
|
Total
|
|
$
|
8,384,243
|
|
|
$
|
6,431,979
|
|
Warrant holder litigation
In connection with the unsettled warrant obligation
(see Note 9), the holder has filed numerous lawsuits and in 2011 made a claim for approximately $28 million. In evaluating the
need for a loss contingency accrual relating to the associated litigation, the Company determined that a loss was probable and
the amount of loss was reasonably estimable, based on the facts and circumstances surrounding the litigation during the last quarter
of 2013. The loss contingency represents the estimated number of shares to settle above a determined share amount necessary to
settle the warrant share obligation plus an additional amount for potential interest charges.
While the Company believes it has meritorious
defenses against the litigation, the ultimate resolution of the matter could result in a loss of up to approximately $25 million
in excess of the amount currently accrued.
Miscellaneous settlements
The Company was not able to reach settlement
agreements with all of holders of convertible promissory notes and warrants that were issued between 2005 and 2010. The Company
has not been contacted by the remaining holders nor has it been able to reach them for potential settlement discussions. The holders
in question held warrants, which expire in June 2014. If the Company is able to negotiate with the holders it anticipates that
the number of shares to be issued will be similar to the settlements that have already been finalized as of December 31, 2012.
9.
Unsettled Warrant
obligation
The Company determined that it has an unsettled
warrant obligation related to two warrant agreements entered into in 2005. The warrant agreement had anti-dilution ratchet provisions
which the Company determined led to a contractual obligation, which became fixed on January 15, 2009, to issue approximately 63.2
million common shares. The Company further determined that those common shares represent a liability which should be recorded at
fair value at each accounting period with changes to that fair value being recorded in earnings. Fair value is based on the share
obligation multiplied by the stock price at the end of each reporting period, with a liability “floor” established,
at $0.06 per share, based on the stock price at the time the ratchet provision was triggered. At March 31, 2014 and December 31,
2013 the liability has been recorded at $4,885,299 and $3,899,391, respectively. The Company recorded an expense of $985,908 for
the three months ended March 31, 2014 due to the change in the fair value of the liability.
10. SERIES B PREFERRED STOCK
On November 2, 2009 (“Effective Date”),
the Company entered into a preferred stock purchase agreement with Optimus Life Sciences Capital Partners, LLC (“Investor”
or “Optimus”). Pursuant to the purchase agreement, the Company agreed to sell, and the Investor agreed to purchase,
in one or more purchases from time to time at the Company’s sole discretion, (i) up to 1,000 shares of Series B preferred
stock at a purchase price of $10,000 per share, for an aggregate purchase price of up to $10,000,000, and (ii) five-year warrants
to purchase shares of the Company’s common stock with an aggregate exercise price equal to 135% of the purchase price paid
by the Investor, at an exercise price per share as follows:
On the sixth (6th) Trading Day following the Tranche Notice
Date, the Exercise Price of the Optimus Warrant shall be adjusted to equal the VWAP for the 5 trading days beginning on and including
the Tranche Notice Date (as so adjusted, the “Adjusted Exercise Price”); and
If the Adjusted Exercise Price results in additional Warrant
Shares being issuable to the Holder, such additional shares shall be delivered to the Holder within one Trading Day following the
Adjustment Date. If the Adjusted Exercise Price results in less Warrant Shares being issuable to the Holder, the excess Warrant
Shares shall be returned by the Holder to the Company within one Trading Day following on the Adjustment Date.
The Company agreed to pay to the Investor
a commitment fee of $500,000, at the earlier of the closing of the first Tranche or the six month anniversary of the effective
date, payable at the Company’s election in cash or common stock valued at 90% of the volume weighted average price of the
Company’s common stock on the five trading days preceding the payment date. The $500,000 commitment fee was outstanding and
was recorded in accrued expenses in the Company’s consolidated balance sheet at December 31, 2009. During 2010, the Company
issued 50 shares of preferred stock as payment for the commitment fee.
During 2010, the Company delivered tranche
notices to Optimus Life Sciences Capital Partners, LLC for delivery of a total of 1,000 shares under the Series B preferred stock
for funding in the amount of $10,000,000 ($9,485,000 in cash proceeds, $500,000 of commitment fee applied, and $15,000 in legal
fees).
During 2010, in connection with the funding,
the Company issued 95,870,362 shares of its common stock upon exercise of the same number of warrants, which were granted simultaneously
with the Company’s tranche notices. During 2010, the Company received secured promissory notes in the amount of $13,500,000
to settle the warrant exercise.
Dividends
Commencing on the date of the issuance of
any shares of Series B preferred stock, Holders of Series B preferred stock will be entitled to receive dividends on each outstanding
share of Series B preferred stock, which will accrue in shares of Series B preferred stock at a rate equal to 10% per annum from
the issuance date compounded annually. Accrued dividends will be payable upon redemption of the Series B preferred stock. Accrued
dividends were $3,921,881 and $3,587,748 at March 31, 2014 and December 31, 2013, respectively.
Redemption Rights
Upon or after the fourth anniversary of the
initial issuance date, the Company will have the right, at the Company’s option, to redeem all or a portion of the shares
of the Series B preferred stock, at a price per share equal to 100% of the Series B liquidation value. The preferred stock may
be redeemed at the Company’s option, commencing 4 years from the issuance date at a price per share of (a) $10,000 per share
plus accrued but unpaid dividends (the “Series B Liquidation Value”), or, at a price per share of: (x) 127% of the
Series B Liquidation Value if redeemed on or after the first anniversary but prior to the second anniversary of the initial issuance
date, (y) 118% of the Series B Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary
of the initial issuance date, and (z) 109% of the Series B Liquidation Value if redeemed on or after the third anniversary but
prior to the fourth anniversary of the initial issuance date.
Liquidation Rights
The preferred shares shall, with respect to
dividend, rights upon liquidation, winding-up or dissolution, rank: (i) senior to the Company’s common stock, and any other
class or series of preferred stock of the Company, except Series A-1 Convertible Preferred Stock which shall rank senior in right
of liquidation and pari passu with respect to dividends; and (ii) junior to all existing and future indebtedness of the Company.
If the Company determines to liquidate, dissolve
or wind-up its business, it must redeem the Series B preferred stock at the prices set forth above. Upon any liquidation, dissolution
or winding up of the Company the Holders of Series B preferred stock shall be first entitled to be paid out of the assets of the
Company available for distribution to its stockholders an amount with respect to each share of Series B preferred stock equal to
$10,000, plus any accrued and unpaid dividends.
The Company has classified the Series B redeemable
preferred stock in the equity section in its consolidated balance sheets.
Related Secured Promissory Notes Receivable:
In accordance with the terms of the Series
B preferred stock agreement, Optimus issued to the Company a secured promissory note in consideration for receiving warrants under
each tranche. The value of each secured promissory note equals the value of the warrants that Optimus received. Interest on the
notes accrues at 2% per year, compounding annually if the interest remains unpaid at the end of each year. The note is secured
by freely tradable marketable securities belonging to Optimus. Each promissory note matures on the fourth anniversary of its issuance.
In the event the Company redeems all or a
portion of any shares of Series B preferred stock held by Optimus, the Company will be permitted to offset the full amount of such
proceeds against amounts outstanding under the promissory notes. Accordingly, the Company included the discounted value of the
secured promissory notes as a separate component of stockholders’ deficit at March 31, 2014 and December 31, 2013.
The value of the secured promissory notes
in the consolidated balance sheet was $13,819,771, net of discounts of $462,338 and accrued interest of $782,112 at March 31, 2014,
reflecting a face value of $13,500,000. The value of the secured promissory notes in the consolidated balance sheet was $13,561,607,
net of discounts of $654,559 and accrued interest of $716,166 at December 31, 2013, also reflecting a face value of $13,500,000.
The Company determined that a 10% discount is appropriate, in order to consistently reflect the Company’s cost of borrowing
under the terms of the underlying Series B preferred stock that permits offset. The Company recorded an initial discount on the
promissory notes in the amount of $3,519,238 during the year ended December 31, 2010. The Company accretes interest at 10% over
the respective four-year terms of the promissory notes.
During the three months ended March 31, 2014
and March 31, 2013 the Company accreted interest on the promissory notes in the amount of $258,164 and $289,942, respectively,
which was recorded in accumulated deficit during the period then ended. The Company recorded dividends on its Series B preferred
stock during the three months ended March 31, 2014 and March 31, 2013 of $334,133 and $290,401, respectively. The accrued dividends
are offset by the accretion of the note receivable discount.
As of March 31, 2014 and December 31, 2013,
1,000 shares of Series B preferred stock were outstanding. As of March 31, 2014, the Company has drawn the entire commitment of
$10,000,000.
Below is a table showing the net settlement
amount at March 31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Face Value of Preferred Stock
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Accrued Dividends
|
|
$
|
3,921,881
|
|
|
$
|
3,587,748
|
|
Redemption factor
|
|
|
100%
|
|
|
|
109%
|
|
Conversion price
|
|
$
|
13,921,881
|
|
|
$
|
14,810,645
|
|
Receivable
|
|
$
|
14,282,109
|
|
|
$
|
14,216,166
|
|
Net settlement (receivable) upon conversion
|
|
$
|
(360,228
|
)
|
|
$
|
594,479
|
|
11. SERIES C PREFERRED STOCK
On December 30, 2010 (the “Series C Effective Date”),
the Company entered into a securities purchase agreement (the “Series C Purchase Agreement”) with Socius CG II, Ltd.,
a Bermuda exempted company (“Socius”). Pursuant to the Series C Purchase Agreement:
|
·
|
The Company agreed to sell, and Socius agreed to purchase, in one or more purchases from time to time (each such purchase, a “Series C Tranche”) in the Company’s sole discretion (subject to the conditions set forth therein), (i) up to 2,500 shares of Series C preferred stock at a purchase price of $10,000 per share, for an aggregate purchase price of up to $25,000,000, and (ii) a two-year warrant (the “Socius Warrant”) obligating Socius to purchase shares of the Company’s common stock with an aggregate exercise price equal to 20% of the purchase price paid by Socius for the Series C preferred stock sold in each Series C Tranche, at an exercise price per share equal to the closing bid price of the Company’s common stock on the date the Company provides notice of such Series C Tranche (the “Series C Tranche Notice”). On each date that the Company delivers a Series C Tranche Notice to Socius, Socius shall also become obligated, pursuant to a right automatically vesting on such Series C Tranche Notice date, to purchase that number of shares of common stock (such shares of common stock, the “Additional Investment Shares”) equal in dollar amount to 100% of the Series C Tranche amount set forth in the Series C Tranche Notice at a price per share equal to the closing bid price of the Company’s common stock on the Series C Tranche Notice date.
|
|
·
|
The Series C Purchase Agreement requires that, when the Company requests Socius to purchase a tranche of Series C preferred stock, the mandatory purchase by Socius of the related Additional Investment Shares must occur no later than sixty (60) calendar days following the Series C Tranche Notice date.
|
|
·
|
The Socius Warrant was issued to Socius on December 30, 2010 (the “Closing Date”) simultaneous with entering into the Series C Purchase Agreement. The Socius Warrant was issued with an initial exercise price per warrant of $0.16 per share and for a total of up to 31,250,000 shares, subject to adjustment as described therein. On January 10, 2011, Socius and the Company entered into a letter agreement in which the parties agreed that, following arms-length negotiations and notwithstanding anything to the contrary in the Socius Warrant, that the initial number of shares issuable under the Socius Warrant, subject to the adjustment mechanism set forth therein, was equal to 30,000,000.
|
|
·
|
As required by the Series C Purchase Agreement, the Socius Warrant must be exercised for such number of shares of common stock equal in amount to 20% of the cumulative purchase price paid by Socius for the Series C preferred stock. The maximum amount of Series C preferred stock that Socius may become obligated to purchase under all Series C Tranches is $25,000,000. Assuming the maximum drawdown of $25,000,000 by the Company under the Series C Purchase Agreement, Socius would be required to exercise the Socius Warrant to purchase 20% of this total dollar amount, or $5,000,000 worth of the Company’s common stock.
|
|
·
|
The letter agreement entered into on January 10, 2011, modified the Socius Warrant only with respect to the initial number of underlying shares and expressly provides that, except as so modified, the Socius Warrant shall remain unchanged and shall continue in full force and effect.
|
|
·
|
At the initial closing pursuant to the Series C Purchase Agreement, which occurred on the
Closing Date, (i) Socius purchased 400 shares of Series C preferred stock and the Company received gross proceeds of
$4,000,000. (ii) the Company delivered to Socius an initial warrant (the “Initial Warrant”) obligating Socius to
purchase shares of its common stock with an aggregate purchase price of $800,000, which shall be automatically exercisable on
the date a registration statement for the resale of all shares of common stock issuable pursuant to the Series C Purchase
Agreement is declared effective (which effectiveness occurred on April 13, 2011), with delivery of such shares made to Socius
on the trading day immediately following the exercise date at a per-share price equal to the closing bid price of the
Company’s common stock on the delivery date, and (iii) Socius became obligated to purchase additional shares of common
stock equal in aggregate dollar amount to $4,000,000 (such shares of common stock the “Initial Investment
Shares”), with delivery of such shares made to Socius on the trading day immediately following the date the
registration statement is declared effective at a price per share equal to the closing bid price of the Company’s
common stock on the delivery date.
|
|
·
|
The Company agreed to pay to Socius a commitment fee of $1,250,000 (the “Commitment
Fee”), at the earlier of the closing of the first Series C Tranche or the six month anniversary of the Series C
Effective Date. This Commitment Fee is payable solely at the Company’s election, in cash or in the alternative, in
shares of common stock valued at 88% of the volume weighted average price of the Company’s common stock on the 5
trading days preceding the payment date. If the Company elects to pay the Commitment Fee in shares of its common stock, no
cash payment would be due as the issuance of shares would satisfy the Commitment Fee obligation in full. The Company issued
7,562,008 shares of its common stock on September 30, 2011 as full payment of the commitment fee.
|
|
·
|
The Company agreed to use its best efforts to file within 60 days of the Series C Effective Date, and cause to become effective as soon as possible thereafter, a registration statement with the Securities and Exchange Commission for the resale of all shares of common stock issuable pursuant to the Series C Purchase Agreement, including the shares of common stock underlying the Socius Warrant, shares of the common stock issuable upon exercise of the Initial Warrant, shares of common stock issuable as Initial Investment Shares, shares of common stock issuable as Additional Investment Shares, and shares of common stock issuable in payment of the Commitment Fee.
|
|
·
|
In the event that Socius does not comply with its obligations under the Series C Purchase Agreement (including its obligations to exercise the Socius Warrant), the Series C Purchase Agreement provides that, in addition to being entitled to exercise all rights provided therein or granted by law, the Company would be entitled to seek specific performance by Socius under the Series C Purchase Agreement and the Socius Warrant.
|
On December 30, 2010, in accordance with the Series C Purchase
Agreement, the Company filed a certificate of designations for the Series C preferred stock with the Secretary of State of the
State of Delaware. As previously reported, pursuant to the certificate of designations, the Series C preferred stock shall, with
respect to dividend, rights upon liquidation, winding-up or dissolution, rank: (i) senior to the Company’s common stock,
and any other class or series of preferred stock of the Company (collectively, with any warrants, rights, calls or options exercisable
for or convertible into such preferred stock, the “Junior Securities”); provided, however, the Series A-1 redeemable
convertible preferred stock and Series B preferred stock (together, the “Senior Securities”) shall rank senior in right
of redemption, liquidation, and dividends; and (ii) junior to all existing and future indebtedness of the Company.
As of March 31, 2014 and December 31, 2013, the Company has
drawn $17,500,000 of the $25,000,000 commitment, respectively.
Dividends
Commencing on the date of the issuance of any shares of Series
C preferred stock, holders of Series C preferred stock will be entitled to receive dividends on each outstanding share of Series
C preferred stock, which will accrue in shares of Series C preferred stock at a rate equal to 6% per annum from the issuance date
compounded annually. Accrued dividends will be payable upon redemption of the Series C preferred stock. Accrued dividends were
$2,744,524 and $2,454,853 at March 31, 2014 and December 31, 2013, respectively.
Redemption Rights
Upon or after the fourth anniversary of the initial issuance
date, the Company will have the right, at the Company’s option, to redeem all or a portion of the shares of the Series C
preferred stock, at a price per share equal to 100% of the Series C liquidation value. The Series C preferred stock may be redeemed
at the Company’s option, commencing 4 years from the issuance date at a price per share of (a) $10,000 per share plus accrued
but unpaid dividends (the “Series C Liquidation Value”), or, at a price per share of : (i) 136% of the Series C Liquidation
Value if redeemed prior to the first anniversary of the initial issuance date, (ii) 127% of the Series C Liquidation Value if redeemed
on or after the first anniversary but prior to the second anniversary of the initial issuance date, (iii) 118% of the Series C
Liquidation Value if redeemed on or after the second anniversary but prior to the third anniversary of the initial issuance date,
and (iv) 109% of the Series C Liquidation Value if redeemed on or after the third anniversary but prior to the fourth anniversary
of the initial issuance date.
Termination and Liquidation Rights
If the Company determines to liquidate, dissolve or wind-up
its business, it must redeem the Series C preferred stock at the prices set forth above. Upon any liquidation, dissolution or winding
up of the Company, the holders of Series C preferred stock shall be first entitled to be paid out of the assets of the Company
available for distribution to its stockholders an amount with respect to each share of Series C preferred stock equal to $10,000,
plus any accrued and unpaid dividends.
Related Secured Promissory Notes Receivable:
As of March 31, 2014, Socius has issued $21,000,000 in notes
receivable in accordance with the terms of the Series C Purchase Agreement.
Interest on the notes accrues at 2% per year, compounding annually
if the interest remains unpaid at the end of each year. The notes are secured by freely tradable marketable securities belonging
to Socius. Each promissory note matures on the fourth anniversary of its issuance.
In the event the Company redeems all or a portion of any shares
of Series C preferred stock held by Socius, the Company will be permitted to offset the full amount of such proceeds against amounts
outstanding under the promissory notes. Accordingly, the Company included the discounted value of the secured promissory notes
as a separate component of stockholders’ deficit at March 31, 2014 and December 31, 2013.
At March 31, 2014, the value of the secured promissory notes
in the consolidated balance sheet was $20,745,715, net of discounts of $1,167,811 and accrued interest of $913,524, reflecting
a face value of $21,000,000.
At December 31, 2013, the value of the secured promissory notes
in the consolidated balance sheet was $20,451,788, net of discounts of $1,363,762 and accrued interest of $815,549, reflecting
a face value of $21,000,000.
The Company determined that a 6% discount is appropriate, in
order to consistently reflect the Company’s cost of borrowing under the terms of the underlying Series C preferred stock
that permits offset. The Company recorded an initial discount on the promissory notes in the amount of $1,968,050 during the year
ended December 31, 2011 and an additional $1,026,809 of debt discounts during the year ended December 31, 2012 related to the fifth,
sixth and seventh tranche notice. The Company accretes interest at 6% over the respective four-year terms of the promissory notes.
During the three months ended March 31, 2014 and March 31, 2013,
the Company accreted interest on the promissory note in the amount of $293,927 and $277,290, respectively, which was recorded in
accumulated deficit during the periods then ended. The Company recorded dividends on its Series C preferred stock during the three
months ended March 31, 2014 and March 31, 2013 of $289,671 and $273,274, respectively. The accrued dividends are offset by the
accretion of the note receivable discount.
The Company has classified the Series C preferred stock in the
equity section in its consolidated balance sheets. As of March 31, 2014 and December 31, 2013, 1,750 shares of Series C preferred
stock were outstanding.
Below is a table showing the net settlement amount at March
31, 2014 and December 31, 2013:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Face Value of Preferred Stock
|
|
$
|
17,500,000
|
|
|
$
|
17,500,000
|
|
Accrued Dividends
|
|
$
|
2,744,524
|
|
|
$
|
2,454,853
|
|
Redemption factor
|
|
|
109
|
%
|
|
|
109
|
%
|
Conversion price
|
|
$
|
22,066,531
|
|
|
$
|
21,750,790
|
|
Receivable
|
|
$
|
21,913,526
|
|
|
$
|
21,815,550
|
|
Net settlement (receivable) upon conversion
|
|
$
|
153,005
|
|
|
$
|
(64,760
|
)
|
12. WARRANT SUMMARY
Warrant Activity
A summary of warrant activity for the three months ended March
31, 2014 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
|
|
|
Warrants
|
|
|
|
Price $
|
|
|
|
Life (in years)
|
|
|
|
(000)$
|
|
|
Outstanding, December 31, 2013
|
|
|
|
7,829,883
|
|
|
|
0.28
|
|
|
|
1.82
|
|
|
|
–
|
|
|
Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2014
|
|
|
|
7,829,883
|
|
|
|
0.28
|
|
|
|
1.58
|
|
|
|
|
|
|
Exercisable, March 31, 2014
|
|
|
|
7,829,883
|
|
|
|
0.28
|
|
|
|
1.58
|
|
|
|
–
|
|
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, 2014:
|
|
|
|
|
Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Exercise
|
|
|
|
Number
|
|
|
|
Remaining
|
|
|
|
Exercise
|
|
|
Price $
|
|
|
|
of Shares
|
|
|
|
Life (Years)
|
|
|
|
Price $
|
|
|
.10 - .11
|
|
|
|
3,239,247
|
|
|
|
0.68
|
|
|
|
0.10
|
|
|
.20 - .30
|
|
|
|
1,630,000
|
|
|
|
1.75
|
|
|
|
0.25
|
|
|
.38-.39
|
|
|
|
1,330,636
|
|
|
|
3.32
|
|
|
|
0.39
|
|
|
.40-.45
|
|
|
|
815,000
|
|
|
|
1.75
|
|
|
|
0.45
|
|
|
0.70
|
|
|
|
815,000
|
|
|
|
1.75
|
|
|
|
0.70
|
|
|
|
|
|
|
7,829,883
|
|
|
|
|
|
|
|
|
|
13. STOCKHOLDERS’ DEFICIT TRANSACTIONS
From January 2, 2014 to March 31, 2014, Lincoln Park purchased
114,287,000 shares of common stock for cash proceeds of $7,706,756.
From January 27, 2014 to March 14, 2014, the Company issued
an aggregate of 43,373,609 shares in settlement of $2,400,000 Debentures to the CAMOFI Parties as required by the Settlement Agreement.
On March 31, 2014, the Company issued various board members
1,222,687 shares of common stock valued at $92,475 as compensation for board services.
14. STOCK-BASED COMPENSATION
Stock Plans
|
|
|
|
|
|
|
|
Options/Shares
|
|
|
|
|
|
|
Options/Shares
|
|
|
Options
|
|
|
Available
|
|
|
|
|
Stock Plan
|
|
Issued
|
|
|
Outstanding
|
|
|
For Grant
|
|
|
Total Authorized
|
|
2004 Stock Plan
|
|
|
2,492,000
|
|
|
|
70,000
|
|
|
|
1,215,104
|
|
|
|
2,800,000
|
|
2004 Stock Plan II
|
|
|
1,301,161
|
|
|
|
1,071,161
|
|
|
|
–
|
|
|
|
1,301,161
|
|
2005 Stock Plan
|
|
|
164,326,391
|
|
|
|
131,415,770
|
|
|
|
417,512,392
|
|
|
|
581,838,783
|
|
|
|
|
168,119,552
|
|
|
|
132,556,931
|
|
|
|
418,727,496
|
|
|
|
585,939,944
|
|
Stock Option Activity
A summary of option activity for the three months ended March
31, 2014 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (in years)
|
|
|
Value
|
|
Outstanding, December 31, 2013
|
|
|
118,278,611
|
|
|
$
|
0.19
|
|
|
|
6.95
|
|
|
$
|
10,319
|
|
Granted
|
|
|
15,750,000
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited/canceled
|
|
|
(1,471,680
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2014
|
|
|
132,556,931
|
|
|
|
0.18
|
|
|
|
7.08
|
|
|
|
50,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at March 31, 2014
|
|
|
129,256,746
|
|
|
$
|
0.18
|
|
|
|
7.01
|
|
|
$
|
50,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2014
|
|
|
107,170,890
|
|
|
$
|
0.20
|
|
|
|
6.49
|
|
|
$
|
50,411
|
|
The aggregate intrinsic value in the table above is before applicable
income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s
common stock as of the reporting date.
The following table summarizes information about stock options
outstanding and exercisable at March 31, 2014.
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Remaining
|
|
Number
|
|
Exercise
|
|
Remaining
|
|
Price
|
|
of Shares
|
|
Price
|
|
Life (Years)
|
|
of Shares
|
|
Price
|
|
Life (Years)
|
$
|
0.05 - 0.079
|
|
22,980,714
|
$
|
0.07
|
|
9.30
|
|
11,772,381
|
$
|
0.07
|
|
9.28
|
|
0.08 - 0.09
|
|
40,010,878
|
|
0.09
|
|
7.16
|
|
25,833,170
|
|
0.09
|
|
5.75
|
|
0.10 - 0.157
|
|
26,710,496
|
|
0.14
|
|
7.35
|
|
26,710,496
|
|
0.14
|
|
7.35
|
|
0.185 - 0.21
|
|
25,760,833
|
|
0.19
|
|
6.48
|
|
25,760,833
|
|
0.19
|
|
6.48
|
|
0.25 - 0.45
|
|
11,071,161
|
|
0.36
|
|
6.56
|
|
11,071,161
|
|
0.36
|
|
6.56
|
|
0.85
|
|
5,417,849
|
|
0.85
|
|
0.15
|
|
5,417,849
|
|
0.85
|
|
0.15
|
$
|
1.35 - 2.48
|
|
605,000
|
$
|
2.02
|
|
1.63
|
|
605,000
|
$
|
2.02
|
|
1.63
|
|
|
|
132,556,931
|
|
|
|
|
|
107,170,890
|
|
|
|
|
The assumptions used in calculating the fair value of options
granted using the Black-Scholes option- pricing model for options granted during the three months ended March 31, 2014 are as follows:
|
|
March 31,
|
|
March 31,
|
|
|
2014
|
|
2013
|
Risk-free interest rate
|
|
1.72 – 2.09%
|
|
0.76 - 0.78%
|
Expected life of the options
|
|
5.00 - 6.25 years
|
|
5.00 - 6.26 years
|
Expected volatility
|
|
112 - 148%
|
|
160%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected forfeitures
|
|
13%
|
|
13%
|
The weighted average grant-date fair value
for the options granted during the three months ended March 31, 2014 and 2013 was $0.0854 and $0.08, respectively.
Stock-based compensation expense to employees
for the three months ended March 31, 2014 and 2013 was $346,595 and $1,132,625, respectively.
The compensation expense related to the
unvested options as of March 31, 2014, was $1,771,262 which will be recognized over the weighted average period of 2.89 years.
15. SUBSEQUENT EVENTS
Lincoln Park
On various dates from April 1, 2014 through April 30, 2014,
the Company received $3,252,482 from the issuance of 53,632,639 shares to Lincoln Park under the purchase agreement.
Camofi/Camhzn Debt
On April 15, 2014, the Company received a notice from
CAMOFI of an Event of Default under Amortizing Senior Secured Convertible Notes, or Notes, due June 30, 2015 held by CAMOFI.
The notice alerted the Company that due to the Company’s failure to deliver shares of common stock issuable to the
Holders within three days of a conversion event occurring in March 2014 under the Notes, an “Event of Default”
under the Notes had occurred and the Holders were reserving all rights held by them arising from such Event of Default. Among
these rights are the Holders’ ability to declare as immediately due and payable the aggregate principal amount
remaining under the Notes together with any other amounts owed under the Notes.
On April 29, 2014 CAMOFI notified the Company that it was accelerating
the debt per its rights described above. On May 2, 2014 the Company paid the outstanding principal balance of the CAMOFI Notes
of $1,200,000 and additional amounts due under the Mandatory Default Amount clause in the debenture agreement with CAMOFI, for
a total payment of approximately $1,616,000.
SEC Section 16 Investigation Settlement
On May 2, 2014, the Company finalized a
settlement with the SEC relating to the investigation of transactions involving sales of shares of our common stock that the
former Chief Executive Officer failed to report in a timely manner on Form 4 under Section 16 of the Exchange Act. The
Company has agreed to pay civil penalties of $375,000 by no later than July 15, 2015 and comply with certain other
undertakings relating to review of its policies and procedures relating to Section 16 compliance.