Advanced Cell Technology (ACTC) filed their annual 10-K report on Wednesday, after some delay. This massive, 145-page document goes beyond simple updates for the final quarter, and a summary of 2013; it restates financial data going all the way back to 2009. The document provides critical information on the company's finances and the status of their various programs. ACT also hosted a conference call the following morning, which provided further color as to its current plans and finances. Taken together, the updated info allows us to gain clarity on future steps that have been much anticipated (incorrectly, in some cases) by investors. Furthermore, although management generally declined to comment on timing for their plans, the financial info provided allows us to infer some ordering of the steps that need to take place and place them within a quantified time frame.
The General Plan
preliminary data suggest that the injected cells are well tolerated and appear generally to be capable of engrafting at the site of injection, forming the appropriate anatomical monolayer structure around the injected area. Visual acuity improvement was observed to varying degrees in several of these very late-stage patients, a result that was not anticipated in the original design of these studies.
We heard this sort of news over two years ago, but the release of such information so early in the trials was one of many very questionable practices by former management. To have new management confirm such results when the trials are nearly complete, and in an official SEC filing, rather than a press release, is significant.
In addition to financial information, the 10-K also has unprecedented breadth and detail on virtually everything related to Advanced Cell Technology, including:
- description of ALL ACT programs and holdings
- a catalog of historical and ongoing legal actions
- assessment of the general state the field and competitors
- a very comprehensive listing of risk factors
Indeed, much of the document reads just like a prospectus. That immediately indicated to me that it is a precursor to the company's long-stated goal of uplisting. This impression was confirmed by management on the conference call, along with the "primary" goals of publishing interim data from the trials in a "top-tier" scientific journal and then transitioning the trials to Phase 2 in the second half of 2014.
What's Done is Done
The call opened with a statement from interim president Ted Myles about erring on the side of "promising less and doing more" as the right approach to running a publicly traded company. I couldn't agree more. I touched on the abysmal accounting and financing practices of prior management, which have taken ACTC stock from 6 dollars to 6 cents, in my previous article. As a result, the 10-K shows that over a third of expenses in the past three years have gone toward settlement of claims rather than substantive operations.
Fortunately, the report also shows that these matters are nearly all put to rest. Those that remain unsettled are as follows:
- Warrant Holder Claim: claims brought by Aronson and Gorton have been in progress for over 2.5 years. The warrants expire June 2014, and most of the counts in this matter have been dismissed. ACT believes it has "meritorous defenses", and if so, stands to recoup up to $6.2m which has been reserved for the case, whose costs could theoretically run up to $25m higher.
- SEC Investigation of Stock Sales by Gary Rabin: Former CEO Gary Rabin has received a Wells Notice regarding this matter, meaning that the SEC may bring a civil action against Mr. Rabin. ACT has cooperated, and discussions with the SEC indicate that it is close to a "reasonable resolution" of the matter as it regards the company.
Resolution of these matters, particularly the warrants, is almost as important as the interim results of the clinical trials on macular degeneration. ACT acknowledges that they can't possibly bring their RPE cell treatment from the trials to market without major new sources of funding, and negotiating that funding will be far easier with all share issues laid to rest.
Clearer Vision for Investors, Too
In the conference call, management once again mentioned non-dilutive funding, and really, they've already pushed dilution as far as it can go. All of the company's 2.6 *billion* shares are listed as floated. The 10-K states that, at year's end, about ~$16M was available, 1.7 in cash, 14.3 from the Lincoln Park agreement. In the conference call management updated that data to $4M cash and $6.5M available via Lincoln Park. Both sets of figures are consistent with the forecast of "having sufficient cash and access to capital to enable us to operate through the first half of 2014" in the 10-K, given yearly expenses upwards of $30M. Note that these projections have the ACT in operation for 2-3 months past warrant expiration. They also assume no deterioration in the stock price, which has averaged ~7 cents per share over the term of the Lincoln Park financing.
There are two main options for funding the company after current means expire. ACT will almost certainly need a buyout or partnership on the Phase 2 of the trials, which are set to begin in the second half of 2014, with revenue sharing on eventual commercialization. This will have to happen without the "breakthrough status" that some authors have claimed was coming this year. Management was very clear in the conference call that such an event would only be a possibility after completion of Phase 2 trials, which is still years away. ACT now has the "goal of becoming a Phase 2 company", and will have to find new means to finance that goal.
Secondly, selling off patents or deriving other funding from prior research may help to buy some time, and thus negotiating power. Here, things have not gone in ACT's favor. The 10-K made it official that it has shelved its platelet program, saying,
While the early data that we have generated are encouraging, we believe that our limited resources are best allocated to our other programs, at this time. In the future we may look to partner this program, pursue government funding or permanently cancel the program.
In reality, ACT has had plenty of time, to shop this program around, though perhaps not the resources or contacts. Although platelet production has potentially huge application, developing both the technology and market is probably so capital-intensive that ACT never expected to bring it further on its own. The call reinforced all these points, where management stated they have "taken the program as far we can on our own nickel", and it "will not advance internally." They have been pursuing partnerships and government funding, but conceded that the those options for deriving revenue are "not likely".
The platelet program was originally expected to use their iPSC (induced pluripotent stem cell) technology. As I wrote previously, the value of these patents has also degraded over time. Although the research on which the recent Nature article was based has turned out to have many problems, the publication in Nature still documents a rising consensus in academia that means of inducing pluripotency are more varied and possibly simpler than originally thought. Whether this consensus or any particular details of recent research turns out to be correct or not, the current controversy will further hinder any attempt to monetize iPSC patents in the 6 months or so that ACT has left to do so.
None of this is to say that ACT can't derive some key revenue from their non-retinal work. These issues are generally just a matter of price, and any income that can be pulled in will give much needed breathing room for negotiation between the publication of interim results and funding of Phase 2.
What to Look For
The financial data and prospects, taken together with the plan provided by management allows us to establish a rough sequence of events for the next 6 months or so:
- U.S. DSMB decision: a decision from the Data and Safety Monitoring Board of the FDA was described as "imminent" by management. Given the statement about the trials in the 10-K and approval already in hand for those conducted in the U.K. it's reasonable to expect good news.
- Next quarterly report: ACT's report the 1st quarter of 2014 is due in May.
- Resolution of Warrant Issues: as mentioned, a dismissal would recover some much-needed capital, but a settlement indicates an eye towards future value for shareholders. Look for this to happen in June.
- Publication of Interim Data: I believe it is in the company's best interest to publish after resolution of the warrants, since any negotiations would involve share price, which hangs on this event. The particular journal that publishes will give a valuable clue as to the prospects for partnership.
- New Funding Source: Buyout or partnership on Phase 2. Shareholder value in a partnership might be enhanced by a sale of other assets, as discussed above.
- Initiation of Phase 2: this is anticipated to happen in the fall and, ideally, should happen after new funding has been identified.
- Reverse Split and Uplisting: this needs to occur after the warrant resolution, but could potentially occur earlier in this list.
I have always been impressed by the scientific efforts from Advanced Cell Technology. New management appears to be taking the right first steps towards a doorway that is no more than 6 months away. While it's too early to say definitively whether or not the company can recover from prior mis-steps, the interim results from the clinical trials continue to give every indication of being the right key. When they are published, we will begin to know whether these steps are leading to a portal for rebuilding shareholder value, or death's door.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ACTC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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